Etsy Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

Key Takeaways

  • Q1 2022 consolidated GMS grew 3.5% YoY to $3.3 B, revenue rose 5.2% to $579 M, and adjusted EBITDA margin reached 27.5%, while Etsy Marketplace GMS was down 2%.
  • Q2 guidance calls for consolidated GMS of $2.9 B–$3.2 B (flat YoY at midpoint), revenue of $540 M–$590 M, and an adjusted EBITDA margin of ~25%, reflecting near-term inflation, reopening, and Ukraine headwinds.
  • An increase in the transaction fee to 6.5% prompted less than 1% of sellers to pause their shops, and listing counts stabilized within a week as Etsy reinvests the incremental take rate into platform and seller support.
  • Product innovations such as personalized search, new discovery pathways, seller videos, and a planned purchase protection program are being paired with brand and performance marketing campaigns targeting new demographics and regions.
  • With only ~49% buyer penetration in core markets, 180 M monthly site visitors versus 89 M buyers, plus over 100 M lapsed buyers and under-penetrated international regions, Etsy sees an enormous long-term growth opportunity.
AI Generated. May Contain Errors.
Earnings Conference Call
Etsy Q1 2022
00:00 / 00:00

There are 4 speakers on the call.

Operator

Hi, everyone. Welcome to Etsy's Q1 2022 earnings conference call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. Joining me today are Josh Silverman, chief executive officer, Rachel Glaser, our chief financial officer, and Jessica Schmidt, who joined us in March as our senior director of investor relations. Me today's prepared remarks have been prerecorded.

Operator

The slide deck has also been posted to our website for your reference. Me once we have finished with Josh and Rachel's presentation, we will transition to a live video webcast q and a session. Questions can be submitted via the q and a window chat displayed on your screen. Feel free to use it at any time as it will remain open throughout the entire conference call. I'll be reading your questions, and Jessica will help me to try to get to as many of them as we can.

Operator

Please keep in mind that our remarks today include forward looking statements related to our financial guidance and key drivers thereof, the global macroeconomic me, including additional or unforeseen impacts of the COVID nineteen pandemic and general market, political, economic, and business conditions may have on our communities, business strategy or operating results, our opportunity, our leverage for GMS growth, and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic marketing and product initiatives and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward looking statements involve risks and uncertainties, which are described in today's earnings release and our 10 ks filed with the SEC on February 25, 2020 me and which will be updated in any future periodic reports we file with the SEC. Any forward looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any any obligation to update them. Also during the call, we'll present both GAAP and non GAAP financial measures.

Operator

A reconciliation of non GAAP to GAAP measures is included in today's earnings press release, which we'll find on our investor relations website, along with the replay of this call. With that, I'll turn it over to Josh.

Speaker 1

Thanks, me. And good evening, everyone. In recent years, it seems one of the only real certainties has been uncertainty. You could say it's the new normal. We believe that over the past 5 years, our team has demonstrated its agility and adaptability, and our this model has shown resiliency through many types of macro conditions.

Speaker 1

In Q1, we rose to the occasion once again to deliver solid results in a challenging quarter, maintaining almost all of the gains reported during the extremely strong year ago period. Me. Our consolidated GMS was 3,300,000,000 up 3.5% year over year or approximately 5% on a constant currency basis with the Etsy marketplace GMS down about 2% as we lapped the exceptionally strong growth of the prior year. Consolidated revenue grew 5 0.2% and our adjusted EBITDA margin was 27.5%. Rachel will cover the results in more detail shortly.

Speaker 1

Me Etsy experienced a tidal wave of growth over the past 2 years. As so much of the world shut down, we went from serving 2.6 me to 5,500,000 active sellers and from 47,000,000 to nearly 90,000,000 active buyers. Me and etsy.comgmsgrewfromabout1.200000000000 in the Q1 of 2020 to 2.8000000000 this past quarter. We've provided a pathway to economic opportunity for 1,000,000 and a meaningful alternative for buyers looking to not be just another cog in the complex and increasingly commoditized global supply chain. As we move from the COVID pandemic To what appears to be an endemic, people have regained their mobility.

Speaker 1

And with that comes so many more choices for where to spend their hard earned dollars. This is a great thing for humanity, and I personally couldn't be more relieved to see it. It also means that in the near term, we'll have to fight harder and invest more to continue to earn and grow Etsy's share of wallet with consumers, which is the only way that our much larger base of sellers can keep growing their sales. We're up for it. The current macro climate makes the coming months more challenging to predict.

Speaker 1

However, Over the long term, we continue to believe that the number of places to shop online will consolidate as the world continues to become more commoditized. The pandemic perhaps gave us the chance to preview what the world could look like for Etsy, where in validated more commoditized future world, Etsy could flourish as one of the few meaningful alternatives amidst a sea of sameness. Through this change, our mission has remained the same to keep commerce human. We continue to believe that the strategy we laid out for you in 2019 centered on our right to win keeps us on the right course. The only change is that we have even more conviction that the opportunity ahead is enormous.

Speaker 1

We plan to go after that opportunity with focus, Discipline and heart. Speaking of heart, the crisis in Ukraine weighs heavily on us all. Our thoughts are with everyone impacted in the region, especially Etsy sellers and buyers, as well as family and friends of our global team. Being part of community means that when one part is suffering, the rest of us step up and offer support. To do our part, me.

Speaker 1

We've taken many steps to help Ukrainian sellers that are facing tremendous hardship. Our financial support, including providing listing and canceling current balances owed to us by sellers totaled $4,600,000 in the quarter. The ability to make me. Sales is more critical than ever for Ukrainian sellers. While shipping physical goods has gotten challenging for some, many sellers have pivoted to listing digital items from printable art to embroidery patterns as a means to generate income.

Speaker 1

We've also had a groundswell of interest from buyers who want to directly support small businesses in Ukraine. Our team has been working hard to ensure our sellers feel supported and to promote their listings to buyers. In total, our Ukraine based sellers made over $11,000,000 in sales in March, an average of nearly $1400 per seller with a sale. In 2019, we also laid out our levers for GMS growth, Bringing more active buyers to the marketplace, getting them to shop more frequently and earning their trust on the larger as well as the smaller purchases. Since then, we've demonstrated that we can meet the everyday needs of millions of buyers across a vast array of purchase occasions me.

Speaker 1

And that Etsy sellers have something delightful to offer. We've also driven our frequency forward in a meaningful way, but we have so much more to do. So I wanted to spend a little time today unpacking how we see these opportunities going forward. Etsy is sometimes referred to as a niche marketplace, me implying that we aren't relevant to most people or at minimum that we aren't relevant very often. I couldn't disagree more and believe that our recent performance proves just how relevant the Etsy marketplace is to almost every type of person over so many different shopping occasions.

Speaker 1

Let's take a look at the numbers. Starting with our current buyer base. We have about 89,000,000 active buyers in nearly 250 countries. And just this past quarter, we acquired 7,000,000 new buyers on top of the 73,000,000 we added over the last 2 years and moving to our categories, 15 Etsy marketplace categories each over 1,000,000 unique buyers in 2021 and of those, the 7 shown on this slide, each had over 15,000,000 unique buyers demonstrating that Etsy is relevant to a large audience across a wide range of categories and occasions Digging into who these buyers are. According to our latest surveys and estimates, about 3 quarters of etsy.com's US and UK buyers identify as women and one Identify as men.

Speaker 1

While we believe that gender identity is widely recognized as a spectrum, the following gender data relates to these 2 largest cohorts. Starting with our core women buyers, we estimate that about 30% of adult women in the US and the UK me Shop on Etsy at least once in the past 12 months. And of those women, about 58% bought on 2 or more days And roughly 56% purchased in 2 or more Etsy categories in that same period. In my opinion, there's nothing niche about that. Me The inverse of this data is that about 70% of women in our top two markets didn't shop on Etsy during this period, leaving a lot more opportunity to grow.

Speaker 1

Turning to the other roughly half of the world's population, those who identify as men, that's a huge population we began thinking About only recently, we estimate that about 10% of adult men in the US and the UK shopped on Etsy at least once in the past 12 months. Roughly 37% of these men bought on Etsy on 2 or more days and 35% purchased in 2 or more categories over the same period. We recently conducted research to better understand men's shopping attitudes and behaviors and learned that those who identify as men are as likely as women to be intentional shoppers, valuing handcrafted items, supporting small businesses, wanting to make a positive impact with their purchases or buying items that reflect their personality. Our data also supports that among prospective buyers who are aware of Etsy, there's no difference in likelihood to visit Etsy by gender. The top three reasons men give for not shopping on Etsy are very similar to the reasons women give, although all relate to awareness.

Speaker 1

Etsy hasn't come to mind. I haven't had a need for the types of items they sell and I don't know what Etsy offers. We estimate 35% of our new in 2021 identify as men. We're just getting started understanding these buyers and developing product and marketing strategies to help them learn the when and the why of Etsy, so we can come to mind more often. For example, we saw positive return on investment from some of our recent tactics using gender neutral TV creative with media placements on NFL and Hulu.

Speaker 1

And this year, we're piloting male influencer content to increase trial and trust in Etsy for buyers who identify as men. And we have so much more room to go on engagement and conversion. While nearly 90,000,000 active buyers is impressive, we estimate that etsy.com had about 180,000,000 unique visitors every month, meaning we can do so much better engaging and converting these visits. And we have over 100,000,000 lapsed buyers. That's millions more who've already shopped with us, are familiar with us, but haven't shopped with us in the past 12 months.

Speaker 1

Turning to our geographic opportunity. Etsy's all time buyer penetration remains below 50% across all 7 of our core markets. The majority of Etsy's active buyers are still in the US and so far, most of the data reviewed today relates to the US and UK, our 2 largest markets. If you were to look more closely at some of our other core markets, such as France, for example, you'd find that our prompted awareness there is only about 40% me Compared to about 90% in the US and the UK and conversion rate is 50% lower in France than in the other two countries. In fact, me.

Speaker 1

Penetration rates in the next 15 markets beyond the US and UK are about 80% lower than those top 2 Etsy markets. Me To size this more clearly, these 15 countries have a combined population that's 58% larger than the US And approximately $20,000,000,000,000 in GDP similar to the US. This slide is not meant to signal any change in our near term strategy to focus on our 7 core markets. It's only meant to illustrate our fervent belief that we have only just begun to scratch the surface of Etsy's long term growth opportunity. In addition to the size of the prize from a total buyer perspective.

Speaker 1

Another key growth lever is frequency. As I mentioned earlier, the Etsy marketplace has something great to offer across so many purchase occasions over the 12 months ending March 31, 2022, 44,000,000 of our repeat buyers purchased on Etsy An average of 5 purchase days and of these 8,000,000 or so are what we call habitual buyers. Well, to be buyer, a customer only needs to make a purchase on Etsy on 6 different days and spend $200 in a year. Our habituals actually shop an average of about once a month, they've figured out the magic of Etsy. And yet there are still so many who haven't.

Speaker 1

In fact, Even with all the progress in the recent past, half of Etsy's 1st quarter active buyers still bought only once during the trailing 12 months. And the vast majority of our habitual buyers are still in the US. We believe our frequency opportunity is still in its infancy. Our last lever of growth is average order value. What I mentioned earlier as earning buyers trust on the larger, as well as smaller purchases, otherwise known as our cushion to couch strategy.

Speaker 1

Most of our efforts here are extensions of other right to win strategies. And in fact, We've only done a few specific things over the years, such as multi shop checkout and buy now, pay later targeted Specifically at AOV, we see significant opportunity to invest in cross category experiences and things like shop the look that we believe could drive big wins here in the future, as well as to give our sellers better tools to showcase the high quality me Differentiated product and service so that they can be rewarded for it. Turning again to frequency and earning a greater share of We told you on our last call, we're centering our frequency investments on inspiration, having a fun and engaging experience that keeps you coming back for more. Me. Efficiency, helping you quickly and easily get in, buy and get out when you already know what you want and reliability, ensuring a stress free and dependable purchase.

Speaker 1

To the first point, many of our visits are from buyers who are on a discovery journey, And there's so much more we can do to make this a more fun and inspiring experience. Recent buyer survey data revealed that Those who visited Etsy just to browse or seek inspiration are 1.3 times more likely to say they'll purchase on Etsy in the next 3 months. Me Our teams have been hard at work on new discovery pathways designed to make the Etsy experience more visual, dynamic, and inspirational for buyers and elevate the stories our sellers are uniquely positioned to tell. For example, Some of you have seen the beta version of our new explore feature on your Etsy app. It's an early iteration of making Etsy a starting point to window shop, Discover and Connect, a mall like experience, if you will, featuring a continuous scroll of short videos made by sellers showing their items being made.

Speaker 1

Me. Etsy sellers are already creating this content for other channels with nearly 15,000,000 seller videos on the site at quarter's end. Me And buyers are interested in watching this content. It's pretty captivating. We're focused on making Etsy a unique place to build experiences this is at the intersection of a seller's imagination and a buyer's inspiration.

Speaker 1

It's early days in this exciting work. While some buyers come just for fun or inspiration, others arrive already knowing what they're looking for. For those visits, we need to make shopping on Etsy more efficient, less overwhelming and easy to navigate. So you can get what you need and get on your way quickly. We continue to improve search this past quarter by applying personalization to in session browsing behavior for us searches on etsy.com, capturing a buyer's short term interests with a particular this on improving conversion for signed out our new buyers.

Speaker 1

This connects to my earlier growth lever comment about how we engage the many millions of visitors who come to Etsy, but don't become active buyers. We can now increasingly refine our search results while a potential buyer browsers in real time, me Leveraging signals we gained during the course of the visit to narrow in on today's shopping mission. In the past, we've needed a buyer to have previously engaged with Etsy to be able to personalize their results. This shift opens the door to better address the approximately 75% of etsy.comwebvisittraffic me from buyers who were signed out or have never shopped with us. We're continuing to innovate our X walk real time retrieval engine To not only use billions more data points, but to simultaneously steer our search engine to optimize for specific attributes, such as to help a buyer find a high quality wallet that is brown and full grain leather and available in time for an upcoming anniversary as illustrated on this slide.

Speaker 1

Me We have enormous conviction that making Etsy a more trusted and reliable place to shop can be a big growth unlock. Me 35 Etsy buyers are unsure we would have their back if something goes wrong with their transaction. Similarly, Sellers worry about times when something goes wrong through no fault of their own. And we want them to know that we'll support them. Later this quarter, we'll share our plans for investments in a new purchase protection program that will extend to both buyers and sellers in a generous way.

Speaker 1

Will also be doing a lot more in 2022 to further last year's progress towards reducing time to resolution for customer support, ensuring that Etsy handmade and other policies are enforced, helping sellers better manage shipping settings and delivery dates to give buyers the information they need to make purchase decisions and more. We know that in order to gain more wallet share, we need to make Etsy more reliable. We simply can't become a habit unless we do better for our customers. We have so many other work streams focused on buyer engagement, frequency and trust. In the Q1, we continued to engage buyers along their Etsy journey by further enhancing our app with new features aimed at increasing purchasing me confidence, including driving buyers to reviews, enabling more ways to sort and filter reviews and collecting more review photos.

Speaker 1

Reviews have been a particularly rich work stream for us. In fact, since 2021, we improved our review rate by 50% globally, which we estimate has driven $200,000,000 in annualized GMS. It's never been more important to be investing to stay top of mind with consumers to keep growing the pie for our sellers. We're investing even deeper in full funnel marketing To engage existing buyers, reengage our lapsed buyers and keep bringing new buyers to the Etsy marketplace. We've me Many new marketing arrows in our quiver this year to better connect off-site and on-site experiences.

Speaker 1

So I'll just mention a couple about which I'm particularly excited. Me The first is our new creator collective program, which leverages influencer and seller generated content to bring new buyers to Etsy. We've also started to test performance marketing spend in rest of world markets beyond our core, including Italy, the Netherlands, Spain, Ireland, Switzerland, Belgium and Austria. So far, we've seen very encouraging results from these efforts. In the Q1, approximately 50% of Etsy market place paid GMS for these markets came from new buyers.

Speaker 1

As we've talked about our above the line brand campaigns are focused on ensuring we continue to strengthen the Etsy brand in our top core markets while finding efficient opportunities to expand and scale our reach in ways that will ultimately drive long term growth. Here's a 32nd clip of 1 of several brand new campaigns now running called live in original. You'll see us ramping up placements as we go through 2022. Me

Speaker 2

1 of a kind pieces made by hand. Livin Original. Etsy. Me 1 of a kind pieces made by hand. Live in original Etsy.

Speaker 1

We are emerging from an unprecedented time. And within that Etsy had unprecedented growth. We expect that this year is going to be unpredictable for us. There are certainly many moving parts, both tailwinds me and headwinds, which are difficult to forecast. People continue to be nervous about global events and the economy, And we'll have to fight harder for consumers time and money.

Speaker 1

Yet we have ample reason to remain optimistic. We've got a world class me with the creativity and conviction to invest with purpose on behalf of our seller community. We truly believe we offer something different across every brand in our house and that the size of the prize for Etsy is enormous. It's why I get so excited to come to work every day. I'll turn it over to Rachel now to take you through the results and provide our outlook.

Speaker 2

Me Thanks, Josh, and thank you for joining us on our call. My commentary will cover consolidated results, key drivers me performance and Etsy marketplace stand alone results where appropriate. As a reminder, Reverb, Depop, and Elo 7 are all reflected in our consolidated financial results and KPIs for the Q1. On a consolidated basis, our Q1 GMS grew 3 and a half percent year over year to $3,300,000,000 Revenue grew 5.2% year over year to $579,000,000 And adjusted EBITDA was $159,000,000 with a 27.5% margin. On a currency neutral basis, GMS increased 4 0.8% year over year.

Speaker 2

As we explained at our last call, the Q1 of 2021 was an anomaly with 132% year over me year GMS growth fueled by pandemic lockdowns and tailwinds from stimulus checks. Flash forward to the Q1 of this year, which was marked by a rebound me on in global mobility and headwinds from the highest inflation the US has seen in over 40 years. Further, geopolitical events appear to be causing additional me particularly in Europe. We estimate that the direct impact of the crisis in Ukraine, including lost GMS from both Russian and Ukrainian sellers was about 40 basis points versus the forecast when we set guidance for the quarter. In short, disposable income is lower, and competition for share of wallet is higher across our markets.

Speaker 2

In that me context, we're pleased with our consolidated GMS growth of over 200% on a 3 year basis. Moreover, We delivered better than anticipated adjusted EBITDA margins, demonstrating the strength of our marketplace model. So let me double click on our performance starting with revenue. Marketplace revenue grew 3.4% in line with me GMS, while services revenue increased 11%. Within services revenue, consolidated ads revenue increased 14% year over year, me Primarily the result of continued improvements to ad relevance and expansion of ads in the buyer experience.

Speaker 2

Etsy ad strength was in driving consolidated take rate of 17.8% for the quarter, slightly ahead of the take rate of 17.5% implied by the mid me Which went into effect on April 11th. We're committed to nurturing our marketplace in a way that enables millions me entrepreneurs to succeed. We're incredibly proud that over the past 2 years, the number of sellers on Etsy Marketplace has more than doubled, and the number of Listings is up 55%. With more sellers on the platform than ever, we need to continue to grow the size of the pie. This requires us to invest me more to scale our platform and, most importantly, bring them even more buyers than the almost 90,000,000 we bring them today.

Speaker 2

Me When the fee change went into effect, we saw less than 1% of sellers go into temporary vacation mode. Active listings dipped less than 1 percent during that week and returned to the prior level when the week was over. Based on past experience and significant research leading up to me change. This was all within our expectations. The overall impact to our GMS for the week was not material, and seller churn remains at normal lever levels quarter to date.

Speaker 2

At quarter end, we had well in excess of 95,000,000 listings on etsy.com. And as you know, we have no shortage of me items for sale. And while no one likes fee raises, we actually heard from thousands of sellers supporting our efforts to invest in them. Me We really value input from our sellers and are confident in our investment plans. We trust that sellers will judge us by our me comes when they see the value we are able to provide.

Speaker 2

Turning now to our consolidated adjusted EBITDA. Our first adjusted EBITDA margin was 27 a half percent ahead of expectations, but well below the prior year. As we have described, the Q1 of 2021 was very strong GMS growth quarter, which drove commensurately high margins in last year's Q1. This year, we have consolidated 2 new subsidiaries into our results, which were not in our prior me your numbers. Neither Depop nor EloSeven are currently profitable, and they are therefore me on our bottom line consolidated margins.

Speaker 2

In addition, we continue to invest in headcount growth and increased compensation, including me in stock based compensation with the largest portion in product development. We also saw growth in our cloud computing costs due to increased development me activity. Finally, there was about a $5,600,000 impact to our adjusted EBITDA directly attributed to the crisis in Ukraine, including Ukraine seller support as well as bad debt expenses related to me seller support as well as bad debt expenses related to closing seller shops in Russia and Belarus. We are also me in our subsidiary brands. While they are experiencing similar reopening headwinds and other macro factors, each made strides in product and me Marketing, incorporating the Etsy playbook into their own growth strategies.

Speaker 2

We've summarized their recent focus areas on slide 28. Me During the quarter, Reverb launched a new Google integration to further optimize performance marketing efficiency as well as scaled tests of new advertising channels, me which are realizing promising early results. At Depop, the recently launched make an offer feature where buyers seamlessly submit product offers to sellers led to a meaningful uplift in both conversion and frequency and was an me Encouraging needle mover for GMS. We also launched Depop's first ever digital video campaign in select local US markets. Me Early results are positive, showing an improvement in brand familiarity.

Speaker 2

And Elo 7's expanded shipping options for sellers cheaper shipping costs and faster delivery times, improving the overall buyer experience and driving an increase in conversion. Me And for the Etsy marketplace, we have a balanced portfolio of product initiatives, some which we expect to deliver in your GMS and others such me visual discovery or improving the foundation for our development capabilities are expected to take a longer period to bear fruit. You can see on slide me 29, how we have scaled our product development investments over the past 4 years and how it has increased as a percentage of revenue in the Q1 of 2022. Me During the Q1, we increased our consolidated marketing spend to $154,000,000 up from 100 and $1,000,000 in the Q1 of the prior year. Our brand spend, sometimes referred to as above the line spend, represented 16% our consolidated marketing spend up from 13% in the prior year.

Speaker 2

For our Etsy marketplace, we were on me during the Q1 of 2022 in our in our core markets, including a male focused campaign, which shows signs of real promise in that demographic. Me We plan to expand placement of our brand marketing campaign for the Etsy marketplace as we go through the year, particularly in the back half. Me 1st quarter 2022 performance marketing spend was down year over year as it dynamically adjusted with demand, me and the decrease was partially offset by an increase in social media marketing spend. In terms of our performance marketing spend, we maintain our general rule of not leaving profitable marketing dollars on the table, and similarly, we don't chase unprofitable buyer acquisition or engagement. Me In addition to our investments in product and marketing, we have made deliberate bets in other areas such as investing in being a trusted brand.

Speaker 2

Me These investments are meant to ensure that our customers, both sellers and buyers, find a welcoming home and have a delightful me experience even post purchase. To that end, we are investing in the support apparatus we need to create a streamlined and efficient experience me If something doesn't go right, including in compliance, both people and systems to keep the marketplace safe, and advocacy efforts to support our sellers globally as the regulatory landscape evolves around privacy, taxation, and content. I'll dive in deeper now me on Etsy marketplace performance on a stand alone basis. During the Q1 of 2022, Etsy marketplace GMS declined 2% year over year me and increased 177% on a year over 3 year basis. That is when compared to the Q1 of 2019.

Speaker 2

The deceleration we started to experience in February 2022 worsened throughout the quarter, which we attribute to headwinds related to increased reopenings, high high levels of inflation weighing on consumer purchasing power and consumer mind share loss due to the crisis in Ukraine and its reverberations throughout the global economy. From a geographic perspective, 45% of Marketplace GMS in the Q1 of 2022 was from transactions where either the buyer or the seller or both We're outside the United States. Non US GMS was up 5% year over year on a currency neutral basis, which was driven in part by strength in Germany, offsetting weakness in the United Kingdom, which was facing much tougher prior year comparisons. SE Marketplace category performance was marked by strength in paper and party supplies for in person events and at such as me baby showers and birthday parties as well as in apparel and jewelry and accessories consistent with reopening trends. Me We've seen strong buyer demand for fashion subcategories and travel related needs, including tote bags, passport cases, and backpacks.

Speaker 2

Me Wedding items are also a bright spot for year over year growth, including wedding party gifts, wedding favors, me The home and living category declined slightly for the quarter on a year over year basis, although we are seeing relative me items related to outdoor and garden. In fact, yurts were particularly hot sellers in the quarter. We believe the diversity of our me Listings and Etsy sellers' ability to rapidly shift to meet changing buyer demands is an important competitive advantage, Especially now. GMS per active buyer on a trailing 12 month basis for the Etsy marketplace increased to $137 up 10% year over year and up 37% on a year over 3 year basis. Me se.com ended the Q1 with 89,000,000 active buyers, largely flat to year end, which includes 8,000,000 habitual buyers and another approximately 36,000,000 repeat buyers, those who made purchases on 2 or more days in a 12 me month period, but we're not habitual buyers.

Speaker 2

The stable performance across all of these buyer cohorts is encouraging, providing me proof points that we are maintaining most of the gains we made during the pandemic despite there being So many more options for consumers' time and money. 46% of GMS came from habitual buyers in q 1 22. Our growth of me habitual buyers in core non US markets held up well in the Q1 of 2022, including 50 55% year over year growth in habitual buyers in Germany. We're also pleased to see continued healthy new me Buyer acquisition and reactivation of lapsed buyers. In the Q1, we acquired over 7,000,000 new buyers, me Almost 60% greater than the number of new buyers acquired in q1 2020.

Speaker 2

We are also continuing to reactivate lapsed me lapsed buyers. In fact, we reactivated a healthy 5,000,000 lapsed buyers in the Q1. Me Okay. So moving to our outlook. While in the Q2 of 2021, Etsy reported consolidated GMS growth of 13% on a year over year me basis, GMS increased 178% from the Q2 of 2019.

Speaker 2

The strength in the me Q2 of 2021 was partially driven by the tail of economic stimulus payments in the US, which hit consumer bank me counts in early April as well as high COVID case counts and low vaccination rates that continue to keep many at home. Me Contrast that with now where mobility indices are approaching 2019 levels and pent up demand may drive this even higher, me Meaning the possibility of more movement and travel and less time for at home shopping. We also see increasing headwinds related to broader macroeconomic issues in our core markets impacting Etsy, Depop, and Reverb. We started to see headwinds in February, which worsened in March and again in April, as well as unusual levels of volatility in our weekly GMS performance. To be sure, It's been a bit of an unpredictable and volatile start to the year.

Speaker 2

As such, we currently estimate that our 2nd quarter consolidated GMS will be approximately 2 9,000,000,000 to $3,200,000,000 about flat at the midpoint compared to the Q2 of last year and up 179% compared to the Q2 of 2019. In a world of so many more choices, our guidance implies somewhere between a decline of low to high single digits me for Etsy Marketplace GMS year over year, retaining over 90% of the gains we have made over the past 2 years, we are forecasting revenue of 500 $40,000,000 to $590,000,000 up about 7% at the midpoint compared to the Q2 of last year and up 212 me compared to the Q2 of 2019. We currently expect adjusted EBITDA margin of about 25%. Me Here are a few additional items to keep in mind as you model the rest of 2022. Assuming macro trends do not worsen, we would expect our GMS growth rate to improve for the second half of twenty twenty two, me As we have said on our last call, with revenue outpacing GMS, we've outlined today that despite the near term headwinds we are experiencing, we remain committed to increasing investments in core Etsy and our subsidiaries.

Speaker 2

The reopening and macroeconomic headwinds we experience as a company are, Of course also being felt in the households and wallets of our small independent sellers. Our take rate increase enables us to lean deeper into me product development and member support to invest for growth at a time when our sellers need it the most. We are playing me through as they say. I am noting this here so you can model second half adjusted EBITDA accordingly. Me In an environment where top line growth is constrained by external factors and with an intent to stay the course on growth investments, we would not expect me margins to expand materially other than potential improvement in the Q4.

Speaker 2

As always, we operate with an ROI discipline me And expect that our current period investments will have a payback in the future. Lastly, for your me we also expect our stock based compensation expense to increase sequentially in the Q2 as a result of our me annual refresh grants that were priced in March. Since this expense will now have a full quarter impact, we currently forecast a 15¢ pretax impact to our 2nd quarter EPS compared to the Q1, assuming stable share count. Thank me Thank you all for your time today, and I'll now turn the call over to Deb so we can take your questions.

Speaker 3

Me Hi, everyone. I'm going to dive right into questions. Good to good to talk to everybody. So the first one's from Maria Ripps, and this is she's from Canaccord. Josh, this one's for you.

Speaker 3

Can you talk about how the near term uncertainty embedded in your Q2 outlook, impacts your investment planning and considerations as you look towards the second half of the year?

Speaker 1

Me Absolutely. Thanks, Maria, for the question. You know, if the pandemic has taught us anything, it has really strengthened our conviction even more in the enormous size of the prize that me We believe we have at Etsy. And just to dimensionalize for a second, you know, in in the second quarter pre pandemic, Etsy sellers sold $1,100,000,000 worth of product on the core Etsy marketplace. And at the low end of guidance, me We're projecting for Etsy Consolidated $2,900,000,000 worth of sales.

Speaker 1

Etsy has been transformed. And maybe that is a glimpse towards that future we keep talking about where we say in the future, we don't think there's going to be an unlimited number of places me to buy things online. Amazon is gonna likely continue to succeed, and, it's not likely that there's thousands of places selling the exact same thing as Amazon trying to compete head to head with them. Etsy offers something truly different, something really meaningful across many categories many purchase occasions relevant to many people as we talked about in this call. We think the size of that prize is absolutely enormous.

Speaker 1

Me. And so we have our eye on that prize and we're investing for that future time. The next couple of quarters absolutely are turbulent. Me We're facing reopening headwinds. We've got a war in Europe.

Speaker 1

We've got inflation. It's turbulent times For everyone, but the strongest companies invest with conviction and discipline through turbulent times with their eye on the medium term. And we think the opportunity for Etsy is enormous and we are absolutely investing for that. And this is, by the way, the time when our sellers need us most to be investing, and that's absolutely what we're doing.

Speaker 3

Okay. Great. Thanks, Josh. Next one is also from Maria, but I will add it's from several other people, including Navet Khan. And we want to talk about the sellers reaction to our recent fee increase, me, how the sellers view all the incremental investments that we're making and, has there been any impact from the boycott that we saw in the middle of the month on our GMS growth?

Speaker 3

Start with Josh on that one.

Speaker 1

Sure. So, we announced a fee increase in in mid February, and the reaction from sellers was actually more muted than in prior, fee increases. No one likes it when prices go up, But actually, the seller reaction was less negative, than than it's been in the past. And, you know, what we said before me The pandemic was we have an enormous number of sellers with a huge amount of things for sale, and what they need is to bring us more buyers, to bring them more buyers. That's more true now than ever.

Speaker 1

Etsy now has 5,500,000 sellers, and they're counting on Etsy to grow the pie. At the very moment when buyers have a ton more choice than they had even 3 6 months ago, They are feeling a lot more pressure in terms of their wallet, and they have the opportunity to travel to dine out and to shop offline. Me It's even more important that we are investing to bring buyers to those sellers and have a really compelling offering so that our sellers can grow. It's the the only way that our sellers can grow. And so what we've been hearing from thousands of sellers is we need you Etsy to be investing to grow.

Speaker 1

Me And, when our sellers sell in other places, and by the way, many most of the big ones do, They sell on eBay, they sell on Amazon, they have their own sites on Shopify or Wix, they sell in craft fairs. As we've said in all of our seller census is our sellers have a lot of choices in terms of where they can sell. And, what they find and what we know is that the value on Etsy is greater. We provide more value than the other alternatives. That was true before the fee increase.

Speaker 1

It's true after the fee increase. While they have many, many places they can sell, they are more successful selling on Etsy. Our top sellers say that, you know, about half of their sales come from Etsy and half come from everywhere else Combined and it's because we invest to bring them buyers and buyers who care about handmade products, vintage products, artisanal products, me Buyers who care about keeping commerce human. So it's even more important now that, me That we we, we are investing to help those 5,500,000 sellers grow. As Rachel shared, while there were A small number of sellers who managed to get quite a lot of media attention.

Speaker 1

In fact, less than 1% of sellers chose to put their vacate their Their shop on vacation mode during that week. We saw no material impact to sales for the week, much less for the quarter. And we saw no material impact to to churn. And we think the reason is that the the value proposition that Etsy offers is really compelling. And whether the transaction fee is 5% or 6.5% right now, what sellers really need is us bringing them more buyers so they can drive more sales so the pie gets gets bigger for everyone.

Speaker 1

Thanks for the question.

Speaker 3

Okay. Next one is for you, Rachel. This is from Naved Khan at Truist. Why are margins lower in q2, 22 despite the higher take rates?

Speaker 2

Hello, everyone. Thanks for the question, Yvonne. So the lower margins reflect, what we talked about as playing through. We're going to continue making our investments even though we're seeing Some constraints on the top line. And 1st and foremost is really investing in our own people.

Speaker 2

So we, we are adding heads. We added heads throughout 2021, we've continued to grow headcount in 2022. And as a reminder, we've also added the headcount in from our recently acquired new subsidiaries, EloSeven and and Depop. And a lot of those people are pointed at product development. So product and engineering are a lot of the headcount ads, and they are really the, growth engine of the company because they are creating all the product that is going to do exactly what Josh talked a lot about, which is increasing, more active buyers and increasing frequency to get me More GMS per buyer.

Speaker 2

So that's the first bucket. We're also gonna continue to invest in marketing. We showed you a clip of one of our new ad campaigns, but we're also running campaigns in the UK and Germany. We tested some me Above the line marketing, for Depop in the Q1, and we'll be looking to scale and optimize that program as well. Me And, we spend on performance marketing dynamically, so we'll continue to lean into marketing where we see that the ROI is there.

Speaker 2

And then the 3rd bucket is, it's less visible to GMS in the short term, but we are spending a lot on our our trust and safety and member support organization. We talked about really having our customers back in a way that they can see see it and feel it more so than ever. We'll talk more about that as We announced it, ex externally, but we're excited about that. And that is an investment that, hits the P and L in in the short term. And so, me You know, we believe that's a long term payback.

Speaker 2

Another place we we invest is in our, you know, as we have more product engineers, we're developing more. So we use more cloud computing and hosting costs. So some of those things you don't see the, direct relationship between those investments and, GMS in the quarter, but we believe in the long term benefit of making those, making those bets. Me.

Speaker 3

Okay, great. Thanks, Rachel. The next one I'll give to you, Josh, it's from Shleta Kajuria from ISI Evercore. Could you please provide more color on the most impactful initiatives that have driven buyer frequency growth so far? And of the upcoming product improvements, which one do you think could be meaningful purchase frequency drivers?

Speaker 1

Yes, absolutely. Thanks for the question. So Let me start with just awareness because one of the top things we hear about why did you not buy on Etsy, more frequently is I just didn't think of it. So we continue. We said that before the pandemic.

Speaker 1

We continue to see that as I just didn't think of it. Should've had a VA. And so The television campaigns that we showed in the investment and above the line as well as the performance marketing investments that we're making are more important than ever to just remind people me of all of the different purchase occasions for which we're relevant, and we shared, you know, for example, 30% of buyers who identify as women in the US the UK shopped on Etsy at least once and 58% of them shopped more than one time. So, you know, we know we're relevant to a lot of people a lot of the time. If we take a second on those 8,000,000 potential buyers, they bought an average of 13 times over the course of the last 12 months.

Speaker 1

So we know that we can be relevant to them, very, very often, more than once a month. And I know, you know, we shop on Etsy more than once a week. Me And I know plenty of people who do. So, we know we can be a lot more relevant. What is it that differentiates those habitual buyers that are shopping once a month or more.

Speaker 1

They figured out the magic of Etsy. Not only do they think of us more often, are we front of mind, but they know how to speak Etsy. They know how to put the right words in our search engine, in order to get the right results. And we got to continue to make it easier to get me The average person who doesn't shop on Etsy all the time to get the kind of results that an expert, Etsy user gets. And so the search engine is continuing to get better and better, which is super important.

Speaker 1

What we talked about in the prepared remarks about xWalk is is really important. And and To simplify it, instead of having one objective function like leather wallet, you can now search, we can now me, optimize for multiple objectives at the same time, leather wallet that's near me will arrive within this time and, and, you know, is brown. Me And the ability for the for the search engine to understand plain English and convert it into things that people want is just getting me Better and better. We're also doing a better job of getting people to leave tea leaves of themselves, to engage in lightweight ways that Tell us about themselves, doing things like favoriting or adding things to lists, which make us able to understand them better And therefore provide better search and better recommendations for them in the future. I'm particularly excited about the work we're doing there for me Buyers who have low or no maybe visitors, people who've never bought on Etsy before or have only bought 1 or 2 things.

Speaker 1

That's a large amount of traffic on Etsy. You know, we talked about over 180,000,000 unique visitors me each month on the ESG website and and we're getting much better at taking someone for whom we don't have a lot of data and Coming much more personalized even for them. And I think that can do a lot more to drive conversion and to drive frequency. Me One of the things that we hear most from buyers is in order to make Etsy truly a habit, a go to starting point for commerce, they need to trust us even more that we will have their back. And so while it's rare that something goes wrong on Etsy, me Buyers don't always trust that we're going to have their back.

Speaker 1

And in fact, that's one of the big value adds that Etsy can offer relative to buying on an individual shop is you haven't heard of that individual shopper, that individual brand, but you've heard of Etsy. And so we build that brand, we build the trust of that brand, And we lend that trust to each of our sellers. It's one of the most important things that we do. It's part of why we do ask for me You know, and promote certain standards among sellers that we build a brand that that stands for something. And so we we we mentioned that We'll be announcing something later this quarter where we're investing to make sure that buyers know that we have their back me And that sellers know that we have their backs.

Speaker 1

When the rare occasion that something goes wrong, people know that they're protected. And I'm really excited about what that can do for frequency over time. Those kinds of things aren't a silver bullet where immediately you necessarily see, GMS growth, but building a brand that stands for reliability, we know, we believe, can have very big dividends over time.

Speaker 3

Okay, great. Thanks, Josh. The next one I'm going to give to Rachel is couple of questions to comment on the Q2 guide. So I'll read the one from Marvin Fong at BTIG. Could you discuss how April GMS performed and what are the assumptions driving both

Speaker 2

me high and the low end of your of your q2 GMS guidance. Thanks for the question, Marvin. So first of all, one thing I want to point out right at the at the start is to think about at the low end of our guidance, it's $2,900,000,000 And in 3, 3 years ago, so So q2 of 2019, we had $1,100,000,000 So even at the low end of the guidance We gave we have we are 3 times nearly 3 times bigger than, where we were 3 years ago, and we're super proud of being able to have retained me All of that, you know, all of that growth. We did say on the call, I think maybe your question was written before I said it, and I know everyone's Multitasking because there's so many people reporting today, but that we saw successive deceleration, in GMS starting in about February, and we have seen that through even in April. So it's been a pretty volatile and unpredictable quarter, pretty bumpy for a lot of people.

Speaker 2

It's part of the reason we gave we stayed with a wide range of our guidance and and a reason why we're not still not giving full year guidance is because there's just a lot we don't know and can't control. Me With that said, there's a lot of positive in the numbers that we gave. We talked about adding millions of new buyers, in the last quarter, which was 60% from the same quarter 3 years ago. And we have so much opportunity for growth as Josh Josh laid out. So we're really pleased with the, the the numbers that we're hitting, and we expect, you know, the other number that we gave in the in the guidance that we gave was that we would back as we get to the second half of the year.

Speaker 2

Generally, the second half is a bigger half than the first half, and we still expect that. And also the other fact pattern is that we're gonna start to have lower comps in the second half of the year, than we did in the first. So those Things remain true, and we're just, you know, playing through with our investments and and and pleased with the results that we're delivering.

Speaker 3

Me Great. Thanks, Rachel. Next one, I think, is also for you. Talk about how performance oh, sorry. This is from John Calantiani from Jefferies.

Speaker 3

Talk about how performance marketing ROI has trended for Etsy over the course of 2022 and whether there was any notable change in ROI that coincided with the pandemic reopening. How are trends in ROI guiding your approach to deploying incremental marketing from the revenue generated by the recent take rate increase versus letting it drop to the bottom line or spending those dollars into product initiatives.

Speaker 2

Great question. We love talking about marketing at Etsy. So first of all, just as a reminder for everybody, We don't really give our marketing teams a marketing dollar budget. We give them an ROI threshold on on performance marketing. Me And so our spend will dynamically increase or decrease based on demand.

Speaker 2

And because we as we talked about, had a bumpy 1st quarter with some deceleration in demand through the quarter, the spend dynamically pulls back on performance marketing. So we did see that happen. Offsetting that is we spent more on on brand marketing, and we I think we said it was about 16% of total spend in the quarter as opposed to 13% in the me period, a year ago. So that, that trend is happening. When we announced the price increase, the price increase takes up our take rate.

Speaker 2

So it takes up our ability to continue to spend deeper into the ROI curve without compromising our ROI me thresholds. And we started to spend ahead of that. So we knew that the take rate was going to go up, and we started to spend ahead of that even before the price increase went into effect. So in March, we started to spend at a higher level. And now that the price increase has been effectuated, we are spending we're able spend more on the performance marketing.

Speaker 2

We haven't seen necessarily any increases in CPC, so it's not necessarily more expensive to spend to buy that to buy that traffic. But as we've said many times, we don't we won't spend beyond our marginal ROI. Me Lastly, I want to remind everybody that we have our off-site ad program, and that subsidizes about 40% of everything that we spend. That's That's just another way of saying we can spend even deeper into the ROI curve. It's it was effectively when we launched that program, wasn't a take rate increase, but it's a, a success based model.

Speaker 2

So the sellers only pay that additional fee if they've had a successful sale. That, that subsidy we get is not seen in the marketing expense line. It's seen obviously in the, in the revenue line. So that, that that, is another factor that, sort of offsets our marketing spend and allows us to spend me where we go. And lastly, we are spending more, on, you saw the brand campaigns, and we'll continue to lean into our above the line marketing as we go through the year more heavily in the 3rd and 4th quarters as we typically do.

Speaker 3

Great. Thanks, Rachel. Next one's for you, Josh, from Victoria James at DA Davidson. How is inflation affecting your business? To what extent are you in relatively favorable position versus your e commerce peers because your sellers allow consumers to save money when they buy things like apparel or home goods.

Speaker 3

To what extent are you relative are you relatively favorable versus your ecommerce peers? Yeah. That's basically the question.

Speaker 1

Thanks for the question. I appreciate it. And, I appreciate the the context behind the question because I think for the past maybe roughly 100 years, the world has been well schooled in the benefits of mass production. And, there's been a lot of focus on on mass production making things cheaper. But it's also true that when something is produced, In mass production, overseas to get on a boat, to end up at a port, to get on a train, to get on a truck to finally make it to your house, and there's maybe 3 markups along the way.

Speaker 1

The opportunity to buy directly from the person who made it Without all those markups along the way can offer that seller the chance, that maker the chance to earn a fair price and a fair living, I will also offering great value to the buyer. So, that's a story that we're we're we want to tell and we want to make sure that the world understands. To be clear, Etsy sellers set their own prices. That's not something that Etsy is directly involved in. We have said in the past and it continues to be true that our sellers have so far on average, if you look at a basket of goods analysis, not chosen to take their prices up me by much at all and far, far less than what you're reading in terms of consumer inflation.

Speaker 1

And as a result, The relative value proposition of things on Etsy is getting cheaper relative to the market, which, which can increase appeal For those products, some sellers may also choose to raise their prices as their inputs go up. And that's perfectly fair and appropriate. It's a big market with 5,500,000 sellers each making their own decisions, on that. But if they choose me Not to raise their prices, the value proposition of of their items, can can get, more compelling. Also, it can be very fair as The competition on and off Etsy if their prices go up, that our sellers can take price, and maintain margins, and that's appropriate as well.

Speaker 1

Me. Either way, we think that our sellers have a tremendous amount to offer the market. And our job is to make the market aware of that great value available on Etsy. And we're investing with discipline and with conviction to make sure that the market is aware of that.

Speaker 3

Great. Thanks, Josh. I'm going to ask the next one from Lauren Shank from Morgan Stanley. This is for Rachel. Can you clarify the 2, 2 H margin commentary margin commentary that you don't expect margins to expand materially.

Speaker 3

Is that a second half comment or a full year comment and Q4 margins are likely to be up year over year?

Speaker 2

Me Hi, Lauren. Hi, Lauren. Thanks for the question. So it was a second half comment. And, we we the caveat there is that to whatever extent seasonality comes into play that could could expand margins slightly.

Speaker 2

Sometimes we see that happen in the Q4. Me But I also I also want to take the opportunity to point out, we put up 27 a half percent margins in the Q1 this me this year and harken back to q one of 2021, our margins were in the 33% range. And I think at some point during 2021, we also delivered 37% margins. We really have full control because our because our costs are so variable with GMS me control over, sort of how much margin we how much we want to flow through to the margin line and what we've said and we want to reemphasize is that we see so much opportunity for growth that we are staying the course on our investment me plan regardless of headwinds that might might factor into the rest of the year. And those investments are really all around our people, which are, you know, the lifeblood of the company.

Speaker 2

They're incredibly important to us to actually unlock that growth in marketing, which we think really will unlock more awareness and, frequency and in the marketplace to really support our customers and our sellers and, their journey all the way through to the end of the the purchase, the point of purchase. And so that me Our margin guidance that we gave reflects our intent to keep investing in those areas.

Speaker 3

Me Great. Thanks, Rachel. I know we're attended from Deutsche Bank. I think I'm moving buyers up the person into who have you not been able to drive habitual purchasing amongst buyers on the platform? Me

Speaker 1

Well, we're really busy with offline stores. Many states were in lockdown. Me And, you know, if you could go to offline stores, it wasn't very pleasant. And even online, shops often had big supply chain challenges. And, it really highlighted the benefit of the Etsy model that, we were not facing those headwinds.

Speaker 1

You know, we had ample supply the entire time. Our We're doing a great job making great product, responding the need and being ready to ship. And so Etsy was one of the few places that you could shop reliably for much of the past 2 years. And, I'm delighted by the fact that the vast majority of our buyers are choosing to come back now at a time when they have so much more choice when there is pent up demand to travel me And dine out and go to all of those stores that they weren't able to go to before. At the low end of our guidance, We say that we'll keep 90% of of of those purchases in spite of having, you know, tremendously more options in a time of inflation when you've also got more pressure on your wallet.

Speaker 1

So, so we're really pleased by the fact that, people want to come back at Etsy and I think they really see that we offer something really compelling and really different in a time that that matters and in a way that matters. And we think that opportunity is, is huge and we're going to keep investing to keep growing it.

Speaker 3

Okay, great. Thank you all for staying on with us a few extra minutes and we will talk to you during the quarter. Thank you very much.

Speaker 1

Me Thank you.

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