Etsy Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

There are 5 speakers on the call.

Operator

Hi, everyone, and welcome to Etsy's Second Quarter 2022 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. And joining me today are Josh Silverman, Chief Executive Officer Rachel Glaser, Chief Financial Officer and Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been pre recorded. The slide deck has also been posted to our website for your reference.

Operator

Once we have finished with Josh and Rachel's presentations, we will transition to a live video webcast Q and today's sessions. 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 I'll be reading your questions, and Jessica will help me try to get as many as we can. Please keep in mind that our remarks today include forward looking statements related to our financial guidance and key drivers thereof, the global macroeconomic uncertainty, including the impacts of general market, political, economic and business conditions may have on our business strategy and operating results our opportunity our levers 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 are our investments and their ability to drive growth. Our actual results may differ materially.

Operator

Forward looking statements involve risks and uncertainties, are described in today's earnings release and in our Form 10 Q filed with the SEC on May 5, 2022, and which will be updated in any future our audit report to be filed 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 obligation to Datham. Also during the call, we'll present both GAAP and non GAAP financial measures. A reconciliation of non GAAP to GAAP measures is included in today's earnings press release, which you can find on our are our website along with the replay of this call. As a reminder, our 2021 financial results and KPIs for the Q2 did not include Deepak and EloSeven, which were acquired in the Q3 of 2021.

Operator

With that, I'll turn it over to Josh.

Speaker 1

Thanks, Deb, and good evening, everyone. We continue to experience striking changes in the global economy and consumer behavior this year. And as a result, our Forward visibility is not substantially clearer than it was a quarter ago. Consumers have more choices for where to spend their time and money, and disposable income is under more are pressure than it's been in a very long time. In spite of these headwinds, we're encouraged by the tens of millions of shoppers that return to Etsy, spending only slightly less with are In the Q2 of 2022 than they did a year ago when choices were far fewer and economic conditions were a lot different.

Speaker 1

While markets are It's naturally go through cycles. I'm energized by the agility of the Etsy team, the adaptability of our business model and our ability to deliver solid profitability in a quarter where achieving top line growth was challenging. We have a are in a quarter where achieving top line growth was challenging. We have a lot of conviction that not only is ecommerce poised for meaningful growth over the medium term, are But that each of the 4 Etsy marketplaces has a unique reason to succeed and scale, offering something truly important and are against a sea of sameness. That's why even through a challenging time, we've continued to invest in our people and our businesses, making bold moves that are We very much believe will set us up for continued future growth.

Speaker 1

And we've been able to do this while delivering strong profitability, thanks to the benefit of our discipline, scale and business model. The headline for our 2nd quarter results is that despite really meaningful headwinds, we continued to hold the vast majority of our top line pandemic gains while delivering strong profitability. In other words, controlling the things we can control. Our consolidated GMS was $3,000,000,000 basically flat year over year and up 2.6% on a currency neutral basis. Are Also, when adjusting for the currency impact, GMS for the Etsy marketplace was down only a few percentage points.

Speaker 1

Our consolidated revenue grew 10 point 6% and adjusted EBITDA margin was 28%. Before moving into our operating highlights for the quarter, I wanted to review our recently announced leadership are changes with our Chief Product Officer, Kruthi Patel Goyal, moving to become CEO of Deepak and Nick Daniel, VP of Product, promoted to Phil Kruthi's former role. In her 11 years at Etsy, Kruthi has led almost every function, including strategy, corporate development, international, trust Safety and Seller Services. 4 years ago, I asked her to run our product organization, and she's done a stellar job. She, together with Mike Fisher, our Chief Technology Officer, spearheaded Etsy's product development culture, building focus, customer obsession, agility and accountability

Speaker 2

are Into the fabric of our

Speaker 1

operating rhythms. She's also built an incredibly talented bench of leaders. She's ready to be CEO of a great marketplace brand. Are And in my opinion, there's no one better positioned to take Deepak to the next level. Kruthi will move to London next month to join Deepak's very talented leadership team.

Speaker 1

I'd also like to express my gratitude to Depop's CEO, Maria Raga. Under her leadership, Depop has taken the world by are Storm and defined itself as a beloved culturally relevant brand. We wish her the best in her future endeavors. Nick Daniel joined Etsy 8 years ago, and over the course of his tenure, has led many of the most complex and value driving are our initiatives in our portfolio. For example, the development and growth of Etsy ads and our off-site advertising program, scaling Etsy's marketing technology capabilities and launching our major push into personalization.

Speaker 1

Nick has the strategy chops to set a vision, the technical chops to ensure good execution and the leadership chops to attract and develop world class talent. I couldn't be more are excited about these changes and I'm immensely proud of the depth of leadership talent we have at Etsy. We've been intentional about building and strengthening that bench over the years, putting us in a position to make moves like these. It also highlights the career adventure we're able to offer our team are And even more now with the addition of Reverb, Depop and DLo7. I believe that's one of the reasons why our engagement remains are strong and attrition low even in these more challenging times.

Speaker 1

Nick will now partner with Mike Fisher to lead the teams driving Etsy's right to our product development roadmap. As we've explained on prior calls, this year, we're organized around making Etsy feel more made for you, more efficient and making Etsy more reliable and continuing to support our sellers' growth by offering are more agency and scalability. We've directed more product teams towards active buyer growth, accelerated efforts to deepen personalization in the buyer experience and resequenced road maps to pull forward higher confidence retention and frequency drivers. Are Let's start with search. We currently have about 100,000,000 items for sale, an unimaginable selection.

Speaker 1

And none of it maps Apps to a catalog. Most queries have more than 1,000 relevant search results. We need to get you to the good stuff past, but each person has their own idea of what the good stuff is. That's why it's so critical that we not only have a world class search are our technology, but that we marry it with world class personalization. In this way, we can make Etsy feel truly made for you.

Speaker 1

And along the way, build a competitively differentiated value proposition. We used to have only 1 search engine, which was great at finding search results using text from the listing title, but was limited since it needed to find an exact or near exact text match in are Order to retrieve results, what we've talked about as the semantic gap. Over the past 6 months, we've gotten significantly better at leveraging multiple search engines are simultaneously, each with different strengths. For example, some are better at head queries or tail queries or understanding the true meaning of phrases. We then intelligently blend the results, personalizing them with insights from what you've done in the past and as are Recently, real time data from the breadcrumbs you've left during this

Speaker 2

are

Speaker 1

add to cart and search results made it easier and faster for buyers to find what are love, thereby creating a faster path to purchase with less distractions. This change drove improvements in conversion rate and average order value, a a testament to the fact that we've improved the quality of search and the information provided on the search result page enough that some people are ready to buy are Without even needing to visit the seller's listing page. Last quarter, we mentioned that we have a portfolio of are Early stage visual discovery ideas. We're testing to learn how we can engage buyers when they don't know what they're looking for and to make Etsy more visual, dynamic, are Emmick and Inspirational. Again, more made for you.

Speaker 1

In June, we held a live Etsy market shopping event on our app. Are In the days leading up to the event, buyers could watch trailer videos for each stream and set in app reminders. The event featured 20 sellers are streaming live from their studios, sharing their stories, process, and styling tips. It's a great example of ideas we're testing and iterating are To help sellers reach buyers in new and authentic ways. Another visual discovery app experience are During the quarter, focused on helping buyers gain confidence in a purchase decision by highlighting the experience of other buyers, by enabling buyers to are video reviews.

Speaker 1

We've just started to collect video reviews and make it easier for buyers to access and engage with this content. And we continue to are on the Explore feed to make it even better. We know that reliability has been an important friction point for buyers. If they can trust are that the item will arrive on time, undamaged, and as described, we believe we can unlock significantly more purchases are From each buyer. Fortunately, our sellers generally do a great job delivering quality items at a fair price.

Speaker 1

And we've made major progress are improving metrics like on time arrival over the past 2 years. That's why we couldn't be more excited that our new Etsy purchase protection program goes into effect next week. Are It's going to help make shopping and selling on Etsy far clearer, easier, and more reliable. This program will sellers and buyers for qualifying orders up to $2.50 when the item doesn't match the description, arrives damaged, are Or never arrives. Etsy expects to invest approximately $25,000,000 annually to cover refunds at no additional cost are to sellers.

Speaker 1

And the refund process will become clearer, faster and easier for many buyers. You'll see us get louder on these new policies as we go through the rest of the year, building up to the all important holiday season in q4. And we've been doing more than ever to help our sellers are we've created an entirely new, simple, and we believe very lovable Sell on Etsy mobile app, more maintainable and extensible are with improved usability versus our legacy seller app. Key new features include the ability to purchase shipping labels and to receive a heads up when a repeat are are Also during the quarter, we incorporated seller feedback into our star seller badge, making it more achievable for sellers that provide excellent customer support. We continue are to invest to help sellers who have the skill and the will to succeed on Etsy, and we're proud of the results.

Speaker 1

While we're on the subject of are helping our sellers to grow. This quarter, I also want to shine a spotlight on Etsy Ads. Over the years, we've made meaningful improvements to the availability of ads on our are marketplace, the relevancy of ads we show to buyers, and the tools we offer sellers to manage their spend and how we bid on their behalf. Are This product has been a win win win for our sellers, buyers, and Etsy. Etsy Ads revenue has grown 516 are over the last 5 years, even faster than Etsy Marketplace's 253 percent GMS growth.

Speaker 1

We've continued to close the semantic gap are By leveraging new machine learning techniques to capture intrinsic styles and properties, thereby providing more relevant ad inventory for buyers without compromising conversion are We also recently expanded Etsy Ads inventory to the homepage, while maintaining listing relevance consistent with organic search results.

Speaker 2

Seller budgets are up 80% year to

Speaker 1

date, and we're are Seller budgets are up 80% year to date, and we're maintaining strong ROAS for them as well. We've are our investments meaningfully in Etsy Ads as it's an area where we see a long runway for continued growth. Are As you know, we've been hyper focused this year on driving engagement and frequency. And one area I'd like to highlight is how we've been working to engage low frequency buyers. More engaged or habitual users are generally more adept at coming up with ideas and or finding are are are significant frequency gains over time.

Speaker 1

And we've been making encouraging progress. Recent examples of wins include a revamped, more diverse presentation of items above the hold on the homepage to generate interest and engagement and a revamped user interface prompting signed out buyers to download the app. Are Once again, app downloads had impressive growth, up 53% versus last year's 2nd quarter. Our research are Search and experimentation are giving us creative ideas for layouts that work to encourage scrolling by incorporating trending shops, searches, and categories. All of which, Of course, get far more powerful when combined with the personalization investments discussed earlier.

Speaker 1

This work is just at its infancy, are efforts. Getting the flywheel turning in additional international markets, we believe can unlock significant growth. Recall from the last are call, the insight that penetration rates in the next 15 markets beyond the U. S. And U.

Speaker 1

K. Are about 80% lower than those top 2 Etsy markets, a great data are to support our belief in just how early our growth journey really is. Some recent international wins include the launch of the first are our version of localized xWalk in all our non U. S. Markets.

Speaker 1

We're now applying this powerful search engine technology to optimize results to find the perfect listing are for our non US buyers. Our fulfillment team has been hard at work moving the needle on expected delivery date, postal code coverage for non US orders, and And other transparency and confidence building initiatives. And we recently added another 8 countries to the list of places buyers are are Research shows that one of the top reasons buyers don't shop more often on Etsy is because we aren't top of mind for enough purchase occasions or moments. That's what gives us continued conviction in our marketing efforts. And I'm proud of the agility of our team continuously adapting our strategies and creative to the market environment.

Speaker 1

Are With macro headwinds continuing to be strong in 2022, our team has modified our very successful Meant For You And Why Buy Boring campaigns to remind people of the many purchase occasions for which Etsy is relevant, that all important are while leaning into value and affordability. So the what and the why to shop Etsy during these times. The message in a nutshell is Etsy has home decor, fashion, jewelry and gifts. It's affordable and better on Etsy. We've also incorporated the messaging about extraordinary and affordable into our earned media engagements, our social channels and the marketplace itself.

Speaker 1

Our team has been really creative during this time, utilizing our CRM tools, app notifications, emails, are And other on and offline techniques to drive buyer engagement and frequency. And we also had some great brand building are are 2022 has been a challenging year for all three, each of whom face reopening and other headwinds similar to those faced are our core marketplace. Current business conditions notwithstanding, we have a lot of conviction that we're in the extremely early days of realizing value are from our House of Brands. Kruthi will hit the ground running at Depop in September, where she'll be focused on incorporating our product development culture to increase product velocity, With goals that will sound a lot like what she's accomplished for the Etsy marketplace, highlighting sellers' unique inventory, improving search and discovery, are elevating the human connections on the marketplace and making Deepak more relevant to more of its target audience and building trust are fostered one of the most passionate communities in e commerce, and it has only scratched the surface when it comes to reaching its full potential. Reverb and EloSeven each have responded to macro challenges with creative approaches designed to set themselves up for future growth.

Speaker 1

Are Reverb helped buyers find their perfect instrument with updates to on-site search algorithms, localization enhancements, are enhancements and improved domestic discovery in the UK. To meet buyer expectations on free shipping and are they helped buyers connect with sellers offering customer services like free 2 day shipping and 30 day return policies. In addition, Reverb built SEO optimized landing pages and drove adoption of My Collection, a feature that helps buyers track the value of their music gear are Over time. EloSeven improved the buyer experience by introducing signals and nudges into the purchasing journey, while are expanding delivery carrier options for sellers to materially reduce shipping costs, increase speed, and improve transparency for are Performance marketing remained an important focus as Elo 7 continues to leverage the Etsy playbook for improving spend are our business model, which we want to highlight today as one of the key factors that gives us are comfort in uncertain times. We see multiple scenarios possible for the remainder of 2022, but even in downside scenarios, are We believe we are well positioned to deliver healthy profitability.

Speaker 1

We'll keep focusing on the things we can control, driving great customer experiences,

Speaker 2

investing with discipline and care, and helping our team

Speaker 1

to minimize distractions and are are in the fact that our work has purpose, delivering value and economic opportunity for millions of sellers and giving tens of millions of buyers are experiences they can't find anywhere else. And most of all, the chance to keep commerce human. Thank you for your time. And are With that, I'll turn it over to Rachel.

Speaker 3

Thanks, Josh. And thank you, everyone, for joining us for our 2nd quarter earnings call. My commentary today will cover consolidated results, key drivers of performance, and Etsy marketplace standalone are are results and KPIs for the Q2 of 2022, but Depop and EloSeven are not included in our Q2 2021 results. On a consolidated basis, our 2nd quarter GMS was basically flat year over year at $3,000,000,000 while revenue increased 10.6 percent year over year to $585,000,000 and adjusted EBITDA was $163,000,000 with a 28% margin. Are The Etsy marketplace transaction fee increase and growth in Etsy ads drove strong revenue performance, and we delivered are Adjusted EBITDA margins ahead of our expectations due to disciplined marketing spend and solid profit flow through.

Speaker 3

Are On a currency neutral basis, GMS increased 2.6% year over year as FX was a 300 basis are Headwind. The 2nd quarter featured challenging comparisons as our consolidated GMS increased 13% year over year are. In the Q2 of 2021, on top of a 146% expansion in the Q2 of 2020, fueled by the initial broad based pandemic lockdowns. In contrast, today we are seeing mobility nearing 2019 levels, a challenging global are macroeconomic environment and ongoing geopolitical uncertainties. I'll dive into these factors shortly.

Speaker 3

Marketplace are Revenue increased 11% year over year, and services revenue expanded 9%. The growth in our marketplace revenue was largely driven by the Etsy marketplace transaction fee increase from 5% to 6.5% effective April 11th, as well as a benefit from the inclusion of our acquisitions of Deepop and Nevo 7. Within services revenue, consolidated ads revenue increased 12.1% year over year, Primarily due to ongoing enhancements to Etsy ads relevance and click through rate, as well as more ad inventory throughout the buyer experience. Better than expected growth of Etsy Ads also drove consolidated take rate to 19.3% ahead of the take rate implied are our guidance. Our 2nd quarter consolidated adjusted EBITDA margin was 28% above our are expectations and above the 26% reported last year.

Speaker 3

The primary driver of the adjusted EBITDA margin improvement was disciplined marketing Ben and the continued growth of Etsy Ads. Consolidated EBITDA margins are also impacted by headwinds related to our 2 new are lower margin subsidiaries that were not included in year ago financials. Our 3 subsidiaries were more than a 400 are headwind to our consolidated adjusted EBITDA margin with Depop representing the primary drag. We have a lot of conviction that the strategic rationale for acquiring Depop and Nilo 7 is sound, providing us access to the large resale apparel market and opening are Up an untapped market opportunity in Brazil. It's also fair to say that given current significant macroeconomic headwinds, both companies have to date performed are below the financial expectations that we had a year ago.

Speaker 3

That said, we remain confident in the long term growth models for each of these businesses and believe it is early days in unlocking that value. Other factors contributing to our bottom line results include investments in headcount growth both an increased compensation, including stock based compensation, with the largest portion in product development where the majority of our engineers sit. I will dig deeper into headcount growth in a moment. In the second quarter, our stock based compensation increased sequentially due to the annual refresh grants that were priced in March are And therefore had a full quarter of impact. Finally, we had higher cloud computing costs related to greater development activity on a year over year basis.

Speaker 2

Are As you know,

Speaker 3

our marketplace operates with minimal capital requirements and there are relatively few expense are we designate as fixed. These would include our leases, the minimum obligations associated with our cloud computing costs, certain portions of our compensation, And our public company costs. The vast majority of our consolidated expenses are variable or semi variable. Are. Variable expenses such as performance marketing move dynamically with revenue.

Speaker 3

Semi variable costs are less dynamic, are But are those we can moderate by tapering up or down as business demands rise and fall. So for example, we significantly slowed new hiring this past quarter in order to are align with our pace with top line trends. That decision enabled us to invest appropriately in our existing team and stay the course on marketing and other investments while maintaining healthy profit margins. Moving to product development, in the second are consolidated product development spend was $102,000,000 up 65% year over year, largely driven by headcount growth, including the Depop EloSeven Acquisitions. Our product development expenses as a percentage of revenue moved sharply lower when revenue rose are.

Speaker 3

In 2020 2021. Meanwhile, during this time, we hired at a steady pace in order to scale in

Speaker 2

a more sustainable way. Product development

Speaker 3

as a percentage of revenue is now at are. Product development as a percentage of revenue is now at a healthier level of spend, similar to our pre pandemic are. Which we believe is appropriate to enable future growth. On a trailing 12 month basis, revenue per average full time headcount for Etsy Marketplace was in

Speaker 2

are Stock based compensation and

Speaker 3

cloud computing costs are factored into our measurement of ROI for product investment. So when we add incremental people. We also increased our GMS and revenue targets and maintain our expectation that product investment is ROI positive in the portfolio within about 2 years. We continue to make strategic investments that do not directly generate incremental GMS, but help us to scale our business, optimize development capabilities, and keep the marketplace are During the Q2, consolidated marketing spend declined 2% from the prior year to $164,000,000 And as are. Percentage of revenue, quarterly marketing spend has been relatively consistent overall for a couple of years.

Speaker 3

Our performance marketing spend are. Are search trends for our related terms. This was partially offset by a higher LTV related to our transaction fee increase, are Which allowed us to spend more. Our brand marketing spend increased 4% year over year in the second quarter as Etsy

Speaker 2

are He was on air in our top

Speaker 3

3 core markets with spending somewhat elevated versus the same time last year. So to summarize, while we are We modestly pulled back our performance marketing spend during the quarter. The ongoing improvements to our marketing models allowed us to deliver greater profitability with minimal impact to are GMS. Moving to our Etsy marketplace performance metrics, we have maintained the vast majority of our pandemic gains with GMS increasing 141 are on a year over 3 year basis. For context, we delivered $2,600,000,000 in GMS this quarter compared to 1,100,000,000 are in the Q2 of 2019.

Speaker 3

It's a nice reminder to also look at how well we are doing today compared with the Q2 of 2020 when we had such a are impact from sales of face masks. From a geographic perspective, 44% of Etsy Marketplace GMS in Q2 of 2022 was from transactions where either the buyer or the seller or both were outside the United States. Non are USGMS was up 3% year over year on a currency neutral basis, which was driven in part by strength in Germany, where we've intentionally built our are over the past few years, offsetting weakness in the UK, which continues to face difficult comparisons primarily due to strict lockdowns in that country a year ago. It's also worth noting that we continue to see that our mobile app share of GMS, which crossed desktop to become the highest GMS contributor in the Q1 of this year, climb as a percentage of GMS in the 2nd quarter. Are Let me take a moment to unpack the various macro factors impacting the Etsy marketplace.

Speaker 3

Starting at the top, the Etsy marketplace declined about are 6% in this quarter versus prior year, meaning we kept 94% of our GMS in the same quarter a year ago. Are As a reminder, in the Q2 of 2021, we continue to experience elevated GMS goals related to economic stimulus payments in the US, high COVID case counts, and low vaccination rates. Are. In contrast, today we are seeing the mobility indices approach 2019 levels as people continue to spend more time out of their home, being less time and money for at home shopping. This slide shows a walk for Etsy Marketplace GMS on a year over 3 year are from mid January through June.

Speaker 3

Based on 3rd party data and our own estimates, we believe there has been a very high inverse are between Etsy USGMS trends and US retail and recreation mobility trends, particularly given our exposure to pandemic categories such as home and living and craft supplies. On this chart, we've estimated that about 75% of our year to date declines can be attributed to these are We attribute the remainder of the decline to FX pressures, macroeconomic factors impacting consumer discretionary spending, inflation as well as the ongoing crisis in Ukraine, which was a supply side factor for us throughout the second quarter. Are Overall, consumers have many more places to spend their money and less disposable income, which has driven week to week volatility in our business. Similar to our commentary last quarter, we have only seen a modest impact from inflation on the price of goods on etsy.com as it appears our sellers remain largely hesitant to increased prices and they often offset pricing increases with discounting. Diving a bit deeper into categories, reopening headwinds have specifically pressured the home and living and craft supply categories, which collectively represented over 40% of our 2nd quarter GMS are And we're meaningful beneficiaries of stay at home related consumer purchasing trends during the pandemic.

Speaker 3

Are Trends remain positive in paper and party and apparel categories as consumers continue to shift to in person events and activities. Demand was also strong for are Travel related needs, including luggage tags, travel wallets, and fanny packs. Weddings and parties remain bright spots, especially wedding favors are as larger in person weddings resumed. GMS per active buyer on a trailing 12 month basis for the Etsy marketplace was $136 in the are down slightly on a sequential basis. On a cohort basis, spend levels for all of our cohorts remain ahead of pre pandemic levels as all of our buyer cohorts remain more valuable today than before the pandemic.

Speaker 3

As an example, we looked at our 2020 cohort, which was first acquired during the pandemic compared to our 2017 cohort, which is an example of a typical cohort short term performance pre pandemic. Slide 26 shows that our 2020 cohort materially outperforms that earlier cohort in terms of value. We also monitor the spending trends by buyer demographic, specifically income level. So far this year, we have seen fairly are GMS distribution across income levels, although it has shifted slightly away from lower income buyers as we continue to lap last year's stimulus check benefits, similar to trends we are seeing reported across retail. Encouragingly, our buyer metrics remained largely stable across active, repeat, and habitual.

Speaker 3

Are We ended the quarter with nearly 8,000,000 habitual buyers, down 2% sequentially and 1% versus last year. Are These loyal buyers accounted for 46% of our GMS in the 2nd quarter. Habitual buyer growth in core non US markets are. We added 6,400,000 new buyers in the quarter, nearly 50% higher than in pre pandemic periods. Are Still, this was down 20% from the prior year and as expected, creates a material headwind to our growth.

Speaker 3

We again debated about 5,000,000 lapsed buyers in the Q2. The composition of our lapsed buyer segment is increasingly compelling. Recently lapsed buyers, are those that made their last purchase between 13 24 months ago now represent about 40% of the lapsed buyer total. We believe these buyers are ripe for reactivation with strategic product and marketing investments, particularly given our improved CRM tools. Are Moving to the balance sheet, as of June 30th, we had 1,100,000,000 in cash, cash equivalents, and short and long term are and a $200,000,000 revolver that is currently undrawn.

Speaker 3

During the Q2, we repurchased $62,200,000 are in stock under our $250,000,000 December 2020 board authorized repurchase program, which we completed in early July. Are As noted in our 10 q, in May 2022, the Board authorized a new $600,000,000 repurchase program. Operating cash flow for are that our guidance assumes currency exchange rates remain unchanged at current levels. As a reminder, in the Q3 of are 2021, Etsy reported consolidated GMS growth of 18% on a year over year basis, and GMS increased 1 are 59% from the Q3 in 2019. We currently estimate our Q3 2022 consolidated GMS to be approximately 2 percent compared to the Q3 of 2019.

Speaker 3

For the Etsy marketplace, this implies a decline of mid to high single digits. Are Said another way, at the midpoint of our guidance, we expect to deliver GMS of around $2,900,000,000 compared to 1.2 are in the Q3 of 2019, nearly 2 and a half times larger than before the pandemic. We are forecasting revenue of are revenue of $540,000,000 to $575,000,000 up about 5% at the midpoint compared to the Q3 of last year, and up about 180% compared to the Q3 of 2019. Our 2 new subsidiaries also contributed to growth in the 3rd are our last year and we passed the anniversaries of these acquisitions a few weeks ago. We currently expect an adjusted EBITDA margin of approximately 26% with investment in Etsy purchase protection and higher compensation costs related to a full quarter of our now larger employee are being the primary factors in the sequential decline.

Speaker 3

We are encouraged to see that the year over 3 year deceleration we have are in the past two quarters has shown signs of slowing significantly over the past 8 to 10 weeks as you can see on this chart. Are In our view, it appears the curve has started to flatten. However, we have not yet seen a return to growth on a year over year basis, nor are we certain are that year over year growth rates have bottomed given the present macro uncertainty and would therefore recommend you consider these trend lines when you are modeling 4th quarter GMS. Are Recall that in the Q4 of 2021, Etsy reported consolidated GMS growth of 17% on a year are basis, and GMS increased 154% from the Q4 of 2019. Very high comp are hurdles to be sure.

Speaker 3

It's also fair to say that we are now more cautious than we were on our last earnings call given continued macro pressures, particularly are consumer discretionary spending, the strong correlation between our business and mobility, and the inflation factors described earlier. Are Unless macroeconomic factors become significantly more volatile, we believe the 4th quarter will track historical holiday seasonality as our largest GMS are for the year. Lastly, for your models, we substantially adjusted our hiring plans during the Q2, which will result in a lower pace of hiring in the second half. However, our second half P and L will reflect the additional headcount we have already added. In terms The marketing spend, we generally spend more in marketing in the second half of the year versus the first, in particular, leaning into brand marketing during the holiday season.

Speaker 3

Our performance marketing investment is largely variable with demand, and we continue to set ROI thresholds for our spend are that keep the last marginal dollar spent at or above those thresholds. We currently expect consolidated take rate for the second half of the year to be largely in line are the 2nd quarter. Thank you all for your time today, and I'll now turn the call back to Deb to take your questions.

Speaker 4

Hi, everyone. Good evening. First, I want to start by saying I know there were a couple of issues during the recording being played back. So if you go to our site later this evening, you should be able to find a fully loaded video with all the audio clear. Are.

Speaker 4

And with that, I will start into the Q and A. Thank you all for submitting the questions. We'll get to as many as we can. So I'll start with Ed Yruma from Piper Sandler. Has there been a change in the seller base since you increased fees?

Speaker 4

I'll start with that one for Josh.

Speaker 1

Yes, thanks for the question. We haven't seen any noticeable change in the seller base that we can track to the change in fees. In fact, I'm happy to report that seller sentiment has rebounded pretty significantly since the fee change went into effect. And I think that's a testament to the fact that we're doing exactly as we said and reinvesting back in the community. So we've got some great TV campaigns going.

Speaker 1

I think that the purchase protection program is a great testament to the kinds of things we're doing to invest that, that sellers really care about. So they know we have their back are buyers care about to bring more buyers back. The refreshed seller app, that we've launched and, the refresh of the Star Seller badge, are and lots of other good things. So we're encouraged by that and we'll keep building.

Speaker 4

Great. Thanks, Josh. Next one came in from Kunal Madhukar from UBS. Given search is such a challenge, how easy or tough it is to scale into different languages and countries.

Speaker 1

Great question. Thank you. The techniques that we use are generally language agnostic. Are These are quite advanced machine learning and neural network techniques that work, regardless of the language. Of course, it does take work to make the models adapt.

Speaker 1

Are we need data and then the size of the training sets matter. But we have recently expanded many of the techniques are into many of our international markets, and we do definitely see gains. You know, one example we talked about last time was translation engines. I don't mean literal translation from Spanish to English, for example, as I said, but understanding the context of a word. So for example, Tiesco.

Speaker 1

In English, mostly people are referring to the DJ, DJ Tiesco. If you're in Spain, the word Tiesco actually means flowerpot. And so, we're using models that are sophisticated enough to understand what you meant, not just what you said. Are. And that can be particularly powerful when we're talking about going from one market to another.

Speaker 4

Okay, great. Thanks, Josh. Are I'm going to give Kunal another one. The, while it may be early for the buyers you have added in the past 2 quarters in 2022, is their behavior different from the new buyers you added during COVID? And how has behavior changed, new buyers pre COVID to today.

Speaker 4

I think we had that one to be one for Josh and then Rachel can add if you'd like.

Speaker 1

Sure. So Rachel showed in her prepared remarks that The cohorts we've acquired since the pandemic actually are more valuable or spending more are Then, the cohort then what, pre pandemic cohorts were doing before the pandemic. And that's continued to be true over the past 6 months or so since we've really felt the reopening come on much more strongly. So we're really encouraged by that. Are And we continue to acquire a lot of new users who are great, new buyers.

Speaker 1

We are acquiring new buyers not as fast as we were during the peak of the pandemic, that's for sure. But we're still acquiring them faster than we were before we entered are the pandemic. We're also reactivating lapsed buyers and we think there continues to be a big opportunity there. Are.

Speaker 4

Okay, great. Rachel, are you okay with that one? I think, yes, we'll go to the next one. Okay. The next one is from Ed Yruma are from Piper Sandler.

Speaker 4

Can you talk about the dynamics driving the reduction in GMS per active buyer? Is this a function of mix or are you seeing signs of TradeDown. That one, I'll get to Rachel.

Speaker 3

Sure. Hi, Ed. Nice to have you back in the on the Etsy team here. Are We we what we said on the call was that GMS, per trailing 12 month buyer in the quarter was up year over year, are down slightly sequentially, but it was really down just a bit. GMS per active buyer in the quarter, are meaning the actual number of active buyers in the quarter was basically flat year over year.

Speaker 3

So there's a slight decline in the total number of active buyers on a trailing 12 month basis who were active in Q2, which basically explains that sequential decline on the trailing 12 month number.

Speaker 2

Are If

Speaker 1

I can just jump in on that. So if you look at the total number of people who bought in the Q2 and divide the GMS are from them by the number of buyers that were active. Year over year, it's about flat. And we think that's actually really encouraging in spite of reopening are And in spite of inflation and all of the other economic headwinds, the buyers that are buying with us are spending about as much are year over year, and that's roughly flat. We are seeing a very slight decline in are the number of active buyers in Q2 relative to trailing 12 month.

Speaker 1

And again, no surprise that When people have a lot more options for where to shop and their pocketbooks are tighter, we might see some contraction in the number of active buyers, but actually all things considered, we're pretty encouraged by how those trends are holding up as well.

Speaker 4

Are. Okay, great. Thanks, Josh and Rachel. Next one is from Rick Patel at Raymond James, also back in the saddle. Can you talk about inflation?

Speaker 4

Have your sellers begun to pass along higher prices in response to their input costs being up? If not, do you see an opportunity to educate the seller community on driving higher GMS like you did with the merits of offering free shipping in the past?

Speaker 2

Are Josh, do you want to start with that one?

Speaker 1

Sure. The short answer is no. We are not seeing sellers take up their net prices are to account for the higher input prices that they have. And so providing them more education and tools are Might well be a strategy, and it's certainly something we're taking a hard look at right now. We are also seeing a lot of discounting in the market.

Speaker 1

Walmart are reported yesterday that they've got oversupply and so they're having to do a lot of discounting. It's moments like that when I continue to be grateful that our model does not require us are to spend 1,000,000,000 of dollars buying inventory in advance on the hopes that there will be demand for it when it finally arrives weeks or months later. Are But nonetheless, there is a lot of discounting in the market. So here's what we've seen. We've seen over the past 5 years, are Sellers take their headline list price up by about 9%.

Speaker 1

Now not 9% a year, in total over 5 years. Are Item prices have gone up by about 9%. We've also launched a lot of sales and promotion tools that our sellers are can use to put things on sale. And our sellers are using those tools, and they're using them with increasing frequency. The result of that is actually that it completely offsets The increase in item prices, meaning that the net item price has been basically flat for 5 straight years.

Speaker 1

Now our sellers, are It also means our sellers are armed with the kinds of tools that they might need in a time like now where there's a lot of heavy discounting and promotion where they can compete are for that. And so we're happy that we're giving them tools to be able to compete and win. But it does mean that while many other are retailers might be promoting might be reporting revenue in GMS numbers that are benefiting from price inflation. Are Our sellers do not appear to be doing that at this time.

Speaker 4

Okay. Thanks, Josh. The next one comes from Tom Forte at D. A. Davidson.

Speaker 4

How should investors think about your staffing levels given comments by your e commerce peers such as Amazon and Shopify suggesting that they are currently overstaffed for today's level of e commerce demand with Shopify going so far as to implement a 10% reduction in force. Josh?

Speaker 1

Are Yes. Thanks for the question. I think that our staffing level is just about right. We're at about the right size and shape right now. We feel pretty good about it.

Speaker 1

And just to give some context, are When our revenues more than doubled overnight in the Q2 of 2020 and then stayed at those elevated levels and grew, We did not throw caution to the wind and suddenly go on a massive hiring spree and, you know, hire super quickly. There's a certain cadence at which you can interview people well, make sure you're getting high quality people, make sure that they have a job That's a clearly defined job, that their manager is ready for them, that they're well trained. There's a certain cadence at which we think you can responsibly hire. Are. And so, we let revenues lead.

Speaker 1

And what we said quarter after quarter is margins are higher than we like are And we are more leveraged than we like. It's just that we can only hire at a certain pace. We also said traffic has also doubled. So every new product release that our team does has twice the impact because we're driving conversion rate on twice the traffic. Are: And so revenues have led headcount, but headcount has caught up.

Speaker 1

And Rachel showed a slide showing that now product development expense as a percent of revenue is roughly back to where it was before the pandemic. I do want to point out that those numbers include the acquisitions are of EloSeven and Deepop. Both of those are earlier staged companies, earlier in their life cycle, so they're not as leveraged as Etsy. But I think that when we benchmark us to our peers, we look good. And I think especially if you look at the Etsy standalone business, we think that we benchmark quite well relative to the peer set.

Speaker 1

Are So we're happy that we have been thoughtful and careful as we've gone. We've never been a growth at all costs company. Are We've always been disciplined about investments, but we think we're about the right size and shape right now. So we have slowed hiring are: As business conditions have slowed, we started to significantly slow hiring in the Q3. We don't have a hiring freeze.

Speaker 1

We are still hiring, are But not at the same pace that we were in the first half of this year and we think that's appropriate.

Speaker 4

Okay, great. The next one. I think these 2 I'll give back to back for Rachel. First one is related to performance marketing from Lee Horowitz at Deutsche Bank. On the performance marketing spend declines in the quarter, with much of those declines being driven by internal initiatives across your marketing team, how should we think about how performance marketing should evolve for the second half of the year.

Speaker 3

So, thank you for the question. Performance marketing, as we've said many times, are For us, varies dynamically with demand. We the when we when we, did our transaction fee increase, are We were able to increase lifetime value, and so our models dynamically adjust to that higher lifetime value. We can spend more are And spend deeper into the ROI curve. And on the other side on the other hand, when demand is softer, it will dynamically pullbacks.

Speaker 3

So we had we saw both of those things happening in the second quarter where we had, some decreased spending because of lower demand, are And on the other hand, being able to spend a bit more, because of higher LTV. Said another way, we would have spent less had we not had the higher LTV. So flash forward going forward, we have continued we have this continued higher lifetime value. We can continue to lean into that ROI curve. Are And we will expect to what we said on the call was we would expect to be spending more and we typically spend more in the second half of the year than we do in the first, a lot of that driven by the seasonality of higher demand as we get toward the second half of the third quarter and the are And into the holiday season in Q4.

Speaker 3

And, we also said that in addition to performance marketing, we would typically spend more on brand are our Q4 also because demand is higher at that time.

Speaker 4

Thanks, Rachel. And then and a follow-up, I'll ask one from Anna Andreeva at Needham. How should we think about Etsy brand marketing spend in the second half as you start going against the pullback in marketing in Q3 of 'twenty one and Q4 of 'twenty one? Can you also talk about the off-site ads and how that's been trending in line or ahead of expectations?

Speaker 3

Thank you, Anna. Let me take the off-site ads question first. Basically, off-site ads is trending in line. It's been about 1 percentage point of take rate improvement are More give or take a little bit here and there, but we're trending roughly in that same neighborhood. On brand marketing, like I said, we typically do spend more are on brand marketing in the Q4, so relative sequentially, right, relative to the first half of the year.

Speaker 3

In the second half, we would expect to spend a little bit more

Speaker 2

are On brand marketing year over year, I

Speaker 3

don't think we've given a guide on that specific number, but we aren't necessarily doubling down because we try to make brand marketing as dynamic as we do with performance marketing, meaning where demand when demand is there, we'll spend more. Are We did expand from the U. S. Into the U. K.

Speaker 3

And Germany as well in the last year. We'll continue with that because we've seen very high are And high ROI on that spend as well as very positive brand marketing results with how, well we resonate top of mind in those markets. So, we we attribute a lot of that to the success of the brand campaigns.

Speaker 4

Are. Great. Thanks, Rachel. Next one, I'll give to Josh, from Noah Zatzkin at KeyBanc. Are are there any actions you're taking in the near term to improve performance at Depop and or EloSeven?

Speaker 4

How are you thinking about the long term opportunity for your 2 brands.

Speaker 1

Thanks for the question. We continue to think it's early days and that Depop is are a great brand with a great community and a great space. So we think that re commerce is going to continue to be a big and important space, and we think Gen Z is the place to be, and Depop is the choice of Gen Z. So we continue to be excited, and it's early days are for Deepak and Elo7 as well. We think Brazil is a really exciting are our Economy a really exciting market and having a foothold there, we think is really important.

Speaker 1

We made these investments with an eye to the long term, not the short term. Are Anne, we are absolutely investing to have an impact there. So I think, Kruthi coming over to Deepak brings tremendous know how. I talked in the call about her 11 years of tenure in almost every role at Etsy. We've also are taking Etsy alumni, now, run the technology team and the product teams, are very talented leaders.

Speaker 1

I think it really speaks to the bench of talent that we have at Etsy are That we're able to do this kind of knowledge transfer and talent transfer. But they're hard at work right now on accelerating the velocity are And the measurability of the product work that we're doing. You know, one of the core, cadences of Etsy that's been so effective is really being able are look at what's truly driving impact in GMS and focus our work on things that are truly unlocking gains. We're building a lot of that are into Depop, really working on building performance marketing systems at Depop that can accelerate growth, are where we can be more measurable and attribute to ROI there. And so we're encouraged are By the work there and then more in search and discovery, that we can do.

Speaker 1

And EloSeven also, there's been a really terrific partnership. Are So for example, they're making a lot of gains right now, getting shipping costs down through negotiations with carriers. They're also seeing real gains with are performance marketing and our ability to help them be more thoughtful about how and where to do their performance marketing. And so We're very encouraged by our opportunity to add value. We think it's early days and we're excited for the future.

Speaker 4

Great. Are Wanted to ask Rachel this one from Rick Patel at Raymond James. How should we think about lower EBITDA margins in Q3 given the upside you had in Q2? Is are Is there something specific about Q3 or the timing of investments that would cause the downward pressure sequentially?

Speaker 3

Happy to answer that question. So there's one main reason I can cite that is are suggest the sequential decline in Q3 margins, from the guidance that we gave. And that that's because, As I said on the call and as Josh reiterated here, even though we have slowed hiring for the rest of the year, are We have been hiring steady as she goes for the last 4 to 6 quarters. And so we have sequentially more headcount, full, you know, full quarter of, more headcount in the Q3 than we did in the Q2, including the headcount we acquired, with the acquisitions of Depop and EloSeven. In addition, we try to stay very competitive on our compensation.

Speaker 3

We do an annual market assessment and we adjust compensation relative to what we learned from that market assessment. And so we've are competitive and higher compensation costs and more people in Q3 versus Q2 drives the primary reason for the are deceleration. That's offset by a higher flow through of revenue from a higher transaction fee. We get a full quarter of that in Q3 as well.

Speaker 4

Rachel, also the purchase protection.

Speaker 3

That's good. And I think we have another question coming up.

Speaker 2

Yes, I

Speaker 4

was going to ask that one next,

Speaker 2

but go ahead.

Speaker 3

So, we've talked a lot about this purchase buyer purchase protection that we've recently just launched. We've talked about that being about a $25,000,000 investment off our P and L on an annualized basis. So we'll be getting a partial quarter of that in Q3 that we did not have in Q2. That is something that has not are To date, we haven't done a large marketing or promotional push so that buyers better understand that we're offering this purchase protection. So right now, that's a full are expense on our P and L are not necessarily being offset in the near term with GMS.

Speaker 3

It is something over the long term that as we build trust in our brand that we would expect to see some benefit. That's the reason that we're doing is higher trust in the marketplace. We'll remove one of the big friction points we have in repeat frequency and new buyers coming to the site.

Speaker 4

Yeah, that's great, Rachel. Thank you. I was actually going to follow-up with Josh on a question from the Vet Con from Truist about just in general about purchase protection and how we see that as a long term growth driver. I don't know if you want to add anything to that, Josh, but are

Speaker 1

Only that I don't think it's a silver bullet that all of a sudden changes things, but brands that are known to have your back in gender loyalty and frequency. And we know that nagging voice in your head of what if it doesn't arrive or what if I don't like it, can be a real friction point are on Etsy, particularly when you're buying, the nature of Etsy is you're buying an unbranded product from an unbranded seller. So we think that by backing it with the full faith and trust of Etsy. We can give you the confidence and we think earn more frequency. Are If you think about the brands that are really famous for this, it didn't happen overnight.

Speaker 1

It's something you earn and people have an experience and you have their back and they tell their friends and it are But, and, you know, fortunately, this is affordable for us because our sellers generally do a great job. And people, are as a percentage of our total volume, don't have a lot of really bad experiences, which is which is what makes it feasible for us to step into this gap.

Speaker 4

Are. Great. We're going to go a couple of minutes over because we are, you know, our prepared remarks were a little bit long. So one is for you, Rachel, on guidance, from John Colantoni from Jefferies. And I'm going to shorten the question a little bit.

Speaker 4

Can you just sort of talk about the midpoint of the Q3 GMS guidance and what's implied on a sequential basis. I think that would be sort of the core of the question.

Speaker 3

Yes. So, there It hits 2 of my favorite charts in the slide deck. I'm not sure if you've been able to see them. But on one slide, we did outline the walk are for q2 what we thought the primary drivers of the GMS decline was and by far the largest are D Cell was coming from what we call mobility. We're almost at, all the way back to the mobility level according to Google Mobility Index that that we were in, Q2 of 2019, you know, or, you know, well before the pandemic.

Speaker 3

So people are out. They're dining out. They're they're shopping online. They're they're they're traveling, and that was the biggest, decline in what we saw in q2, and we would expect, We have no reason to believe at this point that there would be a big difference in that, on our Q3 numbers. Now the second favorite chart was the Q3, are the monthly's that we gave implying where we are, that we're seeing this flattening between May June, between June July.

Speaker 3

And so at the at the high end of our guidance, we're basically flat year over year on on year over 3 year rather on on GMS. And at the low end of the guide, we're we see a continued slight deceleration, but at a slow on a softer slope.

Speaker 4

Great. Thanks, Rachel. And I'm going to just take one more, from Seth Dunlop at Morningstar, and this one I'll ask Josh talk about, are we fully penetrated, in terms of ad load now that we've added, ads to the homepage? What are the future growth opportunities, for Etsy ads?

Speaker 1

Great question. One thing I'll just say, on top of Rachel's question, of course, everything she said, FX is also something of a headwind. It's several percentage points, in fact, are Of a headwind to GMS. So just something to think about. I think in light of that, even more encouraged by how well we're holding up, considering part of this is just FX.

Speaker 1

Are. So the ad load, we're really excited about the continued opportunity for Etsy Ads over time. That team has just done a great job. And when we think about headcount and hiring, by the way, we had a tiny group of people, one squad on that for the longest time, and now there's a few Quads. But for a business that generates the kind of benefits that it does for the community, the kinds of revenue and profit, it's still a very small team.

Speaker 1

Are. And so the question of ad load, have we covered every surface we could on Etsy? Are Actually, it's more complicated than it sounds because the answer is it depends on the quality of ads, right? If the quality of ads are as good as organic are search results. Then you could imagine ad load being very high, right?

Speaker 1

If the quality of the ad product is much worse Then organic, then anywhere you put ads comes at the expense of organic listings, which would be better. Are So the relevance of the ads that we serve has gotten dramatically better over time. And as a result, are There's less variance. In fact, there's often no variance between the GMS produced by an ad or the GMS produced by an organic listening. And as the relevance of ads gets better, as sellers more sellers take up their budget, are That allows us to actually expand ad coverage or ad load even more.

Speaker 1

They actually go hand in hand. There was a question asked about seller budgets. Seller budgets are up 80% year over year on aggregate. So that I take is are a nice testament that sellers are getting good ROAS relative to their expectations and what they want and need from the program. That's an aggregate.

Speaker 1

Are But in fact, some sellers still achieve their full daily budget in the 1st hours of the morning, right? And so there's still room to go on getting more sellers to increase are We still think there's a lot more we can do to make the search engine even more relevant. And as we do those things, we can expand ad coverage or ad load are even more.

Speaker 4

Okay, great. We went over by a few minutes. So I'd like to thank everybody for your time and we will talk to you all soon. Thanks, Josh. Thanks, Rachel.

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Earnings Conference Call
Etsy Q2 2022
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