Etsy, Inc.

Hi, everyone, and welcome to Etsy's third quarter 2020 earnings conference call. I'm Deb Wasser, VP of Investor Relations, and joining me today are Josh Silverman, CEO, Rachel Glazer, CFO, and Gabe Ratcliffe, our Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&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 Gabe will help me try to get to 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 impact of COVID-19 on our communities, business, and strategy, the potential benefits of our 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 are 10-Q filed with the SEC on August 6, 2020, and subsequent reports that we file with the SEC. Any forward-looking statements we make on this call are based on our beliefs and assumptions today, and we don't have any obligation to update them. Also during the call, we'll present GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which you can find on our IR website, along with the replay of this call. With that, I'll turn it over to Josh.

Thanks a lot, Deb. And hello and welcome, everyone. The third quarter was another quarter of really sustained momentum for Etsy, which speaks to, we think, the strength and the dynamism of the business model. And as much as anything, I'm incredibly proud of how the team showed up yet again this quarter. In fact, we took a recent employee engagement survey, which showed that employee engagement at Etsy is incredibly strong. At a time when so many forces are trying to divide us, Etsy employees are coming together to support each other and really focus on the mission, serving our buyers and our sellers. And being proud to work for Etsy is something that we don't take for granted at a time when there's so much division in our society. So we are very focused in this quarter on leveraging all of the strength and momentum we've had in the business to lay the foundation for continued strength far into the future. Rachel's going to take you through the numbers in more detail, but it was a very strong quarter across the board. And the headline is that the macro headwinds that we expected to see in the third quarter really didn't materialize. As a result, GMS and revenue were ahead of our own expectations, which meant that EBITDA margins were also significantly ahead of our expectations. But let's unpack what's driving that growth, turning to slide five. We are very, very focused on the activity of our existing cohorts and our new cohorts. And I'm sure you all are as well. So let's unpack those together. First, new and reactivated buyers grew at an astonishing rate. In fact, we added 15 million new and reactivated buyers over the 12 months ending in the third quarter. In addition to that, active buyers grew by 56% year over year to 69 million active buyers for the 12 months ending in the third quarter. And that's out of a total base of 138 million unique buyers who've ever bought on Etsy. So one way to interpret that is that half of everyone who's ever bought on Etsy has bought in the last 12 months. That's both great in terms of Etsy's ability to reawaken many lapsed buyers, but it also means there's still a ton of opportunity to go and reawaken existing lapsed buyers. And part of the reason why we think that we're seeing so much success there is is, as we've said before, people who've bought on Etsy have generally had a very good experience. And so when we reach out to them and say, why have you not bought in the last 12 months? The most common answer we get is, well, what do you mean? I love Etsy. I thought I'd bought more often. And we tell them, no, you actually haven't been in the last 12 months. And they said, oh, gosh, I just didn't think of it. So now in this moment, a lot more people are thinking of it, and we're seeing that show up in terms of the reactivation of buyers as well as the addition of a very substantial number of new buyers. Let's take a look in slide six at how those cohorts are performing. First, about 75% of the purchase activity in the third quarter was from people who joined Etsy prior to 2020. These are cohorts from 2019 and prior. And we're seeing a real step function increase in purchase activity from all of our prior cohorts. Taking the 2018 cohort as one example, what we show you here is for people who made their first purchase in 2018. They made about 60% more purchases or 60% more GMS they purchased on Etsy in the third quarter of 2020 versus the third quarter of 2019. And as you'll see on slide six, about 50% of that was purchases of non-masks and about 10% was the purchase of masks. Turning to new buyers on slide seven, you'll see that new buyers first accounted for about 25% of the GMS in the third quarter of 2020. And similar to existing cohorts, new buyers look to be more active and purchase more than new buyers did a year ago. But it's a bit of a tale of two cities. We've got new buyers whose first purchase was not a face mask. And those new buyers are more active than new buyers were a year ago, even putting aside a second or third purchase that was a face mask. For new buyers whose first purchase was a face mask, As you'd often expect, their second and third purchases were more often face masks. So what we take from that is that new buyers whose first purchase was not a face mask likely will have a lifetime value as good or more good than previous cohorts. We're watching new buyers whose first purchase was a face mask because it may be an indication that their lifetime value is going to be lower than what our traditional cohorts have been. So why are we seeing such strength? We believe it's because Etsy stands for something different. At a time when there are more and more places coming online to sell you exactly the same thing, Etsy is a place you can go to actually connect with other people and find things that express your sense of identity. It's a place you can go to support small businesses in your community. It's a place that you can go to bring people together. And the way the marketplace works, it's incredibly dynamic and agile, serving you the kinds of products that are relevant right now. So we think that the fundamental strengths of the Etsy business model have been very important in allowing Etsy and Etsy sellers to rise to this occasion. And how have they been rising to the occasion? Well, if we look at the second quarter of 2020, you'll see that overall e-commerce grew at an astonishing 45% year over year. That number would have been unthinkable a year ago. But Etsy grew more than twice as fast. And again in the third quarter, you'll see Etsy's growth was sustained. So we expect that Etsy gained significant market share yet again versus the overall e-commerce benchmark. Turning to slide 10, I know there's always a lot of interest in what specific products and what specific categories are we seeing growth. And you'll see that the story in the third quarter is substantially similar to the story of the second quarter of 2020. The same top six categories growing at very, very rapid rates. And I would point out that these are each, as standalone categories, massive, massive industries. And Etsy is already at scale and growing at extremely rapid rates. In fact, we believe Etsy is growing as fast or faster than the market leaders in many of these categories. And to peel back a little bit, the categories may be similar, but the items that are selling are always dynamic and changing. So for example, in back to school, this year looks different than last year. It's a lot of custom desks and home learning supplies. In jewelry and accessories, we're seeing a lot of vote necklaces. So the categories may be similar, but the items themselves are constantly responding to the times. And of course, masks continued to be a very substantial product in the third quarter. $264 million in GMS and 24 million masks sold. But as masks become more and more ubiquitous, available at every retail outlet everywhere in the United States and across Europe, we are seeing sales decline sequentially. And that sequential decline is continuing into October. However, if masks were their own category, they would still be a top six category in the third quarter. Moving on from our results, we have more conviction than ever that Etsy's mission to keep commerce human is incredibly powerful and that our strategy built around our right to win is compelling and durable. And so we are investing aggressively to deepen our strength in each of these four areas that collectively make up Etsy's right to win. Starting with search and discovery, we have been investing for the past many years to make search dramatically better and to close what we call the semantic gap. And you'll see here that just over the past 12 months, the data we consume in each search query has doubled. It's just one way of giving you a sense for the sophistication of the algorithms that we are using. And when we talk about closing the semantic gap, what we mean is translating what someone types to what they actually need. For example, understanding that the word dress and gown are substantially the same word, and we can use gown results for someone's dress search query, or that the word emerald ring means rings that contain the stone emerald. Etsy has made significant improvements in closing that semantic gap, but there's still a long way to go with a great roadmap that we think can continue to deliver sustained improvements to make the buyer experience better. We hit a major milestone in the third quarter, launching our first ever personalized search. You've been hearing me say for some time that two people who type in the same keyword will get the same results. And now in the third quarter, that is no longer true. We look at your clicks, your favorites, your add to carts, and your purchases, and we use those to inform the search results for so that two buyers will now get different results for the same search. This was an exciting first launch and it's showing promising results, not just in terms of conversion rate, but also in terms of repeat purchase rate. So we're very encouraged, but it's just the beginning and we will now have years of work to refine and improve these models. Plus, we're incredibly excited to bring personalized search to Etsy ads as well. We've been laser focused on driving frequency, launching both product and marketing initiatives to get people to come back more often and buy more often. just one example is a new buyer offer that we automated and launched in the third quarter giving a five dollar off on your next purchase to a select set of new buyers that both look like they have high lifetime value and a lower propensity to come back in the first 30 days and it's an example of something that we're able to launch now that we couldn't have done a year ago because of the investments we've made in our crm systems and in machine learning And it's just one of many examples of the kind of thing we're launching and driving to try to drive frequency. Turning to the all-important holiday season, this holiday season is going to feel different for so many people, but we think that Etsy can play an even larger role in making it feel special and helping you connect to your loved ones even at a time when you need to be more distant. We're doing things a little bit different, pulling forward the season because we know many people are looking to shop earlier, and we're building our campaign around the theme, Gift Like You Mean It. We continue to be really excited about the performance of our television advertising campaigns. In the United States, they're becoming a mature channel where we're seeing really strong ROI and we're seeing strong improvements in terms of top of the funnel brand awareness. So we're doing something new, investing even deeper in the fourth quarter, launching a more brand-focused television campaign at the same time as we have a more direct response campaign running concurrently. Starting with the brand campaign, that's a campaign that has a narrative that's designed to create an emotional connection, speaking to the differentiation of Etsy, and using storytelling as a mechanism. I'm going to pause now so you can look at one example of those ads.

We'll see the kids soon.

I know. Merry Christmas. Merry Christmas. Hi, Grandma. Hi, you're up so early. Merry Christmas, Grandma. Merry Christmas. Mom, Mom, open the blue ones. Oh, look at that. Look, the present's me. You're supposed to hug it when you can't see us. I miss you, Grandma. See you really soon.

And at the same time, we're going to be running an ad that speaks to all of the different kinds of products and purchase occasions that you can buy on Etsy designed to more directly drive you to come and shop. And here's an example of one of the spots in that campaign. You'll be seeing these television ads start running this week. They launch on October 28th. But, of course, our marketing investments are about so much more than just television. We've been making significant investments in our marketing tech capabilities, and they've been yielding great results. Our performance marketing have been even more efficient in the third quarter than they've been in prior quarters, despite a step function increase in investment. We've also been able to really up our game in terms of our performance marketing in business. or European core markets, which has driven very strong results. And we're investing in some new areas, for example, podcasts, which we're really excited about. And in addition to that, as Etsy becomes an even more important part of the zeitgeist, many leading influencers want to associate with Etsy. And we've created some really exciting collaborations with leading influencers where they curate collections of items that they love on Etsy. and then co-market them together with Etsy. And it's an example of the power of a great brand like Etsy combining with great brands that individual influencers have to really go and spread the word in an even bigger way. And, of course, none of this tremendous growth would have been possible if we weren't making meaningful investments in the infrastructure required to serve our platform. For example, I showed you just a few minutes ago the tremendous increase in data we're consuming to make our search algorithms much more relevant. That's required meaningful investments in our data infrastructure in order to serve that growth. We've been investing in site performance to make our page loads happen much faster because we know that faster page loads are really important to create sticky and habit-forming buyer experiences. And we've been investing meaningfully in our developer platform so that as we grow our engineering team, each new engineer can continue to be very effective and efficient. As just one fun fact, we push code on average every 30 minutes at Etsy. So investing to make our code base easy to work with and easy to deploy, we believe has very compelling long-term benefits. And turning to Reverb, Reverb also had a great third quarter. At a time when industry sources indicate that the musical instrument industry contracted in the third quarter, Reverb actually grew at a very healthy rate. We're pleased at how the take rate changes that were announced in the second quarter have been received by the market. And in fact, seller and dealer growth has been very stable while we've seen sales grow. And importantly, it's allowed Reverb to invest even more in marketing and in product development to grow the business for the future. The Reverb team continues to launch great product enhancements and really innovative and exciting marketing programs, and we're really excited about the continued growth potential of the Reverb platform. So to conclude, the third quarter was a great quarter where the Etsy team really put their heart and soul into executing for the benefit of the whole community. We're incredibly proud of what the team has executed and launched in the quarter, not just for this quarter, but because we believe that Etsy has an incredibly compelling growth potential for months, years, and decades to come. And we have a lot of conviction around making the investments that are going to allow us to achieve that full potential. And with that, I'll turn it over to Rachel.

Thanks, Josh. And thank you, everyone, for joining us for our Q3 earnings call. My commentary today will cover consolidated results, key drivers of performance, and Etsy standalone results where appropriate. Q3 was another strong quarter across the board, as we delivered higher-than-expected GMS revenue and adjusted EBITDA. On a consolidated basis, Etsy's third-quarter GMS grew 119% to $2.6 billion. Revenue grew 128% to $451 million, and adjusted EBITDA was $151 million with margins of 34%. On our last earnings call, we indicated that we expected Q3 GMS growth to decelerate from Q2, partly due to lapping the 2019 Reverb acquisition and introduction of Etsy's free shipping initiative in Q3 of last year. Though our results came in better than our forecast, we did see deceleration as the quarter progressed. The month of July was up 152%, August was up 114%, and September was up 98% on a consolidated basis. The sequential deceleration in Etsy standalone GMS growth was primarily driven by a steady decrease in mask sales and the deceleration of new buyer growth. Masks as a percentage of GMS contracted sequentially from 14% of GMS in Q2 to 11% in Q3. In fact, masks declined 34% month over month in September. While masks are still meaningful, we expect this deceleration to continue. New buyers also decelerated sequentially from 159% growth in Q2 to 127% in Q3, with about half of the deceleration driven by mask buyers. Despite the deceleration in overall GMS, we saw healthy underlying trends in non-mask GMS growth, which was 93% in Q3, the same growth rate as last quarter. Also notable, of the 4 million mask-only buyers in Q2, 38% returned in Q3 for a non-mask purchase. Consolidated Q3 revenue was driven by growth in both marketplace and services revenue. Key drivers for the quarter were GMS volume, Etsy payments expansion, Etsy ads, and offsite ads. Transaction revenue grew 121% year-over-year, driven by higher GMS from visit growth and an expansion in conversion rate. Another revenue driver for the quarter was our Etsy payments expansion. We now offer Etsy payments in 45 countries across 21 currencies, processing 92% of our GMS in Q3, up from 88% year over year. We continue to make strides in bolstering advertising products and initiatives to help sellers drive velocity in the marketplace. Etsy ads grew 106% year over year and 19% sequentially versus Q2. We've made significant improvements to the relevance of our ad units by incorporating algorithms that more accurately match listings to search queries. In addition, we're also optimizing our bidding strategies to drive seller return. These changes have led to incremental improvements in both click-through rate and conversion rate, simultaneously improving the buyer experience, Etsy revenue, and seller return on ad spend. A true win-win-win. As a result, seller budgets are increasing as demand for on-site advertising continues to outpace current ad load. Off-site ads had a strong Q3 as we saw the benefit of a full quarter of revenue. Overall opt-out rates remained less than 2%, and we focused our efforts during the quarter on optimizing return and channel mix for our sellers' listings. Etsy ads, off-site ads, and our expanded Etsy payments platform all fueled further growth in take rate in Q3. Consolidated take rate expanded 120 basis points sequentially to 17.1%. Gross margin was 73% of 820 basis points compared to last year and continue to benefit from our shift to off-site ads, which delivers incremental revenue without an equal offset in cost of revenue. We continue to optimize our investments across our marketing channels. We've been rapidly expanding marketing initiatives for about two years now, leaning more heavily into upper funnel strategies through TV ads and paid social. We're also hard at work improving our own channels, optimizing email and push notifications through the buyer journey while building out an integrated buyer CRM strategy across many segments. Q3 consolidated marketing spend was $127 million, up 153% year-over-year. Upper funnel marketing spend for the Etsy standalone marketplace, including television and digital video, was 18% of our consolidated marketing spend in Q3, or approximately $23 million in the quarter. This is important because as we shift spend up the funnel, more of the return will be realized in future quarters. Another factor impacting margins are increased investments in product and engineering as our hiring picked up momentum in Q3. We ended Q3 with 1,375 employees, an increase of 14% versus prior year and a 6.3% increase versus the second quarter. In addition, we're augmenting our workforce by leveraging nearshore contractors, which allow us to rapidly scale up resources as needed. The talent we are adding to our product and engineering bench will focus on buyer frequency initiatives, including search, as well as platform and foundation initiatives that allow us to deliver product more quickly and efficiently. We continually look at the metric of revenue per headcount, which is significantly higher than our peers, as well as GMS per dollar of product development spend, a proxy for ROI. As noted last quarter, it will take some time for hiring ramp plans to fully impact our P&L. Our revenue per headcount today is therefore higher than where we want it to be, given our many opportunities to invest for growth. Moving to our operating metrics, in the third quarter, active buyers grew 56% to approximately 69 million for the Etsy marketplace. GMS per active buyer on a trailing 12-month basis grew 8% year-over-year, driven in part by habitual buyers, which grew over 100% in Q3. This is up from 64% growth in the second quarter. It's great to see this performance of our most loyal buyers. Repeat buyers were 70% to 27 million. Excluding masks, GMS per active buyer was up 4% and 6% on a two-year basis. Digging in a bit more on frequency, as you know, both new and reactivated buyers are important buyer segments for Etsy. New buyers are defined as buyers that are unique to Etsy and haven't made a purchase on the platform, regardless of the time period. And a reactivated buyer is someone who has not purchased in over 12 months. In the third quarter, we acquired nearly 10 million new buyers and reactivated 5 million existing buyers for a total of 15 million. We outlined last quarter that of the 19 million new and reactivated buyers in Q2, nearly 10% of them made four or more purchases across two or more categories. Since this metric was time-bound, it only partially reflected the purchase behavior of many new and reactivated buyers, especially those acquired near the end of the second quarter. So here, we have adjusted to a 90-day window for all new and reactivated buyers in Q2, and the metric increases to 12%. Note that we would expect reactivated buyers to decelerate since a buyer can only reactivate one time in a 12-month period. We would also expect new buyers to continue to decelerate as demand for masks decreases. Active sellers grew 43% to 3.5 million for the Etsy marketplace, and we are focused on growing the pie for all our sellers. Trailing 12-month GMS for active seller was up nearly 18%, and listings in our marketplace grew to over 80 million items. Recently, our teams have developed new initiatives, including improved shop recommendations to get sellers to their first sale more quickly, helping sellers to scale, and investing in member support operations to optimize and streamline issue resolution. Another one of the factors fueling sustained growth in Q3 was robust performance internationally. Etsy standalone percent international GMS expanded 340 basis points sequentially to 37% of overall GMS. International GMS, excluding mass sales, was up 106% on a constant currency basis and was driven in part by strong trends in the UK and Germany, with the strongest trader being domestic sales between buyers and sellers within the same country. Within the UK market, we've seen an acceleration in the share of online retail overall, from which we believe we are disproportionately benefiting, thereby taking market share. Domestic growth in the UK was up approximately 250% in Q3, significant growth for this core international marketing investment. According to Comscore, Etsy is now a top 10 e-commerce site in the UK, up from number 14 a year ago. With all of this momentum, we've made the decision to launch TV advertising in the UK for holiday season, which you will also see reflected in our marketing spend. Moving out of the balance sheet, as of 9.30, we had $1.5 billion in cash, cash equivalents, and short-term investments, in addition to a $200 million revolver that's currently undrawn. During the quarter, we issued $650 million of seven-year convertible senior notes. A portion of the proceeds were used to buy back $301 million of our 2018 notes and a cash call. I'll now review our outlook for Q4. This year has been anything but predictable, so we caution you to remember the potential headwinds we called out in the past and that appear in our slide presentation on factors impacting the business. We currently estimate consolidated GMX for Q4 in the range of $2.7 billion to $3.1 billion, which is up 65% to 85% to Q4 of last year. Revenue of $459 million to $513 million, up 70% to 90% versus last year. An adjusted EBITDA of $117 million to $131 million, with a margin in the range of 24% to 27%. This implies 30% adjusted EBITDA margins for the full year at the midpoint. We continue to model a wide range of outcomes in our guidance to account for significant uncertainty. This quarter primarily focused on the U.S. election, impacts from the pandemic, continued uncertainty around the health of consumer spending, and the holiday shopping period, which is being influenced by many factors. In terms of our GMS guidance, a few things to keep in mind. First, so far, October GMS trends for both Etsy and Reverb have been similar to what we experienced in September. Second, in Q3, mask sales added an incremental $264 million in GMS, about a 23% decline versus the $346 million sold in Q2. Looking monthly, we can see steady deceleration, and we currently expect mass sales to be substantially lower in Q4 than they were in Q3. We encourage you to factor the impact of mass deceleration into your Q4 models and incorporate the large grow over we will have as you update your 2021 models. Third, note that in the fourth quarter, Reverb is currently expected to continue to grow more slowly than Etsy. In the context of our margin guidance, the largest sequential and year-over-year impact to Q4 margins will come from incremental marketing spend. Let me unpack some of the additional spend and how we are thinking about associated return on this investment. First, as we showed you earlier, in Q4, we are launching a new television campaign with brand-focused creative, specifically designed to drive emotional connection to Etsy. This investment will be in addition to our existing ad campaigns, which have a more prominent direct response design intended to drive immediate sales. Although in-period return is likely to be lower, we see this as a real opportunity to build brand affinity that will have positive return next year and beyond. Second, we are investing in upper funnel marketing channels in both the U.K. and Germany. This spend is more experimental in nature, and ROI for these markets is still to be proven out, so we are forecasting return below levels we currently achieve in the U.S. Third, associated with the new brand campaign, we will also be expensing the creative costs for the new ads in Q4. The increase in U.S. and Europe TV media spend, together with the creative expense, account for about a few hundred basis points of the sequential margin contraction. Fourth, seasonality plays a role in fourth quarter margin contraction. We expect higher CPCs in our performance marketing while continuing to target growth and impression volume. Though still achieving our ROI thresholds, we expect lower in-quarter ROI on our fourth quarter spend, which similarly may also drive a few hundred basis points of the margin contraction. And last, macro headwinds and our hiring ramp may also impact Q4 margins. You've seen us be extremely disciplined in our investment approach. And 2020 proved out the scalability and tremendous value of our marketplace business model. While these investments impact our margins on a short-term basis, we have strong conviction and expect them to drive growth over the long-term as we lean into our enormous TAM. One last comment about our outlook. We see a significant amount of uncertainty ahead in 2021. particularly in areas that we cannot control. We have not yet had a view to what our business would look like when economies fully reopen or if consumer spending worsens. We are therefore being cautious in our planning for next year. We encourage you to do the same in your models and pay particular attention to the quarterly grow-over rates. Meanwhile, there's a huge election next week. Etsy has been very active in encouraging our employees to register, to vote, and to volunteer. We are providing our team a meeting-free day on Election Day. We have donated to Mission for Masks, an organization that provides PPE to poll workers, and we have been using our social media channels to remind our millions of followers to get out and vote. We hope you will all do the same. I will now turn the call over to Deb so we can take your questions.

Okay. Thank you, everyone. Thanks, Rachel, and thanks, everyone, for joining. I'm going to kick it off. We have quite a lot of questions in our queue already. If you haven't already put one in, please do use the chat function. I'm going to start with one from Kunal Madakar from Deutsche Bank. How has the GMS growth trends in the quarter to date so far? How has that gone? I know we covered that, but let's just go over it again. How much of that could be pulled forward of holiday spend as consumers anticipate shipping delays? Josh, I think that one's a good one for you to kick off with.

Sure. Hey, Kunal, thanks for the question. Hi, everyone. Thanks for spending time with us. Yeah, as we said in our prepared remarks, October has been largely consistent with September, which means we've seen a great deal of sustained momentum through October to date. And the Fairpoint canal, that some of that may well be a pull forward in holiday spending. We have been tracking that. So we look at keywords, and we are seeing that purchases related to holiday shopping keywords, things like, for example, tree ornaments, are in fact happening a little bit earlier this October than they were last October. So we do see a holiday shift happening earlier in October than before. of November and December or not, I'd say it's too early to tell, but we certainly are encouraged by the momentum that we've seen sustained all the way through October.

Okay, great. Thanks, Josh. Next one is from John Colantoni from Jefferies. Can you talk about recent improvements Etsy has made to search and discovery and help parse out what portion of the increase in conversion is coming from those improvements versus a generally higher intent shopper resulting from the pandemic? Also, can you detail any observations in purchase behavior that help give you confidence the surge in spending on Etsy represents a permanent shift in consumption and habits?

Thanks for the question. So we are seeing conversion rates elevated on Etsy, and that has been sustained for some time. Part of that is no doubt the fact that our customer experience continues to get better through things like improvements in search and discovery. And part of that, no doubt, is that people are arriving on Etsy with fewer options in the outside world and higher intent. And it's hard for us to parse out exactly how much is one versus the other. What I would say is that we've seen steady and sustained progress in search. Month after month and quarter after quarter, we launched new models that are better than the last models. So we've launched neural network models that are substantially more sophisticated. They're doing a better job. As we talked about in the prepared remarks, In the third quarter, we actually launched for the first time the personalization of search, meaning that two different people will see two different search results for the same keyword based on their purchase history. And that's having some impact on conversion rate already, even in the very first launch of that model. So, yeah. And by the way, we haven't even rolled that out yet to recommendations and browse. So we talk about search, but more often we talk about search and discovery. And I will point out that those two are similar, but not the same. With search, we're given the benefit of someone typing in a keyword, which gives us a lot of understanding of what their intent is. Recommendations, we just need to infer what we think you might like. So it's actually related but separate technology. We haven't begun to apply personalization to discovery or browse yet, but we will soon. We'll also be able to apply it to Etsy ads, which we think will make Etsy ads even more powerful. So we continue, and that's just search and discovery. We are doing things to make the trust in the marketplace better every month. We're doing things every month to make the human interface between the buyer and the seller feel better every month. So- No doubt that's having some impact on the customer experience and on conversion rate, and then the impact of the pandemic certainly is as well.

Okay. I'll pick off on that last one in terms of a macro question. This one's from Navid Khan from Truist. Any thoughts on the impact from reopening of physical stores or the expiration of extended federal unemployment benefits?

You know, we talked about in the second quarter how the data are noisy, and we showed you, you know, some states and some countries and how reopenings have been not necessarily correlated with the trends that we've seen on our site. And I'd say that has continued to be true in the third quarter. So things like states reopening retail are may have some impact, undoubtedly have some impact on what we're seeing on Etsy, but it's not like there's a one-to-one correlation. And part of that may be that a city might technically reopen stores, but in terms of what is the culture of that city, how often are people going into those stores and what's it feel like to be in those stores? And I think there's quite a lot of difference around the country and around the world in terms of how that's impacted. So what I'd say is that it's been pretty difficult for us to do things like tie store reopenings directly to the traffic trends that we've seen on the site. No doubt it would stand to reason that those things are correlated over the medium term, but if you look over the short term, sort of day-to-day and week-to-week, it's a little harder to see consistent patterns right now.

I would just add some of the data that we gave showed that, you know, even though there are stores that are kind of consistently reopening, our core business grew 93% in Q3, and the core business also grew 93% in Q2. So it's remained stable. This is the business that is excluding masks. So it seems thus far store reopenings haven't had a huge impact on NC's business.

Okay. Thank you both. Next one is from Heath Terry at Goldman Sachs. What are you seeing from your shipping partners in terms of their expectations for delivery times and costs during the holiday season? How are you messaging these issues to your buyers and sellers? And can you quantify the impact this has had on your guidance for the quarter?

I'll start, and then maybe Rachel will want to add. We are able to track daily what shipping times are like with different shipping providers, and we can even track that down to the city level. And so as we present to buyers what the expected delivery date is, we're able to update that expected delivery date in nearly real time based on what we're actually seeing in terms of shipping times online. in their region or for that particular from to pairing. And by the way, we didn't mention in our prepared results, but expected delivery date has been a very big focus of ours in the third quarter, and we've made significant progress. So at the beginning of 2020, only in the low 30% of listing views would have an expected delivery date. And now in October, about in the mid 50s, percent of listing views have an expected delivery date. So there's been a fairly dramatic increase in coverage for expected delivery date. We're doing a better job of telling buyers when they can expect the item to arrive. And we do incorporate shipping times into that. We are also tracking shipping pricing, of course. You know, a very large percentage of items on Etsy ship for flat rate mail in some of the lowest tier and cheapest parcel rates. And so we think that increases in pricing there, well, you know, on a percentage basis may be meaningful in terms of the total cost of the total item. We don't think are going to be as much of a headwind as maybe you're seeing in some other e-commerce sites. So we are communicating very actively with buyers and sellers. We don't anticipate at this time it being a particularly material headwind for Etsy. And I'll say that I think a lot of e-commerce sites are pretty nervous about Cyber Week because their ability to fulfill large quantities in a short amount of time is constrained. And that's where I think the benefits of the Etsy model really shine through. Our sellers, our businesses largely have one working from their home, and they are not as constrained in terms of having a supply chain dependent on a few factories or having everything shipped through one or two fulfillment centers. And so we're leading into Cyber Week, and I think this is going to be a time that also highlights the strength of the Etsy model there.

And the only thing I would add to that is that, you know, Etsy is known for it takes a little longer to get the item because you're buying things that are customized and personalized just for you on spec. And so our customers are somewhat conditioned to order early. and maybe our holiday season has traditionally ended earlier than traditional retailers. In this case, if the shipping speed is slower for all, it sort of levels the playing field for all. So I think that across the board in e-commerce, we're all going to have the same sort of order by December 15th, order by December 18th, if you want to get it in time for holiday, not just Etsy in this case.

Okay, thank you both. So we obviously gave a lot of cohort data, and there's a good multi-part question here from Shwether Kajuria from RBC. What is driving greater spend levels? Is it fair to say that basket sizes across most cohorts increased? You point to 50% increase in your 2018 cohort spend in Q3 2020 versus Q3 2019, and also a 50% increase in spend in the first 90 days among new buyers in Q2 versus last year. What is driving greater spend levels? Is it selling across new categories? Is it your marketing initiatives? Is it bundling of products for free shipping? Lots of questions, but I think I'll turn it over to you, Josh. You can start, and then Rachel may want to add some things.

Great. I'll start, and I'm sure Rachel will catch what I missed. So I'm going to try to take that question in order. At the beginning, the first thing you said is, is it AOV that's driving an increase in cohort purchases? And for the most part, I would say no, it's not. AOV has not moved appreciably. In fact, masks is a low AOV item. So the mask surge that we saw actually drove down AOV's And as masks have shrunk as a proportion of sales, AOV has recovered somewhat. But if you take out masks, I think AOV has been relatively consistent throughout the pandemic period. The biggest factor that's driving this increase in cohort behavior is the reactivation of lapsed buyers. So when we talked about that 2018 cohort, a higher percentage than normal of the people who joined in 2018 have come back and bought at least one thing in the third quarter of 2019. And that reawakening of the lapsed buyer base across all of our prior cohorts is the number one thing that's driving that increase in GMS forecasts. for each of the cohorts. A second and still very substantial factor is frequency in period or 90-day repurchase rate, meaning that for people who did come back and buy in the third quarter, it was more often that they bought a second or even a third or fourth item in that quarter. So both of those factors are at play. And we did a bit to quantify the relative impact of those. You'll be able to see it when you look at how many active buyers and reactivated buyers there were and how much that accounted for in terms of increased GMS.

And we did give a lot of data on this call. So the other metrics I would point out would be some of the metrics that talk about frequency specifically. So our fastest growing and most valuable cohort are what we call our habitual buyers. Those are buyers that come to us six or more times in a year or spend more than $200. And that cohort grew 100% in the third quarter. I think last quarter we said they grew 64%. Prior to that, that cohort had been growing in the low 20% range. We really had a nice spike in the people that are coming the most frequently to us. The next category down is what we call repeat buyers, which are people that come two or more times a year. That grew 70%. We've got nice uptick in the frequency. And then the last metric that helps to sort of triangulate the frequency picture is that for our new and reactivated buyers, so that was 15 million buyers in the quarter 12% of them came four or more times across two or more categories. And so they are coming more frequently and they're coming across multiple categories, not just a single category. And so those, I think a lot of the marketing and product initiatives that we've put, we've laid down since the beginning of the year are really helping to encourage repeat frequency.

Okay, thank you, Rachel. Moving to a question on off-site ads from Miguel Aronian from Wedbush. How has the traction been on off-site ads? How is it contributing to take rate? How are sellers reacting to it so far? Anything you can share on conversion and how it's driving sales? is number one. And then number two, with the biggest top of the funnel, excuse me, with the biggest spend top of the funnel, what are you seeing there? And anything you can share on your ROI on your top of the funnel spending, understanding that it's early days.

I can start with just some of the specific numeric answers to those questions, and then maybe, Josh, you want to talk about top of funnel value and impact. On take rate, we did say that the largest movers to take rate in the quarter were, and I think we said it went up 120 basis points. were inclusive of offsite ads, but also Etsy ads, which performed really strongly and then Etsy payments expansion into nine new countries. And I don't think we gave the number specifically on offsite ads, but that was one of the contributors to, um, take rate increase because we now had a full quarter of it. Um, and so that, that was, um, I think the other metric we gave for off-site ads is that we've continued to see less than 2% opt-out rate from the sellers that are able to opt out of it. So it's a very strong product and performing with return on ad spend that we think is very attractive for our sellers. Top of funnel, we said that 18% of our consolidated marketing spend was in upper funnel initiatives, which is about $23 million in Q3. And that we said marketing overall on a consolidated basis was up 153%. So it We are spending significantly more on marketing, and a big chunk of that is on upper funnel. As always, we have a very strict ROI methodology, not only for performance marketing but for all of our above-the-line marketing as well, where we analyze it pretty stringently to prove out that every marginal dollar of spend is incrementally ROI positive as well. It's a little trickier with above-the-line marketing. We use, I think, over nine different statistical models, some that we get from our media buyers, some from our internal models, and then we use external iSpot data that's panel data that tells us. How is this dollar of spend performing, and is it achieving the internal ROI thresholds that we have? And so we feel pretty comfortable that our marketing spend has a nice positive return. The one caveat that we talked about is that upper funnel marketing tends to have a longer yield curve, and particularly with a brand-focused campaign, some of that yield is going to come out of the quarter a little bit more than performance marketing does.

And, you know, I would only add that Etsy has suddenly and so powerfully become in the zeitgeist right now. Suddenly you're hearing Etsy mentioned in the same breath as Amazon, eBay, and Target. And that would have been something that would have been surprising to people, you know, even two or three years ago. And if you look at our relative size relative to those four companies, it's a pretty good company to be in. And so this is a moment to be really leaning in, we believe, to marketing. You know, if you look at the reawakening of the lapsed buyers, again, you know, they don't think of themselves as lapsed. They love Etsy. They think of themselves as loyal Etsy shoppers. They just didn't know when to think of us. There are so many great purchase occasions you can use on Etsy, and they just – didn't think of us. And so the ability to be front of mind and use this time to really form habits and deepen our differentiation and reinforce our differentiation, we think is really powerful. And there's still a huge opportunity with you know, 70 million people out there or 80 million people out there who, you know, have shopped on Etsy in the past and haven't shopped on Etsy in the past 12 months. That's a lot of lapsed buyers to go and reawaken. And in addition to that, there are so many people who still have never shopped. People who we might not have thought of as our core demographic a short time ago, who suddenly now maybe, you know, Steve Martin is one of my favorite comedians. And if you go check his Twitter feed, he just posted, I just discovered Etsy. Goodbye. And then he falls into the Etsy vortex and is throwing up all sorts of great things he's finding on Etsy. And so I think we're broadening our appeal to more and more types of people and more and more demographics, and we love it.

That's great. Speaking of getting lost in the Etsy vortex or rabbit hole, this one comes from Rick Patel at Needham and Company. GMS per buyer up 50% year-over-year in Q3. Which categories are getting the most GMS booths, and what's your confidence that this can continue on the other side of the pandemic? That's for Josh, I think.

Yeah, I mean, so we shared some category data, and, you know, I'd say it's very consistent with Q2. So, you know, home furnishings continues to be up, you know, over 120% year over year, but we're seeing different kinds of items. I gave a little bit of color in the prepared remarks, but, you know, what we're seeing even in October now is things that are good for outdoor gatherings, you know, blankets or fire pits. You know, fire pits sell out everywhere else you can go, but there's going to be a steady supply of really cool made-just-for-you fire pits And so, you know, individual items in each of these categories are changing really week to week. But the categories are pretty largely consistent. You know, craft supplies continues to explode. Jewelry and accessories is doing great. When we go to the future, I would say in the near term of 2021, it's very difficult to predict. We're not even giving annual guidance these days. We're only giving quarterly guidance. 2020 has been certainly the most unusual year since World War II. um in in the western economies um and you know i think it's likely that 2021 is also going to be one of the most unusual years uh in in modern history so trying to predict from this time to that time is is very difficult and uh But I would say, though, that every interaction we have with customers, every additional purchase we have with them, every additional visit gives us a chance to deepen our relationship with them, gives us a chance to form habits, gives us a chance to reinforce our point of difference. And all of our signs and signals suggest that customers are having a very good experience on Etsy right now. And frankly, we have additional investment capacity and we are using that. We are doing things like investing in TV right now. We're expanding that to Germany and the UK in the fourth quarter so that we can really lean into this moment and try to build as much sustainable momentum, not just now, but into the future as we possibly can.

Okay, great. I'm going to go into some margin questions from Shweta Kajuria with RBC. So these are going to probably be for you, Rachel. Could you please talk about your Q4 EBITDA margin guide and the puts and takes there? Etsy has a highly variable cost structure and Q2 and Q3 margins were healthy. partially due to upside in revenue. What are some of the most important factors you have taken into account for your Q4 EBITDA margin guide? Could you talk about your expectations on marketing and product spend and also lastly, Reverb's impact on the margins?

Thanks for the question, Shweta. Yes. So for starters, I want to start with masks. So we've talked about a steady deceleration in masks, and we even gave the amount that masks decelerated in September versus August. So that went down 34%. I believe is the number that we gave. And so we would expect masks to continue to decelerate in Q4. And in fact, we gave some cautionary guidance about thinking about your 2021 models as well. In fact, you could think of We gave the year-to-date mask number, but when you think about the full year, something upwards of $700 million is pretty much going to need to be taken out of 2021 when you think about 2020, and that will come to play in Q4. So you asked specifically about Q4. You would assume masks decelerate. The second thing I want to point out is that we did our best to give guidance for top and bottom line for Q3. And when we spend on marketing, we had better than expected impact from our marketing and product initiatives in Q3 and lower than expected impact from headwinds in Q3. So we have a lot of unknowns in Q4. And so we're giving our best to give you top line guidance if our marketing, if the headwinds are, again, as we saw in Q3, if the headwinds are lower and the impact of marketing product is higher, you would expect to see additional flow through to bottom line. But we're doing our best to manage through an unpredictable environment, particularly with elections coming up and you know, the continued headwinds of the pandemic. The last thing, I think we broke this out very specifically when we talked about Q4 margins, the biggest thing impacting our Q4 margins is our increase in marketing spend. and those things will hit margins i i laid out four different impacts for starters we're spending on um two above the line campaigns we're spending on the existing above the line campaign that is very direct response oriented meaning we expect direct immediate sales from that campaign and then there's another television campaign that's new that is in addition to that campaign which is more brand focused and we showed those examples on the call So that's more media spend and more media spend where we would expect some of the yield is going to be achieved outside of the quarter, not in the quarter. Secondly, the creative costs from that new campaign, the brand campaign, will all be expensed in Q4. Thirdly, we're also spending more internationally, specifically in the UK and Germany, not only on above the line, but on putting our marketing technology to work really through better targeted performance marketing and paid social. And then the last piece of this is we're spending more on performance marketing, and it's a lot more competitive to buy media in performance marketing in the fourth quarter. So CPCs will be higher, but we want to get the same impression volume. So we'll be spending deeper into the yield curve, still hitting our ROI thresholds, but probably lower ROI than we would have achieved in a previous quarter just because the CPCs will be higher.

Okay, great. We are at 6.01, so I'm going to squeeze in one more here. I think this one will be a good one for you to end with, Josh. This is from Tom Forte at DA Davidson. Can you please discuss the structural competitive advantages your sellers provide you versus other e-commerce platforms when it comes to making products at times when large-scale manufacturers are having a hard time keeping up with demand, such as masks, desks, doing back-to-school gifts for the upcoming holiday? Did we lose Josh?

Got it. Sorry. Thanks a lot for the question, Tom. Appreciate it. Okay. Am I back? All right, good. So first I'd say that there are more and more places coming online to sell you the exact same thing. And if it's the exact same product you can find in 10 or 100 other places, they can only compete on who can sell it to you cheaper or ship it to you faster. And Etsy is the one place you can go where you're going to find things that are truly unique and different than what you're finding everywhere else and made just for you. And by the way, there are millions and millions and millions of them. So for each person, there is some form of beautiful that's just for you. And we're doing a better and better job of surfacing that and helping you to find that. But some of the strengths that our sellers bring are that, A, they're able to personalize it for you. They're able to customize it for you. So if you need a desk, they're going to make it for the dimensions of your room. If you need, you know, some clothing, they can actually change the color or the length or the fit to be designed just for you. If you're gifting, you can gift like you mean it. But our sellers have also demonstrated tremendous agility. They respond to trends within days. They can literally look at what keywords are really getting a lot of traction, where's the search volume happening, and start making product within hours or days of the trends that they're seeing. And last but certainly not least, they're not reliant on one supply chain. concentrated around very few factories and fulfilled from a very few fulfillment centers and that allows for the dynamism of the marketplace to meet the buyers where they are and to be able to do that in times when other people are are meeting constraints so we think that the individualization the personalization and frankly the humanity of the etsy marketplace at a time when you're being pulled apart and distant from people the opportunity to connect to create connections and meaningful connections, we think is super important now, but we think it's enduring, too. We think that that kind of thing is something people are going to discover in this time, fall in love with, and I believe continue to want for years and decades into the future.

All right. Well, thank you, Josh and Rachel, and thank you all for your questions. I know we didn't get to everyone, so you know where to find us. We will talk to you during the quarter. Thank you all so much, and go out and vote. Take care.