Etsy, Inc.

Hi, everyone, and welcome to Etsy's second quarter 2023 earnings conference call. I'm Deb Wasser, VP of Investor Relations, and joining me today are Josh Silverman, Chief Executive Officer, Rachel Glazer, our Chief Financial Officer, and Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been prerecorded. This 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 Jessica will help me to try to get to as many as we can. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10Q. and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present GAAP measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted on our website, along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good afternoon, everyone. Etsy's results landed in line with our expectations. Consolidated GMS was $3 billion, about flat to last year. Revenue grew 7.5% to $629 million, and our adjusted EBITDA margin was again strong at 26.4%. GMS for the Etsy marketplace was about $2.6 billion this past quarter, about flat with the prior year. Digging deeper, we've seen many of our key metrics trending positively again. Our negative year-over-year growth rate improved sequentially, and even more important, GMS grew year-over-year in May and June and in July as well. Quarterly active buyers reached 91 million, an all-time high. And when adding new and reactivated buyers together, we saw healthy growth in buyer additions on a year-over-year basis. Additional green shoots included GMS growth outside of the U.S., improvement in trends in important categories, and early signs of stabilization in our GMS per buyer and habitual buyer metrics. Overall, this performance is quite encouraging, especially given the tremendous gains we've maintained from our pandemic growth and the stiff headwinds we've continued to face in consumer discretionary spending. Economic cycles are just that, cyclical. The Etsy brand stands for something different in a sea of sameness, and I believe we've proven our resiliency. I'm confident that we're well set up for future growth as we continue to move through this cycle. On our last call, we explained that Etsy's 2023 product roadmap is focused on welcoming new buyers to the joy of Etsy, elevating the best of Etsy to keep buyers coming back, instilling trust when transacting with us, and being the platform sellers love to sell on. As we progress through the year, we continue to prioritize our investments to ensure that we're funding the biggest, boldest, and most impactful initiatives on our roadmap to make our marketplace even more organized, curated, and reliable. Regardless of whether you're new to the Etsy experience or a habitual buyer, we know we have so much more opportunity to gain your mind and wallet share. We've made so much progress improving the relevance of our search results, our ability to find what you meant compared to what you searched for. We've explained some examples of these search technologies in prior calls, which are featured in this slide. The next frontier is to better identify the quality of each listing so that from this relevant result set, we bring the very best of Etsy to the top. Our data shows that high quality listings attract a higher value buyer than our average listings, attract more repeat and habitual buyers, and most importantly, they often convert over two times better than other listings. We have a lot of opportunity here and I couldn't be more excited about some of the progress we're already making, starting with our work in organization and curation. With over 115 million items for sale on Etsy and our average search result yielding well over a thousand listings, this incredible abundance continues to not only be one of Etsy's greatest strengths, but also one of our greatest challenges and where we have so much potential. Our product teams are helping buyers more easily navigate the breadth and depth of our sellers' inventory, leveraging the latest AI advances to improve our discovery and inspiration experiences while surfacing the very best of Etsy. These latest technologies combined with training and guidance from our own talented team is making the superhuman possible in terms of organizing and curating at scale, which I believe can unlock an enormous amount of growth in the years to come. One great example. Over the past quarter, we've more than doubled the size of our best of Etsy library, which is curated by expert merchandisers based on the visual appeal, uniqueness, and apparent craftsmanship of an item. We're now using this library to train our ML models to better predict the quality of items as perceived by humans. We're seeing encouraging results from our first iterations on these models, and I'm optimistic that this work will have a material impact, helping us to surface the best of Etsy in every search. Finding the good stuff also comes to light in two other second quarter product launches, as does our focus on highlighting home and living, style, and gifting purchase occasions. First, we launched a curated shop the look in home and living on our homepage, which drove higher conversion rate. Second, buyer participation in our new Etsy wedding registry showed strong and steady growth from the May launch through the end of June. Not only has this initiative driven buzz for Etsy through earned and social media, about 14% of registry GMS has come from new buyers, and we're seeing higher than average order value from items purchased. Since the success of that launch, we've fast-tracked our expansion to more categories, including a baby registry, which will be live this month. In addition to solving for a buyer's tastes and preferences, we're also working on several compelling initiatives to better highlight specific Etsy seller merchandise, which fits an individual buyer's budget. We're starting to elevate great deals on Etsy, such as through prominent onsite promotional merchandising on our homepage. And we're developing a new feature on the Etsy app, which will help buyers find deals for items in which they've already shown an interest. There's no question this is a very promotional environment, so our team is pulling out all the stops to help Etsy sellers compete and win. Etsy's been on a journey to make shopping and selling in our marketplace more joyful and more reliable than ever before. We're doing this by focusing on quality, doubling down on enforcement, and up-leveling customer support. Specific to our trust and safety work, Advances in ML capabilities have enabled our enforcement models to detect an increasing number of policy violations, which, combined with human know-how, is starting to have a meaningful impact on the buyer and seller experience. Since Etsy purchase protection was launched about a year ago, we've reduced the issue resolution time for cases by approximately 85%, dramatically streamlining the service experience on the rare occasion that something goes wrong. demonstrating to buyers and sellers that we have their backs in these key moments. The opportunity now is to ensure that more of our customers know about this, which is why you'll see us embed even more purchase protection messaging and customer touchpoints. We've got a lot of conviction that we can increase both frequency and AOV as we build consumer confidence in Etsy. We're always focused on helping our sellers grow and thrive. Towards this end, we're investing in our seller growth suite, a group of programs designed to give sellers personalized insights in the tools they need to grow their business in a sustainable way. One area I'm really excited about, we're running tests of a new price discovery functionality utilizing buyer demand data to help sellers think about how to price their items and when or how they might best use promotions as part of their mix. Our recently launched Make an Offer program, currently focused on U.S. vintage sellers, is another example of our investments to help sellers price their items appropriately, an especially challenging task in a world where items don't have MSRPs. And as we improve the seller experience, this in turn enhances the buyer experience. As items on Etsy are priced appropriately, we facilitate better matches between our buyers and our sellers. During the second quarter, we held our annual Engineering Week, designed for our engineers to connect, share ideas, learn new skills and technologies. Of course, much of the focus was on the myriad ways we can continue to harness AI and ML technologies in almost every customer touchpoint, With the potential to further transform buyer-facing experiences like enhancing search and recommendations, seller tools like streamlining the listing process and assisting with answering customer queries, improving fraud detection and trust and safety models, et cetera, the opportunities are nearly endless. But all of this innovation also takes time and effort and relies on a relatively small but mighty team of ML experts, talent that is obviously in high demand. Historically, all new ML models have been created by this team of highly specialized data scientists. And the full process of creating a new model, from cleaning and organizing the data, to training and testing the model, then putting it into production, could take as long as four months. That's why we kicked off a major initiative over a year ago we call Democratizing ML with the goal to streamline and automate much of this work so that virtually any Etsy engineer can deploy their own ML models in a matter of days instead of months. And I'm thrilled to report that we're starting to see the first prototypes from this effort come live now. For example, If you're on the Etsy team working on buyer recommendations, you can now use a drag and drop modeling tool to create a brand new recommendations module without needing our ML team to build that model for you. It's a great example of the kind of longer term infrastructure investments we've been making that we believe will pay very significant dividends over the medium term as we work to get even faster and more efficient as we scale. Turning to marketing, we've released a new creator collab with the award-winning artist and entrepreneur John Legend, featuring handcrafted home decor and wardrobe staples produced in partnership with female sellers from the Etsy Uplift Initiative and other underrepresented communities. To date, we've seen this collection deliver above-average order value and strong awareness, engagement, and frequency. The fifth annual Etsy Design Awards has once again created wonderful buzz for Etsy, this year with the winners handpicked by Sarah Jessica Parker and Etsy's Dana Isom Johnson. And early indications are that our Etsy Has It campaigns in the U.S., U.K., and Germany that emphasize home and living, style, and gifting are performing well and driving brand association for these purchase occasions. While GMS per buyer has shown early signs of stabilization, taking this metric to new heights is a top priority for us. With over a quarter of our GMS coming from buyers who purchased again within 14 days of their prior purchase, one way we can influence this metric is to bring buyers back to the platform faster for their next purchase. we're leaning into this work in the second half of 2023, including leveraging post-purchase touchpoints, better outreach and promotional campaigns, and improvements to seller-funded offers. Given all Etsy has to offer, we're highly confident that we can make Etsy a place where buyers want to shop with us much more than our average of three purchase days and spend significantly more than $128 per year. Moving to our House of Brands. Two weeks ago, we announced an agreement to sell our Brazil-based handmade goods marketplace ELO7 to Enjoie, a Brazilian company which operates an online marketplace for clothes and furniture. Our House of Brands philosophy has been to operate standalone marketplaces that together accelerate value creation for each brand and Etsy Inc. We evaluate each company's performance on a case-by-case basis. And given ELO7's performance over the past two years, due in part to the unique macroeconomic conditions in Brazil, as well as their small scale, it became clear that we needed a different approach for that business. We considered various alternatives and determined that the best opportunity to sustain the marketplace and its thousands of sellers would be for Elo7 to join forces with a local, like-minded marketplace. The transaction is expected to close shortly, and Rachel will review its financial implications in a moment. We remain committed to doing what is best for our remaining marketplaces and will invest with discipline in compelling long-term growth plans that further our global scale and shared mission. The Depop team is starting to see very encouraging signs of success, transforming the business by narrowing their focus and improving operations to reignite growth. In the second quarter, Depop delivered both GMS and revenue growth on a year-over-year basis. U.S. GMS growth accelerated by over 25 percentage points since the end of 2022, where we believe Depop is taking share. We believe this performance is a direct result of improvements in the customer experience and marketing efficiency, powered to a significant degree by Depop CEO Kruthi Patel-Goyal's more streamlined focus, organizational structure, and processes. Product development velocity has remained strong, and the Depop team has been leveraging deep expertise from the Etsy core marketplace to great effect. Some examples are shown on the slide, including new personalized buyer recommendations, greater search relevance, and new make and offer capabilities. Depop also expanded its performance marketing data feeds to additional listings, driving a strong increase in paid marketing contribution. Depop is building a playbook for community-driven marketing, such as branded events, pop-up shops, and influencer marketing. We're seeing really encouraging signs the business is recapturing its mojo with significant opportunity to scale and drive an improved profitability over time. Although macroeconomic factors are pressuring consumer discretionary spend, Reverb has continued to outperform the musical instruments sector overall. Similar to Depop, Reverb has increased its product experiment velocity to more quickly deliver better buyer and seller experiences with its best quarter ever in terms of the number of product wins. Reverb's focus on affordability and helping musicians find good deals has continued. For example, we launched new offer and negotiation tools, making it easier for buyers to save money on a wide range of gear. Over the last few years, Etsy has gone from a period where we grew tremendously with so many tailwinds at our back to a period of stiff headwinds and uncertain macroeconomic conditions. While we're cautiously optimistic for the near term, the macroeconomic climate remains challenging, at least for the moment. Consumers continue to make very tough choices on where and how to spend their money, and we're fighting hard to help our sellers get their share. We're up for the challenge. We have an energized, world-class team who are all in on helping our sellers and Etsy grow. We couldn't be more proud that our already high employee engagement score increased 3% from last year and is now 6% above the industry benchmark. We're acting with focus, speed, and boldness in our work to reignite GMS growth in the second half of 2023 and beyond. In fact, you'll see us making some big moves so that Etsy is even more special and a better place to shop for the holidays this year. Building on our Etsy Has It theme, this year we're working to better connect our brand and on-site experiences to become your gifting accomplice. In other words, helping our buyers to be gifting heroes. Buyers will see some new AI-assisted ways to find crafted, quality gifts for the loved ones at great value with even more confidence that these gifts will arrive on time. Our goal will be to help buyers gift better in 2023. We continue to believe that we're doing something truly important and different and are in the very early days of unpacking Etsy's enormous potential. Thank you for your time. And I'll now turn the call over to Rachel.

Thanks, Josh, and thank you everyone for joining our second quarter earnings call. My commentary today will cover consolidated results for our house of brands, key drivers of performance, and Etsy Marketplace standalone results where appropriate. Last quarter, I commented that one of the things I'm most proud of is Etsy's ability to navigate through choppy waters. And our second quarter performance further demonstrated the resiliency of our business, the benefit of our capital light, highly profitable business model, and our team's strong execution. We delivered strong second quarter consolidated GMS of $3 billion, roughly flat year over year. Revenue increased 7.5% year over year to $629 million. And adjusted EBITDA was $166 million with a healthy 26.4% adjusted EBITDA margin. We are pleased to have delivered strong profitability through this challenging business cycle while also investing in future growth. It's worth noting that our adjusted EBITDA has grown at a 43% CAGR since the second quarter of 2019. While year-over-year consolidated GMS growth remained negative in April, trends turned positive in May and June, driven primarily by strong Etsy marketplace growth in several of our international markets and continued growth in active buyers. FX headwinds softened to 20 basis points, down from 200 basis points in the first quarter. GMS for our three subsidiaries was largely flat in the second quarter, driven by a return to year-over-year GMS growth at DPOP, which was offset by some softness at Reverb and ELO7. Our solid revenue growth can be attributed to continued growth in our marketplace revenue, which increased 3% year-over-year. In addition to the impact of the Etsy marketplace transaction fee change that we fully lapped during the quarter, marketplace revenue also benefited from a mixed shift to more international transactions that often yield higher payments fees and some positive contribution from our subsidiaries. While a smaller percentage of revenue overall, services revenue was our standout growth driver in the quarter with a 21% year over year increase, the highest growth rate in this component since Q4 of 21. Etsy ads was the key driver here due to continued product optimization. For example, we utilize multiple retrieval systems to increase the relevance of paid ads, including integrating Xwalk, our real-time retrieval engine. These enhancements allowed us to show more ads in our search results without negatively impacting conversion rate. These contributions drove consolidated take rate to 20.9%, modestly ahead of the take rate implied at the midpoint of our quarterly guidance. We are pleased with the strength of our profitability and the returns we are getting on our investments in both product development and marketing. Q2 was another excellent quarter for returns in both areas. And you'll see that even as we have gained further leverage in marketing, we are leaning a little bit more into product development, where we see very strong value creation, productivity, and velocity as we have scaled. We believe the investments we are making will continue to be drivers of long-term growth and differentiation as we unpack the significant opportunity ahead. And as I just alluded to, our consolidated product development spend increased 19% year over year to $122 million in the second quarter. Meanwhile, for the Etsy marketplace, product launches increased over 50% year over year, a great sign that we're getting bolder and faster despite getting bigger. We continuously realign resources to focus our talent on the areas we believe will have the highest yield, which is why we have some of the highest revenue per headcount amongst our peer set. We have strong conviction that our teams are working on the true vital few to enable 2023 and 2024 growth. Our consolidated marketing spend increased 1% year-over-year to $166 million, driven by a 1% year-over-year increase in consolidated brand spend. We leaned into our Etsy Hazit campaigns in our top three markets, highlighting home and living, style, and gifting purchase occasions. Our performance marketing spend was largely flat to last year as we ran incrementality tests on our ROI models and selectively pulled back on performance marketing spend in several key channels. Overall, we gained leverage on our marketing spend in the second quarter, with marketing as a percentage of revenue decreasing 160 basis points year over year to 26%. While we primarily utilize ROI models to drive our marketing spend, we understand investors' focus on LTV to CAC and thought we could use this opportunity to provide our view of how you should think about this metric specifically for the Etsy marketplace. Let's start with CAC. Many of you have concluded that the rate of growth of our total Etsy Marketplace marketing spend has outpaced our new buyer growth. That is correct. In fact, from 2019 to 2022, blended new buyer customer acquisition cost increased about 50% after accounting for offsite ads revenue. Effectively, offsite ads revenue offsets a portion of our performance marketing spend. And as such, OSA revenue is important when considering your CAC calculations. And we've seen that omitting this factor leads to incorrect conclusions. And then moving to LTV, the Etsy marketplace's customer lifetime value also increased about 50% over the same period, which allowed us to spend deeper while maintaining very strong efficiencies. This very impressive increase in LTV was driven by a higher GMS per active buyer, transaction fee increases, Etsy ads growth, and Etsy payments expansion. The stability in our CAC to LTV reflects our long stated philosophy of investing to a marginal ROI threshold that we establish for all of our marketing spend worldwide. So what do we mean when we say that we have maintained very strong efficiencies? We think this slide should help clarify our view. While our blended LTV to CAC has held steady, our performance marketing ROI has increased over 40% since 2019 due to the following. successful expansion of our paid marketing to new channels and more countries, which drove an increase in paid GMS and which we believe has contributed to significant non-US GMS growth. And as our buyer mix evolved, we increased the amount of performance marketing spend that goes to retaining and reactivating buyers and encouraging purchase frequency. We have worked hard to maintain the gains we achieved during the pandemic period, as well as through reopening and challenging macro conditions. Given our healthy buyer retention rate, as well as the significant retention of our GMS and scale of Etsy, we believe this investment has been well made. And as a reminder, our LTV models assume that the majority of the payback comes within the first 30 days after acquisition, but there is a tail on the investment which drives future retention and frequency. which is the L in lifetime value. In connection with that, we also have significantly expanded our brand investments during this period, which as we have reported, moved brand awareness up materially in our core markets, contributing to Etsy now being more of a household name than we were several years ago. In summary, we feel great about the returns our marketing spend has generated, and we will continue to invest with discipline and focus as the marketplace scales in the future. Moving now to our review of Etsy Marketplace GMS and buyer metrics. During the second quarter, Etsy Marketplace GMS was nearly flat year-over-year, declining just 0.7% to $2.6 billion. While we continued to experience week-to-week volatility, year-over-year growth trends turned positive during the quarter. These results can be attributed to several factors, including easier year-ago comparisons, positive order growth, moderating FX headwinds, and healthy growth in select international markets. We also saw our average order values remain largely unchanged on a year-over-year basis. Data suggests that Etsy Marketplace GMS remains pressured by consumer wallet share shifts from goods to services and headwinds to consumer discretionary spending, particularly for lower household incomes. When using U.S. Census average household income data by zip code, we have seen a clear delineation of GMS trends between buyers with income above 100,000, where we experienced meaningful GMS growth, and those below that level, where we continue to see declines. This slide shows a monthly view of Etsy Marketplace performance, where we've seen an encouraging trajectory towards positive GMS growth since the beginning of the year, despite the stiff macro headwinds. In fact, the Etsy Marketplace's GMS was marginally positive year over year in July, making our third consecutive month of growth. From a geographic perspective, 47% of Etsy Marketplace GMS in the second quarter was from transactions where either the buyer or the seller or both were outside of the U.S. GMS excluding U.S. domestic returned to positive year-over-year trends, increasing 5% in the second quarter. While we had a modest year-over-year decline in the UK, we reported year-over-year growth in some of our core markets, including Germany and France. We also saw strength in select non-core Western European countries, an encouraging testament to our growing awareness in these markets, particularly as we have carefully expanded our performance marketing with limited, very targeted spend and improved our overall search and discovery capabilities in those markets. We are pleased to report that year-over-year GMS trends improved sequentially in three of our top categories, home and living, apparel, and craft supplies, as shown on the left side of this slide. We also had year-over-year growth in horizontal categories, such as gifts and personalized items, with Etsy being a great Mother's and Father's Day destination. We remain extremely excited about our long-term ability to gain market share in our top categories, as well as improve awareness of Etsy for specific purchase occasions where we have so much great and unique merchandise to offer. The Etsy marketplace ended the second quarter with a new all-time high of 90.6 million active buyers, and our positive year-over-year growth rate accelerated sequentially to 3% from 1% in the first quarter. Growth in our non-U.S. active buyers continued to outpace trends in the U.S. as the majority of our active buyers are still in the U.S. We also continue to see strength in active buyers who identify as men, which increased 8% year over year. While our GMS per active buyer on a trailing 12-month basis for the Etsy marketplace declined 6% year over year to $128 in the second quarter, we are seeing early signs of stabilization on a sequential basis, as you can see from the chart. Overall, our GMS per buyer has held up fairly well, up 28% since the second quarter of 2019, and we continue to maintain nearly all of our pandemic gains. We remain optimistic in our ability to once again inflate GMS per buyer over the long term, both in the US and internationally. We added 6 million new buyers in the second quarter, which is over 40% higher than the average number of new buyers we acquired on a quarterly basis in pre-pandemic periods. We also saw the negative year-over-year new buyer trend moderate to 3% in the second quarter compared to a 6% year-over-year decline in the first quarter. We reactivated nearly 6 million lapsed buyers, up 21% year over year. Overall, we've done a really good job of keeping our active buyers engaged. In fact, our active buyers' retention rate on a trailing 12-month basis remained above pre-COVID levels. On a quarterly basis, retention trends improved from both the prior year and prior quarter. We ended the quarter with 7 million habitual buyers, up 218% from the second quarter of 2019, but down 9% year over year. Encouragingly, our habitual buyers were largely flat on a sequential basis as the strong pandemic-related periods fully rolled out of the trailing 12-month figure. Germany, France, and several non-core Western European markets experienced strong habitual buyer growth. We also saw a year-over-year increase in the number of habitual buyers who identify as men. Continuing the trend we previously reported, the vast majority of the year-over-year decline in habitual buyers can be attributed to buyers moving into the repeat purchase category, with very few of these buyers lapsing entirely. Strong performance in Western Europe also contributed to a 2% year-over-year increase in repeat buyers. Before moving to the balance sheet, we recorded a non-cash impairment charge of $68 million to the long-lived tangible and intangible assets related to ELO 7. This impairment charge was fully offset by tax benefits related to ELO 7, which netted to a neutral impact to our quarterly net income and earnings per share. As of June 30th, we had $1.2 billion in cash, cash equivalents, and short and long-term investments. During the second quarter, we repurchased $39 million in stock under our $600 million May 2022 board authorized repurchase program, of which approximately $114 million remained available as of June 30th. On June 14th, the board authorized a new $1 billion share repurchase program. Our free cash flow this quarter was a healthy $128 million. We continue to convert nearly 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis as our marketplace operates with minimal cash requirements. Now turning to our outlook. We expect to complete the ELO 7 divestiture shortly. So that business is only included in our guidance for half of the quarter. As a reminder, ELO 7 reported 70 million in GMS for all of 2022. So 0.5% of our consolidated total GMS. ELO 7 represented less than a 50 basis point headwind to our consolidated adjusted EBITDA margin last year. We currently estimate our third quarter 2023 consolidated GMS to be approximately 2.95 billion to 3.1 billion, about 3.03 billion at the midpoint, up slightly compared to last year. External factors we're keeping an eye on for the third quarter include those that could influence consumer discretionary spending, including wind down of previously high levels of consumer savings, potential negative impact from the resumption of student loan payments this fall, and discontinuation of child tax credits. On the plus side, we are reading all the same data you are about the potential for a soft landing for the U.S. economy. So, given the continued uncertainty, we're forecasting the midpoint of our guidance to land with a slightly positive year-over-year performance, similar to what we delivered in July. We are forecasting revenue of $610 million to $645 million, up nearly 6% at the midpoint compared to the third quarter of last year. The implied take rate for the third quarter is down slightly sequentially, and please keep in mind that we sometimes see seasonal pressure on our fourth quarter take rate. We currently expect another very strong margin quarter for Q3 with an adjusted EBITDA margin of 27 to 28%. It's quite encouraging to be guiding to a slightly positive GMS at the midpoint of our guidance with another sequential improvement in our GMS trend line currently anticipated for the third quarter. We aren't economists, so it's hard to predict how the macro environment fares from here. But as Josh highlighted, we have an impressive pipeline of product and marketing initiatives where we continue to see strong value creation and return on investment, and strongly believe we are on the right path to reaccelerate growth. Thank you all for your time today, and I will now turn the call back to Deb to take your questions.

Hi everyone, good evening. Thank you for joining us. I'm going to dive right into Q&A. First one I'm going to give to Josh from Mike Morton at Moffitt Nathanson. Looking beyond domestic buyer growth, can you discuss Etsy's expectations for the biggest contributors to GMS growth in 2023 and 2024? For example, do you see this from improved curation, international expansion, or recovery in the softer category such as home and living?

Thanks for the question. Happy to take it. First, I don't want to look beyond domestic buyer growth without talking about domestic buyer growth for a second, because I do think it's important. We're happy about the fact that we have the highest ever level of active buyers of this quarter, and we think it's early days. We think we have a lot of opportunity both domestically and international. As we've said many times before, most people who identify as women in the United States have still have not shopped on Etsy in the last 12 months. Only about one in 10 people who identify as men have shopped on Etsy in the last 12 months in the United States. And so we think there continues to be a big opportunity to continue to grow active buyers in the United States, both new buyers and reactivating that pool of 100 million lapsed buyers. And we saw great evidence of that in this quarter. And as you say, there is a very big opportunity for Etsy to grow internationally. And we're seeing very promising signs of that again this quarter. so etsy uh just began to buy google plas in markets uh outside of the us outside of the uk germany and our core markets um you know recently and we're seeing that we're able to do that in an roi positive way immediately you know the etsy site is translated into many languages and it turns out there's demand for etsy products in many parts of Western Europe, for example. And so we're able to grow in a pretty cost efficient way in those markets. And those markets collectively can be very big, you know, can have the GDP of the United States, for example, the 15 markets beyond our core. have a population that's even larger than the US and GDP equal to the US. So we're very encouraged by that. In addition to that, I think there's a very meaningful opportunity for us to do even more with the traffic that we have to drive GMS proactive buyer, to drive conversion rate up, and I see lots of opportunities to do that. I talked on the call about quality in the recorded part of the call about quality, and I'm really excited about this next chapter for Etsy. We've done so much over the past six years to do a better job with relevancy, to understand what you meant, not just what you said in your keyword and to give you search results that are relevant. It is still the case that most of the time we have thousands of search results to choose from. And finding the ones that are the most visually appealing, that you're most likely to like, the ones that feel priced appropriately, and the ones that deliver really great service quality. And of course, doing ever better at making sure that we can enforce all of our policies in a really scalable way. All of that means we're serving only the highest quality things to you, which is going to, I think, do a lot to make a more delightful experience, to drive conversion rate up, to drive frequency up to even further enhance the appeal of the Etsy brand. I talked in the recorded part about pricing and the tools that we have to help our sellers come up with the right price. I think that's another example of where we can where we can really help to improve the conversion rate of the site and make our sellers be more successful. And then things like promotions. We're investing even more in tooling to help sellers run the right promotions at the right time in the right way. That's more important now than ever. We want to make sure that our sellers can compete and win. If you go look at the homepage of Etsy right now, you're going to see some big, bold banners. around items that are, you know, running promotions right now. That's new. We haven't done something that bold in the past. I think it's appropriate and fitting with the times. I think there's a lot of levers we can pull that will continue to drive drive conversion rate, drive the quality of the experience. One more that I would want to talk about is curation. When you look at the Etsy search results page right now, you'll often see many variants of the same thing, many similar versions of the same thing. We can do a better job of organizing those and collapsing those into a set of things that are different. and showing you just the very best of each of a set of very different items. And I think that can also do a lot to drive conversion rate, perception of quality, and a better customer experience and time. So I'm really excited about our roadmap, and we've got a lot underway right now that I think can really help to even further improve and differentiate Etsy.

Okay, great. Thanks, Josh. Next one is from Laura Champagne at Loop. I'm going to give this one to Rachel. What do you expect to be the ceiling on total take rate now that ELO 7 is being divested and the rate seems to be naturally climbing on an organic basis?

Hi, Laura. Thank you for the question. You know, we've never said anything about a ceiling on take rate, but you're right. We have actually been able to improve take rate almost every single year since this management team has been in place. And we've done that in part from transaction fee increases and in part from offering expanded services that naturally bring the take rate up. Etsy ads, for instance, was not even a new service in the past couple of years or a transaction fee increase. It was just a continuation of optimization of that particular product where we keep making the search results better on Etsy. a sponsored ad which increases click-through rate and therefore increases our ability to drive incremental revenue. So we haven't fixed a price on, you know, a ceiling on take rate and I'm not going to do so here. I will say we are neither the highest take rate for marketplaces nor the lowest take rate for marketplaces and we really always stick to our credo of a fair exchange of value so where we see there are products or needs or services that will benefit our sellers and we can provide a service that will or a product that will benefit them we will charge a fair fee for that and we feel that all boats will rise in that scenario and we see lots of opportunities to do so

Thank you, Rachel. I'm going to move to the next one from Tom Forte at DA Davidson, and this is going to be for Josh. Can you provide an update on your M&A strategy and why was it the right time to divest ELO 7? We've had quite a few questions about that and also related to our House of strategy going forward. I think we'll just, I'll end the question there. And if you can just address those kind of two factors of it would be great. Thanks, Josh.

Sure. So we look at each of our acquisitions on a standalone basis and, you know, we have a thesis. And so we bought ELO 7 with a thesis, which is that when coming out of the pandemic, we would see real tailwinds to ELO 7's growth. ELO 7's merchandise centers a lot around events and activities that happen offline. Things like birthday parties, quinceañeras, weddings, etc., And it's now been two years since we've come through the pandemic and we've not seen the growth rates that we've expected from the ELO 7 business. I think it's a good team doing good work, but they've faced quite a lot of headwinds. And so the thesis hasn't played out. We haven't seen what we've expected, and we thought that this is the time to call it. And I think that's part of taking risks. We're prepared to take calculated risks, thoughtful risks as a business, but we also want to be clear-eyed and call it when we see it, acknowledge when it didn't work out, and move on. We're really excited about the opportunities in our core. We're seeing great progress. DPOP is doing fantastic things. Reverb we think continues to gain share in its industry and we want to keep our focus. And so that's what we're going to do.

Okay, great, thank you. I'm gonna give this next one to Josh. Hold on a second, one second. Okay, actually for Rachel on a couple of guidance questions. This is from Lee Horowitz at Deutsche Bank. The high end of guidance suggests quarter over quarter growth of 40 basis points. In the past, back to school demand has supported growth in the low to mid single digit range. Why is it that you are no longer replicating past seasonality? Is it the continued pressure from the macro environment?

So thank you for the question. Let's talk about what's implied in the guidance that we gave. The midpoint of the guidance is about 0.7% growth, 0.5% growth, rather. And that implies that the conditions that we have seen today, as far as macro headwinds, remain roughly the same. They don't get better, they don't get worse. At the high end of the guidance, we would assume that macro headwinds improve so that we are able to hit the high end of the range. At the low end of the range, we would say that they would slightly worsen. It's still a very volatile market. We don't actually... have our crystal ball to say we'll get more or less volatile. So the guidance does imply that August and September are sequentially a little bit worse than July. We do think we stand to get a fair share of the back to school and Labor Day market. We've been, as Josh talked about, leaning much more into promotional opportunities similar to all e-commerce retailers and more so than Etsy has really ever done before. And we're very excited to be able to talk about back to school as an occasion for which you can find many, many special things that people will be shopping for at this point in time.

was a thank you rachel there was actually another question related to guidance that was from um curtis nagle at b of a and it was really about um we already answered the part about the midpoint and where it was hitting in terms of macro factors but there was another one about whether our product categories had any impact how we were thinking about product categories and the guidance did you want to answer that one as well um well one of the things that we've said we've

we did talk about is that some of our horizontal categories, so specifically gifting and occasions are actually growing quite nicely. And so while we do see headwinds from some of our larger categories like home and living, and those have continued to be a little bit under pressure, Some of the other categories are actually starting to see sequential improvement. And a category like gifting, when we're heading into holiday, we feel pretty strong opportunity for growth.

Thanks, Rachel. All right, Josh, I'm going to give you the next one from Maria Rips at Canaccord. Recently, there have been reports of some sellers taking issue with the company's reserve system and its process for withholding and distributing funds. Can you first refresh us on what that policy is around payment reserves and why it's important to the overall health of the marketplace and maybe comment on how you are addressing this cohort of sellers who are unhappy with the current policy?

Yeah, thanks for the question. So Etsy has an unusually generous payment policy relative to most marketplaces. And that historically, when a buyer buys an item, 100% of that money is transferred to the seller right away. We take it on faith that the seller is going to ship the item to the buyer. And the good news is the vast majority of the time that happens. But things do go wrong. And sometimes, for example, seller sales really ramp faster than they can deliver on. And things go wrong. And Etsy, of course, steps in to the gap in those times to make sure that the buyer is held whole so that the Etsy brand is a great brand and other sellers' reputations are not hurt by that. So it's really important for the overall health of the marketplace that we can always stand behind every single sale and buyers have a lot of confidence that Etsy will always have their back. As part of that, then in 2021, we introduced a payment reserve where a very small number of sellers that are high risk perceived to be high risk, predicted to be high risk, we withhold some of the payment from those sellers. And we continue to iterate. We continue to learn on that program. How do we make the models more precise? How do we withhold the smallest amount that we need to? And how do we communicate better with sellers about what the thresholds are, why they're in that program and not? And so we just announced yesterday some improvements being even clearer with sellers about why they're in the program. We announced actually we're going to be reducing the amount we're holding from the vast majority of sellers. So we continue to listen, we continue to learn, we continue to work together with sellers and buyers to make sure that the marketplace stays safe. And just to put some dimension around this, it's in the low single digits of sellers that are in reserve Right now, 70% of those sellers have less than $50 in payment reserve. And I don't want to, you know, we recognize for every seller being in payment reserve can be a hardship. So we want to do it only when necessary, only the amount when necessary. And we want to be communicating as well as we can with the sellers and get them out of reserve as quickly as possible. And so we're working hard to make sure all those improvements happen.

Okay, great. Thank you, Josh. One from Ed Ruma at Piper Sandler. Can you talk about inflation, if any, observed on the marketplace? Does the pricing tool help sellers understand when they have pricing power and could this help drive GMS? I'll give that one to Josh.

Sure. Thanks for the question. Yeah, we see a lot of opportunity. And, you know, I think we've talked for a few years about how helping sellers set better pricing is a big opportunity. And it's one that we hadn't yet leaned into, but we want to now we really are. So we've kicked off a couple of squads focused on what we call sustainable pricing. And there's really two separate areas that we're focused on. The first part is how do we help sellers get the right data so they can set the right price for their listing at the start. We can share with them, for example, data about items that appear to be similar to theirs and what has been the final selling price for those items. We showed a screenshot of an example of a test of that that we're going to be launching. We'll see, we'll iterate and learn exactly how to do that, how to give sellers the right context. but probably there are some sellers that are really underpricing and some sellers that are really overpricing and some that are getting it just right. But in our market, there are no MSRPs, right? Every item is unique and made by the seller. And so it's, I think, particularly helpful to be able to give sellers context. The second piece is having set your initial price appropriately. When, how, and if should you use promotions? And I think a lot of sellers are just winging it. And so we're doing a lot of research to see when do promotions pay off and when do they not? For example, is a 10% promotion worth it? Maybe a 10% promotion isn't enough to get a seller to buy, so you're just kind of wasting uh, wasting that sale, if, if you will. Um, so, uh, you know, giving them more insight about, about when it makes sense and what doesn't make sense to use promotion and how much promotion may make sense. Uh, I think that's also an opportunity for us to gather a lot of insights that we get through the marketplace and then share those insights back. So sellers, it's always up to sellers, what they wanna do, but we give them the insight so they can make better informed decisions, then build their business better.

Okay, great, thank you. Rachel, I want to give you one from Shweta Kajaria from Evercore, just to clarify the guidance comment that you made. Does the guidance assume August worse than July and September worse than August? She was just following up on that, and I think that's an important one we want to clarify.

Yeah, so first of all, the midpoint of our guidance is actually 0.7, not 0.5, so I want to clarify that first and foremost. Second of all, we don't guide to the months, so we don't guide to August or September individually. I THINK MY COMMENT WAS MEANT TO SAY AT THE LOW POINT OF OUR GUIDANCE, IT WOULD IMPLY SOME DECEL, JULY WAS POSITIVE AS WE SAID SEVERAL TIMES ON OUR CALL, WOULD IMPLY SOME DECEL IN AUGUST AND SEPTEMBER.

Thank you, Rachel. That's perfect. And then I'm going to give another one from Shweta since I have her right here. This one I'm going to give to Rachel also. Etsy ads once again drove revenue growth and take rate expansion. Where do you see the clear growth opportunity? Is it driving relevance, ad load, more sellers, something else? And maybe Josh wants to comment on that one too. It's an exciting one. So Rachel, you go first.

Thanks for the question, Shweta. Yeah, we've continued to be able to grow Etsy ads. I want to say organically, but it's not without a lot of hard work from a lot of really smart machine learning engineers making the algorithm better and better and better retrieval engines. And because we are able to make the ad results so relevant to a buyer's query, we're able to increase the CPC, which increases our revenue, and also at the same time maintaining the ROAS for our sellers. And as you know, we get a lot of budget from our sellers, and we don't spend it if we can't give them a certain amount, a minimum amount of ROAS. So the more that we can match a buyer's query to a seller's product, the more of that budget we can utilize. So we see some continued growth in opportunity for Etsy ads. I will remind you that we do see Etsy, our take rate actually will, it's softer in the fourth quarter. We called that out on the call and that's because Etsy ads, even though it's the gift that keeps on giving relative to the growth we usually see in GMS in the fourth quarter is lower. So that's the one thing to think about is the seasonality of that product.

OK, great. Did you want anything, Josh? Are you good? OK, fabulous. And I'll go to the one for both of you on from the Gala Roni and from city. I'll start with Rachel. Are you able to quantify the AI and ML investments? What they are and how they are impacting margins and then perhaps and then connected to that can have Josh talk a little bit about the benefits we're seeing from Jenny I and whether it's helping develop better product development velocity. And do you have any proof points yet that the AR tools are driving GMS growth? It's sort of for both of you question. Rachel, you want to start? Sure.

Great. Thanks, Igal. You know, we've been doing machine learning at Etsy for a very long time. So we have a lot of talent at the company that is in machine learning and that's already embedded into our cost base. And one of the things that we are focused on is doing what Josh described as democratizing ML so that many people throughout the company are can leverage the suite of tools for machine learning and AI and do their own, leverage that capability and that technology themselves without having to sort of ask for that service from a separate group. So that means that our entire installed base of engineers and maybe even others like people in my finance organization will be able to really leverage the capabilities there without having to hire armies of people to go do machine learning for us. We've also been leveraging the investments that other companies, many of them are existing partners, have invested already in machine learning. And so we're doing a lot of beta testing and experimentation with other companies. And at the moment, that is coming at a very low cost to us. We would imagine that at some point there will be some kind of license fee arrangement, but typically we do not invest in anything unless we see a high ROI for that investment. So if we decide to license different tools that are out there or to invest in our own workforce to be able to, you know, lead more heavily into machine learning and large language models. That would be because we see significant GMS opportunities from doing so. And as you know, we measure everything pretty carefully. We expect about an 18 month return on those investments. And that's the exact same way we would measure any kind of AI new product development as well.

And then, you know, on how Gen AI might affect the customer. I would talk about internal and external customers for that. So there's a set of productivity potential benefits that come from Gen AI, for example, for our software developers. And I'm really pleased by the data we shared in this earnings call about just how much velocity continues to improve in spite of getting better. Velocity per squat continues to get better. And we're really excited about the value creation per squad we're seeing right now. So we continue to focus on making Etsy more efficient and more nimble, even as we get bigger. Gen AI, things like Copilot, are going to be another tool to help with that i i would caution i don't think we you know we're testing and we're leaning in and we're excited about it and i think it's going to be helpful um but it's not the only thing it's not a silver bullet we're actually constantly looking at how can we streamline our processes how can we be more agile and how can we get more productivity and more value creation out of every squad uh i do think that The way that we measure value creation per squad in this company is part of our secret sauce. We've always been obsessed with that. I think it can be a tool that can really help our sellers. So, for example, answering queries from buyers. Can it help to auto-generate some suggested responses? But the seller is still going to want to look at that, put eyes on that before they send it. So it'll be helpful for them, and we want to help sellers every way that we can. help them auto generate listings over time things like that yeah maybe um uh it could be good again if it helps sellers save time that's great we wouldn't want to do anything that makes the site look homogeneous or boring though so we're going to be very careful about that and more listings doesn't necessarily translate into more sales for etsy so if it's useful for sellers we'll lean in For buyers, the idea that the search experience can become more conversational, I think can be a very big deal for Etsy and maybe more for Etsy than for most people. I talked two earnings calls ago now about how you don't walk into a store and shout, dress blue, you know, linen to a sales agent, you know, you actually have a conversation with them that has more context. And I think that's especially important in a place like Etsy, where we've got 115 million listings to choose from and no catalog. So the idea that it can be conversational, I think, can give a lot of context and really help. And I think a lot of the technology behind that is becoming a self problem. What's going to be longer is the consumer adoption curve. what do customers expect when they enter something into a search bar and how do they get used to interacting with chatbots and what's the UI look like? And that's something that I think we're gonna need to, we're testing a lot right now. What do people expect? How do they like to interact with things? And in my experience now, having a few decades of consumer technology leadership, the consumer adoption curve, is often the long pole in the tent, but I think over time can yield really big gains for us.

Great. Thanks, Josh. I'm going to give one from Alexandra Steiger from Goldman Sachs. And I think I'll give this one to Josh. In terms of GMS per buyer, how should we think about declines in that metric? And can you talk about what you were seeing at the cohort level that gives you confidence that you can actually return to positive GMS per buyer growth once macro conditions normalize?

Yeah, great. Thanks for the question. So let me talk about GMS per buyer in the US and international. In the United States, Well, around the world, when the pandemic happened, most places you could shop shut down or were out of stock, and Etsy had enormous tailwinds. And during that time, in the U.S., we saw GMS proactive buyer grow by over 30%. Since that time, there's been an onslaught of competition. There's been inflation and all the other things everyone knows about. And yet, the GMS proactive buyer in the U.S. has stayed almost exactly the same. We've held almost all of those gains. The declines we're seeing in GMS proactive buyer are that we're growing faster in international than we are in the US. And we've seen a little bit of pullback in GMS proactive buyer in international. I'm not mad about us growing faster in international. There's a lot of opportunity in international. There's a lot of buyers to be added in international. And the fact that we've done such a good job maintaining the GMS proactive buyer in the US in spite of these headwinds, in spite of all the new competition, says, wow, people came to Etsy and they loved it. And it was something really different. And now with a lot fewer dollars to spend and a lot more places to spend it, they are continuing to come back and spend in roughly the same amounts today as they were back then. As a platform from which to drive further growth, I take a lot of optimism, excitement, confidence from that. I talked at, I think, the first question about all the things we think we can do to grow and drive even more from there. But I take that as very encouraging. Rachel talked in her part of the call about the difference we're seeing between households over 100,000 and households under 100,000. And we see this not just in ETSI results, but all around that it does seem like for households under 100,000, they're just under enormous pressure right now and having to make very, very difficult trade-offs in life, and if it's not something that's absolutely essential, then people are having a hard time prioritizing that. And we may be feeling some of that. We're still getting a pretty good amount of GMS proactive buyer from people under 100,000, considering the times we're in. But I would say cycles are cycles. And now being over 50, having lived through a few cycles myself, cycles are that. They come and they go. And we are in a tougher part of the cycle And at a time when a tougher part of the cycle and we are still maintaining the GMS gains of the pandemic and putting up EBITDA margins in the core of 30% feels like a pretty good business if this is what bad times look like. And I'm very optimistic that there's much better times to come.

Great. Thanks, Josh. I'm going to just slip in one more for Rachel. from Nick Jones at JMP Securities. The press release indicated there will be more investments in non-core markets and performance marketing in particular. How are you thinking about the pace at which Etsy can capture share in Europe? Can success in North America and UK help accelerate the pace at which you can win active buyers in the European press of Europe?

I really, we're super excited about what's going on internationally. And what we said on the call was that we've seen growth in non-US markets up 5% and we've been able to invest profitably in our core markets with performance marketing and within the UK and Germany with brand marketing as well. We've also been investing with performance marketing in our non-core markets and we're seeing this lovely from that spend where we're getting lots of visits in GMS coming from some of these non-core, especially Western European markets. So look, we'll stay tuned for that. We'll talk more about it. It's a non-human intervention kind of thing. So we're able to spend there with a fairly light lift and with good ROI on our investment.

Okay, great. Thank you, Rachel. I think we went over by a few minutes, so we're going to end it there. Thank you all for your time and attention, and we'll talk to you very soon.