Etsy, Inc.

Hi everyone and welcome to Etsy's first quarter 2024 earnings conference call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been pre-recorded. Joining me today are Josh Silverman, CEO, and Rachel Glazer, CFO. Once we are finished with the presentation, we will take questions from our publishing sell site analysts on video. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business, and our operating results, as noted in the slide deck posted on our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-K, 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 both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or slide deck posted on our IR 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 consolidated results, while within our guidance range, were not where we wanted them to be. GMS was just shy of three billion dollars, down 3.7 percent from last year. Revenue grew a bit, up 0.8 percent to $646 million, and we delivered $168 million in adjusted EBITDA, a very healthy adjusted EBITDA margin of approximately 26 percent. Etsy Marketplace GMS was down 5.3 percent year over year, a bit of a disappointment, as March GMS trends did not improve as we had anticipated. That said, I'm encouraged that the Etsy Marketplace's record high level of 92 million active buyers held up very well in another challenging quarter for our type of markets, signaling to us that while buyers shopped a bit less with us than they did in the prior year period, we have some comfort that these trends are cyclical rather than structural. To that point, while U.S. unemployment is low and inflation data is mixed, consumer sentiment remains depressed, which some speculate can be attributed to the very high cost of money. Consumer wallets remain squeezed, so there's often little left after paying for food, gas, rent, and child care. And there's significant data indicating that the largest e-commerce platforms have primarily been able to grow by selling everyday essentials at very low prices. Macroeconomic conditions also continue to be quite challenging in our other top markets, the UK and Germany. These headwinds are real, do not appear to be abating and are impacting our sales. Stiff headwinds mean that our product and marketing initiatives have to work even harder to drive growth. In the first quarter, we shipped meaningful improvements to the customer experience, positively impacting GMS, just not enough to offset the headwinds to our baseline business performance. I'm particularly pleased that our leaner and more nimble Etsy marketplace product development organization was off to the races. We had double digit growth in the number of experiments per product engineer that utilized machine learning, as well as in our annualized gross GMS from experiments. And the total number of experiments run per engineer increased 20 percent. Some of this progress can be directly tied to work we told you about last year to democratize ML. These metrics give me confidence that the bold moves to improve customer experience can build over time and play a key role to get Etsy growing again. Our marketing team also kicked into high gear, insourcing Etsy paid search efforts and scaling mid funnel channels, expanding our product feed testing across PLA and paid social to improve the quality of inventory we're showing users and developing engaging and creative full funnel activations across channels. Our key focus for 2024 is to continue to build consideration for Etsy to help buyers think of us more often by making it easier to find the best stuff, driving association that there are great deals on Etsy and making shopping on Etsy more convenient. We believe that changing buyer perceptions is eminently achievable, making us more of a go to shopping destination. And we've made excellent progress kicking off bold initiatives to do just that. Thanks to the great work our product team did on the initial launch of gift mode, combined with creative and engaging marketing campaigns to raise awareness of Etsy as a key gifting destination, we're off to a good start evolving Etsy from being one of the places you can go to find a gift toward being the indispensable partner for all of your gifting missions. Gift mode is by far the most unique and varied subset of inventory we've ever curated and shown on Etsy, organized around a set of gift ideas and not just items in order to help you feel like you're shopping for a person and not a thing. We're pleased to report that Etsy's total site wide gifting GMS in the first quarter grew in the low single digits year over year, significantly outpacing our site wide performance and data we're tracking for select U.S. online gifting focused peers who all saw year over year declines. We're seeing quarter over quarter increases in U.S. consumer perceptions that Etsy is making it easy to find great gifts, a key gift mode value prop. And importantly, our research tells you that gift mode expands by our understanding of the breadth of our offering, very helpful, as of course, we're about so much more than just gifts. We utilized full final marketing strategies to tell the world there was something new at Etsy, such as securing the most visible advertising position in football's big game, making an estimated 100 million plus impressions. Gift modes launched generated over four times as many news articles as any of our prior consumer PR campaigns. And we had an over 200 percent increase in conversation volume around Etsy and gifting in our social channels compared to this time last year. As we've said before, this was a kickoff, not the mic drop. And we're in the early days of driving brand awareness to make Etsy more top of mind for gifts. We've got a robust road map for gift mode. To improve the experience and get more buyers into the funnel from recently optimized gift teasers to additional gifty profiles, reminders, video and audio message capabilities and new occasion pages and much more. Turning to our quality focused initiatives, which we believe represent a tremendous unlock to drive buyer consideration, we stand for keeping commerce human and believe that doing this in a way that no one else can is our most important competitive advantage. We're focused on creating cleaner shopping aisles for buyers. All too often when you visit Etsy, your search is cluttered, showing you too many items that feel very similar, increasing cognitive load while failing to highlight the incredible diversity that is a towering strength for Etsy. In addition, you might not be clear as to why each of these items belong on Etsy. For example, which are handmade by the seller themselves, which are designed by the seller, but produced in close collaboration with a production partner and or which are personalized and customized by the seller. While there's demand on Etsy for each of these categories of items, it depends a great deal on the buyer's shopping mission. With the tremendous growth in sellers and inventory we've experienced over the last few years, this challenge has gotten all the more real and complex. The great news about this challenge is that large language models and gen AI techniques provide so much opportunity for Etsy to better understand both the shopping mission you're on as well as our inventory and show you the best stuff in ways we couldn't have imagined just a few years ago. This year, we're going on the offense in an even bigger way to make sure Etsy lives up to our promise from an inventory and quality perspective along these four key focus areas. First, we're doing more than ever to suppress and remove listings that violate our policies. And advances in ML have been particularly powerful as enablers here. In the first quarter, we removed about 115 percent more listings for violating our handmade policy than in the prior year. And you've heard us talk about the violative view rate. Buyer views of listings that violate our handmade policy are now just a few percentage points of total listing views. Our improved enforcement capabilities have resulted in the cumulative removal of millions of listings and tens of thousands of active sellers. Well, there's a strong replacement factor to fill in for any removal of seller listings on our marketplace. We estimate that the heightened level of takedowns we've initiated over the last six to nine months has represented about a 50 basis point headwind to our annualized GMS. We see this as a very important investment in our future with significant progress made, but still more to do to keep making Etsy different and special and even more Etsy. Second, we need to elevate listings that represent the best of Etsy. Over the past several years, we've dramatically improved our search relevance, ensuring that buyers can more easily find what they're looking for. We believe there's a huge opportunity to build on this work by factoring attributes such as the quality of the listing and photography, shipping price and reliability and customer reviews into our organic search algorithms. All of this will help buyers find something that's not only relevant, but will also lead to a purchase experience they're likely to love. We also want to empower sellers through transparency and education so they know exactly what actions they can take to improve their visibility, creating opportunity for more sales on Etsy. And the third and fourth items on this slide, curation and organization, work together to do an even better job showing the newest and best merchandise available from sellers on Etsy, whether through home and landing page experiences, category shopping, initiatives like Gift Mode, our deals tab and more. While we've made incredible strides in directed search on Etsy, we have a very significant opportunity to focus more on window shopping, creating engaging buyer experiences to spark your imagination, capture impulse buys, get to know your tastes and preferences better and expand your understanding of the breadth of products available on Etsy. This is an area where we intend to fight much harder, making Etsy more fun, engaging, inspiring, surprising. We want you to come to Etsy when you have five minutes to spare just to be entertained. She'll come back to us again and again. And I'm confident that with our sellers, incredible merchandise, our large buyer base, brand strength and our team's creativity, we can make this happen. It's imperative that we continue to widen the gap between Etsy's offering and that of the competition so that our site always feels inherently different, fresh, special and even more human. Better organizing our diverse listings into cleaner aisles will declutter our site, enable buyers to find something they love with less friction and keep them coming back. We believe that supporting small business and shopping unique goods are our strongest levers to get buyers to think of Etsy more often. We're planning to be quite loud with this message, reestablishing our point of differentiation in clear and compelling ways. We're also making great progress in our other key focus areas to drive buyer consideration, highlighting great value and reliability. In keeping with the times, during the first quarter, we promoted special and hot deals from our sellers with discount related signals continuing to drive significant GMS impact. We also introduced new functionality for sellers, such as a growth page with customer insights they can use to inform actions to grow their business, such as a new earnings calculator to assist sellers in understanding the various inputs that grow into their profitability. In terms of shipping timeliness, I'm pleased to report that our initiative to tighten estimated delivery dates, which we believe are an important effort to improve buyer perceptions of our reliability as well as to grow GMS, are already paying off. Our fulfillment team recently launched a new machine learning model, which reduced our estimate of USPS transit times by greater than one day, resulting in a nearly tripling of the percentage of eligible orders for which Etsy is now able to show an estimated delivery date of seven days or less. Driving consideration is all about inflecting the curve to capture more new buyers and to help browsers convert to sales, to engage our existing active buyers, half of whom still only shop on Etsy one time per year, and to retain and reactivate more buyers every year. Working to get another bite at the apple with our more than 100 million lapsed buyers. Within this framework sits a very compelling opportunity to further expand usage of our BuyOnEtsy app. Since purchasing days per app user are 75 percent higher than our non app users and only 45 percent of active buyers use our app, we've set some ambitious goals for 2024 to increase user penetration of our app and drive incremental downloads, including strategies to improve how and where we show the app download prompts, increasing the reach and effectiveness of our push messages and improving the experience for first time app users. We have massive pools of buyers to fuel these strategies and are excited about the road ahead. Owning our own destiny, particularly as some top search engines have lost a bit of their potential to drive traffic for e-commerce players is an important priority for us. In closing, while so far 2024 is still proving to be a cyclically challenging period for us, rest assured that we are clear eyed about what we need to accomplish to set Etsy back on a growth path. We're confident we're working on areas that will positively impact Etsy in the months and years ahead. We're leaning in more than ever to what makes Etsy, Etsy. We are not deterred. And as I've said to some of you, proving doubters wrong is frankly quite energizing for us. Even as I celebrate my seventh that's aversary this month, I remain encouraged that we still have so many opportunities to grow. I'll now turn the call over to Rachel.

Thanks, Josh, and thank you, everyone, for joining our first quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace standalone results where appropriate. As a reminder, we divested ELO7 on August 10th, 2023. So please take that into consideration when you compare year over year consolidated results. Etsy's first quarter 2024 consolidated GMS was three billion dollars down approximately .7% year over year with 40 basis points FX benefit. Revenue increased a bit year over year to six hundred and forty six million dollars and our adjusted EBITDA of one hundred and sixty eight million dollars was in line with expectations and roughly similar to last year. Note that ELO7 divestiture resulted in small headwinds to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. While strong external headwinds pressured Etsy marketplaces GMS trends throughout the first quarter, solid year over year GMS growth at our subsidiaries provided a tailwind to consolidated results. Our two point six billion dollars in Etsy marketplace GMS represented a five point three percent decline on a year over year basis. I'll cover this in more detail later. Within our consolidated year over year revenue growth of point eight percent, consolidated marketplace revenue was flat with growth in payments and offsite ads revenue offset by declines in transaction fees given lower GMS this quarter. We had a nominal benefit related to our new seller setup fee experiment launched in late February, part of our efforts to keep Etsy safe and secure. This fee is meant to introduce healthy friction into our process, facilitating enhanced security checks and continued support for new shops. Tests indicated it resulted in an expected decrease in new shop openings and a significant decline in fraud attempts. Based on this successful outcome, we rolled it out in all eligible countries in early April. Consolidated services revenue increased three percent with our ad platforms being the primary contributor. During the quarter, we continue to enhance Etsy ads, including refinements to our data retrieval engines that improved conversion predictions and the pace of spend for sellers ad budgets throughout the day. First quarter, 2024 consolidated take rate was twenty one point six percent, slightly ahead of guidance and above the twenty point seven percent reported in the first quarter of last year. Our first quarter consolidated adjusted EBITDA margin was twenty six percent in line with our guidance down 60 basis points from last year. We gained leverage year over year on employee costs and variable cost of revenue offset by higher marketing expense, primarily from our big game advertising. Our subsidiaries represented an approximately 300 basis point headwind to our consolidated adjusted EBITDA margin. We're encouraged that our efforts to effectively manage our cost structure and look for efficiencies are helping us to make important investments while also delivering very healthy profitability through this challenging environment for our discretionary goods. During the first quarter, consolidated product development spend decreased five percent year over year to one hundred and ten million dollars, primarily as a result of our December Etsy marketplace restructuring. So we are in fact gain leverage on this P&L line, as you can see from this slide. Our first quarter consolidated headcount was approximately twenty four hundred down 15 percent on a year over year basis. For the Etsy marketplace, headcount was down approximately nine percent year over year to a bit under eighteen hundred with revenue per headcount increasing about two percent year over year. We continue to make deliberate and judicious decisions related to our hiring, focused on selective skills and the very best talent for our significant opportunity ahead. First quarter consolidated marketing spend increased 12 percent year over year to one hundred and ninety two million dollars, largely driven by a 59 percent year over year increase in our consolidated brand spend, primarily related to our above the line big game campaign in support of the Etsy marketplace's launch of gift mode. Our consolidated performance marketing spend increased two percent year over year. Performance marketing was a headwind for January as we conducted core channel optimizations and it then became a tailwind in both February and March as we expanded Etsy marketplace product feeds testing across PLA and paid social and scaled up push notifications and mid funnel investments to diversify our marketing portfolio mix. Etsy marketplace paid GMS was about 20 percent of our total, similar to our normal trendline. Moving to Etsy marketplace GMS and buyer metrics, Etsy marketplace GMS declined five point three percent in the first quarter with the negative trends we experienced in January and February continuing through March. While we saw positive GMS impact from our product and marketing initiatives in the quarter and we were really pleased with the performance here, our baseline GMS levels continued to be pressured by macro factors specifically related to consumer discretionary product spending that made it harder than we expected to bend the curve, which was disappointing. More on that in a moment. Further, we saw greater than expected volatility around the timing shift of Easter from April to March. Well, this was a headwind to March. It has also provided a helpful tailwind for April, which I'll cover in our Q2 guidance. Diving in a bit further on the consumer discretionary headwinds we are seeing, particularly in our categories, these two charts are probably the most informative to help us explain the overall GMS pressure we've been experiencing. On the left, you can see the steady decline in U.S. consumer discretionary spending as a percentage of total personal consumption expenditures, including through the first quarter of 2024, which supports our belief that much of our deceleration in the quarter was in line with the larger trend for discretionary goods. And on the right, you can see that consumer edges pure play, pure sales data for our top categories in Q1, with low to mid single digit declines in every category except for craft supplies, which had a slightly positive result. These headwinds were stiffer than we had been anticipating when we set guidance for the quarter. Here you can see that Etsy Marketplace GMS was down across the board in our top categories. When we map our performance to the consumer edge data on the prior slide, we believe that we performed similarly, if not better, than peers in four of our six categories, home and living, apparel, paper and party supplies, and toys and games. And we underperformed a bit in jewelry and craft supplies. But overall, we see this as a tale of broad weakness in the types of merchandise we sell. We'd encourage you to remember that this comparison is a bit of apples to oranges and that Etsy sellers generally have not taken up prices in keeping with inflation as pure retailers do. Consistent with the macro pressure we experienced in the U.S., Etsy Marketplace GMS, excluding U.S. domestic, declined 1.5 percent from the prior year, with particular weakness on a year over year basis in our top markets of the U.K. and Germany. We did see growth in Switzerland, Austria and the Netherlands. While our U.S. domestic GMS continues to decline on a year over year basis, we are seeing healthier performance in our U.S. import trade route, with high percentage share of imports from sellers in the U.K., Canada and Turkey. It's quite encouraging that Etsy Marketplace active buyers grew 2 percent on a year over year basis, roughly flat to the fourth quarter at about 92 million active buyers. U.S. active buyers have grown a bit now on a year over year basis for three consecutive quarters, and we continue to see healthy additions outside the U.S. We reactivated over 6 million lapsed buyers, up 6 percent year over year, and we added nearly 6 million new buyers in the first quarter, down year over year, but still a very healthy proof point in this type of macro climate, well above pre-pandemic levels. Habitual buyers decreased by 3 percent year over year. We continue to observe a trend where some habitual buyers purchase slightly fewer items or spend slightly less, no longer meeting our habitual buyer definition, and moving to the repeat buyer category. We also retained slightly more habitual buyers in the first quarter versus our retention of habituals in the fourth quarter and the prior year period. Lastly, GMS per active buyer was down 3.5 percent in the quarter. Additional Etsy Marketplace metrics and trend charts can be found in the appendix to this presentation, which is posted on our IR website. Our subsidiaries both had encouraging momentum to start the year. Both businesses delivered year over year GMS growth, with Reverb continuing to outpace the musical instruments industry, and Depop growing faster in the U.S. than their comparable resale players. They are providing good lift to consolidated results, affording exposure to different categories and buyer purchase behavior than our core marketplace. Both Reverb and Depop appeal to value-oriented shoppers with great deals, with Reverb highlighting used and outlet merchandise, establishing itself as a destination for affordable and discounted music gear, and Depop continuing to be a home for discovering affordable fashion, with success helping users to set fair prices and more easily negotiate. As of March 31st, we had $1.1 billion in cash, cash equivalents, and short and long-term investments. During the first quarter, we repurchased a total of $158 million in stock under our $1 billion June 2023 board-authorized repurchase program, of which $566 million remains available as of March 31st. Our capital-like business model allowed us to deliver strong free cash flow this quarter of approximately $59 million. We also continued to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis. Now turning to our outlook. As mentioned earlier, the -than-anticipated headwinds the Etsy marketplace experienced in March due to the shift in Easter and Spring break timing had the inverse effect on our consolidated GMS for April, which was down about 2% -over-year, pacing ahead of our consolidated Q1 results. While we are certainly encouraged by this performance, and we have a lot of conviction about our product and marketing investments, which stack each quarter, we remain cautious, given how challenging it has been to predict the outlook for our business. We currently expect the -over-year decline in consolidated GMS for the second quarter to be similar to our actual first quarter performance, with the downside being a -single-digit decline and the upside being the top end of a low single-digit decline. Reverb and Depop are again expected to provide a modest tailwind within the consolidated GMS performance. We anticipate consolidated take rate and adjusted EBITDA margin for the second quarter to be similar to our actual performance for the first quarter. Our subsidiaries are expected to pose about a 300 basis point headwind to adjusted EBITDA margins as their revenue continues to flow through at lower margins. With a range of potential outcomes for the full year, our current view suggests a modest acceleration in -over-year consolidated GMS in the second half. You know we like to call it like we see it, and it's just really tough for us to call it right now. As you can see on the slide, we are reiterating our prior commentary about full year take rate, revenue, and adjusted EBITDA margin. Built into the take rate expectation for 2024 are Etsy payments expansion plans, including recent addition of China and the seller setup fee described earlier. As we continue to build exciting initiatives, we will look for opportunities to deliver a fair exchange of value which enable us to invest in growth. Our team is highly engaged and energized, and we will continue to keep our eye on the prize. Thank you all for your time today. I'll now turn the call over to the operator to take your questions.

Thank you, Rachel. At this time, you may remove yourself from the queue at any time by lowering your hand. When it is your turn, you will hear your name called and receive a prompt to be promoted. Please accept, wait a moment, and once you have been promoted, you may unmute your video and audio and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will wait one moment to allow the queue to form. Thank you. Our first question will come from Maria Rips with Canaccord. You may now unmute your audio and video and ask your question.

Hello.

Thanks so much

for taking my questions. It seems like my camera is not working. So, yeah, first, kind of understanding that we're sort of in a tough environment right now for consumer spending. I just wanted to ask you about the competitive environment. It seems like the Chinese sort of competitors started becoming a little bit more aggressive around Q2 of last year. So, as we start sort of lapping that, do you anticipate maybe a more favorable, maybe a little bit more stable competitive backdrop? Is that becoming less of a headwind as we move through the second half of the year?

It's possible. I think what we've been saying all along is that we think the Chinese competitors are more symptom than a root cause. I think what we're observing again and again, both at Etsy and what we read in the commentary from so many others in our space, is that consumers feel really pressured in spite of what we're seeing about a generally healthy economy. Consumers feel really pressured, and so they are seeking value in deep discounts and deep promotions. And so, yes, the Chinese competitors are offering that, but Amazon and Walmart are too. And it looks like the people that are driving most of the growth in e-commerce are people that are able to offer everyday essentials at very low prices. And there's probably some trip consolidation that's happening there too. While you go into Walmart to buy your groceries at a cheaper price, you may pick up some other items as well while you're there. So, I think that the Chinese competitors are a competitive headwind, no doubt. They've been a headwind to us and to everyone else in e-commerce. It would be great to see them not investing so aggressively in marketing. But I think the root cause of consumers feeling a ton of pressure and therefore seeking deep discounts will remain, regardless of what the Chinese players do. Our focus in that is not to chase them to the bottom, is not to try to be the very cheapest place to buy things. It's to make Etsy more Etsy. It's to lean into what makes Etsy different and special. And we talked a lot about that on the call. I'm incredibly excited about all the initiatives we have going to really elevate the very best of Etsy, suppress the things that are not the best of Etsy, and make the aisles easier to shop so people can see the wonderful products that we have on offer. And the more that they find really, really cheap and really disposable things, the more they will crave an alternative to that. And we're bound and determined to use this moment to get even stronger as that alternative.

Great. Thank you. And then for my follow-up, I just wanted to ask you about your product roadmap. Is there any additional call that you can share with regards to the expected structure and timing of your loyalty program? And then which cohort of customers do you think this loyalty program will have the most tangible impact on driving increased frequency? Is it one-time buyers kind of turning into repeat buyers or maybe repeat buyers turning into habituals?

Yeah, great questions. The team is making really good progress. I don't have any specifics to announce, but we are on track to launch in beta form in the second half of the year. And the focus is going to be on occasional shoppers. And how do we take people that shop on Etsy occasionally and turn those people into more loyal buyers?

Thank you, Maria. Thanks

so much for the call. Thanks for

asking

questions.

Our next question comes from Laura Champagne with Loop. Please unmute your audio and video and ask your question.

Oh, hi. That was got it. And I think we're working now. So the question is about the implication that GMS improves as you move through the year. And I know that's not what you're saying for Q2, but upon what kind of macro changes that predicated, if any?

So I am very excited about the initiatives the team is working on this year. I think the things we've talked about with gifting, getting even more known as the place for gifting, the things we've talked about with quality, leaning into the differentiation of Etsy. There's a lot of really good work going, and that work stacks. So it is our current expectation that more likely not we would grow in the second half of the year as a result of that. Headwinds to that would be if the consumer discretionary environment gets even more challenged. And it's just hard. Things have been pretty volatile even week to week right now. So it's pretty hard to know how that's going to

So just to make sure I'm understanding that correct, sort of a similar macro to what we're experiencing right now, but starting to see the impact of your own initiatives. Is that fair?

That's fair. And I am very excited about what we're doing this year. I think it's really very relevant. I think it's going to be very impactful. And the team did great work last year. The product and engineering teams alone generated an incremental $1.5 billion of GMS from the work they did last year. So we're lapping that. And I think the work we're doing this year is going to be even more impactful. I believe that. I think we're on track for that. And so we believe that can lead to accelerated growth in the second half. That's our hope, and we think it'll happen.

Got it. Quick follow on something that Rachel called out was positive friction with sellers with this incremental fee. And it's been, I think, 12 quarters in a row that your sellers have been outgrowing your buyers. Is that making it tougher for search to improve? And would you rather see a narrowing of that gap?

Yeah, that's such a good question, Laura. So, yes, we have been saying for quite some time that we have quite a lot of sellers and quite a lot of inventory, and we want to make sure that we have enough demand to match supply. And so particularly seeing low effort sellers come on the platform, sellers that may not have the skill or the will, is more data we have to process, more handholding we've got to give to folks. And so having a group of sellers that have higher skill and higher will, these are the sellers that I think are most likely to succeed on the platform anyway. We think that's very helpful. So the early results from having just a small fee of $15 to set up a shop on Etsy, if you're not prepared to invest $15 to get your shop going on Etsy, you may not have the skill or the will to really succeed. So we're seeing that little bit of a speed bump be helpful.

Josh talked about a few things about our quality and curation and really getting better at finding the good stuff, elevating that to the things you see first and then suppressing or not uploading the stuff that's lower quality. So there's a lot of initiatives going on at the same time that's all about keeping them, not only keeping the marketplace safe and secure, but really a focus on quality and being able to find the good stuff. So we also talk about actively removing things that don't comply with our handmade policy. So some of these things that we do on the upfront help us with the downstream efforts that we invest in to really focus on quality and organization of the best stuff on the site.

I can't help but pile on because I'm just really passionate about this. We've talked about the abundance of supply on Etsy a lot, but what does that look like in real life? When you search for something, we usually have thousands and in fact often tens of thousands of relevant results. And first page of search results might be 30 things that look very, very similar. And to a buyer, that's just a lot of cognitive load. If these 30 things are virtually identical, can't you just tell me which one's the best or what are the three and what are the trade-offs between them? And that's harder for us where we don't map to a catalog, but I think with the latest machine learning and gen AI techniques, it's easier and easier for us to start to understand what the stuff is, what's very substantially similar and really try to give you fewer choices of just the best. And in doing that offer a lot more diversity as well. Instead of 30 really similar versions, we can offer much more different things and that can also help buyers to understand the breadth of offerings that we have on Etsy. So not only might they have a more satisfying purchase experience this time, but they'll come back more often because they realize the breadth of offer we have.

Thank you. Next question. Thanks, Laura.

Our next question comes from Michael Morton with Mottfit Nathanson. Please unmute your audio and video and ask your question.

Perfect. Thank you. Two questions, if I could. Josh, you spoke to seller removal, I think, being a bit of a gross margin headwind. It was our interpretation looking at some of the comments last year that some of the fraud that was created in poor behavior from non-compliant merchants could be actually like a gross margin headwind last year. So just curious as you work through this process, if this could be a tailwind to gross margins as you get some of the non-compliant sellers off who maybe elevated levels of returns that are outside of Etsy's protection program?

Yeah. So in terms of gross margins, possibly, yes. And in particular, it may not be non-compliant, meaning sellers that are not handmade, but just sellers that have higher levels of refunds or consistently shift late. So within the quality initiative, when we say we don't want to just get you to a product you're going to buy, but to a purchase experience you're going to love, how do we have the search engine explicitly favor sellers that consistently ship on time, that consistently get five-star reviews, that very rarely get returns? Our search engine has been very focused on relevance. Is this item very closely related to what we think the person's likely to buy? In addition to relevance, we really want the quality of the purchase experience to be very important. And that, I think, is going to lead to more satisfied buyers who come back more often and should be lower cost of revenue through lower refunds. Separately, what I was specifically referring to in my comments was doing an even better job taking not handmade items off the site. And I know you've been talking about that with us, and we couldn't agree more that it's important that Etsy be Etsy. And there's new technologies out there that make it easier and easier to spot. For example, does this same item exist also on AliExpress? And we assume right now if that item exists on AliExpress, we assume it's mass produced and we take it down. You as a seller can appeal that. You can tell us how you made it yourself and it still ended up on AliExpress. And the way that's true sometimes. You can appeal that. But our default now is we take that down. And that's just one example. Gen.ai is actually going to be, I think, more and more helpful at understanding how much value did this particular seller truly add to the product. And we're looking to prioritize items that are really original, where the seller really added value, and then to be able to explain to the buyer exactly where the seller did add value. Did the seller make it themselves? Did they design it and produce it with a production partner? Did they personalize it? I think that buyers are interested in knowing that. And I think we can make that a lot more explicit. And that also, I think, is going to make the Etsy buying experience a lot more satisfying.

And I just wanted to comment real quickly on it. We've been doing takedowns, I don't know exactly how many quarters now, but with really leaning into it for at least the last two or three. So we've gotten successively better at it. We've often talked about the substitution effects when we take things down. It does not necessarily mean a -to-one loss of GMS when we do that, because we have so many listings on the site that there's often very similar items that customers can substitute for that. But it does hopefully mean we're taking down the low-quality GMS. So this GMS that doesn't come with a high amount of chargeback or fraud or unpaid charges, we call it here. And the second thing I was going to say is that the GM, sorry, the gross margin impact may therefore be offset by improvements in the cost of revenue hits we're getting from some of the lower-quality sellers that are on the site.

That's great. And is it safe to assume that the removal of these merchants is having any type of impact on on-site revenue just due to the auction dynamic that there's a merchant sitting right underneath that? Yes.

Most of the time when we remove an item, there's another seller ready, willing and able to take that sale instead. And so when we talked about that 50 basis point hit, we've been really leaning in to, and we've always taken down items for not complying with not handmade. That's always been a focus, but we've been getting better technology and investing a lot in that. And as we've taken down, as we said in the call, millions of listings and tens of thousands of sellers, it has had about a 50-bip impact to, we think, our site, meaning sometimes it is not replaced, but most of the time it is. And frankly, that 50 basis points of headwind, we are happy to bear. We think it's a great investment in making sure that Etsy is different than Etsy is at Etsy. Thank you so much.

I'm just going to mention real quick, we are publishing the transparency report next week, so keep an eye out for that. Mike, I'm sure you'll be all over it. Thank you, Sam. All right, next question.

Our next question comes from Navahed Khan with B. Riley Securities. Please unmute your audio on your video and ask your question.

Hi, can you hear me? Hey, Navahed, yep. Okay, so two questions, maybe just to kind of tease out some of the noise. So Q1, we also have some impact potentially from tax refunds. I heard that tax refunds are up 6% this year. And then we also had an extra day. So if you're talking about as a baseline, GMOs being similar in terms of -on-year growth, does it mean it actually is improving trend wise? How should we interpret that?

There's things that went both ways that were beneficial to Q1 that won't repeat in Q2 and things that are beneficial to Q2 like Mother's Day that didn't happen in Q1. Leap Day was what we say 191st of an additional amount. So it's a pretty small, de minimis, let's say less than a point of benefit to Q1. Tax refunds were up a bit. They came later in the quarter. So it could actually potentially be a bank account and can actually replenish people's balance sheets. It could be a longer term benefit. So I don't think we've thought about it the way you're thinking that granularly of what's in Q1 that doesn't repeat in Q2 and vice versa. That's why I said similar to the guide that we gave in Q1. That's our prime expectation.

You point out some fair things. It is also true, as I think many of you know, that the comps get a little harder each month this quarter. So last year, May was a little stronger than April and June was a little stronger than May. So we also consider that. And we're doing a lot of good things to make the business better, make the customer experience better. And we think that's important as well. So net-net, what we said is we think it'll be roughly similar. Could be as high as the top end of low single digits or could be mid single digits, particularly if discretionary gets even more pressured.

Understood. And then maybe a quick follow up. So I think Josh talked about app downloads as a priority. What are the things you're going to look at in terms of driving those downloads?

Yeah, great question. Thank you so much for that. So first, we find that someone who is an app user produces about 75% more GMS than someone who's not an app user. So we think having someone on the app is a really valuable thing. And we, frankly, we leaned into this a fair amount in 2021 and in 2022 and 2023. It wasn't the big focus with competing priorities. It's a big focus right now for us again. And the kinds of things we can do is first use more screen real estate to be promoting why you should be downloading the app. When someone's on mobile web or on the desktop, using more screen real estate to talk about the benefits of being in the app, there's some trade off to that, of course, because we could be using that space to try to sell you something and drive to sale. And we're going to be using it in the right moments and the right ways to try to drive to app download. We think from a lifetime value perspective, that's a good trade off. We're always looking at how can we add more benefits in the app to make the app more valuable, to make it richer. So you've seen us do things like have app only specials and sales or to have first on app, like certain deals and drops that are specific to the app. Track your package has been a very powerful call to action. Why do you need to download the app so you can track the purchase that you just made? So we've got some squads that are really focused right now on just developing the value propositions and promoting the value propositions to make sure that people are downloading the app and using the app more. And when we compare Etsy to our peers, we find that app penetration on Etsy is lower than many peers. So we think that's a gap that we can close. And we think in doing that will drive more LTV, more frequency. And we think that's very helpful.

Thank you. Thanks, Nived.

Our next question comes from Trevor Young with Barclays. Please unmute your audio and your video and ask your question.

Okay, great. Thanks. Just to clarify on the full year guide commentary and accelerating in 2H, is that to be interpreted that we'll still be slightly negative in the back half? Or do you think we'll get to flattish GMS by year end?

So the guide we gave said that we, the range of the guide was that we could be slightly positive, slightly better than Q2, not positive, slightly better than Q2 or slightly worse than Q2, which I know is not very helpful. Our current forecast sees that, our current view is that we see some acceleration as we go through the year, but the cushion, the margin of error has gotten a lot narrower, which is why very cautiously giving you some, you know, giving you some perspective on what we are seeing. So it's a kind of a cautious, narrow range without specifically saying, do you get all the way to flat or positive at that upper end? And how much further could you go from the Q2 range that we've seen? We're honestly optimistic because we have really great product and marketing initiatives planned and they stack as they go through the year. And so we feel, we felt confident enough in our own internal forecasting to be able to give that guide.

I think what we said is modest acceleration in the second half

of

the year.

And we didn't say whether it would get to positive or

Okay. And then just to clarify on the 50-bit headwind from removing listings that violate the policies, is that expected, that 50 basis points expected to continue throughout this year? Is that what's baked in?

So that has been happening for about six to nine months. And the reason we put that data point in there is just to give some sense that we're leaning in a lot, but there's still quite a high replacement rate. So even as we take things down, you know, we generally see another seller ready, willing and able to make that sale, but it has a slight headwind. I wouldn't be surprised to see it continue. It could even grow a little bit more as we keep leaning in, you know, more and more. We've always said that there, we try as hard as we can to enforce, and there are some things that get through our, through our enforcement controls. It is a small but non-zero number. And so I think 50-bits, is pretty consistent with that prior commentary.

Okay, great. Thank you very much.

Our next question comes from Ken Gorowski with Wells Fargo.

Hi, good afternoon. Thanks for doing this. I appreciate it. Can I ask, you know, it's clear to me that you see yourselves as a growth company, right? And unfortunately, you haven't been growing. So the question I have is, do you, do you feel like you have enough certainty around the different macro factor, macro and maybe even micro factors to be a more aggressive, right? To take, to be a bit bolder in your initiatives. And I'm not suggesting that you're not making real attempts to get back to growth, but I'm, what I'm getting at is, are you willing to make the bet now to say, either we're going to spend much more on marketing because we have a better feel for the landscape and, you know, that we've, we've stomached the team who, you know, excessive spending for, for multiple quarters. And now we know what it looks like, right? You know, and we have a feel for where the macro, where the, the consumer opportunities is, or, or is not. I guess what I'm just trying to get at is it, it feels like there's loyalty, you know, an alpha coming, you know, or an A beta coming in the back half, but it doesn't, I don't hear yet that kind of, the real aggressive move from you. So talk to me about how you, how you think about that, how you feel like the organization is prepared to be more aggressive to get back to growth.

Yeah. I mean, I think that we, the internal mantra we have been on for the past year is bold and fast that we want to move to bigger, bolder, more eye catching, more tension grabbing releases and fewer of the more incremental steps that have been driving a ton of progress in a very ROI positive and very predictable way for the last seven years is now what's going to catch consumer attention and drive that kind of step function change that we are looking for. And so that's much the kinds of things that we have been leading into gift mode being one example where we're launching a whole new experience on Etsy. We launched it very quickly in MVP form. I'm very proud of what the team was able to do in a short amount of time. And now you're going to see us steadily make that experience much better and continue to really differentiate that versus the rest of the market. I think the work that we're doing in quality, which, you know, you'll see we roll through the second half of the year, I think is going to be very impactful and in fact, pretty bold. I do think, you know, launching a loyalty program in beta, like we're trying to launch, you'll see is going to be interesting. And our economic model looks different than first party and making the economics work when you're a third party seller, it's a little different. You're going to see us really lean in there. So we are very much looking for frame breaking, attention grabbing customer experiences that we can launch more often whole cloth and less bit by bit, which has pros and cons. But I think in terms of catching consumer attention, it's really important. What I don't think is just spending a lot more is going to be the answer. So if, you know, when we hear like marketing lean a lot more into marketing, we think we spend a rational amount of money on marketing. We think we're very rational about what is our cost of capital? What do you get if you invest a dollar? And how do we make sure every time we invest a dollar, we get more than our cost of capital back? We, I think, have a lot of science and a lot of discipline around that. The other thing I'll say is, you know, minimizing waste is a really important value that we have always held dear. We are in our seventh year of efficiency now. Every single quarter, we look at every single dollar we spend. And so if you look at the KTLO, the Keep the Lights on activity required to support an organization of our size and scale, it is a pretty material effort to run a business of our size, scale and complexity. We have resources to grow. They're not infinite. And so every year we pick a few battles and we really lean into those with our resources. You could rightly say, why last year and the year before were you not focused more on app download? App download is a great idea. You should be doing it. And I couldn't agree more. It's a great idea. Relative to the other things we were shipping last year, it didn't make the cut. And we are every year making very tough decisions around what are the few things we really want to lean into that we think are bold, that we really think are going to drive growth. By the way, the work the team did last year, we have conviction, we have a shit ton of measurement, sorry, a lot of measurement, excuse me, a lot of measurement to say we think it drove up $1.5 billion of incremental value from the products that team shipped last year. And we have a lot of conviction that the work they're going to do this year with a 12% smaller team is going to drive even more. So we think the work we're doing is meaningfully driving growth. It's driving strong ROI. And we're going to keep leaning into things that we think get customers to reconsider. They think they know Etsy. Here's things you didn't know about Etsy that get you to want to come back and come back more often.

I just want to slip in a couple quick data points. First of all, the definition of MVP is most valuable.

It's minimum viable product. Minimum viable product.

So that's our shorthand for not being agile, not waiting for the whole thing to be fully baked. Second of all, there's a couple of data points that just point to strength. I mean, I think that one of the things we feel internally is that we're building really great product and we have really great marketing initiatives and we're walking straight uphill into the wind with these macro pressures bearing down on us. And when the wind shifts, we are going to be very well poised for, you know, we have a phenomenal product offering and we have a terrific differentiation from other players out there. And a couple of data points I would point to, again, when we look at our household income differentiation between lower household incomes and upper and especially the highest household incomes, those above 200,000, we see continued separation at the higher household incomes are actually growing. And so when the lower household incomes are not. So you can see that behavior quite clearly that people are looking for discounts, they're spending on essentials and things like healthcare, gas, food, whatever. And they just don't have money left in their bank account for things that are highly discretionary. Secondly, our GMS per buyer is still 25% higher than it was in 2019. And the reason that's important is if you look at, I don't know if you've got a chance to listen to the whole call, but we showed a slide and you can look after that shows consumer discretionary spending is coming down and down and down. And it's not all the way down to the levels it was in yet in 2019. It's still about 8% higher than it was then. But our spend GMS per buyer is 25% higher than it was then. So we're still strong amongst, is it like a giant among? I don't want to pick

your analogy. But yes, I've already messed up our language enough.

We're still quite strong and we're laying down these initiatives brick by brick that just aren't really getting the benefit of the true consumer demand that we would expect to get once we're not facing these strong pressures.

Understood. One quick follow up just on the big game, I think you'll call it, spending. I've almost said the super name, but the, you know, you now have 60 to 90 days to kind of judge the impact of in all brand spending. You really leaned into brand spending. What have you seen as the impact? Where has it worked? Where hasn't it worked? Is it frequency, occasional buyers, new buyers? What is it?

So if we're talking about, are we talking about the big game ad in particular or we're talking about GIP kind of more generally?

No, no, I'm talking about the big game, but I'm also talking about brand advertising. Like that big push on brand.

So in big gaming, I'm happy we did it. It did what we wanted it to do, which was to ignite a conversation around the nation about Etsy's new product GIFMA. And that was the goal. I want to compliment the team. We managed to secure the single most viewed spot during the entire big game and our ad tested super well for things like recall and breakthrough and generating interest to try. So I think the team's execution of it was really good. But the strategic goal was we have something to say, and that is that Etsy is the place to go for gifting and we're launching this new thing. And I think that that big game ad did a good job. And, you know, we shared some data in the call about, you know, 200% increase in conversations mentioning GIF, mentioning Etsy, significant increase in people associating Etsy as a place to help find GIFs. And if we look at gifting GMS, that grew significantly faster than sitewide GMS and was positive in the first quarter. All of those, I think, are helpful data points. Does that mean we would do it again next year? I'm not sure. It really would depend on do we have something we really want to announce? Do we have something we really want to say? But getting back to your first question, bold and fast has really taken root. You hear it in the halls of Etsy every single day. Is this bold? Is this fast? And a little story behind that, the team pitched me in the summer of 2023 and said we have this great idea for GIF mode. We think it's going to be amazing. And we think we can do it great. It's going to be bold. And we proposed to launch it in the big game of 2025. And, Josh, if you're prepared to be bold, this would be a way to do it. And I said I am prepared to be bold. I'll meet you halfway because we're going to do it in the big game of 2024. And that built and shipped that in four months. And I think it's a great example. I'm proud of the work that that team did. And as we said, it's the kickoff, not the mic drop. There's now a lot more work that's going to happen to make GIF mode better and better and better. But it's that kind of urgency and the willingness to place a bet that I think is exactly what we're talking about. Now, a big game ad is not going to make or break the company. It works or it doesn't work. We don't do it the next quarter. It's fine. We're not betting the company on these things. We're putting a few million extra dollars into a spot. And from that, we learn. And we'll see whether we do it next year or not. But it would be predicated on having some important launch that we really want to talk about.

Thanks so much.

Thanks, Sam. Yeah, thank you. I know we went over, but we did have one more in the queue we want to try to get to. So, operator, can you just give us the last one?

Our final question comes from Mark Kelly with Stiefel.

Hey,

Mark. Hey, how is everybody? Thank you very much for squeezing me in. I appreciate it. Thanks for

staying late.

Yeah. Of course. My first question, and I know you touched on this a little bit in the prepared remarks, but can you just walk me through the dynamics of Easter a little bit? Was it not as much of a tailwind because it was like the exact last day of the quarter and maybe some shipments occurred in Q2? I guess maybe some of the dynamics there would be helpful just to start.

Okay. So the headline is that it was a bigger headwind to March than we expected and an equal better tailwind to April than we expected. We obviously knew when Easter was. We obviously forecast it in. And so it was just a bigger impact than we expected. And from what I can see from others, and I can't validate this, but from a little data, it looks like it might have been bigger impact for us than for other people. And the truth is we have several hypotheses as to why, but no really great data. It candidly wouldn't matter because it was a headwind to March and a tailwind to April of roughly equal and opposite size. The only reason it matters is it fell right smack between Q1 and Q2. If it was all in March, it wouldn't have mattered. So we haven't spent an enormous amount of time trying to dissect something that ultimately was just a timing shift. But that's what it was.

I'll just add, it's not just Easter. It's spring break. And what happens when people go on spring break is they're spending money on travel instead of spending money on Etsy. And they're also traveling, so they're not shopping. And that shift we think had a pretty big impact more so than we thought it would on March. And so that's why in a way it's a tailwind to April because last year when they were traveling and it was, we get them back now because they're not traveling anymore and they're focusing on commerce. Also Easter's not a huge holiday for Etsy. It's not a huge gifting holiday. So people do buy things for their brunches and dinners and things like that. Easter baskets and apparel for the kids and stuff like that. But it's not like a mother's day or a winter holiday, so to speak. So it was really more of the way we forecasted it and the time spent shopping got disrupted.

Yeah. And what Rachel said, the leading hypothesis of ours that travel during that impacted this holiday more than others, and it again speaks to the macro that people are just having to make tougher choices. And if they're spending discretionary budget traveling to see the family, it's just fewer dollars. They've got to make tougher choices and they're going to just have to spend less on discretionary product.

Okay. All right. Perfect. I appreciate you clarifying that and making you repeat yourself.

Sorry.

The second one is just the commentary around the team building gift mode in four months. Can you talk a little bit more about just using large language models to be more efficient on the R&D side? That seems like a pretty short window and maybe what else we could think about there? Yeah.

Well, large language models were really helpful for gift mode. So for example, there's 200 different persona in gift mode. Then within each persona, there are three to five different gift ideas and the ability to ask large language models, what are 200 examples of persona? And it wasn't quite this simple, but it does give you a head start on that. If I'm a foodie who also loves to travel, what are three things I might buy on Etsy? Three different ideas for gifts on Etsy. It does help to come up with a lot of ideas more quickly. The productivity gains, large language models are starting to help us with coding productivity as well. But in addition to that, we talked last year about paved paths and democratizing machine learning. And that work is paying off. Not all of this is large language model machine learning, but we use a lot of machine learning. Once we have an idea for a gift, what's the five very best examples of that idea amongst tens of thousands of opportunities on Etsy? We use machine learning for that. And so the democratization of machine learning has also been really helpful. We do make steady investments in allowing the teams to work more quickly and those pay off. So I'm proud of the engineering culture at Etsy that allows our teams to move really quickly. We have a very entrepreneurial and really agile, really fast development culture at Etsy. And this is a great example of that.

All right. Perfect. Thank you very much. I appreciate you fitting me in. Thank you.

Great way to end.

Operator, I think that's it for tonight.