Etsy, Inc.

Hi, everyone, and welcome to Etsy's first quarter 2020 earnings conference call. I'm Deb Wasser, Vice President of Investor Relations, and joining me today are Josh Silverman, CEO, Rachel Glazer, CFO, and Gabe Ratcliffe, our Director of Investor Relations. Today we are trying something a little different given our work-from-home status, our first-ever video earnings call. For quality purposes, our prepared remarks have been prerecorded along with accompanying slides. The slide deck has been posted on 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 by the Q&A chat window displayed on your screen. Feel free to use it at any time as it will remain open throughout the entire conference call. I'll be reading your questions and Gabe will help me try to get to as many as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance for the second quarter of 2020 and key drivers thereof, the impact of investments on top-line growth, And certain impacts that the COVID-19 pandemic may have on our business strategy, operating results, key metrics, financial condition, profitability and cash flows, and changes in overall level of consumer spending and volatility in the global economy, and the impact of ongoing settlement of intercompany balances on future foreign exchange rate volatility. Our results, actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in our press release and our 10-K filed with the SEC on February 27th and subsequent reports that we filed with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we don't have any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures. Reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR website. along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and hello, everyone. And let me start by saying that our hearts go out to everyone that's been touched by the COVID crisis. And it's in this crisis that we're reminded ever more of the mission and the purpose of Etsy and how important we are in the lives of our sellers, our buyers, and our teams. And, you know, I hope you'll see in the course of this call that we take that responsibility really seriously and we are acting with urgency. And in this moment, I think it's also demonstrating the resiliency and the agility of the Etsy model to rise to this crisis. We stood up a COVID crisis task force. in January. We tested work from home in February so that we were as prepared as we could be to be continuing and productive in an entirely work from home environment. And, you know, I'm pleased to say that so far we've seen productivity hold up really quite well. And you'll see on the slide In fact, software releases are up 20% year over year in the first quarter in spite of all the changes. And that's really a testament to the hard work that the team has undertaken and the seriousness and the urgency that they take their work. And it's not without real personal stress on them. So I do want to take a moment to thank the team for all of their hard work. And with that, let's dive in. So I know we're all very anxious to discuss the trends we're seeing in April and our thoughts for the future. And I want to spend the bulk of my time talking about that. But because this is our first quarter earnings call, let's hit the headlines very quickly. We delivered $1.4 billion in consolidated gross merchandise sales in the first quarter, 32% year-over-year growth. Etsy standalone delivered 16% year-over-year growth in GMS. Revenue was about $228 million, and adjusted EBITDA was about $55 million. And Rachel is going to go into more detail about the first quarter and take you through that in a disciplined way. So I'll just hit those headlines and now move on to April. April was an extraordinary month, and I mean it in the sense of extraordinary, very, very big. and extraordinary, very unusual. And there were two separate things happening in April. First was the effect of the sale of fabric face masks, and Etsy sold about $133 million worth of fabric face masks in the month of April. Separate, and in addition to that, the core Etsy marketplace grew very, very robustly in April, 79% year-over-year growth. In early April, the CDC changed its guidelines to recommend that Americans wear fabric face masks, and we saw a tremendous surge of demand for fabric face masks right away on our site. In fact, it was like waking up and discovering that it was Cyber Monday, except that everyone in the world wanted just one product, and that one product was an extremely limited supply. And so we needed to respond extremely quickly to that new reality. And there were a set of things that we had to do. The first was really within hours to change our search results so that when you searched for fabric face masks, you actually saw masks. Previously, when someone would search for masks, they would be thinking about Halloween masks or maybe cream for their face. So the search engine needed to be retrained literally within hours to respond to that. And thanks to our Google Cloud implementation, we've been able to respond much more quickly. And having very relevant results very early on was a big part of what earned us good rankings on Google SEO, which has been incredibly important for the future. But in meeting that demand, we then all of a sudden had a lack of supply. And so we put out a call to our sellers, and we're able to get thousands of sellers to begin making masks within a matter of days. In fact, at this point, there's over 60,000 sellers making masks and selling masks on Etsy. But not only do we need to recruit sellers to make masks, we needed to make sure that we could understand what their delivery times were so that we could manage customer expectations around delivery. We needed to distribute demand so that it wasn't too concentrated in just a few sellers and on and on. This effort touched almost every single team at Etsy. It was truly an all hands on deck. We sold over 12 million face masks in the month of April alone. In fact, if face masks were a standalone category, it would have been the second biggest category on Etsy in the month of April. So as we look forward, obviously our opportunity is to really work on deepening our engagement with these buyers so that they understand that Etsy can do a lot more for them than just sell them fabric face masks. So why am I going into so much detail about masks? It's not because I'm convinced that masks are going to be an enduring category for months to come. They may not be. Nor are we convinced that this new cohort of buyers is going to be with us for months and years to come in a highly active way. We're going to work really hard to try to earn their loyalty and we'll have to learn and see what their behavior is over time. The reason I wanted to tell this story is because I think it really highlights the dynamism of the Etsy model and our Etsy sellers. and how they're able to shift so rapidly to meet new demands. But April was about so much more than just masks. In fact, non-mask sales on the Etsy core marketplace were up 79% year over year. So the strength of Etsy sales came really from two factors. The first was a groundswell of demand across a set of categories, including home and living, craft supplies, self-care, toys and games and gifting, combined with fewer alternatives in the marketplace with many retail stores closed and e-commerce players having shipping delays or sometimes supply chain disruptions. And I think that this combination of both macro factors And the dynamism of the Etsy marketplace, Etsy sellers and the Etsy team created an opportunity for Etsy to step in and fill a void in what we think could be a really meaningful and enduring way. But it's our responsibility to step up and really communicate to the world how we can fill those needs. how we can be there for them at a time when they might not have often thought of Etsy. And so the marketing team has been really hard at work to develop and then communicate that message to the market. Starting with our brand strategy, we asked the team to come up with some brand pillars that would really speak directly to this moment, but have real enduring value. And I think they did a great job with a brand campaign that centered around three core messages to the buyer. First, Etsy sellers are open for business. Second, Etsy is there with everyday essentials that you need. And third, when shopping on Etsy, you're supporting small businesses. And when shopping on Etsy or supporting small businesses, that's a message that might be familiar. That's been a core pillar of our messaging strategy for some time. But the idea that Etsy is reliable. and the idea that Etsy can meet everyday needs, those are messages that I think are maybe newer to many of our buyers. And we know that we can live up to those commitments. And this is a moment of truth when we think Etsy can really do a great job of that and maybe disrupt some people's understanding of Etsy in a really positive way. Our message to our sellers has been singular, which is we have your back. And we think now more than ever it's important that we're communicating to them and taking actions that demonstrate that we have their back. We look at our merchandising strategy. We are able to take search query data and almost in real time, within hours, iterate the kinds of merchandise that we're showing on our site to reflect what's currently happening in consumer demand, which, as we all know, has been exceptionally dynamic at this time. And the ability of the team to be super responsive, we think, is a real strength of Etsy. All of this is underpinned by some core evergreen messaging. Like we have many items that are ready to ship. The fact that when shopping on Etsy or supporting small businesses and many of our sellers are running sales right now and promotions that really speak to the economic realities that we're facing at this moment. We then asked the team to develop a TV campaign to communicate that. And you'll remember that in the April 2nd call, we talked about how we pushed back our TV buys into May. So within days, again, the TV, the marketing team had to both create all new creative, by the way, without getting to bring any new actors into the studio and shoot any new footage. They had to find a way to take existing footage and cut that into entirely new TV campaigns and get on the phone with TV stations and others and negotiate new ad buys. And by mid-April, we were live with all new creative reflecting this new brand strategy in a pretty loud and prominent way on TV. We're proud of this TV creative. We think it's not just the same as every other TV campaign that's running right now. We think it is unique and stands out in a way that really does speak to Etsy. So I'd like to take a second to show you the TV creative now.

There are millions of people making incredible things. in small towns, in faraway cities, and right next door. People with the skill, the imagination, and the ability to create joy and share it with the world. They're out there, always open, still making. They're on Etsy. Shop Etsy. Find joy.