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.

So we have millions of people shopping on Etsy now that might not have shopped with us before or might not have shopped with us in this way before. Obviously, the task ahead is to deepen our engagement and earn their loyalty over time. And that's the task for our CRM and loyalty team. And fortunately, we have an entirely new set of tools that launched just in April that are going to make us much more capable of doing that. And these are tools that allow us to create segments in a very rapid way, and then push messages specifically to each of those segments across any touchpoint we have, be it email, app, onsite, or any other channel. Even offsite ads and paid advertising, we can start to target the same segments with these messages. But I don't want anyone to think that we've only been doing COVID related work. We laid out a strategy that we have been executing on quarter after quarter that centered around the four key pillars of our right to win. And that has been a true and enduring strategy that mattered before and it matters every bit as much now. And our team is hard at work continuing to deliver against each of these four pillars, search and discovery, human connections, a trusted brand, all built on the foundation of our seller's collection of unique items. And just to give a very quick highlight in each of these four, starting with search, in Q1, we launched a deep learning model to close the semantic gap And that can, for example, determine that the word dress and the word gown are actually identical in meaning and use gown search results for dresses and dress search results for gowns. And that's another meaningful step forward in the quality and relevance of our search results. And it's just one of many examples of the great work that the search team is doing to continue to push the frontiers and make our experience more relevant. We've talked a lot about trust. And the trust team has been working very hard to gain more reviews and get buyers to leave more and richer reviews. Speaking of our seller's collection of unique items, our sellers are so agile in responding to the demands of consumers. And this current environment highlights that now more than ever. We're seeing so many great examples of sellers innovating to meet needs that didn't exist even a month ago. A favorite example of mine is a pocket hug. This is a little trinket that you send to a loved one to give them a virtual hug and let them know that you're thinking about them. And last but not least, I certainly want to mention the successful launch of off-site ads. It launched in the first quarter and we feel great about how it's going so far. And, of course, Etsy ads, which is formerly known as promoted listings, is also continuing to perform very, very well. And I also want to take a quick minute to talk about Reverb. Reverb is benefiting from many of the same trends that Etsy is seeing. They're seeing a groundswell of first-time buyers coming to Reverb, many of whom might not have played an instrument before and are coming to take up their first instrument. And at a time when many retail operations are not open or even e-commerce musical instrument companies are having a harder time shipping, Reverb is there. And so it's doing a great job rising to the challenge and meeting the needs of both its existing buyers and many new buyers with a lot of innovative strategies. In particular, they did a great job, I think, of innovating how to communicate that things are available and ready to ship right now. and also bringing some brands, manufacturers directly on the site and having those brands sell directly to consumers in a way that's been very successful. As a result, Reverb's GMS in the month of April was up over 50% year over year. So let me close by acknowledging that these are very challenging times. They're challenging times for many of our sellers. They're challenging times for many of our buyers. And these are challenging times personally for many people on the Etsy team. And yet we're really proud of the fact that our model allows us to be really helpful to many of our sellers at a time when they need the income. We're really proud of the fact that we're able to be really helpful to many buyers at a time when they have maybe fewer alternatives and a lot of really important needs. And I am personally really proud of the Etsy team. who in spite of many personal stressors have risen to the challenge. They take the responsibility of serving this community really seriously and are working really hard every single day to live up to that responsibility. And with that, I'll turn it over to Rachel.

Thanks, Josh. And hello, everyone. I hope you're all doing well and staying safe and comfortable during this uncertain time. My commentary today will cover consolidated results as well as key drivers of performance, which include Etsy standalone results where appropriate. You can find select details on Reverb's contributions in our press release and soon to be filed 10Q. Heads up, I'm going to be reading my prepared remarks since there are quite a few numbers and I want to make sure I get them all right. We've got a lot to tell you about Q2 financial performance, but before I go there, Q1 was a very strong quarter, and I want to walk you through those results first. Despite the headwinds to growth caused by COVID-19, primarily during the month of March, we delivered a solid quarter. On a consolidated basis, Etsy's first quarter GMS grew 32% to $1.4 billion. Revenue grew 35% to $228 million, and we delivered adjusted EBITDA of nearly $55 million, or margins of 24%. As mentioned on our update call in early April, consolidated GMS growth during January and February was very strong, trending at 41% for the quarter, Etsy's standalone GMS growth for the first quarter was 16%, reflecting a strong January and February with a significant deceleration in March compared to last year and last quarter. Q1 revenue was driven by growth in both marketplace and services revenue, as our consolidated take rate expanded 60 basis points sequentially to 16.9%. We reported strong growth in revenue related to advertising, which was up approximately 70% year over year. Google Shopping contributed about $11 million to advertising revenue for the quarter. As a reminder, in the first quarter, we are accounting for our old Etsy ads model, which recorded the Google Shopping product as revenue with zero margin, as it carried an equal offset in cost of revenue. As planned, During the quarter, we transitioned the Etsy ads product, separating off-site ads to a standalone product and introducing a transaction fee on every product listing ad that resulted in the successful sale for our sellers. This new product was ramped during the second half of March and into early April. Sellers have now had the chance to see the advertising of their product listing ads in action. We began billing for this product on May 4th. having waived the first month of fees for sellers during the turbulence of the COVID-19 environment. Waiving the first month of fees is part of a basket of initiatives we implemented to provide some relief to our seller community. I'll touch on the financial impact of that whole basket in a few minutes. Reminder, going forward, Etsy Ads is now our name for promoted listings in Etsy advertising product. In Q1, we tested our PLA channel. which had been excluded from the incrementality testing we did in 2019. This had the effect of reducing our performance marketing spend in the quarter. Q1 marketing expense was $49 million, or 21% of revenue, which was flat compared to Q1 2019. Of that, performance marketing for the Etsy marketplace was $26 million and delivered 16% of overall GMS. Despite the deceleration in GMS we described in March and the consolidation of reverb into our financials, our Q1 adjusted EBITDA margins expanded 400 basis points sequentially. Our cost structure is highly variable to revenue, and we've continued to take measures to optimize and scale our business. I'll talk more about operating expenses and the variability of our cost base in more detail shortly. Net income in the first quarter was $12.5 million, with diluted earnings per share of 10 cents. Net income was primarily impacted by non-cash foreign exchange losses of $9.3 million, or 8 cent loss per share. Foreign exchange fluctuations on our P&L are primarily related to intercompany activity between our U.S. and foreign entities. The ongoing settlement of these balances, which we did in Q1, reduces future foreign exchange volatility on our P&L. Key operating metrics for the Etsy marketplace were relatively stable during the first quarter. We maintained our momentum in driving frequency on the platform. Etsy's GMS for active buyer on a trailing 12-month basis grew 4% year-over-year, and on a two-year stacked basis increased 6% flat compared to last quarter. On a consolidated basis in Q1, active buyers grew 16% to 48 million. and active sellers grew 26% over $2.8 million. Percent international GMS was approximately 36% of total GMS, up 27% year-over-year on a constant currency basis. Now turning to April. As Josh said, April has been an extraordinary month, and I'm going to dimensionalize that for you. During the month, we saw a marked increase in the demand for face masks and other self-care products, and this had a significant impact on GMS growth and on our Q2 financials. Etsy standalone GMS for the month of April was over 100%, resulting in $780 million of GMS. Of that, masks were 17% of Etsy standalone GMS for the month. We're also seeing demand for masks drive engagement with new buyers and buyers that have not purchased for a year or more. During the month of April, we acquired nearly 4 million new buyers, which was up 160% year over year. 22% of mask-related GMS was from new buyers. Year over year growth in overall GMS from new buyers accelerated from 5% in Q1 to over 130% in April. We've also reengaged 2.5 million buyers that have not purchased for a year or more, an increase of 186% year over year. Overall, 32% of buyers who purchased a face mask returned within 14 days to make an additional purchase, and the majority came through Etsy's direct channels, which is free. As shown on slide 29, our new and older cohort saw an inflection higher in April. We've shown you our cohorts before, and historically they've been stable and predictable, but we're now experiencing a disruptive change to the positive. This is a brand-new cohort acquired during an extraordinary time, and we don't have any basis to believe they will perform similarly to our existing cohorts. With that said, they could provide a tailwind to future growth. This is an unprecedented time for us, and we are unsure of when these trends stabilize in the future. In addition to masks, we're also seeing additional momentum in other categories. Excluding face mask-related items, Etsy standalone GMS growth was 79% during the month of April. Now, of course, these results are likely magnified by broader industry tailwinds, specifically a shift from offline to online. According to external industry data, online retail sales for major marketplaces have risen dramatically in April. On the supply side, new sellers that joined the platform in April accounted for 13% of mask-related GMS. Over the past three years, we've shifted one of the largest fixed expenditures to variable with our migration to Google Cloud. Both Etsy and Reverb have highly variable cost structures. So in an environment where top-line growth contracts, a large portion of our expenses can dynamically adjust with growth. In response to the rapidly changing macro environment, we took a thorough look at operating expenses and implemented actions to reduce costs where it made sense, while simultaneously continuing to invest for long-term growth and playing offense where we see the opportunity. We're currently seeing times of exceptional volatility, and we hope for the best, but we plan for the worst. We recognize that this is a moment for Etsy where we are uniquely meeting the needs of millions of buyers and sellers. We want to embrace that moment as a potential inflection point for consumer behavior and habits and invest into it. We're being very careful about our fixed costs while leaning into variable investments that we think can change the slope of the curve and engage these newer cohorts. So how are we doing that? First, we've leaned into marketing more than we planned in Q2. Television marketing is affording great placement at CPMs that are 20% to 30% lower than normal. With so many people at home and more screen time being consumed than ever before, we believe increased investment in brand marketing makes sense as we are able to engage millions of new buyers and buyers who have not purchased for a year or more, for whom Etsy is top of mind right now. Performance marketing is yielding higher ROIs with a lower cost per click. As we've mentioned before, performance marketing naturally flexes with demand. When demand is high, we spend more. In addition, our offsite ads program will enable us to lean heavily into this channel. So if you take them both together, we're talking to buyers at the top of the funnel and we're catching them at the bottom. Second, we also undertook a product prioritization exercise that doubled down in areas where we see the highest potential. Some of these areas are more experimental in nature and have longer term time horizons to deliver expected returns. so they may not yield in period returns. We expect work in this area will enable us to drive progress in areas such as search and frequency that will be important to drive growth over the longer term. We've also made significant one-time investments to help our seller community during this difficult time. These total approximately $11 to $13 million, the majority of which will be incurred in Q2. These include waiving offsite ad fees until early May, deferring seller bill payments for a month, increasing member support operations, and providing listing credits for mask sellers as well as listing and ad credits to some of our hardest-hit sellers in categories like weddings and party supplies. We donated thousands of face masks to hospitals and have supported many of our small contracted vendors by keeping them employed despite our own office closures. Overall, we have conviction in the investments we're making and believe they'll enable us to support our community and sustain growth over time. As of 3-31, we had almost $900 million of cash, cash equivalents, and short- and long-term investments, in addition to a $200 million revolver that's currently undrawn. In the first weeks of Q1, we repurchased 543,000 shares at an average price of $46, a $25 million investment. We've now paused share or purchases in light of the current macro environment. With minimal capex and marginal working capital needs, we believe we can continue to convert a very high percentage of our adjusted EBITDA into free cash flow. Before I discuss guidance, let me provide some background about how we forecast our business. No easy task given all the uncertainty right now. We build up our own internal models and look at cohort data to establish baseline trends and layer in the impact of our investments in marketing and product, which drive incremental growth. In addition, we evaluate a lot of external economic data, closely monitoring headwinds and tailwinds, and from there we develop a range of scenarios that could play out. It's been an incredibly dynamic couple of months. You'll recall that we told you that on a consolidated basis, GMS was down more than 2% in the third week of March and then up over 100% in April. To give you a bit more color on our recent performance, the Etsy marketplace delivered our highest ever month of GMS as a public company in April. And the two highest days of GMS of all time were Thursday and Friday of last week. And so far, May performance remains consistent with what we saw in April. There are a number of tailwinds that we believe contributed to our strong April, including, but of course not limited to, increased sales in categories unique to this current environment, such as face masks, leveraging millions of new buyers and buyers who have not purchased for a year or more, the benefits of attractive CPMs in many channels, enabling us to spend deeper, widespread shifts from offline to online commerce, so many fewer places to shop, dislocations in the competitive landscape, some of which may be only temporary, and government relief packages, including stimulus checks. So there's things that we know, and there's things that we don't know. For instance, we continue to monitor the possibility of very real headwinds, which we haven't experienced yet. such as a potentially deep and broad economic downturn, mounting job losses, small business closures, fragile consumer confidence, and many other macro factors. Our best view today is that the recent surge in demand is likely to ease, but GMS strength in April will support strong top-line growth for the quarter. Because of the uncertainty, We're going to provide guidance for Q2, but we're not able to provide guidance for the full year. We currently estimate consolidated GMS for Q2 in the range of $2 billion to $2.2 billion, which is up 80% to 100% compared to Q2 of last year. Revenue of $310 million to $340 million, up 70% to 90%. and adjusted EBITDA of $75 to $90 million with a margin in the range of 23 to 27%. This implies a deceleration in growth rates for each of May and June, but a strong quarter overall. Our own internal model assumes that retail begins to reopen, creating more choice for consumers, and that economic hardship mounts during this time. The combination of the two could potentially lead to meaningful deceleration both in this quarter and as we go through the year. A couple of thoughts for your model. We would encourage you to think about the headwinds and tailwinds we discussed and their implications on growth in the back half of the year. Offsite ads revenue will reflect a partial quarter beginning in early May given the free trial period. As we transition from our prior model, you can expect gross margin to benefit from the marketing offset shifting from cost of revenue to marketing expense. Our Q2 take rate will contract temporarily a bit given the delayed fee charges for offsite ads and the impact of the large increase in GMS without a corresponding increase in certain seller services. As we mentioned last quarter, Q2 marketing spend will increase significantly on a sequential basis due to our transition to off-site ads and now also with our incremental investment in TV. Of the $11 to $13 million in costs to support our seller community, approximately $1 million were incurred in Q1 and the balance in Q2. These costs are non-recurring and at the midpoint of guidance represent approximately 300 basis points of adjusted EBITDA margin for the second quarter. Also keep in mind that we'll be lapping the reverb acquisition in Q3 2020, reflecting a partial quarter. Based on our Q1 performance and Q2 guidance, we believe that we are extremely well situated to execute on our strategy in this environment. with a marketplace model that allows us to scale our investments and respond to changing conditions very rapidly. We have a disciplined investment approach and an agile team who are rising to the challenge of our current environment and executing superbly. Deb is going to now moderate our live Q&A session. Thank you.

Hi, everyone. Hope you're all doing well. I'll start with a question we received from Kunal Mudekar at Deutsche Bank. As you think about marketing spend in Q2, what is your strategy with regard to brand versus performance, search versus social versus TV, and then off-site ads supported versus own spend? That one I think is for you, Josh.

Great. Okay. So as with all of our investments, we try to have a very disciplined framework around how we make those investments. And so let me start with performance marketing because performance marketing is really a natural shock absorber that rises and falls with consumer demand. So we've talked a lot about our ROI thresholds, and we're very disciplined at looking at the next dollar spent and whether we think the next dollar spent is going to deliver a good return. And for all of our performance marketing budgets, that continues now just as it did, you know, before the crisis. And that would include both our Google performance marketing spend as well as performance marketing spends that we have on Facebook and a couple of other places. And in terms of the question about off-site advertising, what gets billed back to the seller versus the part that is Etsy-funded – Overall, there is still a subsidy in performance marketing where Etsy is paying a portion of the performance marketing budget, and that comes in a number of different ways. If someone goes to Google and they see a search result for Etsy and they click through, they may not buy from that particular store. They may buy from a different store. So in that case, neither of the sellers gets charged. Neither the seller whose ad was shown on Google nor the place that the purchase was eventually made, neither of those sellers gets billed for off-site advertising. That's something that Etsy funds. So there may be times where the cost of advertising from an off-site ad is higher than what the seller pays. And, again, that would be something that Etsy subsidizes. But, again, we think that that's a great partnership with our sellers because because the seller is selling a product and gaining a new customer, which is great for the seller. But Etsy is also gaining a new customer, and that's great for Etsy. So the performance marketing spend will vary naturally with demand, and the portion that is seller-funded versus Etsy-funded will vary a bit as well. But I would say we expect it to be broadly consistent with the kinds of guidance that we gave before the crisis in terms of the off-site ad versus Etsy funded portion of it. I do think the performance marketing spend is elevated right now because demand is elevated. Now let's talk about the brand, the mid and upper funnel advertising. There the way we look at it is we look at reach and frequency. So we look at GRP points against the audiences that we really want to target. And we think what is a GRP, a reach and frequency number that's high enough to really be above the noise. And we think that this is a really great moment for Etsy to be communicating above the line. Millions of people may be trying Etsy for the first time or trying Etsy for things that they hadn't realized that they could turn to Etsy for, and they're having a great experience. But rather than just having them land on the site and buy something, we want the opportunity to really tell our story, to create an emotional connection, to help them understand the connection that they have with the seller. And the opportunity to do that on TV is really special. And you saw the creative lean into that in a way that you haven't seen our creative do before. We're really telling our story from our seller's point of view. And so we are looking at reach and frequency that's meaningful and to dimensionalize that for you, similar to the kinds of reach and frequency that we will be doing in the fourth quarter during peak holiday periods. And again, given the kinds of traffic that we've been seeing, We think that that kind of spend is appropriate. The other place we're spending in what I would consider mid-funnel is video on social channels. And the opportunity there, again, we're going to think about that in terms of reach and frequency. We have a better opportunity to A-B test that over time even than we do with TV. And we can rapidly iterate new creative and test new creative in front of these audiences, which is also really helpful for us as we think about how our message is resonating and how to tell very targeted messages to different audiences. So broadly speaking, that's how we're thinking about our investment framework. And I'll just close that question by saying I think that this is a really fantastic time for Etsy to be leaning in to these investments. But these are variable spends. So, you know, if conditions should change significantly, it's quite easy for us to pull back this investment level if we think it's appropriate at that time.

Okay, great. Thanks, Josh. Next one is from Shweta Kajuria from RBC. I understand that you aren't guiding to the full year, but can you please talk about the general philosophy strategy of how you plan to manage costs this year with respect to top-line growth? And what are some of the places you plan to continue to lean into and where will you be seeing cost savings? Will there be more areas to pull back on costs? You talked about the three scenarios during your inter-quarter COVID update. Do those scenarios still stand?

Thanks, Greta. Maybe I'll start and then Rachel can fill in the gaps. Yeah, I mean, in the April 2nd call, we talked about how we took some pretty fast action to look at our operating costs. And we're always... I guess I'd start by saying that we've always been very disciplined about our cost structure. And if you go back and you look at our earnings call from the prior quarter, you know, we pointed out that we have some of the highest revenue per headcount of anyone in our peer group. And so we entered this crisis with already quite a lot of fiscal discipline. And we are continuously looking at how we can get better and how we can make sure that every dollar is going to its best and highest purpose. Minimizing waste is one of our core values as a company. We also said that we're not going to take short-term actions about our investment levels based just on short-term trends. And, oh, boy, am I glad that we did not overreact to the events in the third week of March because we were very, very busy in April rising to the challenge. And I think the team did a fantastic job doing that. And the fact that we were continuing to invest appropriately meant that we had the resources and the capacity to step in when we were needed in the month of April. So Rachel said in her prepared remarks, we're going to hope for the best but plan for the worst. And what do we mean by that? We mean that we're going to continue to have a lot of discipline around our fixed costs. We're going to be taking a very careful eye on our fixed costs. because it's hard to predict what the future will hold. But in terms of variable investments, we are leaning into variable investments right now that we think are going to have a good payback because we think this could be an inflection point for Etsy in a really positive way. And we want to make sure we really embrace that and take full advantage. The last thing I would say is just in our product roadmap, you know, it – We put a lot of thought into our product roadmap coming into this year, and we think we're working on a lot of really high value projects that align very clearly with those four pillars of our right to win. If we got to May and said we've thrown everything out the window and started over. That would be strange, and in fact, that's not at all what we've done. The vast majority of work that was underway as we entered 2020 continues because we continue to think it's really important work. At the same time, if we said that we haven't changed a thing as a result of the current crisis, that would also be strange. And, in fact, there are things that we need to do in two directions. So we took a look at what are things that really speak to the moment now and that have a lot of urgency, are both important and urgent. And we have made some pivots in our product team. to go and respond to those things. And I'm proud of the way that the team has responded. We've also looked and said, hey, this is a moment when we actually have the opportunity to do some investing in some fundamental platform pieces of our business that are going to make us much stronger for the future that might have slightly longer time horizons. And one example I would give of that is within search, the quality of all of our data pipelines. Are we capturing the right data? Are the data clean? Are they in usable formats? How can we give the teams the right tools to use those data? And there's an opportunity for Etsy to get much stronger there, which is going to result in much better search and recommendations. And we're taking that opportunity right now, and we are investing deeper there. And that's not something that I would expect to have a payback in the next three or four months. But I think it's going to make Etsy much better for the medium term and the long term, and we are embracing that opportunity right now.

If I can, I'll jump in with a few additional notes specifically around margins. So I just want people to remember that we've now consolidated Reverb into our financials, which creates a lot more revenue on the top line with potentially – zero margin for now. We have said that we expect them to be breaking even or positive as we exit the year. In the first quarter, we accounted for Etsy ads as a cost of revenue – sorry, as revenue with zero margin. So that's also dragging down Q1 margins. Now that will shift as we get into Q2 and beyond. We also spend pretty heavily in Q1 this year on television. brand marketing, which we didn't spend in Q1 of prior year. And as Josh talked about, we're leaning into that in the second quarter. So we'll continue to spend on television advertising. And the last thing I would remind you as it relates to margin is that we're capitalizing less about product development labor this year than we were last year. So a lot more of our product development team is expensed through our through our P&L. So those are the, I know your question, Shweta, was specifically about cost reduction, and we've been judicious where we can, but also keep in mind those other puts and takes that impact our bottom line.

Great. Thanks, Rachel. The next one I'm going to give you is from Darren Aftahi at Roth. You said masks would have been the number two category in April if it was its own category. So what was number one?

number one uh as uh as historically often been the case was home and living so everything around nesting right now uh to get your home more comfortable uh was our top category and i think that again speaks to the enormous opportunity for etsy the tam of etsy that home and living uh is only one of our categories it's it's it's a very large category in the world and it's a very large category on etsy it's our number one category right now and in a moment like this a lot of people are thinking about how can they make their home more cozy how can they get a home office set up and etsy is there for them and can do that in a way that no one else can really do but it's still only one of many categories other categories that were really robust this quarter included things like craft supplies toys and games gardening self-care you know so many different categories on etsy that are really relevant gifting is a really big deal uh in this moment so many categories that are that are really relevant um right now and the challenge for us historically has been getting people to think of etsy for those particular products and suddenly we have the opportunity to do that in a bigger way than we've we've had before And, you know, what I know is our sellers are doing a great job delivering and delighting those customers. And so that makes me optimistic for the future.

Okay, great. Next one comes from Laura Champagne from Loop. In Q2, should services revenue grow faster or slower than JMS, and what are the drivers?

So I would expect services revenue to grow slightly slower in Q2 than GMS for what is a kind of a unique reason to this moment. So GMS is obviously growing really, really nicely on the Etsy marketplace. And, of course, GMS is a function of three things, visits, conversion rate, and AOV. And right now we're seeing visits grow really rapidly. And we're seeing conversion rate improve over its historical averages again. Obviously, then AOV is the third factor. AOV is slightly down from its historical averages. But we very rarely see visits grow very rapidly and conversion rate improve at the same time significantly. So that's very positive for Etsy. What we now call Etsy ads, what we used to call promoted listings, is really driven by views. So if visits are growing slightly slower than GMV, then it means that, you know, we may see Etsy ads grow slightly slower, actually, than GMS overall. And I want to emphasize that we think Etsy ads is doing great. It's on a great trajectory. But, again, if visits is growing slightly slower than overall GMS, then we may see Etsy ads grow a little slower than GMS in the second quarter in particular.

May I add one thing to that, to Josh's response, which is also just to point out that in the first part of April, when we were seeing the surge in mask sales, we took the Etsy ads, formerly known as promoted listings, off of the mask listing pages. It's now back on, but for a portion of the month of April, there were no promoted listings there.

Okay, great. We have a couple of questions that are guidance-related. I'm going to go with this one from John Colantoni. I hope I said that right, John, from Jeffries. Q2 GMS guidance implies a high level of growth in May and June. Can you talk about some of the key assumptions in your internal model that get you to the full quarter forecast?

I'm happy to start. I would start by emphasizing what Rachel said before. which is that it's really hard to forecast right now. And we had a lot of conversations about whether to give guidance or not, and we know there's been a broad range of people giving guidance and not giving guidance. We wanted to be as transparent with you as we can. We always try to be as transparent as we can and as helpful as we can without overpromising. And so what we gave you is a very broad range. If you think about the fact that there's only two months left in the quarter and we're giving you a 20-point range, it's pretty broad range. And I think that just speaks to the time. And so there's a set of tailwinds, and we are currently benefiting very materially from those tailwinds, things like a rise in demand and fewer alternatives, Etsy sellers being able to rapidly pivot to produce in-demand products and not just masks, lots of other things that are currently in demand, the fact that we're not reliant on, you know, logistics, central logistic fulfillment warehouses like others. There's also a set of headwinds that we anticipate. So it's a very tough economic background and our hearts go out to everyone who's lost their job or is feeling economic insecurity. And we think that that could well get much more real in the months to come. But we haven't seen that headwind show up much yet. We expect that retail will reopen. We hope for everyone's sake that the economy gets back on its feet sooner rather than later. And so it's very hard to model when we will start to feel those headwinds and at what pace we will start to feel those headwinds and how the continued tailwinds might counteract them or not. So we did the best within our guidance range to anticipate those trends. I don't know, Rachel, if there's more you'd want to say there.

Yeah, I would only just point out a couple things. First of all, we gave you the first couple of days of May. Don't get too attached to that because we're not planning to update you daily. So we've seen some trends holding, and we told you that we expect May, the numbers, you could back into the numbers we've given you, assume we'll decelerate in May. We said we thought we'd accelerate in May and then follow that trend line through to the end of the quarter, accelerating again in June. And lastly, don't forget, we're giving you consolidated guidance. So Reverb's performing strongly. We've given you, I think, some information there that will help you understand the two respective marketplaces, but Reverb's is a smaller percentage of our total, and Etsy's deceleration will obviously have a higher weight into the total guidance we gave for the quarter.

Okay. Thanks, Rachel. The next one is from Nick Jones at Citi. Though it is still early days in this crisis, what are you learning about your your habitual buyers, your active buyers, and your occasional buyers? Are you seeing early trends that each of these groups are growing?

Yeah, I mean, to break it down, starting with our habitual buyers, and we love our habitual buyers, you will see that the number of habitual buyers grew again. But, you know, because they're already habitual, they already know so much about what Etsy can offer, and they're already coming to us frequently. And so we have seen frequency in that group improve, which is great. But they're kind of the folks that have figured out the secret sauce of Etsy. The big opportunity in this moment is there's a lot of people who maybe have never shopped on Etsy before or who have shopped only very occasionally on Etsy. They might think of us only for one very specific product category. And now they're thinking about us. And now they're coming for other product categories. And that's a moment. And so we're excited about the opportunity that we are seeing frequency gains in the lapsed buyers and the occasional buyers. We're also encouraged by, you know, it's very early days, but this brand new cohort from April, you know, we gave you some data in our prepared remarks that the frequency of this brand new cohort looks very healthy. as well. So, you know, the task ahead now is to do a great job engaging them so that we continue to earn their loyalty in the future. And, you know, we're really excited about the new tools that we have that allow us to really be able to identify different segments and communicate to those different segments in a very personalized way and really dynamic way really quickly. And we're really focused on that and investing in that.

Okay, next one is from Maria Rips, the Canaccord. When you think about your Q2 guidance, can you talk about the relative contribution from new customers versus engagement from existing customers? It seems like with this much visibility, you must be seeing a lot of activity from your existing customers. Can you just talk about it a little bit more?

Yeah, I guess I'd start, and Rachel, feel free to pile on, of course. But first I'd say that we define new customer at Etsy as new ever. And many other people, everyone uses different definitions, but a lot of people have a definition of new that means they haven't been around in a while. And when we say new, we mean we're not aware of having seen that buyer before, at least using that ID. And so we are seeing, you know, very strong growth in brand new buyers. And we're excited by that. And, you know, in 2020, we have to remind ourselves there's still a lot of people that just don't shop online much, right? And there's a lot of people that have never shopped on Etsy. And so, you know, some of those people are showing up now and shopping on Etsy, and it's really exciting. So new buyer growth is very strong right now. And I'm excited about the fact that I feel like we're really well prepared. The hard work that we've done over the past few years to make search much better, to make the shipping experience feel really good, to build trust. You know, these are people that are coming on to Etsy for the first time and they're finding a marketplace that we're proud of, you know, that we think is well organized and trusted marketplace where sellers do such a great job delighting them. But as we've talked about before, there's a very large number of infrequent buyers. They've bought on Etsy before. They had a great experience. They think of us fondly, but they just don't think of us very often. They don't know when to think of us. And suddenly, we're more front of mind, and we're one of a smaller set of places that is open for business and shipping. and shipping a lot of different products that they might want. So we're definitely seeing improvements with the occasional buyers or the lapsed buyers, people who just haven't been on the site for more than a year. And then, of course, we are also seeing frequency improvements with people who already shop and shop frequently. It's just that the delta with that community is not as high because they started from a higher point already. I don't know, Rachel, if there's anything else you'd want to add.

I mean, I'm probably just being redundant, but I just want to point out this. By the definition most other companies use for new buyers, the buyers that have not been to the site for 366 days or more, if you add those two groups together, the new and reactivated, we had 6.5 million new buyers in the month of April. And really about half of our, that's about half of the April wire. So that cohort, the new and reactivated, is a material portion of our growth. And they're the ones that are really the opportunity for us to capture and be top of mind for as we lean into marketing and other things.

Okay, thank you. Next one is from Navat Khan at SunTrust. What kind of uplift do you think you may be seeing from the lift in consumer spend due to government support and stimulus?

Yeah, we've been looking at that as well. And, again, it's hard to parse out because it's all fairly recent. But what I would say right now is that the growth, and we gave you pretty specific data on how April and early May have been trending. So you can kind of see for yourself that – It's probably true that the stimulus checks were helpful. We certainly think on behalf of the American people and the American economy that they've been helpful. But we've continued to see sustained growth. So, you know, we feel good about that. Now, we anticipate. that over time that growth will decelerate, you know, that as we get past those stimulus checks, as people's savings get worn down a little bit, that the economic hardships will get even more real for people. But it's just hard for us to know all the puts and takes of that very precisely.

Okay, great. Next one is from Jason Halstein at APCO. Are you seeing better seller demand for your new ad products and for seller re-engagement with those products? Any way to quantify that?

I'll start, and then, Rachel, if you want to jump in. But we are very happy with – so we've basically got two seller ad products. We've got off-site ads and we've got Etsy ads. So off-site ads is off to a great start. We're very pleased with the launch. By the way, we think the team did a really nice job getting that product launched. And just to take a second on Offsite Ads, too, I'm really pleased with how that team had a real biased action. I think they also were ready to pivot when that made sense. And they came to a new model, actually. They launched a version one, and then they came to a version two that's even better and I think is even more fit for these times. We couldn't have anticipated these times. But we do think that this new version is even more appropriate for the current environment that we're in. And in addition to having the right strategy and being willing to pivot, they executed really nicely on both the technology, which is complicated, and the messaging to sellers. And so we're pleased with how the launch has gone. We are pleased with, you know, what we're hearing by and large from the community. And, you know, the early metrics are very encouraging on off-site ads. It's very early days, very early days. But the metrics are encouraging around things like opt-out rates and seller churn. You know, we're very encouraged by what we see there. And on Etsy ads, what used to be called promoted listings, you know, we continue to see that be a very popular product. And so our sellers like it. They're investing in it. And, you know, it delivers really good value for them. So we're also pleased with what we're seeing on Etsy ads.

And if I may, I'll just add a couple other notes. So because the product was live for a month before we started billing, and one of that was part of the seller relief basket that I talked about, but it was also designed so that sellers could actually see and start to calculate how this product was performing for them economically. They could actually start to see sales that they had made. And on their bill, it would say the fee and then a wage. It was a strikethrough. So they were seeing what would I have paid and what sales would I have gotten or would I not have gotten had they not been paid. had the opportunity to be listed in one of these product listing ads. And so we've been collecting feedback for several weeks now on whether they like the product and whether they feel that it's performing well. So we've been very pleased with what we've read. It doesn't mean that everybody loves it. We certainly get our share of feedback. of issues and considerations being raised. But what we see now, since we've had the billing live for several days, is that everything's performing exactly as we expected, as Josh said, in these very, very early days. But nothing is out of line with how we have modeled the product to perform as we expected.

Great. Okay, thank you. We went over time here a little bit. I'm going to squeeze in one more high-level question to end it, and anybody else whose questions got stuck in the queue, we'll make sure we get back to you. This one's for Josh, and it's from Tom Forte at DA Davidson. As a longtime industry participant, what are your thoughts on e-commerce mix coming out of the coronavirus outbreak? For example, the home category online mix today is about 40% versus 20% last year. How much does the increased mix hold near-term as physical stores reopen?

Yeah, I mean, I think that this is going to be an inflection point for e-commerce, and I think that that inflection point is going to be meaningful and lasting. As much as many of us are really native to online and have been shopping online for years and shop online for many, if not most, of our purchases, there's still a very large segment of the economy that shops offline. Um, and I think this is a moment when a lot of people are suddenly turning online and discovering that it's really convenient and it works really well for them. And I think that that could create some very lasting behavior changes. And I think that, um, in that world, people aren't going to want to remember 5,000 or 10,000 or 50,000 brands. And I don't think they only want to show up in one or two places. So in a world where everyone's on Amazon every day all the time, which is great because Amazon meets a lot of needs a lot of the time, they're going to want an alternative to Amazon. And I think Etsy is super well positioned to be one of the few meaningful alternatives that stands for something truly different than what you get at Amazon but can meet a wide range of your needs. And this is a moment when we're actually getting to demonstrate that to people. And we're embracing that moment and we're investing into that moment. And most importantly, I think our sellers are doing a fantastic job of rising. They're innovating on products that are really cool. They're delivering delight, the handwritten notes, the personal touch that, you know, you're never going to get from almost any other place. So I do think that this is a moment that's going to create lasting behavior change. And I think that Etsy is going to be a winner. in that over the medium term and the long term. And I think that's incredibly exciting, most of all for our sellers and for buyers. And so it's a time when our team, as I said in my prepared remarks, has a lot of stress in their lives, but they understand how important that this is for for all of our stakeholders. And so, again, I guess I'd like to close by saying how grateful I am to all the people on the NCT that are really pulling out all the stops to try to do everything they can to support the community. It means a lot, and I'm really grateful for it.

Great. Thanks, Josh. And thank you, everyone, for joining us. We hope you stay safe, and we'll talk to you soon. Thank you so much.