Etsy, Inc.

Hi, everyone. Welcome to Etsy's second quarter in this conference call. I'm Deb Wasser, VP of Investor Relations, and joining me today are Josh Silverman, CEO, Rachel Blazer, CFO, and Gabe Ratcliffe, our Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&A window chat displayed on your screens. Feel free to use it at any time as it will remain open throughout the entire conference call. I'll be reading your questions and Gabe will help me try to get to as many as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 on our communities, business and strategy, marketing and product initiatives, our future financial results, anticipated investments in the timing and benefits of our seller initiatives, and the strategic benefit and impact on our financial performance of Reverb. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in our press release and our 10Q file with the SEC on May 7th, and subsequent reports that we will file 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. A 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 a lot, Deb, and hello, everyone. Etsy's mission is keeping commerce human, and we feel that that mission is even more relevant today than it's ever been. at a time when our sellers rely on income from Etsy to provide meaningful income for their families, and at a time when there are so many forces that are pulling us apart and dividing us, the opportunity to create human connection through commerce, we believe, is incredibly powerful and motivates us as a team every single day. I'm going to share with you some pretty exceptional financial results for the second quarter. But before I do that, I wanted to pause for just a second on our social impact goals because we're as proud of how we achieve these results as we are of the results themselves. We apply the same focus and accountability to our social impact goals as we do to the rest of our business because we believe very strongly that being a great corporate citizen makes us an even stronger business. And so for the past many years, we have been setting goals, we have been publicly announcing those goals, and then we've been publicly reporting the results and progress towards those goals as part and parcel of our annual report. And we feel great about the progress we've made, although there's much more work to be done. And we think that that's a big part of why we've been as successful as we've been in the second quarter and in prior quarters as well. Sellers across the consolidated Etsy marketplaces sold $2.7 billion worth of merchandise in the second quarter, up 147% year over year. That resulted in $429 million of revenue and over $150 million of EBITDA. I'm proud to report that productivity across every team stayed very strong as our product and engineering teams shipped very innovative new product releases, our marketing teams achieved new levels of efficiency, and our G&A organizations worked so hard to meet the surging buyer demand. But more than just fantastic financial results, these results underpin the incredible opportunity that Etsy has to meet so many different purchase occasions for so many different buyers. Of course, one of those purchase occasions was masks. In the second quarter, Etsy sold $346 million worth of masks, and over 110,000 sellers sold at least one mask. These are really big numbers. It's hard to wrap your head around them. But to give you some sense of scale, that's enough masks to stretch all the way from New York to London. But the strength of the second quarter was about so much more than masks. In fact, non-mask sales grew 93% in the second quarter. That's an acceleration from the 79% that non-mask sales grew in the month of April. And while we added more sellers in the second quarter, GMS per active seller nonetheless grew by 15% year over year. So our sellers on average are becoming more and more successful. And the breadth and depth of different purchase occasions that buyers turned to Etsy for in the second quarter was truly breathtaking, spanning all of our top categories. If you need to furnish something for your new home office, why not get a custom-made desk made by a carpenter just for your size? If you're going to get something nice for the summer to wear, why not buy a beautiful linen dress direct from the craftsperson who made it at a really valued price? If you need a painting for your wall, why not get a personalized portrait of your pet? Even everyday goods like bread sold extremely well on Etsy. In fact, looking across our top categories, what you see is across each of our top categories, Etsy showed extremely strong growth. In our largest category of housewares and home furnishings, Etsy's sellers sold over $2 billion of merchandise over the last 12 months and over $700 million of merchandise in the second quarter alone with growth rates of 128% year over year. And if you look at each of these categories, what you'll see is they are each individually very large categories. There are multi-billion dollar retailers whose business focuses exclusively on each of these individual categories. Etsy is growing faster than most of them and already from a very substantial position of scale. And, of course, that's just our top six categories. In fact, 25% of our GMS came from other categories that weren't even top six, where Etsy sold about $600 million of GMS. And many of these are in and of themselves very large categories as well, like toys and games or pet supplies. So when you add it up, it speaks again to the extremely large addressable market that we believe we are facing. In fact, if you go back to our investor day in March of 2019, we made an attempt to size our TAM at that time. And what we said is if you look at just our top six countries and you assume that Etsy competes only in those top six countries, and then you make a second assumption, that online is a completely different market from offline. And then you make a third assumption that special is distinct from everyday products. If you believe each of those three assumptions, the market opportunity for Etsy is $100 billion. But in fact, COVID has helped to explode each of those three assumptions. Etsy competes in almost every market in the world, not just the core six. And in fact, the distinction between online and offline has all but evaporated in the past few months. And we've learned that you can inject the special of Etsy into everyday purchases as well. Etsy's there for so many purchases for so many different people. So when we pull back and look at what we've learned over the past three months, it reinforces my belief that the size of Etsy's addressable market starts with a T, not with a B. All of this gives us even more conviction about the size of the prize that Etsy is chasing and the opportunity to invest to fully realize that growth. And obviously, revenues in the second quarter exploded so quickly that they surpassed our ability to reinvest efficiently in the second quarter alone. But we maintain our conviction that we should be investing given the early stage of our growth and the significant opportunity ahead of us. As one example, we made a commitment in 2018 to migrate to the cloud, and that took a significant investment of both money and time. But thankfully, the engineering team completed that migration on schedule in the first quarter of 2020, which allowed Etsy to realize the full opportunity of the second quarter of 2020. Without that investment, Etsy would be in a very different position today. And we're going to continue to make those investments that position Etsy to obtain its full potential for the future. So where are we excited to invest for the future? It's in the same four areas we've been talking about for some time that collectively make up our right to win. I believe passionately that we are in the very early innings of unlocking the opportunity in each of these four areas. This is not about low-hanging fruit. There are meaningful opportunities to create step function improvements in our customer experience that will position Etsy even better to be a meaningful part of our sellers' and our buyers' daily lives. Let's step through them one by one. Starting with search and discovery. In the prior quarters, I've geeked out with you a little bit on some of the machine learning algorithms where we've been making progress, and in the second quarter, we made even more progress getting even better algorithms. But let me talk about some of the user-facing features that are also really important in search and discovery. In the second quarter, we launched saved searches, and that allows a buyer to declare a persistent interest in and say that they want to learn more about this search over time. So each time they come back, they can see fresh results that are related to that search. Or we can email them when there are new and exciting products or maybe products that have gone on sale that are related to that search. This makes the buyer experience better. It makes it fresher. And importantly, it gives buyers more reasons to come back more often. And it tells us really important information about the buyers. Already 8% of visitors have at least one saved search. And for a visitor that has a saved search, 11% of them have come back again successfully. to interact with that saved search, which we think is really encouraging given how very new this feature is. Another area we've been promoting is favorites and lists. Buyers tell us that there are so many good things they find on Etsy that it's hard to organize them and to narrow down to make that final purchase decision. So we've been making favoriting and listing more visible and easier. And because of that, we've seen a meaningful uptick in favoriting and adding to lists. And this also gives us really valuable knowledge about the buyer so that we can deliver even more personalized results for them. And it allows buyers to have a better buying experience and often to share with others in a way that can create viral growth that we think is really encouraging for frequency and growth into the future. Turning to human connections, the ability to tell the story of the seller and the story of the item is so powerful in differentiating the kinds of products for sale on Etsy. And in the second quarter, we launched the ability for sellers to upload videos of themselves and of their items, which make the buying experience richer and tell the story. And already, even though this feature has been live for only a few weeks, there are over 700,000 videos that have been uploaded. We're really excited to track the progress that this is going to make for our buying experience. Turning to a trusted shopping experience, we've talked a lot about our push into free shipping, and we're so happy that we pushed hard on free shipping in 2019 because we believe that it positioned us better for the current moment that we're in. In the second quarter, we launched bundles, which is the ability to see what other items a seller sells that might push the cart over $35 and therefore qualify for free shipping. And we saw some meaningful uplift there that we think is really encouraging. Next up for us is really working on setting appropriate expectations around when the item can arrive and helping to resolve issues proactively for buyers before they might even become serious issues. We learned a lot from the surge in mask sales about what happens when a seller's sales surge and how to anticipate and get ahead of potential issues in a way that supports the sellers and the buyers. And we're now starting to apply that to many other products as in a way that we are really excited about to continue to deliver an even more trusted shopping experience. And last but certainly not least, our sellers' collections of unique items. And in the second quarter, we launched augmented reality that allows a buyer to visualize a piece of wall art on their space. And wall art, by the way, is one of the most popular areas categories on Etsy. And unlike many other people who sell home furnishings and wall art, we don't get structured data from our sellers with specific dimensions. So we need to use machine learning to interpolate what we think the dimensions are, and then show how that item would look on your wall. And it's a great example of the kind of investment that we at Etsy make because of our very unique kinds of inventory that we think are going to continue to differentiate us from other people whose primary source of inventory is products that map to a catalog. Collectively, we are so excited about the continued progress that our product team is making in differentiating the experience for buyers and for sellers in a way that we think is going to pay off for years to come. And all of that gets even richer when we do a better job telling the world about it. We continue to lean into all of our marketing investments, both higher funnel like television, as well as performance marketing in places like Google and Facebook. and we believe that they delivered very strong returns in the quarter, even as we elevated the absolute dollar investments in those returns. We're also really starting to learn to use these new CRM tools so that as we gain more personalized information about our buyers, we're able to communicate with them through our owned channels and through our paid channels, as well as on the site, in ways that feel more and more personalized. And all of that makes us feel encouraged about what will happen with these buyers in the future. To sum up, we believe that Etsy is in the very early stages of an enormous opportunity for the Etsy marketplace and for the Reverb marketplace, which Rachel will talk about further. We couldn't be more excited about what the future holds and the progress that the team made in the second quarter. And with that, I'll turn it over to Rachel.

Thanks, Josh, and hello, everyone. 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. I look forward to speaking to many of you soon in a less scripted format, but for today, with so many numbers to report, I'll be reading my prepared remarks. Q2 was a spectacular quarter, breaking records for new highs in GMS revenue and EBITDA. On a consolidated basis, Etsy's second quarter GMS grew 147% to $2.7 billion. Revenue grew 137% to $429 million. And we delivered adjusted EBITDA of nearly $151 million or margins of 35%. Both the Etsy standalone and Reverb marketplaces saw unprecedented growth in the second quarter, with Etsy and Reverb delivering $2.5 billion and $227 million in GMS, respectively. Q2 was unexpected in many ways. On our last earnings call, we outlined that with limited visibility, we thought GMS growth might decelerate in May and June from the highs seen in April. In fact, strong trends continued throughout the quarter, April GMS was up 136%, May was up 158%, and June was up 142%. We saw those trends continue in July, which I'll talk about more when I get to guidance. Another point worth noting, particularly as you think about forecasting, while our overall results were very strong in Q2, we did experience significant volatility, mostly attributed to reopening and closing of local economies globally. For example, in the months of May and June, we had a high of 151% and a low of 109%. Q2 was driven by growth in both marketplace and services revenue. Key drivers of growth were driven by an increase in GMS volume, Etsy payments, and on-site advertising revenue. The launch of off-site ads has been a decisive success, both for our sellers and for Etsy. We began billing sellers in early May, so the marketplace revenue contribution from off-site ads only reflects a partial quarter. Thus far, there has been a very low level of opt-out from sellers who have had that option, and minimal churn from those required to participate. In all, as of the end of Q2, less than 2% of sellers had opted out of the program. Etsy Ads, our optional on-site ads program previously referred to as Promoted Listings, continues to be a very successful seller service, Etsy ads grew 94% year-over-year in Q2 and 60% sequentially versus Q1. It's worth noting that Etsy ads had its first million-dollar day in July. Once off-site ads launched, the budgets for the former Google shopping product were migrated to Etsy ads, and those dollars have been put to work at higher efficiencies. The growth in Etsy ads was modestly offset by a planned decrease in the number of promoted ads per page. Take rate declined 100 basis points sequentially. While the core business performed well and our off-site ads drove significant incremental revenue, this was offset by a lower effective take rate on our on-site Etsy ads product and to a lesser degree, some of our seller investments. As a reminder, to support our sellers during this difficult time, we made one-time investments, which totaled $12 million in Q2, which predominantly included waiving off-site ads fees for a month and providing listings credits to some sellers. Another factor impacting Etsy ads take rate was increased conversion rate from higher intent visitors searching and quickly finding things like face masks, which reduces page views. We also continued to grow our payments platform, another contributor to revenue growth in the quarter. In Q2, we expanded Etsy payments to five additional countries. Etsy payments is now available in 43 countries across 19 currencies, processing 92% of our GMS. Gross margin was 74%, up 640 basis points compared to last year, primarily driven by our shift to off-site ads, which generated revenue growth without an equal offset in cost of revenue. Our Q2 adjusted EBITDA margins benefited from the significant and unprecedented top-line growth we had in the quarter, A great proof point that our marketplace model is scalable and cash generative. Cost of revenue, G&A, and product all declined as a percentage of revenue in the quarter. As a relatively young company with an enormous market opportunity in front of us, we believe we should more aggressively invest in growth and pursue our very clear roadmap. And as mentioned in the past, our revenue per employee is so meaningfully higher than our peers. Recent growth provides a unique opportunity for us to reinvest some of the incremental revenue rather than put it in the bank at flat yield. Etsy's philosophy is to focus investments on driving profitable growth, and Q2 margins of 35% demonstrate our long-term potential. To that end, during Q2, we increased our marketing investments to $115 million. significantly leaning into this moment where Etsy captured the world's attention, representing 27% of revenue. Note that as a percentage of sales, marketing spend was up 140 basis points compared to last year. Within that spend, performance marketing for the Etsy marketplace was $78 million and drove paid GMS to 21% of overall GMS. We believe we're gaining share in performance channels led by efficiency, even at higher levels of investment. However, we are uncertain how this plays out. Currently, we are seeing substantial growth in conversion rate and impressions, and we can't predict that these trends will continue. For our new buyers and reactivated buyers, our newer cohorts, we're seeing LTV increase driven by higher frequency and an increasing AOV. These factors drive higher buyer lifetime value and enable us to spend deeper on marketing without reducing our ROI. Higher GMS per click on performance marketing and broader reach on television have also extended our marketing dollar. We've made substantial progress building toward a full funnel marketing approach and continue to optimize our investments in each part of the funnel. From a more robust investment in TV and digital video at the top of the funnel, leveraging social more extensively in the mid, and driving visits and conversion with performance marketing low in the funnel. Our new CRM stack is a key element in helping us dynamically target and acquire buyers with richer and more personalized content. All of these activities are early days, particularly outside of the US, where we continue to experiment with mid and upper funnel marketing in places like the UK and Germany. Many of our key operating metrics for the Etsy marketplace were significantly higher in the second quarter than any other period since we've been a public company. This signals the dynamic nature of our business model, scalability of our sellers' inventory, and the power of our brand and what we stand for. In the second quarter, active buyers grew 39% to 60 million for the Etsy marketplace, and repeat buyers grew 51% to 26 million. Buyers on the platform with only a mask sale were approximately 7% of the buyers in the Etsy marketplace, or 4 million. So while mask sales were a tailwind for growth, our core business is performing exceptionally well. GMS per active buyer on a trailing 12-month basis grew 4.8% year over year, higher than the record growth reached last quarter, driven in part by habitual buyers growing 64% year over year. Excluding masks, GMS per active buyer was up 5.9% in Q2 and 7.3% on a two-year basis. On a consolidated basis, including reverb, percent international GMS contracted 400 basis points sequentially to 32% of overall GMS, as a greater percentage was driven by U.S. domestic buyers. International GMS was up over 100% and was driven in part by our international domestic trade group, which is GMS between sellers and buyers located in the same country. New buyers and reactivated buyers are expanding as a percentage of our overall buyers and we're up 162% year over year. In the second quarter, we acquired nearly 12 million new buyers compared to 19 million in all of 2019 and reactivated 7.2 million buyers. Our existing buyer segment also grew 124% year over year. Repeat purchase rate was 45% in Q2, up 520 basis points sequentially. Non-mask buyers had a disproportionate impact on frequency compared to mask buyers, as GMS for non-mask items was up 93% year over year in the second quarter, as Josh mentioned. Our internal data shows that getting new buyers to their fourth purchase is generally an inflection point for repeat purchases. In the second quarter, 9.6% of new and reactivated buyers made four or more purchases across two or more categories. This metric nearly doubled compared to last year and is really encouraging and a strong indication that we have a high probability of retaining these buyers. Currently, our newer cohorts are performing better than our older cohorts, but this is an unusual time with fewer options for buyers. And with so much uncertainty about current and future macro conditions, we're not asserting that these newer cohorts will continue to outperform. However, we do feel confident that these cohorts will be at least as good as any cohort we've ever acquired. In fact, if you look at slide 30, you can see that our historical cohort trends have been extraordinarily reliable and predictable, driving a very steady recurring annuity of GMS in our base business that has gradually improved with product and marketing wins. You can see a clear inflection point starting in April of this year, reflecting the significant growth in new and reactivated buyers and increasing frequency. Our work going forward is very focused on engaging and retaining these new cohorts. We have seen some interesting GMS dynamics as geographies impacted by COVID began to reopen. This slide shows two examples. First, in France, we experienced a decrease in the repeat purchase rate as reopenings commenced. But metrics in a state like Texas that reopened for a short period remained strong, though a bit choppy. Not surprisingly, mask trends have generally held up or even accelerated in some locations as economies reopen. So it's important to keep in mind that macro conditions are very volatile and hard to predict. A moment on Reverb, which also had a great Q2, with strong and stable performance throughout the quarter, featuring high growth in the U.S. and internationally as well. In addition to its traditional appeal to musicians and music aficionados, Reverb became an important online channel for many sellers and has expanded its reach as a place for new gear and novice buyers. Reverb has built significant value in the marketplace over the past year, but like Etsy, is in the early innings of realizing its true potential. Effective this week, Reverb has increased its seller transaction fee from 3.5% to 5%. and will utilize the incremental revenue to invest in marketing, customer engagement, and seller tools and services. We believe the changes to Reverb's pricing model and incremental investments will unlock significant growth opportunities and serve as a foundation to build on for the future. As of 6-30, we had over a billion dollars of cash, cash equivalents, and short-term investments in addition to $200 million revolver that's currently undrawn. We have a capital light business model with minimal CapEx and marginal working capital needs, and we believe we can continue to convert a very high percentage of our adjusted EBITDA into free cash flow. Finally, let me discuss our outlook for Q3. This year has been anything but predictable, so we caution you to remember the potential headwinds we called out in the past and that appear in our slide presentation on factors impacting the business. We currently estimate GMS for Q3 in the range of $2.2 billion to $2.5 billion, which is up 80% to 110% compared to Q3 of last year. Revenue of $366 million to $426 million, up 85% to 115% versus last year. And adjusted EBITDA of $111 million to $127 million, with a margin in the range of 28% to 32%. Our margin guidance reflects our strong conviction that Etsy has significant opportunities for further growth and that investments in technology, marketing, product, and people will yield both near and long-term benefit. We have started ramping our investments this quarter, but they'll take some time to fully impact the P&L. Our Q3 margin guidance is modestly higher than we want it to be if we were able to flip a switch and have all resources onboarded at once. We expect Q4 and 2021 margin guidance will reflect more of the impact of the increased pace of hiring. In addition, here are a few insights to help you with your models. Our GMS guidance for Q3 implies a deceleration in top line growth, mainly due to lapping the reverb acquisition on August 15th, which added approximately 20 percentage points to growth in the second quarter. We still expect Reverb to achieve break-even adjusted EBITDA margin ending 2020 as their incremental transaction fee revenue is mostly offset by stepped-up investments. We'll also be lapping the introduction of Etsy's free shipping initiative, which resulted in higher GMS as sellers incorporated a portion of the cost of shipping into the item price. At the midpoint of our Q3 guidance, Revenue will increase 100%, and we expect Etsy's consolidated take rate for the second half of the year to be approximately 16.9%. As we execute our strategy, invest in our seller success, and make investments to drive growth, we believe we can capture more of our addressable market opportunity. And before I close, a quick shout-out to Etsy's amazingly talented and dedicated team who are working hard to deliver this growth. I'll now turn the call over to Deb so we can take your questions.

Great. Thanks, Rachel. Hi, everyone. So we're now going live. We have plenty of questions in the queue, so I'm not going to give it any time to take any more. If you do want to put a question in, we'll try to get some as well, but we really have plenty already. So the first one I'm going to turn to today is from Ed Ruma from KeyBank. So Ed wants to know if we can talk about the mask business intra-quarter and exiting the quarter. Do we see a pickup as COVID impacted southern states and has demand softened as masks have become more widely available?

I'm happy to start with that. Yeah, I mean, I guess what I would say about masks is that it continues to be very volatile. The primary observation we have is that when government agencies like the CDC in the United States or similar agencies in international markets recommend mask usage, we do see a material increase in mask usage, a spike in mask purchases around that time. But it does tend to fluctuate state to state, county to county, country to country. to the point that it's pretty volatile and, frankly, quite hard to predict. So we've tried very hard this quarter and even last quarter to break out mask sales because we know that you might want to model those differently as you think forward. It's just really hard to have a crystal ball around what's going to happen with it in the future.

Thanks. Great. Thanks, Josh. Next question comes from Rick Patel at Needham. Can you talk about what your sellers are saying about off-site ads and what gives you confidence that they see the value in paying the fee in order to see higher conversion? Do you expect to be more aggressive with this going forward in light of your momentum?

I'm happy to start, and then maybe, Rachel, if you want to pile on. You know, we're really pleased with the response from Offsite Ads. As Rachel said, we have about a 2% opt-out rate right now. And what that indicates to us is that sellers are really seeing the value in the program. And, frankly, we think they should because we think it's a really valuable program for them. The return on ad spend is terrific. You know, if you look at 12% or 15% of revenue being spent on performance marketing, that benchmarks really well to what a seller would normally have to spend if they were marketing their own website. But in addition to that, we take the risk. So if a seller were normally marketing their own website, they would typically pay per click. and be on the hook as to whether or not that sale converted. So as that program has really rolled out and sellers have had a chance to experience it, I think they are seeing firsthand that it is, in fact, really good value and sentiment continues to improve. And so we're happy with how the program is going and the value that it's delivering.

And I think the only thing I'd add there is that just remember for your models that we didn't start billing on off-site ads until May. So there was a month of the quarter that didn't include any of the incremental revenue from that. And the other little fact I'd put in there is that we had very well researched and worked with sellers to gauge what their appetite was going to be for this product and how it would be received. And so it didn't roll out without noise. It just rolled out with the level of noise we had expected or slightly better than that. And so the churn and opt-out rates speak for themselves. So 98% in is something that we feel pretty good about.

Great. Thanks, Josh and Rachel. Okay. Okay, next from Jeffries. Okay, Etsy realized 18% operating leverage and had its highest ever quarterly EBITDA margin, despite expanding marketing spend by nearly 150%. Has the high level of scale and efficiencies that were achieved in Q2 increased your outlook for 30% or greater EBITDA margins by 2023? Or what's your view on margin potential over the long term?

You want me to start, Josh, and then you can file on? Go for it. So first of all, we gave guidance for Q3 and didn't even give guidance for Q4. So you can tell we're being cautious about the future is unpredictable and we're definitely not giving 2021 guidance or guidance beyond 2021. And the guidance that we gave for Q3, by the way, is a pretty wide range. We gave a 30-point range on GMS. So we talked about a lot of volatility. When we gave long-term guidance, though, I will say that we gave an average, you know, on average and over time, those were the rates that we would be at. And we also, as Josh just mentioned a couple of questions ago, we took – Several times we've called out how to think about mask sales, which are probably a non-recurring. Now, it may be part of our life for quite some time, but it's probably non-recurring into perpetuity, we hope. And so when you think about long-term, you might want to think about backing those numbers out of your models to look at what our base business will do.

Okay. Next question from Nick Jones at Citi. How has Etsy's free shipping initiative progressed amid COVID? Given the surge demand in GMS, are sellers more aware of the benefit of free shipping, or given the demand, is free shipping less of a factor? I think that one's for you, Josh.

Sure. So we're feeling really good about how free shipping is going, and we're Grateful that we took it head on in 2019 when we did because I think it positioned us much better for this moment that we're in today. When buyers show up on Etsy, they're most of the time finding shipping prices that are aligned with their expectations. And I think that's really helping. Etsy to rise to the moment right now. So we continue to see progress in free shipping, and we highlighted, you know, the highlight of the quarter was really presenting this concept of bundles. So when you're on a seller's shop looking at an item, we show you another item or two you could add to your cart that would tip you over to $35 so that you would get free shipping. And that showed positive progress. So I think that there's continued things we can do in shipping to help meet people's expectations on cost. But candidly, that is not the friction point that it once was because of the good work that we've done. When we look at top concerns or headwinds from buyers, shipping cost no longer is often cited as a top friction point. So we're turning our attention now to what are the next things on the list. And for example, expected delivery date is something that we hear a lot. Is this item going to arrive on time? What happens if it doesn't arrive on time? So we're turning more attention now to setting buyer expectations around when an item will arrive, making sure we have a variety of options for shipping speed, and also showing them if there's a particular date that they need to hit. Here are things that can arrive in time for that date. Also, I think in terms of keeping Etsy human, helping them to see the making process. You know, Etsy may not be the fastest place to ship something, but there's a lot about having the product be made just for them. And so giving them insight into where the product is in the fulfillment process, where it is in the making process, we think can actually build excitement and energy around the product even before it arrives. So you'll see us focusing more in the coming quarters around that post-purchase experience as well.

Great. Thanks, Josh. Okay, next one is from Maria Rips at Canaccord. You highlighted performance for a number of product categories, which is very helpful. Can you talk about product categories in terms of behavior of the customers you are seeing? Is there anything in the behavior pattern of new customers that would indicate whether they will stay with the platform longer term or not?

Yeah, great question. You know, Rachel gave some highlights on that in her prepared remarks. So we're trying to give you as much color as we can. So things like repeat purchase rate are up very significantly year over year from where they were. You know, second quarter of 2019, and we feel great about that. Metrics like what percentage of customers are making four or more purchases from two or more categories, that metric is going very well as well. So we're really encouraged by that. But we also do acknowledge that this is anything but a normal time. And so how this will trend once people have more options again is impossible for anyone to predict with accuracy. And so what I can say is that we're working super hard to make sure that our customers have a fantastic customer experience. and that we're engaging them, learning what we can about them to deliver even more personalized experiences to get them to come back. And that's really our whole focus right now.

And the only thing I'd add there is that some of the metrics we gave on non-mask sales, so looking at really the core business, and Josh gave a lot of information on how categories are performing, but we also said non-mask sales were up over 90%. And GMS per buyer on a trailing 12-month basis was accelerated to almost 6%, where it's been gradually ticking up. We saw a nice little lift in that metric, too, which just reinforces the fact that people are coming back more frequently and sticking with the offering.

Okay, great. Moving on to a question from Lauren Castle from Morgan Stanley. Can you quantify at a high level how much you reinvested either into marketing, technology, and so forth into the business in the second quarter? We covered that on the call. Maybe we can talk about it a little bit more.

I think Rachel, that's you. Sure. I can start with the numbers that we gave on the call. We significantly increased our marketing spend. In fact, Q2, I think, was our highest. It was a high watermark on marketing spend. for the company. And you can do some back of the envelope math that would show that we're getting really healthy ROIs on spend. And it's even healthier when you think about, if you do that back of the envelope math, you'd just be looking at the in-quarter GMS from the in-quarter spend. But for every buyer that we acquire, you get a nice tail on that buyer, more so even when you spend on brand marketing. So you're going to get a long tail after the fact. So we feel pretty confident that we're placing our bets in the right places. We've got on our television spend, this is the first time we broke out the brand marketing dollars. And on the television spend, we triangulate or even, you know, from nine or ten different sources, we will pull data to make sure that we're getting to the right place, the right answer on ROI. So we use our own data. We use the data of our media company we layer on. brand tracker information so we can get sort of testimony from both Etsy buyers and non-Etsy buyers. And then we use panel data from iSpot to make sure that we're getting healthy return. And we feel very, very good about the returns we've been getting on that spend. Looking forward, we're very likely to continue to spend taking advantage of very attractive CPMs in the digital video and television, linear television markets, and very attractive CPCs in the performance marketing. And we'll start to invest more in some of the international markets, particularly the UK and Germany, as well as use both brand creative and DR, or performance-related creative, in tandem with each other. So we're... um, pretty pleased with the performance we've been getting with that marketing spend.

And if I can pile on, um, you know, we are all creatures of habit and shopping is largely habit driven and, uh, There are very few times in one's life when you have an opportunity to reshape their habits. You know, the classic three are when you get married, when you move home and when you have a baby. And otherwise, your habits are pretty cemented and you're not really open to forming new habits. And so what this current moment has created is it's created a moment when everyone's habits are up for grabs. Suddenly, before you go buy anything, you've got to stop and think for yourself, where can I go to get that? And in that pause, Etsy is winning. If you can get someone to pause for 30 seconds and say, where can I go? Etsy is going to come to mind. But, you know, in more normal times, you don't get 30 seconds. You've got maybe a fraction of a second. So the opportunity is if somebody has one second or less and you say, where can you go to buy home decor? Where can you go to buy jewelry? Where can you go to buy a dress? Where can you go to buy a gift for your mother? Where can you go to buy toys for your kids? We want Etsy to be on the tip of people's tongues. And this is a moment to lean into that and to try to rewire those habits because we know that if we are on the tip of their tongues and they come to us, they're going to have a great experience. It's just about that top-of-mind consideration. So as Rachel said, we spent at a higher level than we ever had in the second quarter, and we feel very good about the returns that we got. We're always very focused on looking at returns and, in particular, at the margin. If we spent one more dollar, what would have happened? And so given that we feel quite good about the returns we got in the second quarter, we're going to push harder in the third quarter and see what happens if we go even deeper into some of our marketing spend, both in terms of sort of real-time metrics and the brand metrics and the consideration metrics, because we think that this is a moment that we really want to rise to and try to really lean into.

Okay. Okay. Great. Thanks, guys. Next one's from Jason Healthstein from Oppenheimer. How much of the improvement in checkout conversion or top of the funnel checkout can be traced to product and search changes as a result of the cloud migration? What other product changes can you highlight?

Well, I can speak about a couple. First, I mean, the cloud migration is a great example of Etsy making a long-term investment in It took us several years of work, and of course it cost money, but it also took material time from our engineering team. But had we not, and of course no one could have anticipated what would have happened in April and in the second quarter, but had we not made that investment when traffic doubled on the site basically overnight, if we had been in our own data centers without the ability to add capacity, you know, our site would have slowed to a crawl and this moment would have passed us by. So I think that it's a great example of us making investments both for the near term, but also for the long term in balance that set Etsy up to really achieve its full potential. And we're going to continue to have a very balanced investment portfolio to make sure that we are well set up to achieve our full potential. When you look at conversion rate and conversion rate was up significantly in this quarter, I think part of that is there are fewer places to shop. And so people are arriving with a fairly high degree of intent. But I also think our search engines are just getting better. And I don't know that I need to geek out every quarter with you on algorithms, but I will say that we've launched even more robust machine learning algorithms that are consuming more data that are doing just a better job of serving search results to you. We're doing a better job of organizing those search results in a way so that it feels to you a little bit easier to digest or to buyers easier to digest. And we're doing a better job of streamlining what's the information that needs to be on the page and what information is extraneous or distracting. We're constantly experimenting with that. And frankly, it's just getting better, and that's allowing people to make more confident purchase decisions, which is undoubtedly helping with our conversion rate.

Hey, Josh, this next one is sort of a follow-up on that one a little bit, so I'll just go with this one. It's from Rick Patel at Needham, a follow-up from him. Can you provide more color on your initiatives toward personalization? So save searches and favorites sound like a stepping stone to product discovery and inspiration. How do you see these features evolving, and do you see this as a multiyear journey?

Definitely a multiyear journey, and there's at least two pieces. We've got to know more about you, and we've got to know more about the items. And so in terms of learning more about you, allowing you to leave breadcrumbs, tell us more about yourself, things like what do you favorite? What do you add to what lists? Also tells us a lot. How do you name that list? Is this value-oriented, you know, mid-century modern? Or did you name it, you know, things for my living room? So all of that gives us a lot more data about you. By the way, there's other things that we can start to incorporate that we haven't. Things like size of wallet that might inform, you know, what kind of average purchase price we'd want to be showing, what part of the country you live in, which might also inform taste. Those kinds of things which maybe sound pretty basic, we have not historically incorporated into our search engines. So historically and up until, you know, very, very recent times, everyone in America searching for a certain keyword would get the same search results. And so there's obviously an opportunity to do much, much better than that. And you're seeing us now ask buyers for breadcrumbs, ask them to tell us a little bit about themselves, their taste, their interest, as well as our ability to intuit things about them that are going to allow us to be more personalized. The other piece is how much do we actually understand about the item itself? And we've talked in the past a little bit about knowledge base. But what we mean by that is that we have been extremely reliant on the actual words that a seller inputs when they describe an item. And that is naturally very, very limited, both in terms of what we understand about the item and what other items it might be related to. So our ability to say, based on looking at an item and based on other items that are related to it, ah, this is a gemstone ring and it's for people whose birth month is April and other things that relate to the birth month of April are the following. Those kinds of things, there is a huge roadmap where we are only at the very beginning of unpacking and I think can make the Etsy experience much better. Another thing that I'll add is in order to navigate Etsy really well, You have historically needed to be quite articulate. You've needed to know what keywords you should input into our search engine to describe your taste or what you're looking for. That implies a pretty high degree of intent that you know what you're looking for and quite a lot of savvy to come up with words like boho that many of us wouldn't even know what that means. So the ability to use images is and say, I'm not sure I can put into words, but it looks like this. That kind of image-related search, or let me show you some inspirations of other people who seem like you, and does this motivate you? Those kinds of ways to prompt, allow people to browse, allow them to... to find inspiration from other people without needing to come up with words themselves, we are again at the first inning of that. In fact, I think we're just stepping up to the plate at the top of the first on that. And I think there's so much we can do that's going to make Etsy an even better place to shop coming through that.

Okay. Thanks, Josh. Next one's from Laura Champagne at Loop. Can we get more color around the potential long-term impact of off-site ads to margins and more granularity about the impact they had in the second quarter?

I'll grab that one. So first of all, the second quarter, as a reminder, you're looking at two-thirds of the quarter from the incremental revenue we generated from off-site ads. On the other hand, we continue to spend. So we're out there spending our marketing dollars. You'll see the expense in the marketing line. and then that's offset by incremental revenue. And so some of the accounting that you might see happening is that we formally had a Google Shopping product in revenue with – a complete offset to revenue and our cost of revenue line. So it was revenue with zero margin. That's gone away now. We now have revenue at a margin, but the expense is hitting marketing, not our gross margin line. We would expect, you know, we've seen great performance from this product. We've seen very low churn. As a reminder, so every time there's a successful ad that we – a successful PLA that we place on one of the off-site channels that we use, a seller will be charged either 12% or 15% of that transaction fee if that sale is successful on their site. So if we buy that PLA and it's not successful or we buy that PLA and it's successful on somebody else's listing – there's no transaction fee that gets transferred over. So there's nice performance. It's not a 100% passive of cost, though.

Okay, great. Thanks, Rachel. Next one's from Rick Patel at Needham. Can you talk about Etsy's performance in the markets where store reopenings are further along? Have consumers in those markets remained loyal to digital platforms, and particularly to Etsy? How do you reinforce your success to make sure you retain these customers?

Yeah, I can take it. So we gave a couple of examples, both in France and Texas. So in France, we saw there was an impact as that market reopened. There has been, I'd say, a soft impact to Etsy's performance in that market, as opposed to a state like Texas that reopened, but it's been pretty stable, volatile, but the overall trend line has been stable. There's a slide in our presentation deck that shows that dynamic. I think we're going to see states reopening and closing, reopening and closing, and we don't know a lot about what's happening with return to work scenarios and return to school scenarios, which actually might drive more demand for things that Etsy sells in the nature of personal care or personal protective gear. Even with masks, even though there's now more competition with masks, that might be something that sticks with us for a very long time. People might need to wear masks for a very long time. We're starting to see things like accessories. So a hair scrunchie that matches the mask. I might have made this joke on the last quarter call, but I've started to see trikinis, which is a mask plus a bikini that all match each other. You start to see face shields and other products that all have to do with the current environment that we're in. So The reopenings and closings by themselves don't necessarily predict what will happen to performance on the site. And then going back again to the point we made about there's a core business there completely unrelated to mass sales that just the line between online and offline has virtually disappeared. People realize that Etsy is a place over 90%.

It has been extraordinarily difficult to look and find one-to-one relationships of estate reopens. And, you know, you see that more starkly in as one example. There is a decel, and that is appropriate. You know, although it's very difficult to find a light switch effect, a sudden change. In fact, we do see some deceleration. When they close back down again, we see some acceleration. And so our guidance implies some level of... We think that that's appropriate and to the best... We think is most likely to happen. The other thing that I would point out is... stimulus, which has been very meaningful. And we have some indicators to suggest that it is making some difference. And so if those checks were to stop or be reduced, you know, we also think that that could have an impact. So all those are things.

Okay, great. We're just about out of time. So I'm going to squeeze in one more from the Golaronian from Wedbush. With the influx of new buyers coming to Etsy, are there one new and reactivated buyers back to the regular Etsy shoppers? And are there pockets of users within these cohorts that you think are more attractive going forward?

Well, as I said, I think we're really everyone equally up until now, and we're now gaining the tools to be able to start to differentiate and personalize. And again, we value every buyer and we value every seller, but that doesn't mean that they want to see the same things from us. And in fact, given the vastness of the Etsy marketplace, they certainly don't want to see the same things. So the more we can learn about the buyers, the more we can match them with the sellers and the And we are just starting things like saved searches, favoriting. These are very powerful, but they're just the beginning of the kind of things that we can do. to start to understand what a buyer likes. And by the way, once we know that, if a buyer has favorited something in particular, if we see them searching for something on Google or we find them on Facebook, our opportunity to be more specific in terms of what we market to them, have a better sense of what we would bid to be in front of them again and to re-engage them. What's that second purchase worth? What's that sixth purchase worth? We're starting to get much more specific about thinking about the incremental value of getting someone to that next step in the life stage and what's the next likely purchase that's likely to get them there. So I'm really encouraged by the roadmap that we have ahead of us to be able to do an ever better job on that. Mostly, I think, because I think we're almost out of time, I am incredibly excited by what this quarter says about the potential of Etsy. When buyers give us a chance, we have an unbelievable ability to meet their needs across almost everything in life that they want to buy. And when they try us, they find we've got something great for sale that's similar to what they have, you know, could have found someplace else, except that it's made just for them. And they bought it from the person who made it in a way that feels really human. And so we're seeing buyers be delighted by that. And so I think that that speaks volumes to the potential that we have in the years and decades to come.

Great, Josh. That's a perfect way to end. Thank you all for listening. Thanks, Josh and Rachel. And we will talk to you all soon. We appreciate your time and interest in Etsy. Everyone have a good night. Thank you.