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.