Etsy, Inc.

Hi, everyone, and welcome to Etsy's third quarter 2020 earnings conference call. I'm Deb Wasser, VP of Investor Relations, and joining me today are Josh Silverman, CEO, Rachel Glazer, 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 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 and key drivers thereof, the impact of COVID-19 on our communities, business, and strategy, the potential benefits of our marketing and product initiatives, and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in today's earnings release and are 10-Q filed with the SEC on August 6, 2020, and subsequent reports that we file with the SEC. Any forward-looking statements 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 GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings 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 and welcome, everyone. The third quarter was another quarter of really sustained momentum for Etsy, which speaks to, we think, the strength and the dynamism of the business model. And as much as anything, I'm incredibly proud of how the team showed up yet again this quarter. In fact, we took a recent employee engagement survey, which showed that employee engagement at Etsy is incredibly strong. At a time when so many forces are trying to divide us, Etsy employees are coming together to support each other and really focus on the mission, serving our buyers and our sellers. And being proud to work for Etsy is something that we don't take for granted at a time when there's so much division in our society. So we are very focused in this quarter on leveraging all of the strength and momentum we've had in the business to lay the foundation for continued strength far into the future. Rachel's going to take you through the numbers in more detail, but it was a very strong quarter across the board. And the headline is that the macro headwinds that we expected to see in the third quarter really didn't materialize. As a result, GMS and revenue were ahead of our own expectations, which meant that EBITDA margins were also significantly ahead of our expectations. But let's unpack what's driving that growth, turning to slide five. We are very, very focused on the activity of our existing cohorts and our new cohorts. And I'm sure you all are as well. So let's unpack those together. First, new and reactivated buyers grew at an astonishing rate. In fact, we added 15 million new and reactivated buyers over the 12 months ending in the third quarter. In addition to that, active buyers grew by 56% year over year to 69 million active buyers for the 12 months ending in the third quarter. And that's out of a total base of 138 million unique buyers who've ever bought on Etsy. So one way to interpret that is that half of everyone who's ever bought on Etsy has bought in the last 12 months. That's both great in terms of Etsy's ability to reawaken many lapsed buyers, but it also means there's still a ton of opportunity to go and reawaken existing lapsed buyers. And part of the reason why we think that we're seeing so much success there is is, as we've said before, people who've bought on Etsy have generally had a very good experience. And so when we reach out to them and say, why have you not bought in the last 12 months? The most common answer we get is, well, what do you mean? I love Etsy. I thought I'd bought more often. And we tell them, no, you actually haven't been in the last 12 months. And they said, oh, gosh, I just didn't think of it. So now in this moment, a lot more people are thinking of it, and we're seeing that show up in terms of the reactivation of buyers as well as the addition of a very substantial number of new buyers. Let's take a look in slide six at how those cohorts are performing. First, about 75% of the purchase activity in the third quarter was from people who joined Etsy prior to 2020. These are cohorts from 2019 and prior. And we're seeing a real step function increase in purchase activity from all of our prior cohorts. Taking the 2018 cohort as one example, what we show you here is for people who made their first purchase in 2018. They made about 60% more purchases or 60% more GMS they purchased on Etsy in the third quarter of 2020 versus the third quarter of 2019. And as you'll see on slide six, about 50% of that was purchases of non-masks and about 10% was the purchase of masks. Turning to new buyers on slide seven, you'll see that new buyers first accounted for about 25% of the GMS in the third quarter of 2020. And similar to existing cohorts, new buyers look to be more active and purchase more than new buyers did a year ago. But it's a bit of a tale of two cities. We've got new buyers whose first purchase was not a face mask. And those new buyers are more active than new buyers were a year ago, even putting aside a second or third purchase that was a face mask. For new buyers whose first purchase was a face mask, As you'd often expect, their second and third purchases were more often face masks. So what we take from that is that new buyers whose first purchase was not a face mask likely will have a lifetime value as good or more good than previous cohorts. We're watching new buyers whose first purchase was a face mask because it may be an indication that their lifetime value is going to be lower than what our traditional cohorts have been. So why are we seeing such strength? We believe it's because Etsy stands for something different. At a time when there are more and more places coming online to sell you exactly the same thing, Etsy is a place you can go to actually connect with other people and find things that express your sense of identity. It's a place you can go to support small businesses in your community. It's a place that you can go to bring people together. And the way the marketplace works, it's incredibly dynamic and agile, serving you the kinds of products that are relevant right now. So we think that the fundamental strengths of the Etsy business model have been very important in allowing Etsy and Etsy sellers to rise to this occasion. And how have they been rising to the occasion? Well, if we look at the second quarter of 2020, you'll see that overall e-commerce grew at an astonishing 45% year over year. That number would have been unthinkable a year ago. But Etsy grew more than twice as fast. And again in the third quarter, you'll see Etsy's growth was sustained. So we expect that Etsy gained significant market share yet again versus the overall e-commerce benchmark. Turning to slide 10, I know there's always a lot of interest in what specific products and what specific categories are we seeing growth. And you'll see that the story in the third quarter is substantially similar to the story of the second quarter of 2020. The same top six categories growing at very, very rapid rates. And I would point out that these are each, as standalone categories, massive, massive industries. And Etsy is already at scale and growing at extremely rapid rates. In fact, we believe Etsy is growing as fast or faster than the market leaders in many of these categories. And to peel back a little bit, the categories may be similar, but the items that are selling are always dynamic and changing. So for example, in back to school, this year looks different than last year. It's a lot of custom desks and home learning supplies. In jewelry and accessories, we're seeing a lot of vote necklaces. So the categories may be similar, but the items themselves are constantly responding to the times. And of course, masks continued to be a very substantial product in the third quarter. $264 million in GMS and 24 million masks sold. But as masks become more and more ubiquitous, available at every retail outlet everywhere in the United States and across Europe, we are seeing sales decline sequentially. And that sequential decline is continuing into October. However, if masks were their own category, they would still be a top six category in the third quarter. Moving on from our results, we have more conviction than ever that Etsy's mission to keep commerce human is incredibly powerful and that our strategy built around our right to win is compelling and durable. And so we are investing aggressively to deepen our strength in each of these four areas that collectively make up Etsy's right to win. Starting with search and discovery, we have been investing for the past many years to make search dramatically better and to close what we call the semantic gap. And you'll see here that just over the past 12 months, the data we consume in each search query has doubled. It's just one way of giving you a sense for the sophistication of the algorithms that we are using. And when we talk about closing the semantic gap, what we mean is translating what someone types to what they actually need. For example, understanding that the word dress and gown are substantially the same word, and we can use gown results for someone's dress search query, or that the word emerald ring means rings that contain the stone emerald. Etsy has made significant improvements in closing that semantic gap, but there's still a long way to go with a great roadmap that we think can continue to deliver sustained improvements to make the buyer experience better. We hit a major milestone in the third quarter, launching our first ever personalized search. You've been hearing me say for some time that two people who type in the same keyword will get the same results. And now in the third quarter, that is no longer true. We look at your clicks, your favorites, your add to carts, and your purchases, and we use those to inform the search results for so that two buyers will now get different results for the same search. This was an exciting first launch and it's showing promising results, not just in terms of conversion rate, but also in terms of repeat purchase rate. So we're very encouraged, but it's just the beginning and we will now have years of work to refine and improve these models. Plus, we're incredibly excited to bring personalized search to Etsy ads as well. We've been laser focused on driving frequency, launching both product and marketing initiatives to get people to come back more often and buy more often. just one example is a new buyer offer that we automated and launched in the third quarter giving a five dollar off on your next purchase to a select set of new buyers that both look like they have high lifetime value and a lower propensity to come back in the first 30 days and it's an example of something that we're able to launch now that we couldn't have done a year ago because of the investments we've made in our crm systems and in machine learning And it's just one of many examples of the kind of thing we're launching and driving to try to drive frequency. Turning to the all-important holiday season, this holiday season is going to feel different for so many people, but we think that Etsy can play an even larger role in making it feel special and helping you connect to your loved ones even at a time when you need to be more distant. We're doing things a little bit different, pulling forward the season because we know many people are looking to shop earlier, and we're building our campaign around the theme, Gift Like You Mean It. We continue to be really excited about the performance of our television advertising campaigns. In the United States, they're becoming a mature channel where we're seeing really strong ROI and we're seeing strong improvements in terms of top of the funnel brand awareness. So we're doing something new, investing even deeper in the fourth quarter, launching a more brand-focused television campaign at the same time as we have a more direct response campaign running concurrently. Starting with the brand campaign, that's a campaign that has a narrative that's designed to create an emotional connection, speaking to the differentiation of Etsy, and using storytelling as a mechanism. I'm going to pause now so you can look at one example of those ads.

We'll see the kids soon.