Etsy, Inc.

Hi, everyone, and welcome to Etsy's second quarter 2021 earnings conference call. I'm Deb Wasser, VP of Investor Relations in ESG Engagement. And joining me today are Josh Silverman, Chief Executive Officer, Rachel Glazer, Chief Financial Officer, and Gabe Radcliffe, our Director of Investor Relations. Today's prepared remarks have been pre-recorded. 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 display 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 to 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 or its abatement may have on our communities, business, strategy, or operating results, the potential impact of our strategic, marketing, and product initiatives, the potential impact of our acquisition of DPOP and ELO 7 on our market opportunity and on our future consolidated financial results, 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 May 6, 2021, and which will be updated in any future periodic reports we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim 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 investor relations website, along with a replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb. And good evening, everyone. Etsy delivered a strong second quarter. I'm pleased to share highlights with you on our progress and our results. Consolidated GMS was $3 billion, up 10% year-over-year on a currency-neutral basis. In fact, non-masked GMS on an Etsy standalone basis grew 31% year-over-year, which frankly, I find remarkable given the extraordinary comps from last year. And on a two-year basis, this is 153% growth, also excluding face masks. Revenue grew 23%, and our adjusted EBITDA margin was 26%. We feel great about these returns we're seeing as our investments ramp. We also announced the acquisitions of DPOP and ELO7 during the quarter, which I'll talk about in just a few minutes. Our Q221 performance is particularly impressive when put in context of the year-ago period that we're comping. Remembering back to Q2 of 2020, brick and mortar stores were largely shut down with the exception of essential services. And even at those essential stores, lines were long and shelves were often empty. Even e-tailers faced similar challenges with many products out of stock and long shipping delays for the rest. And in the midst of this crisis, Etsy mobilized cottage industry to the rescue. Etsy sellers had so much of what you needed and were ready to ship quickly at a fair price and without significant supply chain challenges. In fact, Etsy was one of the few places where you could shop with confidence and convenience in Q2 of 2020. As a result, we delivered the highest growth rate of any company that we track in our sector. Flash forward to Q2 of 2021, and thankfully, things began to look dramatically different. While the situation is still evolving, people are moving about much more freely and beginning to travel and dine out again. Many brick and mortar stores have reopened, and there are a wide range of retailers ready to ship almost anything to your doorstep without delay. And even in the face of this renewed abundance of choice, again and again, shoppers chose to return to Etsy. In fact, about 90 million of them. And most importantly, they chose to shop with us more frequently. Given the massive pull forward in new buyer acquisition last year, it's no surprise that new buyer growth has decelerated materially in recent months. However, that deceleration has been offset by growth in GMS per active buyer, which as you know, is a big focus area for us. We're encouraged to see that shoppers loved the experience they've had with Etsy over the past year and are coming back for more, even in a world of greatly expanded choice. As Rachel will talk about further, we're extremely pleased with the strength and stability we're seeing in our cohort performance and our conviction to invest in what we believe is Etsy's tremendous long-term opportunity. Turning to our most important focus area and job number one, growing the core Etsy.com marketplace. We continue to make what we believe are very valuable long-term investments aligned with our right to win, driving continued material improvements in the customer experience in order to make Etsy even more special and deepen our competitive advantages. I'll now walk through some of the exciting progress we made in Q2. Starting with search and discovery, in our quest to close the semantic gap and create a platform that better understands our buyers, tastes, and preferences, in Q2, our team created and launched a proprietary capability we call XWALK, a large-scale, real-time graph retrieval engine that dramatically expands the amount of available data used to capture semantic meaning and to improve conversion rate by showing more relevant inventory to buyers. Every click and purchase on Etsy gives us information about the relationship between users, queries, listings, shops, and more. And these events have long powered our ranking and retrieval systems. But due to the sheer volume of information, we could only use a relatively small slice of it. With XWalk, we're now able to use nearly all of our relevant data to better capture semantic meaning across all of our inventory. For example, XWALK has significantly reduced the number of dead ends, which are queries that return zero search results, unlocking over a million incremental searches that are delivering relevant search results. We're only at the very beginning stages of leveraging XWALK, which has many other applications beyond search. For example, making recommendations more relevant, providing better on-site marketing experiences, and improving technologies that keep the marketplace safe. Turning to slide seven in our efforts to amplify the human element of the Etsy marketplace. We've mentioned listing videos in our last few calls, and we're now starting to get real traction as they're incorporated throughout more and more of the Etsy experience on-site and off. In fact, there are now nearly 8 million videos uploaded on Etsy. Listing videos are driving engagement on social, and we're seeing measurable wins from adding videos to the homepage. We're especially encouraged by the results our sellers are seeing from their process videos, which show how our sellers make their items, and especially Etsy-like experience. Many buyers are viewing these videos and watching them to completion. In fact, listing and process videos drove a significant sequential increase in engagement on our social channels, up 700% quarter over quarter. Our third pillar is, of course, about trust. And as we've said, we're laser focused this year on the post-purchase experience, and we're making great progress. This quarter, I'd like to highlight the gains we've made with delivery predictability, setting clear expectations for when items will arrive and ensuring our sellers consistently meet those expectations. In the second quarter of 2020, only 73% of domestic orders on Etsy displayed an expected delivery date. In other words, before you placed an order, almost 30% of the time, we couldn't tell you when you could expect to receive it. Origin zip codes, which tell us from where in the US an item is shipping, have also been an area of focus because they help us to more precisely estimate the time in transit. We've more than doubled origins of code coverage over the past year, which has cut one full day from the expected delivery date, causing a meaningful positive impact to conversion rate. While we aren't in a race to be fastest, it's critical that we have transparent expectations that our sellers can meet reliably. This is a needle mover for us. As we deliver on buyers' expectations, they've tended to come back and make more purchases more frequently. We're targeting to get both of these metrics over 90% in time for the holiday season. Last quarter, we told you that we would be exploring ways to define what good service looks like for Etsy sellers, leading to last week's global launch of our Star Seller program. The program's goal is to recognize and reward our best sellers while motivating all sellers to deliver exceptional customer service. As part of this program, we've defined a set of customer service metrics that we know are critical to buyers, such as on-time shipping, five-star reviews, and responsiveness to buyer convos. And we've set the bar for what good looks like, all while providing a transparent dashboard to show sellers where they stand versus each of these metrics. We believe that this creates a race to the top for sellers who will understand even more what actions they can take in order to further delight customers. Later this year, we'll begin to surface star seller badges throughout the buyer experience. Turning to slide 10, let's talk about our continuing investments designed to increase frequency. As you know, we're laser focused on this area. And in fact, the Etsy marketplace delivered a 22% increase in GMS per active buyer in the quarter. I'm delighted to report that we're seeing encouraging signs of progress across multiple initiatives. highlighting just two. First, we're continuing to see progress with buyer triggers. For example, adding a badge in the upper corner of the app icon showing how many updates are pending drove a meaningful increase in repeat visit rate. And second, we've created faster and easier ways for sellers to invest in deepening relationships with their buyers while driving frequency to Etsy. A great example is seller thank you coupons. For example, get 10% off on your next purchase when you buy again from my shop, which during an experiment saw 170% improvement in uptake. Now, 11% of purchases include a thank you coupon. As many of you know, the Buy on Etsy app has historically been our highest converting experience. In Q2, we began to test more prominent ways to prompt buyers to download the app at key moments in their journey. We focused on organic product improvements and today have invested very few marketing dollars to drive app downloads. we've seen major wins. For example, by prompting app downloads on the post-purchase thank you page, encouraging you to download the app in order to easily track your order status. The results have been compelling. We're now running at about 1.3 million app downloads a month and have garnered 9 million downloads year to date. And Etsy is now the number seven shopping app in the iOS app store, the highest it's ever been. Most importantly, newer cohorts of app users are showing promising engagement signals based on their visits, favoriting, and purchase behavior. In Q2, new app users that made a purchase then went on to favorite and view listings roughly 20% more than new mobile web users that made a purchase during the same timeframe. Turning to brand marketing, TV and digital video continue to be great tools to drive awareness and engagement with the Etsy brand. As we mentioned last quarter, our investments in the UK and Germany are showing encouraging results. Double-clicking on Germany, in addition to our TV and digital video investments, we worked with German personalities to support our Etsy Hotsy or Etsy Has It campaign. We saw five points of improvement in prompted and unprompted awareness, expanded social reach, and generated over 4.5 million impressions in earned media during the campaign flight. Other benefits included an uptick in seller growth and a higher return on our performance marketing channels. We're very pleased with these results, which indicate that we're laying the foundation for growth in this important market. There are so many more product and marketing wins I'd love to tell you about, but I also want to give some time to our other marketplaces. We now have four highly differentiated e-commerce marketplaces in our house of brands, and we couldn't be more excited to have found two more businesses that share our mission to keep commerce human. In addition to common missions, strong leadership teams, and performance-based cultures, each brand is connected at the core with similar growth levers and requirements for success, such as sophisticated search technology, compelling onsite customer experiences, an efficient payment platform, value-added seller services, effective shipping options, strong brand and performance marketing capabilities, and a commitment to investments that protect the marketplace. As you know, we have deep expertise in each of these areas and will be implementing knowledge sharing loops to drive value creation across the brands, all while enabling each to serve its customers in its own distinct way. First, turning to Depop on slide 14, We believe Depop is the best asset in the resale space given its high user engagement metrics. The U.S. secondhand market opportunity is projected to double to $77 billion by 2025. And the resale portion of secondhand is forecasted to grow 11 times faster than retail clothing for the next five years. We're also seeing that young consumers are adopting secondhand fashion faster than any other audience. And Depop is the 10th most visited shopping site among Gen Z consumers in the US. In fact, we think Depop is potentially to Etsy, like Venmo was to PayPal, a new way to shop for the new generation. Let's take a look at a quick 30 second video that captures the excitement of Depop. Thank you. So where do we want to take Depop? Just like we've demonstrated with Etsy and Reverb, we see significant opportunities to make focused improvements to the onsite product experience that we believe can expand conversion rate. We'll also explore value-added services to drive monetization. We'll compare insights on how we've grown Etsy globally with localized experiences and focused investments to help Depop take its marketplace beyond its current core regions in the US and UK. and will work to evaluate the efficiency of their marketing investments, focused on improving LTV, driving buyer and GMS growth, and enabling the business to invest more in similar or better returns compared to their current investments. Now, turning to ELO 7. ELO 7 is known as the Etsy of Brazil, a leader in custom and made-to-order merchandise. We now have a foothold in Latin America, a region with high barriers to entry, where we previously did not have a meaningful customer base. ELO7 is ranked as a top 10 e-commerce site in Brazil, providing us with a strong local brand in the largest Latin American e-commerce region. E-commerce in Latin America is estimated to be less than 10% penetrated and is expected to reach approximately $160 billion by 2025. Brazil alone is forecasted to reach $50 billion in the same time period. Here's a quick glimpse of ELO7 through one of their TV ads. We hope you'll agree that the similarities with Etsy are obvious. Oh, oh, when you're feeling small, I think that you should know.

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