Etsy, Inc.

Hi, everyone, and welcome to Etsy's third quarter 2021 earnings conference call. I'm Deb Wasser, VP of Investor Relations and 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 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 this 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 of them 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 uncertain impact the ongoing COVID-19 pandemic or its eventual abatement may have on our communities, business, strategy, or operating results, the potential impact of our strategic marketing and product initiatives, our ability to integrate and benefit from our acquisitions of Depop and ELO7, and their impact 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 10Q filed with the SEC on August 5th, 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 IR website, along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. Etsy delivered a very strong third quarter. Last year, Etsy dramatically outperformed e-commerce industry benchmarks. Now, in 2021, we're lapping that performance with flying colors, reinforcing the significant market share gains we've made. These great Q3 results further reflect that we're moving the needle on frequency and that many of the millions of buyers who found or re-found Etsy during the pandemic are sticking with us and performing even better than historical cohorts. Our consolidated GMS was $3.1 billion, up 17% on a year-over-year currency-neutral basis, with the core Etsy marketplace being the main driver of GMS growth for the consolidated business and responsible for the outperformance compared to our guidance. Excluding masks, GMS for the Etsy standalone marketplace grew 24% year-over-year and 138% on a two-year basis. This continued strength in our core on a two-year basis is one of the main takeaways that we want to highlight today. Revenue grew 18%, and our adjusted EBITDA margin was 33%, with the sustained momentum in Etsy.com's top-line growth contributing material flow-through to the bottom line. Etsy has truly risen to the moment, due in large part to the focused investments we've made over the past four years to execute our long-term strategy. As you know, this strategy hinges on building a sustainable competitive advantage around four elements that we believe differentiate us from our competition, what we call our right to win. In Q3, we again see significant evidence that the strategy is working, and we believe we're still just getting started. We're investing aggressively to strengthen each element of this strategy, all to continue elevating the customer experience. And we've driven significant gains in visits, purchase frequency, and average order value. In fact, GMS per active buyer for our Etsy.com marketplace was up 20% in the quarter, sustaining momentum over the past year. We've been speaking to you for a while about our focus on frequency, or better said, how we're working to position Etsy as a starting place for commerce. We believe that there are several factors that contribute to habit-forming behavior in e-commerce and move the needle on frequency. First, inspirations. having a fun and engaging experience that keeps you coming back for more. Second, efficiency, helping a buyer to quickly and easily get in, buy, and get out when they already know what they want. And third, reliability, ensuring a stress-free and dependable purchase. We've invested in frequency driving initiatives in each of these three areas, and these investments are made even more impactful by our increased traffic and much larger scale. We now have more squads and more product teams focused on frequency than ever before. We know that changing habits takes time and it's early days for this work, but we're seeing very encouraging signs of progress. Here are a few examples of our frequency initiatives. We're investing in multiple areas focused on driving buyer inspiration, engaging buyers early in their lifecycle, and bringing them back to Etsy. For example, our new personalized onboarding, which you can see in the image on the left, allows the buyer to engage with Etsy to discover new trends and styles while giving us insights into their tastes and preferences. This new customer journey has driven increases in repeat visits and purchase frequency. We've also had great success with our updates tab, which prompts buyer actions such as favoriting and in turn helps us to improve the relevancy of their Etsy news feed. And we're leveraging machine learning to personalize the updates feed for each user. These initiatives collectively have enabled us to have a deeper understanding of our buyers, which we then use to segment and target them with relevant content on and off of Etsy. Many of our visits are from buyers who are on a discovery journey, and there's so much more we can do to make this experience more fun and inspiring. In the past, Etsy recommendations have often felt like a rearview mirror based on things you've recently bought or searched for. Today, we're investing aggressively in machine learning tools, attempting to understand your tastes and preferences in order to anticipate and inspire your next purchase. We want to make Etsy feel truly made for you. For those buyers on a specific shopping mission, we're focused on driving efficiency, a fast and easy shopping experience. During the third quarter, we launched real-time personalization, which leverages in-session data about a buyer's tastes and preferences to help them to find what they're looking for more quickly and easily, with the goal of ultimately making shopping on Etsy feel like having a personal shopper. For example, shown on slide six, a user first searches for leather accessories and later in the session enters a search for wallets. We now incorporate the prior in-session search and prioritize results for leather wallets, knowing of the buyer's previously stated preference for leather. This can be especially relevant in time saving when you're shopping for multiple items that have something in common, a shared theme, style, or preference. Turning to slide seven, we entered 2021 with a strong focus on making Etsy a more reliable place to shop. While our competitors invest capital building out logistics systems designed to ship one to many, we believe that our massive peer-to-peer fulfillment ecosystem is a core part of building Etsy's sustainable competitive advantage. We'll likely never promise to deliver every item on Etsy in two days or less. It's not what we're about. But we do think it's very important that we set clear expectations for when an item will arrive and reliably live up to those expectations. And we're doing a far better job of that. For example, we talked about estimated delivery dates on our last call, and we continue to make progress. Looking at the left side of the slide, you can see that as recently as January of this year, we couldn't tell our buyers when an item would arrive on nearly 25% of U.S. listings. And now, in time for the holiday season, nearly 100% of U.S. listings show an estimated delivery date. This year, we've also markedly improved the accuracy of estimated delivery dates we provide to buyers while prompting sellers to ship on time, cutting in half the number of shipments that arrive past their estimated delivery date is shown on the right. In addition to our fulfillment goals, our Star Seller program launched in July looks to motivate sellers to deliver exceptional customer service, thereby creating a race to the top, which elevates the shopping experience and enhances reliability for buyers. In just 90 days, we've already seen the appeal of earning a Star Seller badge alter seller behavior. delivering meaningful improvements to several key customer service metrics critical to buyers. For example, the percentage of buyer messages that got a response within 24 hours increased by 600 basis points in the two months post-launch of our Star Seller initiative. And there's real tangible value for our star sellers. The September month-over-month repeat purchase rate, or RPR, for star sellers was 25% higher than the RPR for non-star sellers. We also recently launched a preview version of our new Sell on Etsy app, an area we haven't invested in for a while, and it's trending positively in seller engagements. We mentioned our buy on Etsy app on the last earnings call, and it's great to see this work continuing to pay dividends. We're driving buyers to the app at a higher rate than ever before. We believe there's no better place to experience our improved customer journeys than the app, which is why we've been aggressively promoting it to buyers. We've seen a 36% increase in app downloads year to date, and it's surpassed mobile web GMS share, now making the app the most used mobile channel for purchases on Etsy. Once buyers transition to the app, their engagement and frequency are higher relative to our other platforms. Ultimately, as app usage increases, we can begin to inspire cross-category browsing earlier in the buyer journey, which has historically led to increased frequency and retention. Moving on from frequency, as you know, we often talk about our impact initiatives being part and parcel of our business strategy. One I'd like to mention this quarter is tied to our efforts to lower our carbon footprint. In September, we launched an exciting sustainable packaging initiative. Etsy now offers planet-friendly packaging made from responsibly sourced and 100% recycled materials to enable US sellers, the majority of whom believe it's important to run an environmentally friendly business, to join us in reducing the environmental impact from e-commerce. This initiative is not just about helping us to achieve our goal to be net zero by 2030. We know that consumers care about the impact of their purchases. In fact, 90% of Etsy's U.S. buyers have told us that they care about sustainability. We have a lot of conviction that an initiative like this can drive business growth, so we'll be highlighting it in the buyer experience with a focus on driving conversion and loyalty to Etsy. we're still in the early days of our journey to help customers understand the positive impact they can make when they shop on Etsy. Turning to our marketing initiatives, we've invested in creative new approaches to broaden the global reach of Etsy's brand. One great example of our team's innovation is the exciting launch of the Etsy House, our first ever interactive augmented reality experience that allows buyers to shop a digital home filled with curated Etsy items. We see this as a beautiful, powerful way to showcase the breadth and depth of high quality items on Etsy. It's one more example of how we're evolving the perception of our brand so that buyers think of us not just for the cushion, but also for the couch. And while I don't have time to mention them all, other examples of novel approaches we're taking to attract new audiences and drive top-of-mind awareness, frequency, and loyalty include testing bus and train ads in London as the city comes back to life, male-focused brand campaigns in the U.S., I think placements on ESPN and the History Channel, not just Hallmark and HGTV, and marketing partnerships with leading consumer brands. We've kicked off an exciting holiday season on Etsy with our product development initiatives, improved user experience, and multi-channel full funnel marketing campaigns we believe will, once again, make Etsy a meaningfully better place to shop for the holidays. We've been encouraging buyers to start shopping earlier than last year and are leaning into gift guides and personalized shopping missions, and we're creating localized experiences in our key geographies outside the U.S., One initiative we're really excited about is our new Gift Finder feature. It's a fun and interactive way for us to help you find surprising and delightful gifts tailored exactly to the interests and tastes of the recipient. A uniquely Etsy way to help you get to the good stuff from among our almost 100 million items. We'll continue to reinforce what is different and special about Etsy during the holiday season through many channels, including TV and digital video, with our new Give More Than a Gift campaign. Here's a 30-second spot that just started running in the U.S. this week. And you'll also see us on air in the U.K. and Germany this holiday season.

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