Etsy, Inc.

hi everyone and welcome to etsy's third quarter 2022 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 blazer chief financial officer and jessica schmidt senior 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 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 Jessica 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, key drivers thereof and underlining assumptions, the global macroeconomic uncertainty and volatility, including the impacts general market, political, economic, and business conditions may have on our business strategy or operating results, uncertainty regarding overall levels of consumer spending and e-commerce generally, uncertainty The impact and duration of reopening headwinds and stabilization of COVID-19-driven economic trends, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic 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 in our Form 10-Q, filed with the SEC on July 28, 2022, 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 the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. We're pleased to once again be reporting strong results. Etsy's consolidated third quarter 2022 GMS was $3 billion. Revenue grew to $594 million, and our adjusted EBITDA margin was again very strong. Etsy Marketplace GMS was $2.6 billion this past quarter, compared with about a billion dollars in the same quarter three years ago. And when adjusting for rather formidable currency headwinds, GMS for our core marketplace was up a bit on a year-over-year basis. We believe this performance is the direct result of the actions we've taken to put our larger size and scale to work. Investing in our sellers and aiming to drive long-term growth in our active buyer base with strategies designed to fuel awareness with new audiences, retention, reactivation, and frequency. And these investments have really paid off. Not only is the Etsy marketplace over two times bigger than we were three years ago, but overall, we've held most of our gains. This speaks volumes to the work done by teams across Etsy, particularly within the context of a fully reopened world and ongoing macro challenges. In my opinion, this is a great setup for future growth. Another reason that we believe our business has held up so well in this post-pandemic environment is because in a world of mass commodities supplied by companies obsessed with speed and scale, Etsy is the antidote. Etsy offers something different, and we've continued to invest to bring even more joy to the very human experiences of selling and buying on Etsy. During the pandemic, tens of millions of buyers tried Etsy for the first time or for the first time in a long time. And our customer research indicates that most buyers were delighted with the experience. I've spoken with so many buyers who described how it was better than they expected or than they remembered. Easier to find great products, easier to buy them, and with a more trustworthy and reliable post-purchase experience. And of course, they found the human touch from our sellers to be so differentiated and special. So while millions came to us during the pandemic because they had limited choices, it's clear to me that they're coming back again and again now because they want to. We're just getting started advancing our right to win, our playbook for ensuring that Etsy is the first stop when you want to shop your tastes and values. By simultaneously succeeding in all four of its elements, we differentiate our value proposition in a highly competitive environment. As we explained on prior calls, this year we've organized our investments around making Etsy feel more made for you, more efficient and inspirational, making Etsy more reliable, and continuing to support our sellers' growth by offering them more agency and scalability. Some of you have asked if we're running out of ideas to fuel future growth. In fact, the opposite is true. Even as the team has scaled significantly, we're seeing return metrics like incremental GMS produced per squad holding steady at very high levels, while our backlog of great ideas significantly exceeds our capacity. One of the needle-moving innovations I'm most excited about is the journey we're on to leverage personalization to better tailor Etsy to the tastes and needs of each buyer. Etsy buyers struggle with our tyranny of choice. For example, user feedback I saw recently from an Etsy shopper who complained about his search for lamps. 400,000 results? Hmm, no thanks. I'm going to take a hard pass on that. That's why it's so important that we narrow search results and get you to the good stuff fast. Especially challenging since each person has their own idea of what the good stuff is. We need world-class search technology married with world-class personalization. Your search and discovery journeys, on-site experiences, and emails, push notifications, app engagement, all need to be relevant to you and the mission you're on. Whether to find something for yourself or for a loved one, to find just the right thing that truly reflects your style and tastes, or to just hang back and be inspired, which of course is also a very personal experience. In this way, we can make Etsy feel made for you. And because it's so challenging, our investments here are a key source of our competitive differentiation. Every quarter, we'll expect to make progress on this journey, and I'm especially proud of the progress we've made in the past few months. In our effort to get you to the good stuff fast, we began to incorporate signals into our search engine correlated with quality, such as seller reviews, on-time shipping performance, customer responsiveness, and price. In this way, we don't simply prioritize items that match your search query, but rather items that are the most likely to result in a delightful purchase experience. I'm excited that this quarter we added videos to search results. Similar to the Add to Cart button in search we mentioned last quarter, we're now able to bring highly differentiated information to buyers directly on the search result page without needing to click through to the listing, creating a very social shopping feel on Etsy that we believe can be inherently more personalized. We also had some early wins incorporating buyer tastes and interests to create more interpretable and personalized recommendations. For example, if we believe you like mid-century modern style and you do a search for lamps, we'd be more likely to show you lamps that fit the mid-century modern aesthetic. We're making great progress expanding search capabilities in non-US markets, launching in-session personalized ranking to better rank order results, introducing dynamic information retrieval, which helps us to choose more relevant listings for you, and adding neural models that helped us to understand what you're looking for, even if you don't know how to describe it. And speaking of making it easier for buyers who may have trouble finding the right words to describe an item, just a few days ago, we launched a new capability for iOS buyers to take or upload a picture of an item and search on Etsy for items that are visually similar. Cool technology advances like this support the notion that you can find virtually anything on Etsy. And more often than not, that item will be different and more special than what you might find elsewhere. I'd encourage you to check it out around your own homes. It's a powerful way to see the breadth, depth, and versatility of merchandise on Etsy. Our personalization journey is not just in product development. Our marketing teams are also doing great work here, contributing to the great buyer retention and reactivation we've had this year. We're finding so many ways to bring buyers back to Etsy by reinforcing what our brand stands for in bold and creative ways and offering ever more relevant updates, triggers, and pathways to keep you coming back. For example, this year we've created a personalization engine that models and predicts the next best action a buyer should take on Etsy. and then sends personalized content specifically to them, bringing to life a timely and relevant message. This might be a reminder to visit a shop you favorited whose listing is now on sale, or go back to your cart to complete a purchase, or suggesting you favor a listing you recently viewed so you can get alerted if it's about to sell out or go on sale. In addition to our focus on improving buyer experiences, 2022 has also been a year of tremendous investment in our sellers. We're always listening and trying our best to respond with care. In fact, every month we hear from hundreds of thousands of sellers through research groups, surveys, forums, and social channels, support lines, and community events. It's been really encouraging for us to see that our seller sentiment metrics continue to trend favorably. We strive to understand our sellers' passions, their craft, and the scale of their business better than any other platform. We provide affordable access to our global marketplace, scalable tools, support and services for shop management, and growing customer relationships. And we elevate their unique items in a global marketing campaign that they could not create alone. A major area of focus is to give our sellers agency, the ability to understand what can drive their success, enabling them to act on that understanding and be rewarded for it in ways that ultimately grow their sales. One great example of how we do this is our Star Seller Program, which provides sellers with a dashboard highlighting the metrics buyers care about, such as being responsive, shipping on time, and getting great reviews. It then rewards, with badging and increased prominence, those sellers that best deliver in these key areas. The number of sellers in the program has increased over 150% year-over-year, and they represent a growing percentage of our GMS. Our data indicates that those sellers who have the badge earn about 18% more GMS than their similarly situated non-star seller counterparts. Even more importantly, we continue to see the Star Seller program positively impact responsiveness and shipping practices across the marketplace, resulting in an elevated experience for Etsy buyers. We're also continuing to give sellers insights to help them understand the macroeconomic pressures and think about creating pricing strategies for their listings, including adding systems for tracking their expenses and income, considering discounting in their pricing strategies, and participation in sales events on Etsy. Being the platform sellers love to sell on also means having their back when things affect their business that are out of their control. For example, when Hurricane Ian made landfall last month, we saw devastating impacts across Florida, where we have a meaningful concentration of sellers. We reached out to impacted sellers with guidance to help them manage their shops in the wake of the hurricane, and among other things, offered bill deferments and the extension of Star Seller status to ease their burden. As you know, we're on a multi-year journey to deepen buyer loyalty and trust, a journey we believe will bring even more buyers to Etsy and get them coming back more frequently. The Etsy Purchase Protection Program was launched August 1st as a set of policies built to ensure our customers, both sellers and buyers, have a positive experience on Etsy. While it's early days, we're very pleased with how the launch has gone, helping to make shopping and selling on Etsy far clearer, easier, and more reliable. Since launch, average resolution times for order issues escalated to Etsy have been cut in half, while customer satisfaction scores related to how we handle these cases have meaningfully improved. We've had conversion rate wins from adding purchase protection messaging on listing pages and in cart. And our customer support team is seeing positive trends across issues management and ticket volume. The program is off to a great start, well in time for the holiday season. Another key element of trust is returns. During Q3, we announced significant improvements, moving from having sellers set a single policy for their entire shop to allowing them to set return policies at the individual listing level. This is important as sellers often sell a range of items. For example, some best sellers where returns are accepted and others personalized or customized where returns are not. These return policies have been developed as highly customizable parameters that can meet a wide array of sellers requirements. And by quarter end, approximately 70% of global Etsy listings had a listing level return policy, offering buyers a great deal more clarity in time for the holiday season. All of this work contributes to a KPI we're tracking for easy resolution rate. How all of our initiatives, such as delivery transparency, purchase protection, and return policies, work together to help us resolve buyer problems more quickly and easily, to instill a brand promise that you can trust and rely on. And I'm pleased to report this KPI has been steadily climbing all year. Moving now to our Super Bowl season, the holiday shopping period. We recently completed a survey to gain insights for how consumers in our top three core markets were thinking about the holiday season. Our data shows that while holiday shoppers and even more so Etsy buyers will be looking for sales and discounts with an eye on affordability, finding meaningful, high-quality gifts is actually most important to them. So we'll be leaning into our message of extraordinary, handmade, affordable this holiday season. Reminding buyers that for gifting moments, big and small, Etsy has it.

Mom, I forgot you said that. Baby, where you are.