Etsy, Inc.

Hi, everyone, and welcome to Etsy's first quarter 2023 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 Jessica Schmidt, Senior 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 Jessica will help me try to get to as many as we can. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent form 10-K, and which will be updated in future periodic reports that 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 measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted 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. We're pleased to be reporting another quarter of healthy performance to start the year. Etsy's consolidated GMS was $3.1 billion. Revenue grew nearly 11% to $641 million, and our adjusted EBITDA margin was again strong at 26.6%. Etsy Marketplace GMS was $2.7 billion this past quarter, down about 3% on a currency-neutral basis, as we've once again maintained the vast majority of our pandemic gains in the face of stiff macroeconomic headwinds. As Rachel will review, some of the volatility and headwinds the Etsy Marketplace experienced in February eased in March, enabling our consolidated GMS to come in above the midpoint of guidance. The Etsy marketplace is starting to see some green shoots in our buyer metrics as we move past pandemic period comparisons, including the first year-over-year increase in active buyers in five quarters. In the last few years, we've all faced continued uncertainty, which frankly is feeling like the new normal. But despite the ups and downs, Etsy has thrived. I believe this has everything to do with our agility and resilience, both in our business model and the way we run our company. We stand apart because we offer something different, something we believe is evergreen and enduring. Summing up our core Etsy Marketplace plans for 2023, we'll work hard to knock down barriers that have historically made Etsy your once in a while rather than your every day. These barriers can be summarized in three main areas. First, Buyers too often think of us only for very specific needs or at the end of their shopping journey when they can't find the item somewhere else. Second, it simply takes too much time and effort to find the best things among our over 100 million items. And third, buyers worry about the post-purchase experience. Given our breadth and depth of merchandise, we're confident that we should be more relevant more often to many more millions of buyers around the world. And if there's anyone who doubts this point, I challenge you to review your recent purchases and search on Etsy to see whether you might have found something similar yet more special and possibly better value if you purchased it from a creative entrepreneur on Etsy. I bet you'll be surprised how often the answer to that question is yes. As we lessen these barriers to purchasing more frequently, we believe we can earn the right to gain a far greater share of our buyer's wallet and to reach our aspiration to become the starting point for many more of their e-commerce journeys. This year, our product roadmap is focused on welcoming new buyers to the joy of Etsy, deepening buyer curiosity and engagement, instilling trust when transacting with us, and being the platform sellers love to sell on, where they can most effectively and efficiently grow. We're doubling down on initiatives from our core female buyers, building awareness among male buyers, and driving the two-sided marketplace flywheel in more of our seven core markets. I'm excited to tell you more about some of our plans today. Improvements to search technology are obviously central to this roadmap, and you'll see us invest here in a big way. Many of you ask what inning is Etsy in, in making search better. For the past six years, I've consistently answered very early innings. We've been at the cutting edge of search technology for the past several years, and while we use large language models today, we couldn't be more excited about the potential of newer large language models and generative AI to further accelerate the transformation of Etsy's user experience. Even with all our enhancements, Etsy Search today is still keyword-driven and text-based, and essentially the result is a grid with many thousands of listings. We've gotten better at reading the tea leaves, but it's still a repetitive cycle of query, result, reformulation. In the future, we expect Search on Etsy to utilize more natural language and multimodal approaches. Rather than manipulating keywords, our search engines will enable us to ask the right question at the right time to show the buyer a curated set of results that can be so much better than it is today. We're investigating additional search engine technologies to identify attributes of an item, multi-label learning models for instant search, graph neural networks, and so much more, which will be used in combination with our other search engine technologies. It's our belief that Etsy will benefit from generative AI and other advances in search technology as much or perhaps even more so than others. Why? Think about the way you shop. You don't walk into a store and yell blue, shirt, cotton the way you search on Etsy today. In a store, you walk in, explain to a salesperson that you're going to a cocktail party at a chic place in Brooklyn and are looking for a shirt to fit the vibe. What do you recommend? and you certainly don't expect the salesperson to show you 90,000 options. They'll show you the best handful of items that match the vibe. What if we can bring the human aspect of retail boutiques to e-commerce? What if buyers could tell us what they want in real time and adjust their search results that way? What if they could show us images during the conversation? And particularly intriguing for Etsy, what if buyers could better visualize products that might be similar to, but not exactly like the ones initially displayed in response to a search, such as, I like that planter, but do you have it in the shape of a duck and not a cat? With over 100 million items, chances are whatever you're imagining is already for sale on Etsy. We'll help you find it more easily. While we're in the early days of thinking through how these advances might impact Etsy, you can imagine how conversational search can help bring the human aspect even further into our marketplace, or how visualization can enable more seamless product discovery. Summing it up, we're excited. Combining natural human language with progress on search is pretty on brand for Etsy. Tying back into welcoming new buyers to the joy of Etsy and deepening buyer curiosity and engagement for those coming back to us. For every buyer, we should be able to show you the very best of Etsy for you. we have the opportunity to be far more curated and organized, to reduce the clutter in order to be the place you come to more often for your head queries and not just your tail queries. To that end, we have two very exciting cross-functional initiatives in 2023 that aim to unlock the best of Etsy. The first we're calling Curation at Scale. You may be familiar with our editor's picks features. Items we select for editor's picks have traditionally fueled content for on- and off-site merchandising and marketing strategies. These features, as well as the Etsy pick badges we use throughout the site, are fueled by a dynamic library of a couple of hundred thousand listings curated by humans, Etsy merchandise experts. Etsy Pick Badged Items show meaningfully higher conversion rates than non-badged items. Why? Because our merch team knows how to select the very best inventory, items with true craftsmanship, those that are well photographed to display key features, and are from sellers who adhere to our policies and provide excellent customer service. Our experts also know how to incorporate market trends, localization, and diversity of merchandise into the experiences we're creating. So our search experience and merchandising teams are working together to feed the best of Etsy human curation into our ML and AL data sets in a highly scalable way, with a goal to train our algorithms to better detect the quality of items as perceived by humans, such that we showcase the best of Etsy in every search. Over time, we believe this and other work streams will help make search more personalized for each type of buyer on Etsy, further identify what quality means for you, enable us to make better recommendations, help buyers move more easily from inspiration to purchase, and enhance the brand perception of Etsy. We'll also share insights with sellers on what being the best of Etsy looks like for their type of item, so over time we can help lift our entire seller community. The second area we're working on to unlock the best of Etsy is related to creating shopping experiences that make Etsy feel more organized. To set the stage, it's worth taking a look at our brand awareness data. While Etsy's aided awareness is now quite high, particularly in the US, our largest market, When we ask consumers the open-ended question, name the top places to shop for gifts, only about 11% will name Etsy, and only about 3% name us for home furnishings or for style, in spite of these being some of our most popular purchase occasions. This lack of top of mind awareness represents a tremendous opportunity for us. We believe we have both the merchandise and a differentiated shopping experience to warrant significantly greater buyer consideration. So this year, our product teams will create new pathways or wayfinding to give buyers easy ways to understand our seller's inventory by surfacing category-specific information and removing friction in the purchase experience in order to surface high-quality items and provide inspiration. For example, a complete the look recommendation model is showing early promise to help home and living buyers shop more effectively. And in gifting, we're testing new ways to narrow broad gifting missions, such as Gift for Mom, to filter by a hobby or other interest, or in jewelry, one of the most common gifts on Etsy, to help a buyer more easily find a specific type of jewelry. We'll also leverage our marketing channels and campaigns to associate Etsy with specific purchase occasions, starting with home and living, style, and gifting. Here are a few of our new TV spots which seek to raise awareness that Etsy has it for those purchase occasions.

Got a feeling I can't escape it. Feeling good, but yet for great cause.