Etsy, Inc.

Hi everyone, and welcome to Etsy's third quarter 2023 earnings conference call. I'm Deb Wasser, VP of Investor Relations, 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. I'll be reading questions from covering sell-side analysts, 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 10Q, 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 afternoon, everyone. Before we begin, the last few weeks of conflict in the Middle East have been devastating for impacted communities and beyond. ETSI has taken actions that can most directly and immediately help our sellers who live in the impacted region, including covering their existing balances as of October 31st, which represents a contribution of about $1 million. And we're providing additional resources to help sellers manage their shops during this incredibly difficult time. Turning to our results, Etsy performed in line with expectations for modest top-line growth and strong profitability continued. Consolidated GMS was $3 billion, up 1.2% compared to last year. Revenue grew 7% to $636 million, and our adjusted EBITDA margin was again very strong at 28.6%. As you all know, there's been significant pressure on consumer discretionary product spending, as high inflation, elevated interest and mortgage rates, splurges on YOLO experiences, and declining savings balances have meant that there's little left over for many consumers after paying for food, gas, rent, and childcare. These issues are magnified for lower-income buyers, and we feel the impact on the Etsy marketplace. We're also experiencing an increasingly competitive retail environment with a very heavy emphasis on deep discounting, and in some cases, competitors investing at potentially unsustainable levels in marketing and promotions. While the headwinds we're facing at this moment in the cycle are undeniable, I'm pleased that once again, performance green shoots for the Etsy marketplace were evident in the third quarter. GMS grew about 1% versus the prior year. and the prior quarter. We hit another new record in active buyers, now at 92 million, with slight growth in U.S. active buyers as well. And buyer additions were up over 6% year over year. On a sequential basis, we reported accelerated international growth and improving trend in GMS per buyer and flat performance in habitual buyers. In this very challenging environment, it's more important than ever that we bring our A-game, competing hard to win our share of consumers' wallets. And we are. We believe that overall, we're at least holding our market share gains and that our product and marketing investments are making a difference for buyers and sellers. We've been laser focused all year on knocking down barriers that stop buyers from shopping or shopping more often on Etsy. We know that buyers turn to Etsy most often for low risk items, but we believe our opportunity is so much larger than that because we know that Etsy can offer high quality merchandise at a great value in a way that is both reliable and convenient. We've been hard at work to break down brand barriers so that buyers will think to shop with us even more often across a wider range of purchase occasions, leading to significantly improved consideration beyond just those low-risk items and ultimately market share gains. Throughout 2023, we've moved boldly and with great urgency to address these areas, making strong progress in order to deliver a significantly better experience we can shout from the rooftops this holiday season. I'll explain each area further. With over 120 million items for sale, we've got millions of beautifully crafted items we believe are perfect for almost any person or occasion. Our opportunity is to organize and curate the experience to help get you to the very best of Etsy quickly and easily. We're moving beyond relevance to the next frontier of search, focused on better identifying the quality of each Etsy listing, utilizing humans and ML technology, so that from a highly relevant result set, we bring the very best of Etsy to the top, personalized to what we understand of your tastes and preferences. For example, from the start of the year, we're tracking to a nine-fold increase in the number of human-curated listings on Etsy, to over 1.5 million listings by year-end. We're also utilizing ML models designed to determine the visual appeal of items and incorporating that information into our search algorithms. Frankly, our timing on this work is important, with more competition than ever offering low-quality, same-as-everyone-else mass-manufactured merchandise. There's also a huge opportunity to evolve the Etsy experience so that we show buyers a more diverse set of options when they search for open-ended head query items, such as back to school. On the left of this slide, you can see an example of how a search for back to school items looks on Etsy. We generally show multiple very similar versions of customized pencils, stickers, lawn signs, and so on, all mixed together. This is suboptimal as it offers buyers only a few main ideas on the first page of search and requires a ton of cognitive load to distinguish between virtually identical items. We've recently launched a variety of experiments with the help of GenAI to evolve these types of head query searches. As we move into 2024, when a buyer searches for broad queries, we expect to be able to show a far more diverse and compelling set of ideas, all beautifully curated. By organizing search results into a number of ideas for you that are truly different and helping to elevate the very best items within each of these ideas, we can take a lot of the hard work out of finding exactly the perfect item. and help build frequency as we highlight the wide range of merchandise available on Etsy. Another critical part of highlighting the good stuff and leading into our competitive differentiation is doing a better job than ever to enforce our Etsy seller house rules. In the race to the bottom of commoditized commerce, it's never been more important that Etsy stands apart, showcasing items that meet our policies and stand for keeping commerce human. Handmade policy takedowns are up over 120% for the third quarter. I'm also pleased to say that in just a few months of work, we've nearly cut in half the percentage of visits where a buyer comes across a violating listing based on our constant sampling of the marketplace. So while buyers don't come to Etsy looking for mass manufactured merchandise, it's critical we do an ever better job elevating the best of Etsy to keep Etsy special in the minds of our buyers and sellers. We're all aware of what an incredibly promotional environment this is. We pivoted our roadmap this year to invest significant resources into highlighting the great value Etsy sellers can offer. Many consumers don't realize how cost-effective it can be to buy directly from the maker, even when buying something produced just for you or in very small lots, because there are not layers of distributors and middlemen taking markups along the way. But our sellers don't have pricing departments giving them insights into things like how best to price each item and how or when to use promotions. So we need to be the ones to provide those insights and be their advocates. We're helping sellers by providing information so that they can set their own appropriate and sustainable prices and offer promotions that make sense. During the quarter, we began initial limited testing of new features such as a pricing optimizer that provides real-time information on market prices for similar items and a cost recovery insight feature for heavy users of sales and offers. We've also improved the way that sellers can put items on sale and provided insights that will help them understand how to use those sales in a way that can drive GMS. We continue to elevate seller-funded sales using a series of evergreen promotional content throughout the quarter, such as our best of home at 40% off sale, five-star gifts under $30, back to school basics under $50, and so on. Seller sales, coupons, and urgency signals drove well over $100 million in incremental GMS during the quarter. We told you on our last call that we would pull out all the stops to help Etsy sellers compete and win. And in September, we ran an Etsy-funded 48-hour promotion in North America and Europe. The sale impacted GMS, had a positive ROI, and created a nice bump in reactivation of lapsed buyers. Buyers loved our Get 5 promotion. In fact, we saw an increase in average order value during the sale period as buyers spent more than the $25 minimum needed to use the coupon. We'll continue to test and optimize new marketing approaches, including Etsy-funded offers, in a disciplined and ROI-focused way. If buyers are unsure whether an item will arrive on time, if they lack confidence in the fit or quality, or if they're unsure if someone will have their back when something goes wrong, it provides a lot of friction, causing shoppers to buy on Etsy less often. The good news is we've made so much progress against these metrics in the recent past As you can see on this slide, which represents our greatest hits in improving reliability and convenience, we've driven a tremendous increase in coverage for estimated delivery dates, better tracking of packages, big improvements in on-time delivery, and transparent return policies and information. But perception is not kept paced with reality, and we need to close that gap. We know that generally, buyers have a great experience on Etsy. So in addition to doing this work, we need to disrupt buyer perceptions even further so that they can see Etsy as a convenient and trusted place to shop. And we'll do that in a big way this holiday season, as I'll explain in a moment. Only 12% of buyers will name Etsy Top of Mind as the place to shop for gifts, and association levels are much lower for other major categories like home and living and style. We believe our efforts to improve quality, value, and reliability will significantly improve consideration for Etsy starting in these important categories and purchase occasions. Our Etsy Has It campaign is an important component given direct messaging and call to action alongside a significant amount of on-site product work such as our new wedding, baby, and gift registries, new home and living category pages, and more. Building this type of brand association to help buyers and potential buyers understand the when and why of Etsy is a long-term play and I'm confident that a powerful combination of better on-site experiences and off-site amplification can build Etsy's consideration over time. It's game time for holiday, and thanks to all the work I've just described, I think our offering is the most compelling we've ever had, and we're ready to win. Our message this holiday season is that we'll make you a gifting hero, helping you find the exact right quality gift at a great value for the special people in your life. all while supporting independent makers. No one has a better opportunity to own gifting than Etsy. And what better time than the holiday season? So here are some of our new initiatives. First, we've launched a new and improved curated gift finder, now available in our app and featured more prominently on mobile web. Second, our new deals tab replaces our updates tab in our app, making it easier to find personalized deals and amazing gifts at an affordable price. And third, we'll continue to selectively test Etsy funded offers with an eye to optimizing our return on investment. And last, but certainly not least, we couldn't be more excited about our holiday plans to market in the U.S. that Etsy gifts will be delivered on time or your money back. Our estimated delivery date performance and Etsy purchase protection program enable us to stand behind purchases and work to disrupt buyer perceptions. Here is one of our new TV campaigns, all of which aim to disrupt buyer perceptions of Etsy this holiday season.

Twins, twins, twins, twins. They look the same. They're not the same. Different gifts. Help me. One likes clothes. One likes art. Wait a sec. Etsy. Painting set. Jumpsuit. I know my own children, sort of. Great gifts made by real people.