Etsy, Inc.

Hi, everyone, and welcome to Etsy's first quarter 2024 earnings conference call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Josh Silverman, CEO, and Rachel Glazer, CFO. Once we are finished with the presentation, we will take questions from our publishing sell-side analysts on video. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business, and our operating results as noted in the slide deck posted on our website for your reference. Our actual results may differ materially. 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 and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or 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. Etsy's consolidated results, while within our guidance range, were not where we wanted them to be. GMS was just shy of $3 billion, down 3.7% from last year. Revenue grew a bit, up 0.8% to $646 million, and we delivered $168 million in adjusted EBITDA, a very healthy adjusted EBITDA margin of approximately 26%. Etsy Marketplace GMS was down 5.3% year-over-year, a bit of a disappointment, as March GMS trends did not improve as we had anticipated. That said, I'm encouraged that the Etsy Marketplace's record high level of 92 million active buyers held up very well in another challenging quarter for our type of goods, signaling to us that while buyers shopped a bit less with us than they did in the prior year period, we have some comfort that these trends are cyclical rather than structural. To that point, while US unemployment is low and inflation data is mixed, consumer sentiment remains depressed, which some speculate can be attributed to the very high cost of money. Consumer wallets remain squeezed, so there's often little left after paying for food, gas, rent, and childcare. And there's significant data indicating that the largest e-commerce platforms have primarily been able to grow by selling everyday essentials at very low prices. Macro economic conditions also continue to be quite challenging in our other top markets, the UK and Germany. These headwinds are real, do not appear to be abating and are impacting our sales. Stiff headwinds mean that our product and marketing initiatives have to work even harder to drive growth. In the first quarter, we shipped meaningful improvements to the customer experience, positively impacting GMS, just not enough to offset the headwinds to our baseline business performance. I'm particularly pleased that our leaner and more nimble Etsy Marketplace product development organization was off to the races. We had double digit growth in the number of experiments per product engineer that utilized machine learning, as well as in our annualized gross GMS from experiments. And the total number of experiments run per engineer increased 20%. Some of this progress can be directly tied to work we told you about last year to democratize ML. These metrics give me confidence that the bold moves to improve customer experience can build over time and play a key role to get Etsy growing again. Our marketing team also kicked into high gear, insourcing Etsy paid search efforts and scaling mid-funnel channels, expanding our product feed testing across PLA and paid social to improve the quality of inventory we're showing users, and developing engaging and creative full funnel activations across channels. Our key focus for 2024 is to continue to build consideration for Etsy, to help buyers think of us more often by making it easier to find the best stuff, driving association that there are great deals on Etsy, and making shopping on Etsy more convenient. We believe that changing buyer perceptions is eminently achievable, making us more of a go-to shopping destination. And we've made excellent progress kicking off bold initiatives to do just that. Thanks to the great work our product team did on the initial launch of Gift Mode, combined with creative and engaging marketing campaigns to raise awareness of Etsy as a key gifting destination, we're off to a good start evolving Etsy from being one of the places you can go to find a gift, toward being the indispensable partner for all of your gifting missions. Gift Mode is by far the most unique and varied subset of inventory we've ever curated and shown on Etsy, organized around a set of gift ideas and not just items, in order to help you feel like you're shopping for a person and not a thing. We're pleased to report that Etsy's total site-wide gifting GMS in the first quarter grew in the low single digits year-over-year, significantly outpacing our site-wide performance and data we're tracking for select U.S. online gifting-focused peers who all saw year-over-year declines. We're seeing quarter-over-quarter increases in U.S. consumer perceptions that Etsy is making it easy to find great gifts, a key gift mode value prop. And importantly, our research tells you that gift mode expands by our understanding of the breadth of our offering. Very helpful, as of course, we're about so much more than just gifts. We utilized full final marketing strategies to tell the world there was something new at Etsy, such as securing the most visible advertising position in football's big game, making an estimated 100 million plus impressions. Gift Mode's launch generated over four times as many news articles as any of our prior consumer PR campaigns, And we had an over 200% increase in conversation volume around Etsy and gifting in our social channels compared to this time last year. As we've said before, this was a kickoff, not the mic drop. And we're in the early days of driving brand awareness to make Etsy more top of mind for gifts. We've got a robust roadmap for gift mode to improve the experience and get more buyers into the funnel, from recently optimized gift teasers to additional gifty profiles, reminders, video and audio message capabilities, and new occasion pages, and much more. Turning to our quality-focused initiatives, which we believe represent a tremendous unlock to drive buyer consideration, we stand for keeping commerce human. and believe that doing this in a way that no one else can is our most important competitive advantage. We're focused on creating cleaner shopping aisles for buyers. All too often, when you visit Etsy, your search is cluttered, showing you too many items that feel very similar, increasing cognitive load while failing to highlight the incredible diversity that is a towering strength for Etsy. In addition, you might not be clear as to why each of these items belong on Etsy. For example, which are handmade by the seller themselves, which are designed by the seller but produced in close collaboration with a production partner, and or which are personalized and customized by the seller. While there's demand on Etsy for each of these categories of items, it depends a great deal on the buyer's shopping mission. With the tremendous growth in sellers and inventory we've experienced over the last few years, this challenge has gotten all the more real and complex. The great news about this challenge is that large language models and Gen AI techniques provide so much opportunity for Etsy to better understand both the shopping mission you're on, as well as our inventory, and show you the best stuff in ways we couldn't have imagined just a few years ago. This year, we're going on the offense in an even bigger way to make sure Etsy lives up to our promise from an inventory and quality perspective along these four key focus areas. First, we're doing more than ever to suppress and remove listings that violate our policies, and advances in ML have been particularly powerful as enablers here. In the first quarter, we removed about 115% more listings for violating our handmade policy than in the prior year. And you've heard us talk about the violative view rate. Buyer views of listings that violate our handmade policy are now just a few percentage points of total listing views. Our improved enforcement capabilities have resulted in the cumulative removal of millions of listings and tens of thousands of active sellers. While there's a strong replacement factor to fill in for any removal of seller listings on our marketplace, we estimate that the heightened level of takedowns we've initiated over the last six to nine months has represented about a 50 basis point headwind to our annualized GMS. We see this as a very important investment in our future with significant progress made but still more to do to keep making Etsy different and special and even more Etsy. Second, we need to elevate listings that represent the best of Etsy. Over the past several years, we've dramatically improved our search relevance, ensuring that buyers can more easily find what they're looking for. We believe there's a huge opportunity to build on this work by factoring attributes such as the quality of the listing and photography, shipping price and reliability, and customer reviews into our organic search algorithms. All of this will help buyers find something that's not only relevant, but will also lead to a purchase experience they're likely to love. We also want to empower sellers through transparency and education so they know exactly what actions they can take to improve their visibility, creating opportunity for more sales on Etsy. And the third and fourth items on this slide, curation and organization, work together to do an even better job showing the newest and best merchandise available from sellers on Etsy, whether through home and landing page experiences, category shopping, initiatives like gift mode, our deals tab, and more. While we've made incredible strides in directed search on Etsy, we have a very significant opportunity to focus more on window shopping, creating engaging buyer experiences to spark your imagination, capture impulse buys, get to know your tastes and preferences better, and expand your understanding of the breadth of products available on Etsy. This is an area where we intend to fight much harder, making Etsy more fun, engaging, inspiring, surprising. We want you to come to Etsy when you have five minutes to spare just to be entertained, so you'll come back to us again and again. And I'm confident that with our sellers' incredible merchandise, our large buyer base, brand strength, and our team's creativity, we can make this happen. It's imperative that we continue to widen the gap between Etsy's offering and that of the competition so that our site always feels inherently different, fresh, special, and even more human. Better organizing our diverse listings into cleaner aisles will declutter our site, enable buyers to find something they love with less friction, and keep them coming back. We believe that supporting small business and shopping unique goods are our strongest levers to get buyers to think of Etsy more often. We're planning to be quite loud with this message, re-establishing our point of differentiation in clear and compelling ways. We're also making great progress in our other key focus areas to drive buyer consideration, highlighting great value and reliability. In keeping with the times, during the first quarter, we promoted special and hot deals from our sellers with discount-related signals continuing to drive significant GMS impact. We also introduced new functionality for sellers, such as a growth page with customer insights they can use to inform actions to grow their business, such as a new earnings calculator to assist sellers in understanding the various inputs that grow into their profitability. In terms of shipping timeliness, I'm pleased to report that our initiative to tighten estimated delivery dates, which we believe are an important effort to improve buyer perceptions of our reliability as well as to grow GMS, are already paying off. Our fulfillment team recently launched a new machine learning model which reduced our estimate of USPS transit times by greater than one day, resulting in a nearly tripling of the percentage of eligible orders for which ETSI is now able to show an estimated delivery date of seven days or less. Driving consideration is all about inflecting the curve to capture more new buyers and to help browsers convert to sales, to engage our existing active buyers, half of whom still only shop on Etsy one time per year, and to retain and reactivate more buyers every year. working to get another bite at the apple with our more than 100 million lapsed buyers. Within this framework sits a very compelling opportunity to further expand usage of our Buy on Etsy app. Since purchasing days per app user are 75% higher than our non-app users, and only 45% of active buyers use our app, We've set some ambitious goals for 2024 to increase user penetration of our app and drive incremental downloads, including strategies to improve how and where we show the app download prompts, increasing the reach and effectiveness of our push messages, and improving the experience for first-time app users. We have massive pools of buyers to fuel these strategies and are excited about the road ahead. Owning our own destiny, particularly as some top search engines have lost a bit of their potency to drive traffic for e-commerce players, is an important priority for us. In closing, while so far 2024 is still proving to be a cyclically challenging period for us, rest assured that we are clear-eyed about what we need to accomplish to set Etsy back on a growth path. We're confident we're working on areas that will positively impact Etsy in the months and years ahead. We're leaning in more than ever to what makes Etsy, Etsy. We are not deterred, and as I've said to some of you, proving doubters wrong is frankly quite energizing for us. Even as I celebrate my seventh anniversary this month, I remain encouraged that we still have so many opportunities to grow. I'll now turn the call over to Rachel.

Thanks, Josh, and thank you everyone for joining our first quarter call. My commentary today will cover consolidated results, key drivers of performance, and Etsy Marketplace standalone results where appropriate. As a reminder, we divested ELO 7 on August 10, 2023, so please take that into consideration when you compare year-over-year consolidated results. Etsy's first quarter 2024 consolidated GMS was $3 billion, down approximately 3.7% year-over-year, with 40 basis points FX benefit. Revenue increased a bit year-over-year to $646 million, and our adjusted EBITDA of $168 million was in line with expectations and roughly similar to last year. Note that ELO 7's divestiture resulted in small headwinds to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. While strong external headwinds pressured Etsy Marketplace's GMS trends throughout the first quarter, solid year-over-year GMS growth at our subsidiaries provided a tailwind to consolidated results. Our $2.6 billion in Etsy Marketplace GMS represented a 5.3% decline on a year-over-year basis. I'll cover this in more detail later. Within our consolidated year-over-year revenue growth of 0.8%, consolidated marketplace revenue was flat, with growth in payments and off-site ads revenue offset by declines in transaction fees given lower GMS this quarter. We had a nominal benefit related to our new seller setup fee experiment launched in late February, part of our efforts to keep Etsy safe and secure. This fee is meant to introduce healthy friction into our process, facilitating enhanced security checks and continued support for new shops. Tests indicated it resulted in an expected decrease in new shop openings and a significant decline in fraud attempts. Based on this successful outcome, we rolled it out in all eligible countries in early April. Consolidated services revenue increased 3%, with our ad platforms being the primary contributor. During the quarter, we continued to enhance Etsy ads, including refinements to our data retrieval engines that improved conversion predictions and the pace of spend for sellers' ad budgets throughout the day. First quarter 2024 consolidated take rate was 21.6%, slightly ahead of guidance, and above the 20.7% reported in the first quarter of last year. Our first quarter consolidated adjusted EBITDA margin was 26%, in line with our guidance, down 60 basis points from last year. We gained leverage year over year on employee costs and variable cost of revenue, offset by higher marketing expense, primarily from our big game advertising. Our subsidiaries represented an approximately 300 basis point headwind to our consolidated adjusted EBITDA margin. We're encouraged that our efforts to effectively manage our cost structure and look for efficiencies are helping us to make important investments while also delivering very healthy profitability through this challenging environment for our discretionary goods. During the first quarter, consolidated product development spend decreased 5% year-over-year to $110 million, primarily as a result of our December Etsy marketplace restructuring, so we are in fact gained leverage on this P&L line, as you can see from this slide. Our first quarter consolidated headcount was approximately 2,400, down 15% on a year-over-year basis. For the Etsy marketplace, headcount was down approximately 9% year-over-year to a bit under 1,800, with revenue per headcount increasing about 2% year-over-year. We continued to make deliberate and judicious decisions related to our hiring, focused on selective skills and the very best talent for our significant opportunity ahead. First quarter consolidated marketing spend increased 12% year-over-year to $192 million, largely driven by a 59% year-over-year increase in our consolidated brand spend, primarily related to our above-the-line big game campaign in support of the Etsy Marketplace's launch of Gift Mode. Our consolidated performance marketing spend increased 2% year-over-year. Performance marketing was a headwind for January as we conducted core channel optimizations, And it then became a tailwind in both February and March as we expanded Etsy Marketplace product feeds testing across PLA and paid social and scaled up push notifications and mid-funnel investments to diversify our marketing portfolio mix. Etsy Marketplace paid GMS was about 20% of our total, similar to our normal trend line. Moving to Etsy Marketplace GMS and buyer metrics, Etsy Marketplace GMS declined 5.3% in the first quarter, with the negative trends we experienced in January and February continuing through March. While we saw positive GMS impact from our product and marketing initiatives in the quarter, and we were really pleased with the performance here, our baseline GMS levels continued to be pressured by macro factors specifically related to consumer discretionary product spending that made it harder than we expected to bend the curve, which was disappointing. More on that in a moment. Further, we saw greater than expected volatility around the timing shift of Easter from April to March. While this was a headwind to March, it has also provided a helpful tailwind for April. which I'll cover in our Q2 guidance. Diving in a bit further on the consumer discretionary headwinds we are seeing, particularly in our categories, these two charts are probably the most informative to help us explain the overall GMS pressure we've been experiencing. On the left, you can see the steady decline in U.S. consumer discretionary spending as a percentage of total personal consumption expenditures, including through the first quarter of 2024, which supports our belief that much of our deceleration in the quarter was in line with the larger trend for discretionary goods. And on the right, you can see that ConsumerEdge's pure play pure sales data for our top six categories in Q1, with low to mid single digit declines in every category except for craft supplies, which had a slightly positive result. These headwinds were stiffer than we had been anticipating when we set guidance for the quarter. Here you can see that Etsy Marketplace GMS was down across the board in our top categories. When we map our performance to the consumer edge data on the prior slide, we believe that we performed similarly, if not better, than peers in four of our six categories, home and living, apparel, paper and party supplies, and toys and games. and we underperformed a bit in jewelry and craft supplies. But overall, we see this as a tale of broad weakness in the types of merchandise we sell. We'd encourage you to remember that this comparison is a bit of apples to oranges, in that Etsy sellers generally have not taken up prices in keeping with inflation, as pure retailers do. Consistent with the macro pressure we experienced in the U.S., Etsy Marketplace GMS, excluding U.S. domestic, declined 1.5% from the prior year, with particular weakness on a year-over-year basis in our top markets of the U.K. and Germany. We did see growth in Switzerland, Austria, and the Netherlands. While our U.S. domestic GMS continues to decline on a year-over-year basis, we are seeing healthier performance in our U.S. import trade route. with high percentage share of imports from sellers in the UK, Canada, and Turkey. It's quite encouraging that Etsy Marketplace active buyers grew 2% on a year-over-year basis, roughly flat to the fourth quarter at about 92 million active buyers. U.S. active buyers have grown a bit now on a year-over-year basis for three consecutive quarters, and we continue to see healthy additions outside the U.S. We reactivated over 6 million lapsed buyers, up 6% year-over-year. And we added nearly 6 million new buyers in the first quarter, down year over year, but still a very healthy proof point in this type of macro climate, well above pre-pandemic levels. Habitual buyers decreased by 3% year over year. We continue to observe a trend where some habitual buyers purchase slightly fewer items or spend slightly less, no longer meeting our habitual buyer definition and moving to the repeat buyer category. We also retained slightly more habitual buyers in the first quarter versus our retention of habituals in the fourth quarter and the prior year period. Lastly, GMS per active buyer was down 3.5% in the quarter. Additional ETSI marketplace metrics and trend charts can be found in the appendix to this presentation, which is posted on our IR website. Our subsidiaries both had encouraging momentum to start the year. Both businesses delivered year-over-year GMS growth, with Reverb continuing to outpace the musical instruments industry and Depop growing faster in the U.S. than their comparable resale players. They are providing good lift to consolidated results, affording exposure to different categories and buyer purchase behavior than our core marketplace. Both Reverb and Depop appeal to value-oriented shoppers with great deals, with Reverb highlighting used and outlet merchandise, establishing itself as a destination for affordable and discounted music gear, and Depop continuing to be a home for discovering affordable fashion, with success helping users to set fair prices and more easily negotiate. As of March 31st, we had $1.1 billion in cash, cash equivalents, and short and long-term investments. During the first quarter, we repurchased a total of $158 million in stock under our $1 billion June 2023 board-authorized repurchase program, of which $566 million remains available as of March 31st. Our capital light business model allowed us to deliver strong free cash flow this quarter of approximately $59 million. We also continue to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12 month basis. Now turning to our outlook. As mentioned earlier, the larger than anticipated headwinds the Etsy marketplace experienced in March due to the shift in Easter and spring break timing had the inverse effect on our consolidated GMS for April, which was down about 2% year over year, pacing ahead of our consolidated Q1 results. While we are certainly encouraged by this performance and we have a lot of conviction about our product and marketing investments, which stack each quarter, We remain cautious given how challenging it has been to predict the outlook for our business. We currently expect the year over year decline in consolidated GMS for the second quarter to be similar to our actual first quarter performance with the downside being a mid single digit decline and the upside being the top end of a low single digit decline. Reverb and Depop are again expected to provide a modest tailwind within the consolidated GMS performance. We anticipate consolidated take rate and adjusted EBITDA margin for the second quarter to be similar to our actual performance for the first quarter. Our subsidiaries are expected to pose about a 300 basis point headwind to adjusted EBITDA margins as their revenue continues to flow through at lower margins. With a range of potential outcomes for the full year, our current view suggests a modest acceleration in year-over-year consolidated GMS in the second half. You know we like to call it like we see it, and it's just really tough for us to call it right now. As you can see on the slide, we are reiterating our prior commentary about full-year take rate, revenue, and adjusted EBITDA margin. Built into the take rate expectation for 2024 are ETSI payments expansion plans, including recent addition of China and the seller setup fee described earlier. As we continue to build exciting initiatives, we will look for opportunities to deliver a fair exchange of value, which enable us to invest in growth. Our team is highly engaged and energized, and we will continue to keep our eye on the prize. Thank you all for your time today. I'll now turn the call over to the operator to take your questions.