Etsy, Inc.

Hi, everyone, and welcome to Etsy's third 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, our CEO, and Rachel Glazer, our CFO. Once we have finished with the presentation, we'll 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 to 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-Q, 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 in our 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. We're pleased to have delivered solid consolidated revenue and profit despite a challenging GMS quarter for the Etsy marketplace, with overall performance roughly in line with our guidance. Consolidated GMS was $2.9 billion, down about 4.1% year over year. Revenue grew 4.1% to $662 million, benefiting from continued take rate expansion. And we posted a very healthy adjusted EBITDA margin of approximately 28%. While Etsy Marketplace GMS was down about 6% year over year, it's encouraging to see our active buyer levels remain solid at approximately 91 million. We maintained strong revenue flow-through and profitability despite continued macro headwinds and multiple mindshare events this quarter. I'm excited to tell you more about how we're investing with focus and discipline in the things that we believe truly differentiate Etsy in order to get us growing as quickly and strongly as possible. Earlier this year, we outlined our commitment to driving consideration among our customers, centered around highlighting Etsy's quality, value, and reliability. We said we'd elevate gifting, prioritize quality and search, foster loyalty, and improve shipping. Fast forward to today, we've delivered on those goals. We've created a more intuitive gifting experience, enhanced our search algorithms to showcase higher quality and more diverse listings, launched the Etsy Insider Beta Loyalty Program to encourage repeat purchases, and reduced estimated global shipping times and charges on millions of items. Achievements like these are part of a bigger story. At a time when it feels like everyone else in retail is focused on slashing prices and offering steep discounts, we're approaching things differently. We know that our strength lies not in a race to the bottom. It's simply not who we are. It's not who our sellers are. Instead, we're choosing a different direction, choosing to double down on the things that make Etsy markedly different and markedly better as the best path to restarting our growth engine. And so far this year, I believe we've done more to holistically improve the customer experience than in any other year in my tenure. A lot of this work has been foundational in nature. Throughout the year, you've heard us talk about our journey to evolve from a historical focus on in-period conversion and incremental GMS banking to infuse engagement and better customer experiences as core metrics of success for our team. We've shifted the ways we hire, manage, and goal our people how we manage our portfolio of product development investments, how we operate and measure success across teams, and how we deploy technology on the Etsy platform. We've moved with urgency, taking the steps that we believe are necessary to build a springboard for future growth, even as there's been some opportunity cost related to these initiatives. Two areas where you'll start to see this shift are within our app and search. For the Etsy app, while it's early days, we've started making real progress. Getting a buyer to download the app increases their lifetime spend on Etsy by at least 40%, yet less than half of our GMS is transacted on the app. So there's tons of untapped potential. We've tasked our teams with revamping the app homepage to dedicate far more screen real estate to inspiring new shopping missions, but to do so without hurting conversion. That alone was a big undertaking, and just in time for the holidays, millions of users now see a dramatically improved experience with a 33% reduction in what we call rear-view mirror impressions, when we show you items influenced by your past shopping missions. Instead, we're using that real estate to offer fresh, exciting shopping inspiration, perfect for those who arrive without a clear idea of exactly what they're looking for. We also stepped up efforts to secure incremental app downloads by increasing the rate at which we intervened in mobile web visits, prompting more shoppers to download the app mid-journey. We're willing to briefly interrupt a shopper's current mission to promote better overall experiences. Initial experiments showed these bolder prompts led to incremental lifts in app downloads, which we believe is very promising. For example, in one experiment, we drove 3 million incremental app downloads from placing a prompt on the signed-out listing page on mobile web. We're also testing and learning with paid ads to drive downloads while we optimize our presence and placement in the App Store. The other major area where we're building engagement more intentionally is within search. We've historically built our algorithms to help buyers find the specific thing that they're looking for. Now, we're working to also show the wide range of items that we have to offer. To do that, we're taking a three-pronged approach focused on diversity, quality, and agency. Let's touch on each one. Starting with diversity. As you know, our teams are leveraging GenAI to increase variety in search results, creating a more inspiring and engaging and less repetitive shopping experience. As we shared last quarter, we drastically reduced search results that have identical images. To even further diversify results, we've been casting a wider net to also incorporate items with similar images, not just those that feature exact matches. We're now seeing an approximately 40% reduction in search results where at least a quarter of the listings look alike. And we're working to improve from here. We believe the impact of this work will be to better expose our buyers to the incredible breadth of offerings on Etsy, in turn leading to increased consideration and visit frequency over time. onto quality. This year, we retrained our search algorithms, adding indicators of high caliber listings, like having a shipping charge that aligns with buyer expectations, providing return policy, and the shop's level of customer service. We want to not just match you with an item you're likely to buy, but with an overall purchase experience you're likely to love. we're encouraged that our experimentation in these areas appears to be leading to an increase in the number of four- and five-star buyer reviews and decreases in both the number of reviews that are three stars or lower, as well as the rate at which buyers request refunds. These are great signs that we're doing an even better job delivering consistently delightful buying experiences on Etsy, which we believe ought to lead to more purchase frequency and even better word of mouth. A key ingredient to bring these quality efforts to life is giving sellers more agency over what affects their search ranking. So in late August, we launched the Etsy search visibility page within the seller dashboard. This new page features tailored actions sellers can take to improve their position in search, such as listing image quality and quantity, return policies, message response times, and shipping charges for domestic listings. As sellers make these changes, they'll have the ability to track improvements in real time. In one example of this work in action, since launch, sellers have lowered shipping charges on approximately 2.5 million items to better meet buyer expectations. In fact, we've already seen excellent overall uptake in sellers taking an action that we've suggested, beating our internal adoption target by approximately 60%. We're positioning ourselves to evolve from being the place you come after you know exactly what you want and haven't been able to find it elsewhere, to also being the place you come early on for inspiration and to discover what you want in the first place. Connected to our focus on highlighting what makes Etsy different and special, in July, we introduced creativity standards to help fortify our position as the marketplace for original items from real people. We pulled these creativity standards through to the shopping experience, adding descriptors for each item to underscore the role the seller played in making or designing that item, and to show buyers why what they're seeing belongs on Etsy. We spent much of the third quarter refining label accuracy and are continuing to explore how to highlight them to buyers in areas like search, discovery, and new marketing experiences. This effort, involving dozens of product development and marketing staff, exemplifies this year's shift towards long-term customer experience improvements, prioritizing fundamental changes that will benefit Etsy in the long run rather than focusing primarily on short-term metrics like conversion rate and GMS. These updates were accompanied by what I consider to be our most profoundly human marketing campaign to date, featuring real Etsy sellers in the throes of creating their bespoke items. The campaign resonated with buyers. Our research shows that supporting small was among the top recalled messages, along with themes of originally made and handcrafted goods. These findings align with our belief that there's no one better positioned to tell the world what creativity means than Etsy and our sellers. Now let's talk loyalty. In mid-September, we began officially inviting a highly targeted group of occasional buyers to join Etsy Insider through email, push, and on-site prompts, with the app driving the majority of sign-ups across platforms so far. We're just beginning to glean insights on how to best approach buyers and pique their interest. We plan to evolve our beta offering along the way as we formulate a rewards program that is uniquely Etsy and encourages buyers to think of us first and shop with us more often. Our gifting strategy is the gift that keeps on giving, with a number of product improvements this quarter. We've introduced new ways to browse and discover unique gifts, while tripling the number of gift ideas available to buyers. We've also increased buyer adoption of existing gifting features. For instance, approximately 1.1 million gift lists have been created, and 1.3 million incremental visits came from people who received a gift teaser and then went directly to the site. We've also just started rolling out physical Etsy gift cards at more than 20,000 stores in the U.S., including major pharmacies and retailers. And starting today, U.S. consumers can also purchase and ship physical cards directly from Etsy.com, another way to help people give the perfect gift as we head into the holidays. Gift cards represent less than 1% of our GMS, compared to industry estimates of a few percent of GMS for peer specialty retailers, so we see significant opportunity here. And naturally, gifting takes center stage in our holiday marketing this season, with an amazing lineup of creative content on-site and off. Turning to our house of brands, Depop has been a stellar top-line performer, with GMS growth accelerating on a sequential basis. In July, the marketplace removed U.S. selling fees and introduced a small buyer marketplace fee following their UK model. This change has made Depop more appealing to sellers, increasing listings, and giving buyers a wider selection. Since launch, U.S. listing growth has accelerated by 26 percentage points. And in August, Depop rolled out its biggest ever U.S. marketing campaign, amplifying the no-selling fees proposition to more than 70 million people, building on its position of strength as a market share gainer in U.S. resale. On Reverb, used music gear sales growth in the U.S. continues to outpace new gear sales, and outlet and exclusive music gear is seeing double-digit year-over-year growth. In August, Reverb partnered with Fender, one of the world's leading guitar manufacturers, to launch Fender Certified Pre-Owned on Reverb, helping musicians access affordable, pre-owned music gear directly from a trusted brand. Reverb continued to focus on operational efficiencies to drive profitability and value-added services for its community. In closing, I'm extremely proud of the progress we've made so far this year to make Etsy even more differentiated. Our right to win is more important than ever as we work to restart our long-term growth flywheel by shifting our energy towards cohesive, engaging experiences. While the rest of the world is obsessed with discounts and promotions, we're obsessed with making our customer experience even better, with making Etsy even more Etsy. In doing so, we make good on our promise to keep commerce human. While the tide is out right now for discretionary products, we're hard at work ensuring our boat is large and strong, ready to sail even further and faster as the tide comes in.

Thanks, Josh, and thank you for joining our call. My commentary today will cover consolidated financial 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 third quarter 2024 consolidated GMS was $2.9 billion, down approximately 4.1% year-over-year, with a 30 basis point FX tailwind. Etsy Marketplace GMS was down 6% year-over-year. Strong DPOP performance contributed a nice benefit to consolidated GMS as they delivered excellent top line growth in the U.S. and also performed well in Australia. Third quarter consolidated revenue increased by 4.1% year over year to $662 million and adjusted EBITDA was $184 million, representing a very healthy 27.7% margin. down 90 basis points year over year and ahead of our guidance. We gained leverage year over year on employee costs and costs of revenue, which was offset by a higher level of consolidated marketing spend this quarter. Note that ELO 7's divestiture resulted in a small headwind to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. Digging into the consolidated revenue growth, Marketplace revenue increased 3.3% year-over-year, primarily driven by payments fee revenue. We continue to drive Etsy payments expansion with penetration of our payments platform now at about 99% of Etsy Marketplace GMS compared to 93% in the corresponding prior year period. Our new seller setup fee and off-site ads fees also contributed to Marketplace revenue expansion. In addition, an increase in GMS and resulting transaction fee revenue for the Depop marketplace was a tailwind to our consolidated performance. The growth in consolidated services revenue was even faster at 6%. For the core Etsy marketplace, ads revenue performance accelerated on a year-over-year and sequential basis. The result of significant strides made in optimizing how we bid on behalf of our sellers was which resulted in better balancing seller ad value across seller segments, all while maintaining consistent seller ROAS. We also incorporated more features and multimodal embeddings into our ranking models, capturing listing image representations, which led to an improvement in ads conversion rates. All in all, as you can see in the chart on the right, our consolidated Q3 24 take rate improved to 22.7% above our guidance of approximately 22% and 180 basis points above the 20.9% reported in the same period last year. This strong year over year performance is a great demonstration of how we have been able to drive value for our sellers, and improved by our experiences while also delivering more revenue and a higher take rate for Etsy in a truly win-win manner. We are proud that Etsy has been able to invest with discipline in bold initiatives Josh described while also managing our spend during a challenging macro and economic time for our core Etsy marketplace. For example, we continue to drive leverage within consolidated product development spend which decreased approximately 6% year-over-year to $107 million during the third quarter, primarily due to decreased employee compensation expense connected with our 2023 workforce reductions. You can see from the chart on the right that revenue per headcount for the Etsy marketplace continues to grow on a year-over-year basis and remains well above many of our peers, even those of significantly larger size and scale. Third quarter consolidated marketing spend increased 22% year over year to $197 million. In addition to increases in Etsy Marketplace performance marketing spend, Depop had a large step up in its spend versus last year in support of its US fee change announcement. As we highlighted on our last call, We also expanded mid-funnel and newer performance channels, particularly within paid social, which increased meaningfully, as you can see from the chart in the lower right portion of this slide. We have been increasing our paid social spend throughout the year as we test and learn, but it is not yet fully matured and optimized. This investment is well aligned with our overall push into discovery and inspiration. Solving for a buyer's more generalized needs, such as the recent addition of a new baby in your family, rather than helping you find a specific personalized onesie. Paid social is having a positive impact on our buyer reactivation, which is beneficial since a reactivated buyer spends 40% more with us in the next 12 months than a new buyer. Consolidated brand spend increased 21% year-over-year, also connected to Depop's higher level of spend. As previewed on our last call, Q3 brand spend also includes the creative costs we incurred for our Etsy seller-focused campaign. Moving to Etsy Marketplace GMS performance and related metrics, we had a year-over-year decline in our top categories, and GMS was down in our U.S. domestic-only trade route as well as non-US trade routes. We did see some modest growth in our international non-domestic trade route, as well as US imports. Digging into this performance, there are three primary factors at play. First, overall macro conditions, which influence consumers' budgets, continue to weigh on the wallet share we are able to win. As you can see from this chart, the percentage of US personal consumption going to discretionary spend continues to decline versus the COVID peaks. Second, there were a few discreet mindshare events during the quarter, which we believe created additional headwinds for our business. These included general elections in the UK and France, a host of major sporting events, including European football, the highly popular Olympics, events tied to US politics and the general election, and Hurricane Helene at the end of September. And third, as Josh described, we've really focused on shoring up the core Etsy marketplace, leaning into item quality, and making sure we have a great cohesive experience, especially in the app. These are pretty large shifts in how we run the company, and they're putting some pressure on in-session conversion and creating some modest headwinds to GMS. That said, we are pleased to have been able to drive some pockets of GMS strength in the quarter, Our focus on making Etsy the destination for gifting again resulted in site-wide GMS growth, albeit not as strong as experienced in the second quarter, which featured very important calendar-driven holiday gifting occasions such as Mother's Day and Father's Day. To help fill in such gaps, we'll continue to focus on driving more evergreen gift purchases such as for birthdays and anniversaries. We've also seen personalized and customized items continuing to outpace site-wide performance up 4% year-over-year, reinforcing one way that our brand can resonate with buyers. And in the U.S., back-to-school merchandise, GMS, grew 5% year-over-year. We have continued to see resilience in our Etsy Marketplace active buyer count, which was approximately 91.2 million, ticking down only slightly on a year-over-year basis. We reactivated over 6 million lapse buyers in the quarter, up close to 6% year-over-year. And we added over 5 million new buyers in the quarter, down around 13% year-over-year. Habitual buyers decreased by about 5% year-over-year. However, our retention rate of habitual buyers was slightly better on a year-over-year basis. And habitual buyers remain a very healthy 43% of our GMS. Lastly, GMS per active buyer was down 3.4% in the quarter to $123. In keeping with trends we have been seeing for quite a while, the year-over-year decline in GMS per active buyer is predominantly due to buyers visiting us a bit less frequently and spending less per purchase day. I want to take a moment to talk about the Etsy seller community. Our heart goes out to those in regions hard hit by recent hurricanes. As is our normal course, we have adjusted their billing schedules, offered disaster grants to sellers in need, extended star seller status as relevant, and proactively provided guidance around managing or taking a break from their businesses. Our hope is that these steps provide impacted sellers with the flexibility they need to focus on their health and safety. As you may have noticed in our press release, the active seller count for the Etsy marketplace was 6.2 million, down 8.5% versus the prior year and down sequentially. We have long asserted that when we lose a seller, we rarely lose a sale given the large amount of substitution available. In fact, we believe that the decline in our active seller count is actually a helpful byproduct of our focus on quality and stepped up enforcement actions, including our new seller setup fee and other actions we are taking to ensure that the right sellers, those with the skill and will to succeed on Etsy, can win. To that point, we're very pleased to see a year-over-year increase in the percentage of sellers who made a sale during the third quarter, a metric which has been moving in the right direction this year. And we also see strong pockets of seller growth, such as in Ukraine and other emerging markets. As of September 30th, we had $1.2 billion in cash, cash equivalents, and short- and long-term investments. During the third quarter, we repurchased a total of $156 million in stock under our $1 billion June 2023 board authorized repurchase program, of which approximately $260 million remained available as of September 30th. Our capital light business model allowed us to deliver strong free cash flow this quarter of approximately $204 million. We also continued to convert approximately 90% of adjusted EBITDA to free cash flow on a trailing 12-month basis. Related, our net income was impacted by a non-cash foreign currency loss compared to a non-cash foreign currency gain in the prior year. In addition, earlier today, our Board of Directors approved a new stock repurchase program authorizing Etsy to repurchase up to an additional $1 billion of our common stock. we see significant value in our shares and we and our board have confidence in the growth plans we have underway. Given that we have $1.2 billion in cash and generate such strong free cash flow, this new authorization will give us the flexibility to potentially go beyond our already high level of share repurchase. And it's worth noting that these repurchases do not come at the expense of important investments in our business. Turning to our outlook, Our guidance is that fourth quarter consolidated GMS will decline in the low to mid single digit percentage range on a year over year basis. We're confident that Etsy is the best we've ever been for holiday gifting, which gives us reason for optimism. We also know there is a lot of pressure on the consumer in our core markets, and they appear to be prioritizing deep discounts and value within tight budgets. Etsy will present gifting front and center, on-site and off, and we will be running cyber sales and highlighting our sellers' great value and highly differentiated product. With that said, our brand stands for special and unique rather than cheap and deals. One other unknown is how the U.S. general election may impact the consumer psyche or holiday spending trends. Q4 24 consolidated take rate is currently estimated to be 22.3%. up versus the prior year result, but a slight step down from Q3-24, with our normal sequential seasonal trend coming into play, with higher levels of organic GMS in the fourth quarter relative to revenue we earned from Etsy ads in the quarter. Consolidated adjusted EBITDA margin will be in the range of 28% to 29% ahead of the Q3-24 and prior year Q4 performance. The sequential improvement in adjusted EBITDA can be attributed to seasonal volume and cost efficiencies, as well as DPOP scaling back on performance and brand marketing spend after the higher than normal Q3 spend tied to the buyer fee campaign. So for the full year, using the midpoint of this guidance, we will have withstood a host of stiff macro headwinds with consolidated GMS down roughly in the low single digits, still driving very respectable growth in revenue, all as we created fair value and fair exchange for our sellers, made critical investments that we believe can reignite future growth, and delivered strong adjusted EBITDA profitability at least as good, if not better, than our commitment for the year. While we're not satisfied with the lack of GMS expansion, we take comfort that if this is what our business can deliver in an extremely challenging period, the future for Etsy will be bright indeed. Thank you all for your time today. I will now turn the call over to the operator to take your questions.