Etsy, Inc.

Hi, everyone, and welcome to Etsy's fourth quarter and full year 2024 earnings conference call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been pre-recorded. Joining me today are Josh Silverman, CEO, and our new CFO, Lani Baker, who joined us at the start of the year. Once we are finished with the presentation, Josh and Lani 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 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 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. 2024 was a challenging year for Etsy, one where we underperformed the far higher standards we hold for ourselves as the market leader for special. We're disappointed, as we know you are, and we're working with tremendous urgency and focus to inflect the trajectory of the Etsy marketplace's GMS performance. I'm excited to tell you more about how our refreshed executive leadership team, combined with a clear strategic plan, will build upon the fundamental improvements we made to the ETSI customer experiences in 2024 to lean into our core differentiation even more, all with the goal to return to meaningful GMS growth. To recap our full year performance, consolidated GMS was down 4% from 2023 to $12.6 billion. Strong execution enabled take rate expansion in a win-win way that provides value to our community, resulting in record revenue of $2.8 billion, up about 2% year over year. And we exceeded our commitment to deliver strong profitability with adjusted EBITDA of $782 million and margins of 27.8%. Recent e-commerce growth has been skewed towards those that offer low prices and fast delivery, and that's a game we're unlikely to win. We also recognize that consumers are shopping and spending their time differently, with more competition than ever for mindshare. So during 2024, we challenged ourselves to zoom out, and we made some considered pivots to focus on where we can win to make Etsy truly better on the whole. We temporarily shifted our way of working to be less focused on near-term conversion-driving experimentation in favor of creating holistically better customer experiences focused on quality, reliability, and making our app a place for discovery. While this resulted in real opportunity cost to GMS to the tune of at least a few hundred million dollars last year, we believe it will be well worth it as we're now building on this improved foundation for 2025 and beyond. Etsy truly has something different and valuable to offer the world. That's certainly what we hear from so many of our buyers. We want more people to think of us more often and to come to us to be inspired and to have fun to bring Etsy front and center in their consideration set. So while others focus on cheap and fast, we're focusing on creativity, self-expression, and elevating artisanal items. And while others rely on mass production and complex supply chains, we are empowering our nimble and unique seller base to thrive. Let me walk through how the foundation we laid in 2024 to make Etsy the starting point for Special will help us to move faster in 2025. First, by dialing up Etsy's differentiation. We've often said that our selection of over 100 million unique, creative goods is what truly sets us apart. It's our job to showcase the very best that Etsy sellers have to offer. Last year, we introduced a quality score by adding indicators of high caliber listings into our search algorithms. Factors like positive reviews and on-time shipping. This is helping us move from showing you listings you're most likely to buy to surfacing ones you'll truly love. By also providing sellers with actionable insights on ways they can improve their listings and customer service such that they'll rank higher in search, this work is having the intended effect, creating a race to the top dynamic. Sellers took millions of actions to improve their listings and we're observing a higher propensity for sellers to get better reviews, indicating that customers are having better purchase experiences when they visit Etsy. In 2025, we'll make the quality score more dynamic and robust. For example, we're looking at how we might tackle higher order questions, such as how unique the item is, or is it priced competitively? We're even testing an LLM that identifies the skills and level of craftsmanship that goes into an item. There's no army of humans we could have hired to answer these types of questions before the advent of Gen AI and advanced LLMs. As you know, frequency has been a challenging metric for us to move. We've made some progress over the years, but we're focused on doing much more to fuel purchase frequency as a key lever for growth. Our 2024 work on gifting is a great example of how we built a dramatically better shopping experience to serve a frequent purchase occasion where special really matters. and it made a difference. 2024 gifting GMS outperformed site-wide GMS, and gifting grew as a percentage of overall GMS. We made shopping for gifts on Etsy easier through meaningful, targeted product improvements, expanded our gift card offerings, and evolved our marketing to drive awareness for gifting moments all year long. Gifting will remain an always-on focus for Etsy, ingrained within our core discovery flow. And in 2025, we'll highlight key gifting moments like birthdays, anniversaries, and baby showers to drive consideration and engagement. This year, we'll pull from the gifting playbook to capitalize on another quintessential Etsy cross-category purchase occasion, personalized items, which fits squarely into our Place for Special wheelhouse. Similar to gifting, Etsy's already known for being a great destination for personalized goods. About a third of buyers come to us looking for personalized items, spanning many categories and price points. Personalized or customized items make up roughly a third of our GMS today, and we're already experiencing strong growth in some subcategories, like personalized party decor and personalized apparel, which both grew double digits in 2024. Today, the personalization process on Etsy can be clunky and often very manual. So this year, our roadmap includes improvements to seller tools and buyer functionality. Last fall's introduction of Etsy Insider, a loyalty program designed for occasional shoppers, was also targeted at growing consideration and frequency. While still in closed beta mode, we've seen encouraging results on members' purchase frequency. They appear to value the free shipping benefit and are meaningfully more engaged with Etsy's direct marketing content than non-members. We'll continue to test, iterate, and learn as we move through 2025, particularly focused on building a successful, scalable economic model. But so far, so good. We're excited to see early proof points that Insider could be part of an Etsy ecosystem where our loyal customers come back to us more frequently without us having to invest marketing dollars to re-engage them. In 2024, you saw us evolve our marketing approach to attract, retain, and engage millions of consumers around the world. This year, we'll focus even more heavily on efficiency and meeting our customers where they are. For example, we'll dial back on linear TV and dial up our presence on connected TV and paid social. And the system we built last year to more efficiently segment product listing ads will now incorporate ML models to further improve our ability to showcase quality and drive more sales. We also have big plans to expand the relevance and reach of our owned channels, specifically push and email. Again, using ML to get better at sending buyers the right nudge on the right channel at the right time. The other major way that we're anchoring to being the starting point for Special is by powering discovery and inspiration, building a stickier ecosystem to keep buyers engaged, starting with the Buy on Etsy app. The app is our highest converting channel and accounts for just over 40% of our marketplace GMS, yet only makes up about 25% of total visits today. We estimate that getting Etsy's app penetration in line with our peers represents up to a billion dollar GMS opportunity. Last year, we optimized screen real estate by consolidating pick-up-the-thread content that's based on past missions, prototyped discovery-driven surfaces, and enhanced ML models with richer buying signals. We're now launching an entirely revamped navigation featuring our all-new Shop tab, which leans heavily into discovery with browsable, inspiration-rich content designed to better showcase the incredible possibilities that Etsy has to offer. Why are we so focused on powering discovery and inspiration? It's really the start of a fundamental shift in how we interact and engage with our buyers, creating a powerful flywheel designed to elevate the entire Etsy experience. As our services become more browsable and engaging, we can capture an order of magnitude more data about our buyers' interests, inclinations, and habits, both collectively and individually. For example, what did you hover on? What did you swipe past quickly? Which images did you choose to enlarge? Historically, we've been focused on spear phishing, optimizing to quickly get you to what you want and then show you similar things. The signals we get from spear phishing are powerful and show high intent, like what did you favorite and what did you actually buy? but they're quite scarce compared to what we can learn from browsing behaviors. By gathering more about what sparks your interest, we'll be better positioned to delight you when you're ready to buy. With discovery forward services, we're dramatically expanding the signals we collect. This richer data fuels our ability to build even more powerful models, leveraging the revolutionary power of LLMs to better predict buyer preferences and understand their intent with unprecedented accuracy. which then leads to the core of the flywheel, creating more personalized experiences, like window shopping in a store curated just for you. That's the experience we envision for our evolved surfaces, driven by the insights from our powerful models. As the flywheel spins, these personalized experiences become even more refined and engaging. A critical offshoot of this flywheel is the ability to create more tailored marketing. By leveraging these vast data sets and powerful LLMs, we expect to be able to generate more effective and personalized marketing strategies across all channels, from email and CRM to push notifications. And that will land buyers on our highly browsable experiences, All of this reflects a fundamental shift in how we're working to get consumers to come and return to Etsy's evolving and ever more personalized and resonant surfaces. Everything we're working on is in service of better buyer experiences and helping our sellers to grow. It's important to highlight that in today's highly commoditized world of e-commerce, Etsy sellers and their items are the foundation of what makes us special. In fact, in our recent seller census results, which you'll find in our 10K, show that nine out of 10 Etsy sellers are one person businesses. Nearly all work from home. Eight out of 10 are women and half sell exclusively on Etsy. As intended and expected, our new seller setup fee, combined with enhanced trust and safety efforts, resulted in a decline in active sellers last year. However, the result is a healthier seller base, evidenced by the higher percentage who are making sales, demonstrating our commitment to their success. And we have a lot more in store in 2025. Turning to Depop, which represented a strong growth tailwind in 2024, with GMS up nearly 32% year over year to $789 million. Depop's fourth quarter represented the highest year over year GMS growth since our acquisition. Depop's full-year GMS growth in the US was outstanding, up about 60% year-over-year, making Depop the fastest-growing US fashion resale player. We've captured a winning formula, blending cultural apparel trends with the individuality and self-expression that resonates with the younger generation, all while enhancing the product to more effectively match buyer intent with seller supply. Depop is offering great prices for buyers and sellers at a time when that matters a lot. Etsy's new president and chief growth officer, Kruthi Patil Goyal, is working to fill her Depop CEO seat while transitioning back to Etsy. Reverb's GMS was down 2.6% year over year, landing at about $918 million for 2024. Reverb continues to perform slightly better than the musical instrument industry, as the team has done an admirable job navigating through challenging industry headwinds, leveraging their tremendous differentiated inventory, and building a thriving circular economy for music gear, all while improving profitability. Reverb leaned into wallet-friendly options, like with the launch of the Reverb Outlet, contributing to double-digit percentage growth in that segment in 2024. 2025 marks Etsy's 20th anniversary, our Etsiversary. For the past two decades, Etsy has been the home for creativity and self-expression. As I look ahead to what's in store, I feel deep conviction in the power of our brand, Etsy's millions of incredible sellers, and our strong team. Starting with Kruthi, who brings vast experience building and scaling critical growth strategies and a deep commitment to Etsy's mission and community of passionate buyers and sellers. I've long admired Kruthi's customer-centric approach to leadership, and I'm excited about where she'll make her mark. Lanny's only seven weeks into the CFO job, and I'm thrilled with our choice. His critical thinking, deep toolkit of marketplace operational and financial expertise, and tremendous fit with our culture have made him an ideal partner. And Brad Miner, who we elevated to Chief Marketing Officer, is seamlessly evolving our marketing strategies in 2025. We kicked off our CTO search with two strong internal leaders sharing the seat on an interim basis. They and the rest of our team are optimistically charging forward to make Etsy better and to keep commerce human. With that, I'll turn it over to Lani.

Thank you, Josh, and thanks to everyone for joining our fourth quarter call. Before I dive into the results, let me start by saying how excited I am to be here. As a student of digital marketplaces, I have always admired Etsy's brand, business model, and leadership team. I am a habitual Etsy shopper myself, ever since my first purchase of a handmade leather computer bag nearly 10 years ago. I am thrilled to join Etsy at this pivotal time. This company has a history of sharp strategic execution. From 2017 to early 2020, Josh and the team led a transformation to establish Etsy's demand-centric business model, which drove a reinvigorated growth and a stair-step in profitability. Then, from 2020 to 2024, Etsy successfully navigated another extraordinary period with seamless execution, exiting the pandemic, maintaining much greater consumer scale, and take-rate efficiency. And right now, accelerating advancements in ML and AI are redefining the technological landscape and creating new opportunities for those poised and driven to take advantage. With Etsy's strong track record, our brand, scale, and talented team, I strongly believe we are well positioned to harness new technologies and make Etsy ever more clearly differentiated, a vastly better place to shop, and to drive growth in the long term. Etsy delivered approximately $3.7 billion in consolidated GMS in the fourth quarter, down 6.8% year over year. GMS in the core Etsy marketplace declined 8.6% year over year, leading to softer than anticipated consolidated GMS. As discussed earlier, this was partially driven by our decision to prioritize longer-term initiatives over shorter-term growth, combined with a shorter holiday shopping period. I do want to highlight Depop's strong top-line performance, which Josh mentioned, as it represented a very nice tailwind to Q4 consolidated GMS. Although consolidated GMS declined in the fourth quarter, consolidated revenue increased 1.2% year over year to a record 852 million. And adjusted EBITDA grew to an all-time quarterly high of $251 million, up 6% from the prior year. Within that revenue performance, consolidated marketplace revenue declined 1.4% due to lower GMS, which pressured transaction revenue partially offset by higher consolidated payments revenue, as well as revenue from the new seller onboarding fee. Services revenue was once again a key contributor to performance, increasing 8.1% year over year. The take rate bridge on the left shows Etsy ads as a primary driver of this strength. where improved ad relevancy and optimized bidding are giving us the ability to deploy more of sellers' budgets and deliver attractive return on ad spend to sellers in the process. All in all, Etsy delivered a consolidated fourth quarter take rate of 22.8% ahead of our outlook, driven by the aforementioned contributions, solid take rate expansion in Etsy ads, consolidated payments expansion, including for both Etsy and Depop, and incremental revenue from the seller onboarding fee. Fourth quarter consolidated adjusted EBITDA margin was 29.4%, above the outlook of 28 to 29%, and roughly 140 basis points higher than last year. The primary source of that improvement was gross margin leverage at the Etsy marketplace, where a lower rate of fraudulent activity led to a meaningful decrease in the variable cost of revenue in the quarter. I think it's encouraging to see Etsy deliver healthy bottom line performance in what was a challenging quarter for GMS. During the fourth quarter, consolidated product development spend decreased 5% year over year to $111 million. We gained leverage on a full year basis with consolidated product development spend as a percentage of revenue declining to 15.8% in 2024 compared to 17.1% in the prior year. primarily reflecting the reorganization undertaken in late 2023. Fourth quarter consolidated marketing spend increased 9% year over year to $285 million, which drove total marketing spend as a percentage revenue to 33.5% in Q4. The company pulled back a bit on brand spend versus the prior year and increased investment in paid social while continuing to execute across other performance channels. For the full year, consolidated marketing spend increased 13% year over year and consolidated marketing spend as a percentage of revenue increased to 30.5%. Turning to Etsy marketplace buyer metrics, as a longtime observer, I'm frankly in awe of the way Etsy has driven buyer acquisition over time. And while Etsy obviously had an outsized influx of buyers during the pandemic, the ability to continuously find new buyer channels, reactivate large pools of lapsed buyers, and create stickiness with existing buyers is no small feat and provides enormous value to our sellers. To that point, the Etsy marketplace ended the year with nearly 90 million active buyers, still close to record levels. One of the silver linings in 2024 was the continued reactivation of lapsed buyers, nearly 29 million for the year and nearly 10 million in the fourth quarter alone. MidFunnel and other paid social marketing channels are working well as a tap on the shoulder, reminding buyers to come back to Etsy. And while fourth quarter new buyer acquisition declined year over year, Etsy acquired 7 million buyers globally and 24 million for the year who had never shopped on the marketplace before. In terms of geographic performance, in our appendix slides and the 10K, you will see that we have transitioned to a new view of U.S. versus non-U.S. GMS performance. This updated disclosure is based solely on where the buyer is located, rather than our prior definition, which took into consideration the location of both the buyer and the seller. U.S. buyers represented 74% of full-year GMS in 2024 and 75% in the fourth quarter. And non-U.S. buyers accounted for 26% and 25%, respectively. Looking forward, we believe this view will provide a clearer picture of our success in attracting international buyers and growing non-US buyer GMS over time. In the fourth quarter, on a year-over-year basis, non-US buyer GMS underperformed US buyer GMS, underscoring the unfavorable macro environment in many of Etsy's marketplaces in international geographies. Our GMS per active buyer, which is a trailing 12-month figure, was $121, down 3.5% year over year. And in a continuation of the trend throughout 2024, lower household income buyers underperformed relative to higher household income buyers. While Etsy's top categories experienced softness in the fourth quarter, we saw growth in some subcategories, like personalized clothing and vintage jewelry. These are classic examples of what buyers come to us for. These nuggets give us conviction in the work that Josh described earlier to highlight purchase occasions and to deepen item attributes, which is meant to unlock new and exciting buyer discovery journeys within our many millions of items. Moving now to the balance sheet, as of December 31st, Etsy had $1.2 billion in cash, cash equivalents, and short and long-term investments. During the fourth quarter, Etsy repurchased a total of $260 million in stock, and at year end, we had an additional $1 billion available under our newer board authorization. Etsy generated over $780 million in adjusted EBITDA in 2024, converting approximately 90% of that to free cash flow, a portion of which the company deployed to reduce the outstanding share count by 12.2 million shares over the course of the year. Turning to our outlook and starting with the first quarter of 2025, we currently anticipate that first quarter consolidated GMS will decline at a rate similar to the year over year performance reported for the fourth quarter of 2024. In a typical first quarter, we would expect to gain significant benefit from GMS attributable to prior year product launches. And that's less of a factor this year due to the shift in our product investment strategy last year. We've seen some bright spots in the quarter so far, including encouraging Valentine's Day and related gifting performance. Collectively, our subsidiaries are expected to provide a tailwind to consolidated GMS growth in the first quarter. We expect Q1 2025 take rate to be approximately 23% due to the benefit of ad product improvements, payments expansion, and the seller onboarding fee we initiated in 2024. We currently anticipate our first quarter 2025 consolidated adjusted EBITDA margin will be approximately 25 to 26%. While we aren't ready to provide a specific consolidated GMS outlook for the full year, I want to point out a few factors that we believe should position the Etsy marketplace for improved GMS performance beyond the first quarter. First, and most obviously, the comparisons get easier in the second half of the year. Second, we expect to move beyond the opportunity cost phase of our 2024 product development shift with the benefits of investments in our foundation and in the Etsy shopping experience emerging over time. And third, our 2025 product development plan is rebalanced to accelerate the velocity of product experimentation that has historically driven incremental near-term GMS impact while we continue to push forward the longer-term priorities we've discussed. Given our desire to fund an ambitious product development pipeline, including some incremental hiring in AI and ML, we're planning for modest deleverage in consolidated product development spending this year. Meanwhile, it's our current intention to keep consolidated marketing spend as a percentage of revenue fairly constant on a year-over-year basis in 2025. we'll be making certain spending reallocations and remaining very ROI driven, seeking efficiencies to drive GMS. Putting those pieces together with Etsy Marketplace GMS positioned to improve as we move through 2025, we would expect adjusted EBITDA margins to be stronger in the second half of the year than in the first half, consistent with what we've seen in prior years. We are committed to maintaining strong bottom-line performance and generating healthy free cash flow, while also investing in the things which will further differentiate Etsy, which will build our opportunity and drive long-term growth. Thank you all for your time today. It's truly a pleasure to be here, and I'm excited to help Etsy get to this next phase of growth and success. With that, I'll now turn the call over to the operator.