Etsy Inc Q2 FY2021 Earnings Call

Hi everyone, and welcome to Etsy's Second Quarter 2021 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. Joining me today are Josh Silverman, Chief Executive Officer, Rachel Glaser, Chief Financial Officer, and Gabe Ratcliff, our Director of Investor Relations. Today's prepared remarks have been pre-recorded. The slide deck has also been posted to our website for your reference. Once we finish Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. You can submit questions via the Q&A window chat on your screen, which will remain open throughout the entire conference call. I will be reading your questions, and Gabe will assist me in trying to get to as many as we can. Please remember that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 or its abatement on our communities, business, strategy, or operating results, the potential impact of our strategic, marketing, and product initiatives, the potential effects of our acquisition of Depop and Elo7 on our market opportunity and future consolidated financial results, and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties described in today's earnings release and our 10-Q filed with the SEC on May 6th, 2021, and will be updated in any future periodic reports we file with the SEC. Any forward-looking statements we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Additionally, during the call, we'll present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb. And good evening, everyone. Etsy delivered a strong second quarter. I'm pleased to share highlights with you on our progress and our results. Consolidated GMS was $3 billion, up 10% year-over-year on a currency-neutral basis. In fact, non-mask GMS on an Etsy standalone basis grew 31% year-over-year, which frankly, I find remarkable given the extraordinary comps from last year. And on a two-year basis, this is 153% growth, also excluding face masks. Revenue grew 23% and our adjusted EBITDA margin was 26%. We feel great about these returns we're seeing as our investments ramp. We also announced the acquisitions of Depop and Elo7 during the quarter, which I'll talk about in just a few minutes. Our Q2 '21 performance is particularly impressive when put in the context of the year-ago period that we're comping. Remembering back to Q2 of 2020, brick-and-mortar stores were largely shut down with the exception of essential services. And even at those essential stores, lines were long and shelves were often empty. Even e-tailers faced similar challenges, with many products out of stock and long shipping delays for the rest. And in the midst of this crisis, Etsy mobilized the cottage industry to the rescue. Etsy sellers had so much of what you needed and were ready to ship quickly, at a fair price, and without significant supply chain challenges. In fact, Etsy was one of the few places where you could shop with confidence and convenience in Q2 of 2020. As a result, we delivered the highest growth rate of any company that we track in our sector. Flash forward to Q2 of 2021, and thankfully, things began to look dramatically different. While the situation is still evolving, people are moving about much more freely and beginning to travel and dine out again. Many brick-and-mortar stores have reopened. And there is a wide range of e-tailers ready to ship almost anything to your doorstep without delay. And even in the face of this renewed abundance of choice, again and again, shoppers chose to return to Etsy. In fact, about 90 million of them. And most importantly, they chose to shop with us more frequently. Given the massive pull forward in new buyer acquisition last year, it's no surprise that new buyer growth has decelerated materially in recent months. However, that deceleration has been offset by growth in GMS per active buyer which, as you know, is a big focus area for us. We're encouraged to see that shoppers loved the experience they've had with Etsy over the past year, and are coming back for more even in a world of greatly expanded choice. As Rachel will talk about further, we're extremely pleased with the strength and stability we're seeing in our cohort performance, and our conviction to invest in what we believe is Etsy's tremendous long-term opportunity. Turning to our most important focus area and job number one, growing the core etsy.com marketplace. We continue to make what we believe are very valuable long-term investments aligned with our Right to Win, driving continued material improvements in the customer experience to make Etsy even more special and deepen our competitive advantages. I'll now walk through some of the exciting progress we made in Q2. Starting with search and discovery. In our quest to close the semantic gap and create a platform that better understands our buyers' tastes and preferences, in Q2, our team created and launched a proprietary capability we call XWalk, a large-scale real-time graph retrieval engine that dramatically expands the amount of available data used to capture the semantic meaning and to improve the conversion rate by showing more relevant inventory to buyers. Every click and purchase on Etsy gives us information about the relationship between users, queries, listings, shops, and more. And these events have long powered our ranking and retrieval systems. But due to the sheer volume of information, we could only use a relatively small slice of it. With XWalk, we are now able to use nearly all of our relevant data to better capture semantic meaning across all of our inventory. For example, XWalk has significantly reduced the number of dead ends, which have queries that returned zero search results, unlocking over a million incremental searches that are delivering relevant search results. We're only at the very beginning stages of leveraging XWalk, which has many other applications beyond search. For example, making recommendations more relevant, providing better on-site marketing experiences, and improving technologies that keep the marketplace safe. Turning to Slide 7, in our efforts to amplify the human element of the Etsy marketplace. We've mentioned listing videos in our last few calls, and we're now starting to get real traction as they're incorporated throughout more and more of the Etsy experience, on-site and off. In fact, there are now nearly 8 million videos uploaded on Etsy. Listing videos are driving engagement on social, and we're seeing measurable wins from adding videos to the homepage. We're especially encouraged by the results our sellers are seeing from their process videos, which show how our sellers make their items and especially Etsy-like experience. Many buyers are viewing these videos and watching them to completion. In fact, listing and process videos drove a significant sequential increase in engagement on our social channels, up 700% quarter-over-quarter. Our third pillar is, of course, about trust. As we've said, we're laser-focused this year on the post-purchase experience, and we're making great progress. This quarter, I'd like to highlight the gains we've made with delivery predictability, setting clear expectations for when items will arrive, and ensuring our sellers consistently meet those expectations. In the second quarter of 2020, only 73% of domestic orders on Etsy displayed an expected delivery date. In other words, before placing an order, almost 30% of the time, we couldn't tell you when you could expect to receive it. Origin Zip Codes, which tell us from where in the U.S. an item is shipping, has also been an area of focus because they help us to more precisely estimate the time in transit. We've more than doubled Origin Zip Code coverage over the past year, which has cut one full day from the Expected Delivery Date, causing a meaningful positive impact on the conversion rate. While we aren't in a race to be the fastest, it's critical that we have transparent expectations that our sellers can meet reliably. This is a needle mover for us, as we deliver on buyers' expectations, they've tended to come back and make more purchases more frequently. We're targeting to get both of these metrics over 90% in time for the holiday season. Last quarter, we told you that we would be exploring ways to define 'what good service looks like' for Etsy sellers, leading to last week's global launch of our Star Seller program. The program's goal is to recognize and reward our best sellers while motivating all sellers to deliver exceptional customer service. As part of this program, we've defined a set of customer service metrics that we know are critical to buyers, such as on-time shipping, five-star reviews, and responsiveness to buyer requests. We've set the bar for what good looks like while providing a transparent dashboard to show sellers where they stand versus each of these metrics. We believe that this creates a race to the top for sellers who will understand their metrics. Later this year, we'll talk about our ongoing investments designed to enhance our offerings and ensure our marketplace continues to thrive, and in fact, the Etsy marketplace delivered a 22% improvement fueled by initiatives. Highlighting just two; first, we're continuing to see progress with buyer triggers. For example, adding a badge in the upper corner of the app icon, showing how many updates are pending, drove a meaningful increase in repeat visit rate. Secondly, we've created faster and easier ways for sellers to invest in deepening relationships with their buyers while driving frequency to Etsy. A great example is seller Thank You coupons. For example, get 10% off on your next purchase when you buy again from my shop, which, during an experiment, saw a 170% improvement in uptake. Now, 11% of purchases include a Thank You coupon. As many of you know, the buy-on Etsy app has historically been our highest converting experience. In Q2, we began to test more prominent ways to prompt buyers to download the app at key moments in their journey. We focused on organic product improvements, and today, we have invested very few marketing dollars to drive app downloads. We've seen major wins. For example, by promoting app downloads on the post-purchase Thank You page, encouraging you to download the app to easily track your order status. The results have been compelling. We're now running at about 1.3 million app downloads a month and have garnered 9 million downloads year-to-date. And Etsy is now the number 7 shopping app in the iOS App Store, the highest it's ever been. Most importantly, newer cohorts of app users are showing promising engagement signals based on their visits, favoriting, and purchase behavior. In Q2, new app users who made a purchase then went on to favorite and view listings, roughly 20% more than new mobile web users who made a purchase during the same timeframe. Turning to brand marketing. TV and digital video continue to be great tools to drive awareness and engagement with the Etsy brand. As we mentioned last quarter, our investments in the UK and Germany are showing encouraging results. Double-clicking on Germany, in addition to our TV and digital video investments, we worked with German personalities to support our Etsy HotSeat or Etsy Has Its campaign. We saw a 5-point improvement in prompted and unprompted awareness, expanded social reach, and generated over 4.5 million impressions in earned media during the campaign flight. Other benefits included an uptick in seller growth and a higher return on our performance marketing channels. We're very pleased with these results, which indicate that we're laying the foundation for growth in this important market. There are so many more product and marketing wins I'd love to tell you about, but I also want to give some time to our other marketplaces. We now have four highly differentiated e-commerce marketplaces in our house of brands. And we couldn't be more excited to have found two more businesses that share our mission to keep commerce new. In addition to common missions, strong leadership teams, and performance-based cultures, each brand is connected at the core, with similar growth levers and requirements for success, such as sophisticated search technology, compelling on-site customer experiences, an efficient payment platform, value-added seller services, effective shipping options, strong brand and performance marketing capabilities, and a commitment to investments that protect the marketplace. As you know, we have deep expertise in each of these areas and we'll be implementing knowledge sharing loops to drive value creation across the brands while enabling each to serve its customers in its distinct way. First, turning to Depop. We believe Depop is the best asset in the resale space given its high user engagement metrics. The U.S. secondhand market opportunity is projected to double to $77 billion by 2025. And the resale portion of secondhand is forecasted to grow 11 times faster than retail clothing for the next 5 years. We're also seeing that young consumers are adopting secondhand fashion faster than any other audience. Depop is the 10th most-visited shopping site among Gen Z consumers in the U.S. In fact, we think Depop is the potential to Etsy like Venmo was to PayPal, a new way to shop for the new generation. Let's take a look at a quick 30-second video that captures the excitement of Depop. Where do we want to take Depop? Just like we've demonstrated with Etsy and Reverb, we see significant opportunities to make focused improvements to the on-site product experience that we believe can expand the conversion rate. We'll also explore value-added services to drive monetization. We'll compare insights on how we've grown Etsy globally with localized experiences and focused investments to help Depop take its marketplace beyond its current core regions in the U.S. and UK. And we'll work to evaluate the efficiency of their marketing investments, focused on improving LTV, driving buyer and GMS growth, and enabling the business to invest more and similar or better returns compared to their current investments. Now, turning to Elo7. Elo7 is known as the Etsy of Brazil, a leader in custom and made-to-order merchandise. We now have a foothold in Latin America, a region with high barriers to entry, where we previously did not have a meaningful customer base. Elo7 is ranked as a top 10 e-commerce site in Brazil, providing us with a strong local brand, in the largest Latin American e-commerce region. E-commerce in Latin America is estimated to be less than 10% penetrated and is expected to reach approximately $160 billion by 2025. Brazil alone is forecasted to reach $50 billion in the same time period. Here's a quick glimpse of Elo7 through one of their TV ads. We hope you will agree that the similarities with Etsy are obvious. On Slide 19, you'll see Elo7's near-term priorities, which will focus on; optimizing conversion rate, prioritizing the roadmap to focus on initiatives that will inflect GMS and make the selling and buying experience easier; Marketing efficiency, leveraging Etsy know-how to further invest with a disciplined ROI lens, evaluating lifetime value, and customer acquisition costs. Seller transparency, giving sellers visibility into their performance metrics. And shipping, ensuring sellers have the very best options for fast and affordable shipping that buyers can rely on. We've just kicked off integration work for both businesses, so it's important to keep in mind that it will take multiple quarters and years to operationalize all of the many ways that we believe it can help Depop and Elo7 grow. And last, but certainly not least, Reverb delivered a solid quarter despite prior year comps that benefited from many competitors having to close their retail stores and warehouses. We're confident that the Reverb team is focused on the right areas and are excited about their future opportunities. In particular, this past quarter, we launched personalized recommendations and invited more music makers to add to their gear collections, which now includes over 175,000 pieces of gear from players across Reverb. This capability not only helps us to learn more about buyers and personalize their experience, but it also helps players consider selling their gear through a greater understanding of how much it's worth. We launched a new premium ad platform for Bump, and we formed a new international product team that delivered its first global-specific feature enhancements. Taking all of this together, we believe that Etsy is now an even more valuable company with an even larger opportunity than we had before. We have a large and expanding TAM, and we're moving in a different direction in commoditized marketplaces. The pandemic proved just how many purchase occasions Etsy is relevant for, and we have more confidence than ever in our core opportunity. Reverb has a compelling value proposition in musical instruments, and we see a clear path for future growth. Depop enables us to deepen our penetration into apparel, specifically in the exciting and fast-growing sector of resale. And Elo7 gives us a local presence in the large Brazilian market. Our ambition is driven by a true love of lightning in a bottle of peer-to-peer marketplaces and a well-defined investment strategy that we believe can drive strong top-line growth and profitability for these brands. Many of you have asked whether these deals are a sign of more to come. I can tell you that our primary focus now is to integrate Depop and Elo7 into the family while continuing to drive strong performance at Etsy and Reverb. We're incredibly proud of what our team has accomplished. And, hopefully, we've demonstrated to you that we balance our ambition with discipline, making thoughtful and strategic moves that build long-term value for all of our stakeholders. And with that, I'll turn it over to Rachel.

Thanks, Josh. Thank you all for joining our call. Today, I will discuss our consolidated results, key performance drivers, and specific etsy.com results where relevant. Please note that Depop and Elo7 results are not included in our consolidated financial results or KPIs for the second quarter. We had a robust quarter despite macro challenges and tough year-over-year comparisons, achieving GMS, revenue, and adjusted EBITDA within our expectations. It's important to highlight that we're growing from a significantly larger base. For instance, in terms of GMS, we've added an incremental $2 billion since 2019, and we're just beginning to realize the benefits of this larger scale for Etsy. Looking at the financials, Etsy's second-quarter GMS increased by 13% year-over-year to $3 billion, while revenue rose by 23% year-over-year to $529 million. Adjusted EBITDA reached $139 million with a margin of around 26%. For etsy.com specifically, the decline in face masks to 1.4% of standalone GMS indicates a significant decrease each quarter since last year. Non-mask GMS grew by an impressive 31% year-over-year, especially notable considering last year's significant rise in new buyers due to the pandemic. Over a two-year period, non-mask GMS growth remained relatively stable compared to last quarter. We do not expect the same monthly growth cadence to continue in the future, but we thought it was crucial to highlight the stability of our trends given the anticipated challenges ahead. In terms of our monthly growth on a two-year basis for the etsy.com marketplace, we saw increases of 177% in April, 150% in May, and 143% in June, demonstrating strong growth throughout the quarter, though we noted a steady deceleration due to the reopening of the world. On a consolidated basis, international GMS grew to 41% of overall GMS, expanding by 900 basis points year-over-year. International GMS outpaced our overall growth, rising by 45% in Q2, with domestic sales being our fastest-growing trade route. Growth in international was supported by product investments, including an improved translation model for English to German and increased brand marketing efforts in the U.K. and Germany. Consolidated Q2 revenue was driven by both marketplace and services revenue. Key contributors included growth in Etsy Ads, Etsy Payments, and GMS volume. Transaction fee revenue increased by 15% year-over-year due to higher GMS from increased visits and frequency. Payments revenue was up 19%, with 92% of etsy.com standalone GMS processed through Etsy Payments in Q2, following our expansion to nine new countries. Consolidated advertising revenue, which includes Etsy Ads and Reverb's Bump, grew by 44% year-over-year. The consolidated take rate reached 17.4%, a 150 basis point increase from last year. Etsy Ads revenue, excluding Reverb's Bump service, rose by 47% after nearly doubling the previous year. This growth was driven by enhancements to our ad ranking function, resulting in a significant increase in post-click conversion rates while maintaining a strong return-on-ad spend for our sellers. In June 2021, sellers' budgets for Etsy Ads were 92% higher compared to June 2020. Gross margin on a consolidated basis was 72%, benefiting from our shift to offsite ads, which provide additional revenue without equivalent costs. The opt-out rate for Offsite Ads in Q2 '21 was still below 2%, and the number of sellers opting to stay in the program is growing faster than the rate of active sellers, indicating strong value perceived by sellers. Our product development investments continue to yield positive results, enhancing conversion rates and visit frequency. In Q2, we spent $62 million on product development, a 37% year-over-year increase, driven largely by our planned headcount growth, with nearly 1,600 employees at the end of the quarter, a 24% year-over-year increase mainly in product development. We have increased our marketing expenditures to capitalize on the global attention the Etsy brand is receiving. Q2 marketing spend reached $167 million, up 46% year-over-year, with 23% of it dedicated to brand marketing, an increase of 73% year-over-year. Significant marketing initiatives included successful TV campaigns in the U.K. and Germany, which led to improved retail rankings. We're also progressing in encouraging buyers to download our app, which currently represents a smaller portion of our visits but has a high conversion rate, primarily driven by product investments. In Q2, active buyers grew by 51% year-over-year to around 90 million, while repeat buyers increased by 61% to 36 million. Our most loyal "habitual" buyers saw a 115% growth to nearly 8 million in this quarter, making up just 9% of active buyers but contributing about 40% of our GMS. These metrics reflect encouraging stability in our buyer base, as we look at the permanence of the gains from 2020. During 2020, we added 38 million new buyers, almost double the amount from 2019. Our new buyer growth rate did decline in Q2 but remained strong at 8 million, nearly twice as many as in Q2 2019. Over the last 12 months, we brought in over 40 million new buyers, and it's reassuring that the purchase behavior of these new cohorts remains positive, with Q2 GMS per new buyer growing by 24% to $46. We believe the buyers acquired during the pandemic maintain similar value to those gained before it. GMS from active buyers over the trailing 12 months rose to $129, displaying a record growth of 22%. We're thrilled to see continued stability among our buyer cohorts as we implement strategies to encourage loyalty and repeat purchasing. On our balance sheet, as of June 30, we had $2.5 billion in cash and equivalents, along with a $200 million revolver currently undrawn. The acquisitions of Depop and Elo7 occurred in July, and therefore, they are not reflected in our end-of-quarter balance sheet. During the quarter, we also issued $1 billion in seven-year convertible senior notes, a portion of which was used to repurchase $180 million of our stock. Free cash flow was affected by the timing of cash payments and the accrual of significant expenses such as sales taxes and marketing. Looking ahead, we estimate our Q3 consolidated GMS—including Etsy, Reverb, Depop, and Elo7—to be between $2.9 billion to $3 billion, representing about 12.5% growth at the midpoint compared to last year. We expect Q3 revenue to be between $500 million and $525 million, reflecting an approximate 13.5% increase at the midpoint compared to Q3 of the previous year, with an adjusted EBITDA margin around 25%. For the etsy.com standalone marketplace, we're forecasting solid mid-single-digit GMS growth, with a mid-teens growth expected when excluding face masks. Last year's Q3 saw a remarkable 116% GMS growth for etsy.com; remember that 11% of that GMS came from face masks. Our revenue guidance assumes a take rate of about 17.4%. Excluding Depop and Elo7 from our Q3 guidance, the anticipated take rate for just etsy.com and Reverb would have been about 17.7%. The addition of Depop and Elo7 is estimated to contract our adjusted EBITDA margin guidance for Q3 by about 300 basis points. However, we believe both can achieve strong margins and profitability levels in time. It's worth noting that the etsy.com marketplace will continue to drive a significant portion of our performance in the near future, with only minor contributions expected from Depop and Elo7 in our Q3 and FY '21 results. As for employment figures, Q2 consolidated headcount increased over 20%, a trend we expect to maintain this quarter. Our recent acquisitions added 550 new employees to Etsy Inc. As we look ahead to Q4, we are enthusiastic about the upcoming holiday season with many product and marketing initiatives already yielding results. However, we will face a strong comparison to last year's holiday period, which was bolstered by an extended shopping window, stimulus payments, region-specific shutdowns, and logistical challenges faced by competitors. Remember, Q4 included $133 million of facemask GMS, about 4% of our total. We anticipate minimal GMS from facemasks in our Q4 2021 projections. As we have indicated, our comparisons will become more challenging throughout 2021, with Q1 2022 potentially being particularly hard due to the considerable impact of government stimulus from Q1 2021. We manage Etsy with a focus on maintaining a healthy balance between growth and margins, and historically we have performed within the Rule of 40 to Rule of 50 range. We will continue to uphold this balance and are confident in our long-term profitability strategy. Thank you for your time, and I will now pass the call to Deb for your questions.

Hi, everyone. Good to see you today, and we're going to dive right into questions. Okay. I'm going to start with Alexia Tsimikas from D.A. Davidson. We've had a lot of investors ask us about the impact of the economy reopening on Etsy. How should we think about the impact overall? And additionally, what categories are benefiting from the reopening, such as weddings, and what categories would you say are being negatively impacted? I think, Josh, we can at least start with that one?

Sure. We are very optimistic about our guidance for Q3. We expect Etsy to see mid-teens growth quarter-over-quarter as the world largely reopens, allowing people to return to a more typical way of life, though not completely like it was before COVID. One area driving this growth is weddings, which experienced over 100% year-over-year growth in Q2 and marked its second consecutive quarter of growth. We're also noticing positive momentum in back-to-school shopping; last year focused on homeschooling furniture, but now consumers are purchasing backpacks and other essentials for sending their kids back to school, and we're already observing this trend. We are encouraged by the consistent growth across various categories, with Home Furnishings, our largest category, performing particularly well. Popular items in Home Furnishings include kids' furniture and gardening supplies. Additionally, we continue to see emerging trends, as items that are popular on platforms like TikTok quickly appear on Etsy and can generate significant sales. Those are the key areas we are focusing on.

No, you got it. You got it. That's great. Thanks, Josh. The next one I'm going to take from Ana Andreeva from Needham. This one is for Rachel. A question on taking rate came in flat sequentially. What's driving the upside, excluding the new businesses to the second half, and how do you think about the take rate opportunity, longer-term for Etsy?

First of all, I think we gave a lot of color on taking rate because we provided what our take rate would be with and without the new businesses. So, you can see that without the new businesses, our take rate would have been 17.7%, and the new businesses, though much smaller than Etsy, have lower take rates and make some contraction to that overall number. Etsy's gotten take rate gains from the expansion of Etsy Payments to nine new markets globally, and Reverb actually took a price increase last year as well, which helps keep the former consolidated Etsy take rate high. We look at taking rate improvements as a value exchange. Where we can offer more services that benefit the seller in exchange for some fee increase, we are open to doing those things. For instance, last year, we added Offsite Ads, and that was a win-win for sellers and for Etsy. So, there are lots of opportunities to continue to add services, and where we see a fair exchange of value, we'd consider taking fees for that. But right now, we have no plans for that and there's nothing in our guidance that would suggest that we have any plans for that.

Great. Thanks, Rachel. The next one is from Eddie Yruma at KeyBanc. Josh, I'll toss this one to you. You moved very quickly to bring selection inventory from DaWanda onto the core Etsy marketplace. Do you see the same opportunity existing with Elo7?

Great question. Thanks, Edd. With the DaWanda arrangement, we had an Etsy business in Germany, and we did a referral agreement with a basically Etsy look-alike Company called DaWanda in Germany. And we just combined the two, you're right, very, very quickly. Brazil is different. Etsy doesn't really have a presence in Brazil. In fact, cross-border trade between Brazil and other markets outside of Mercosur is really tough for a bunch of reasons. And so, we expect that Elo7 will remain a standalone brand and a standalone business, giving us a presence in Brazil for the first time. When we look at who has succeeded in Brazil, it tends to be the native companies. Mercado Libre is very successful there, and eBay didn't manage to penetrate. We think having a native brand in Brazil, built for Brazil, that is focused primarily on domestic trade, is the right way to go. We're really excited about the Elo7 team and brand as our way to do that.

Great. Since we're talking international, we'll go next to a question from John Colantuoni from Jefferies. Last quarter, Josh characterized the advertising strategy in Germany as being different than in the U.S., because Etsy is leaning into brand marketing early on. After having success with your brand marketing campaigns in the UK and Germany, is the next step to begin layering in more performance marketing spend, to take advantage of the improved awareness that you were achieving? Josh?

Yes. Is that for me or Rachel?

I think for you. Yeah.

Okay. Got it. Sorry. I think the short answer is yes. We are seeing that the brand marketing spend we're doing in Germany and the UK is making our performance marketing more effective, and therefore we are spending more. The performance marketing spend is quite mechanical. We have very clear ROI thresholds and we have quite clear ways to measure impact in nearly real-time. As the performance of our performance marketing gets better, we just automatically increase spend, and if things happen to depress it, we automatically take spend down. But you're right that because the TV advertising is making brand awareness higher, it means the propensity to click on our ads is higher and the lifetime value of the customers is higher, and that allows us to spend incrementally more in those markets.

Okay. Great. The next one I will take is from Laura Champine, from Loop. This one is for Rachel. What drove the decline in a mix of GMS from paid channels in the quarter?

Good question. We said the percentage that was paid was 19%, which is down from the previous quarter. Remember that one of the things that we do is invest in top-of-funnel marketing, which we don't count in our paid spend because the traffic from the top of funnel marketing comes in through the direct channel. We spend a lot of money incrementally marketing in the second quarter. The dominant portion of that incremental spend was on top of funnel marketing in the UK and Germany which drove a lot of toplines that we count as direct. That's one of the answers to your question. The second answer is that we actually spent a relatively flat amount of money on performance marketing, and we got the same or better ROI. And also recall that our performance marketing is now subsidized by our Offsite Ads product. We don't actually see that subsidy in the marketing line; that shows up in revenue. All of those factors together drove a really high return on our performance marketing spend and a relatively lower percentage of total traffic coming from paid channels.

Okay. Great. Thanks, Rachel. Next from Nick Jones at Citi. Josh, we'll throw this one to you to start. Can you talk about the effectiveness Etsy has had in managing Reverb and the implications for its ability to manage Elo7 and Depop? And how many other opportunities might there be out there that could look similar to these, in terms of focusing on products or demographics or geography? I assume that means in terms of potential future acquisitions.

Yeah. We feel great about the progress to date with Reverb. And really, job one was to partner with the Reverb team to think about where their product efforts could be most focused to improve conversion rate. That makes the value of a visit go up, and the lifetime value of a visitor and a customer go up. At the same time, how can we optimize their marketing spend? And those two are actually a virtuous cycle because if the conversion rate goes up, the value of the visit goes up. That allows you to actually invest more in marketing. If your marketing is more efficient, you can really get the flywheel to turn. So, we're excited about how that has worked at Reverb, and we hope to execute similar ideas, not the exact same, but similar kinds of playbooks at both Depop and Elo7. They're both very different marketplaces, and they have different dynamics and they face different trends. Step one is to partner with their teams and understand where they are and see where we can add value and what their current roadmaps are. The teams are doing that very actively. I think we've owned those two businesses for 2 or 3 weeks in total. The teams are already there and working, and we're excited about what the future can hold. I will say that this takes work, and it takes time, and it takes effort. We are very conscious of the fact that the big prize here is the core Etsy marketplace, which we are incredibly excited about the massive opportunity ahead of us at Etsy. We want to be thoughtful and disciplined as we always are. Integrating Depop and Elo7 is meaningful, and we want to take the time to integrate those two and make sure that they're successful and really set up for success. That's very much our focus right now. To the question of whether there are other two-sided marketplaces out there, maybe. As I've said, it's lightning in a bottle. It's not every day you come across a truly authentic, organic, two-sided marketplace that really has the potential to be additive to Etsy, where we can acquire it at a fair price and where we have the bandwidth available to do it. So, we've got a high bar, and I would say we are going to be patient and picky. Right now, we're very much focused on the core Etsy marketplace and integrating Depop and Elo7.

Okay. Great. Thanks, Josh. I'm going to give a couple to Rachel that also have to do with Depop and Elo7, more on the financial side. So, from Shweta Khajuria from Evercore ISI; Rachel, could you quantify the impact from Depop and Elo7 included in the Q3 guide?

Hi, Shweta. Thanks for the question. First of all, I will start by saying that our three subsidiaries in our new House of Brands together represent less than 15% of our total GMS. So, they're still important. We see a huge opportunity for them, but they're a relatively minor impact on our total guide. At Etsy, we try to think about focus, and we're very focused on continuing to grow the Etsy marketplace. What we've disclosed for Depop and when we announced the acquisition was that Depop did about $650 million of GMS in 2020 and about 70 million in revenue, and it was growing about 100% at that time in 2020. You would expect that Depop is experiencing the same macro headwinds from the economy reopening, that all of the e-commerce is experiencing. So, while we're not giving specific guidance for Depop now, you can consider that that's factored into our guidance. Elo7 is much smaller. Also, they did not have a tailwind from the pandemic in 2020 as Depop and Etsy did. This is largely because they've had significant impact from COVID in that region, and also their business is much more concentrated in the event space, which has been more hampered by shutdowns. We did, however, say in our guidance that the addition of those two new businesses to our former consolidated numbers creates about a 300-basis point contraction to the bottom line. These are very new businesses. We've owned them for two weeks. Reverb's a perfect example of how we've been able to grow and optimize that business. We're super excited about it while we invest in them for growth.

Rachel, I have a related question from Jason Helfstein at Oppenheimer. If we consider a 10% take rate for the acquisitions of Depop and Elo7, would that provide us with a reasonable estimate of the revenue impact from those acquisitions in Q3?

So, I think we gave pretty clear and transparent information on the impact of taking the rate from our subsidiary businesses. We said our total take rate for Etsy would have been 17.7% without them. I believe we gave the take rate specifically for Depop when we acquired them in about that 10% range, so that's a good number. Elo7 today is very, very small, so it's not going to move the needle. I think you're safe in that assumption.

Okay. Great. The next one is from Ygal Arounian from Wedbush. You added 8 million new buyers this quarter, following a big last 12 months of new and reactivated buyer ads. What is driving the continued uptick in new buyers strategically? And how is this behavior from this cohort similar or different? Maybe Josh, wants to talk about overarching new buyer behavior?

Sure. We feel great about that. Adding 8 million new buyers is a sequential decline from what we were adding in the pandemic. But it's 8 million new buyers. In fact, it's almost twice the level of new buyers we were adding before the pandemic. I think that's remarkable. And they're coming from a number of sectors. One, international has been great, and we are growing in international markets a little faster as a percentage of the total than we are in the U.S., and in places like the UK and Germany, for example, our core focus areas, the investments we've been making over a period of years to make those markets more robust. We're seeing some of the fruits of that. But even in the United States, there are still a lot of people who don't shop online or don't regularly shop online, or haven't really heard of Etsy. Etsy is coming into common vocabulary now, and people are starting to say, 'Oh, yeah. My neighbor told me about that,' and 'Oh, yeah. I hear that's really hip and cool.' There are a lot of people who still haven't yet experienced Etsy. And then there's new demographics that we're starting to really lean into. For example, men, that's about 50% of the population, and it's very underrepresented at Etsy, as we've said. We think that leaning in more there can do a lot to open up to new segments and new categories even within the United States.

The only addition I would make is that our new buyer growth over the last 12 months was 40 million, which is a significant figure. We've discussed the impact of acquiring many new buyers within a short period and how it accelerated the number of new buyers we would typically have acquired in future years. It's important to remember that someone can only become a new buyer once. The slowdown in new buyer growth aligns completely with our expectations, and we're encouraged by the fact that these buyers are returning to Etsy more frequently and shopping more often. The gross merchandise sales per active buyer increased by 22% in the quarter, which is very exciting to observe.

Great. Okay. We've received several versions of this question, but I'll ask the one that came in from Ana Andreeva from Needham. We have heard from several online companies talking about the intra-quarter slowdown as the economy reopens. Can you talk about what you are seeing quarter-to-date in Q3 2021, and if there are any call-outs from a category standpoint?

Do you want me to grab it?

Yes.

We are not providing guidance on what we are observing in Q3 at this time. However, a straightforward way to address your question is that our guidance assumes there will be no additional lockdowns. Naturally, depending on global developments, this may lead us to adjust our forecast accordingly.

That's great. Thanks, Rachel. The next one is from Nick Jones, and I'll give this one to Josh. Can you talk more about the Star Seller program? Is this an icon on the seller profiles? And can you give us any data that you can share about how this might help sellers to sell more?

Yeah, great question. Thank you for that. The Star Seller program is really designed. Yes, it will be an icon on people's shops. That will show up in a few months. We might do featured marketing around our Star Sellers. It might influence your prominence in search. We're going to experiment with a lot of things. But at a minimum, it will be a badge on your shop to highlight to buyers that you're one of the very best sellers. I think one of the most important things it does, though, is it provides agency to sellers to tell them very transparently, 'Here are the customer service metrics that buyers care about the most, and here is what good looks like.' That sets a bar, an aspiration for our sellers of where they want to go and where we want them to go. One of the things we hear from sellers over and over again is, 'What can I do to be more prominent?' If you look online, the tips and tricks they hear from a lot of others are like keyword stuffing, putting more keywords in your title. That doesn't necessarily make the buying experience better. Do you ship on time? Do you answer buyer requests promptly? Do you get five-star reviews on your products? Those are things that buyers really care about, and we want to focus sellers on those things. The Star Seller program is a great example. By the way, it's not the only way we can do this. But it is a powerful example of how we can really tell sellers exactly what they can do to be more prominent and give them agency in their own success, in a way that creates a race to the top and lifts itself up. I'm really excited about this track-up work in the coming years.

Okay. Great. Thank you. And from Marvin Fong at BTIG. Here's another one on Q3 guidance. Would you say you are contemplating mainly a slowdown in traffic, or are you also seeing changes in conversion rate, items per basket, or purchase frequency? Rachel, did you want to take that on?

Sure. So, no, we are not contemplating a decrease in conversion rate or frequency. We're really excited about the product and marketing initiatives that we have that are actually driving growth in those metrics. And as we've talked about and answered a few other questions, there's a deceleration in new buyers, largely associated with masks. Remember that in Q3 of last year, 11% of GMS came from mask sales, and new buyers were a lot of the mask buyers. So, those things go together. We have really, really big growth numbers to comp. We said that non-mask sales in Q3 last year grew 119%, and we've added roughly $2 billion of GMS on a 2-year basis. So, these are really big numbers to comp, and it's mathematical gymnastics that we're doing, but with lots of underlying growth opportunities in the core business.

Okay, great. I have one more question from Navi Khan at Trust. How are you approaching the opportunity to move payments on Depop to Etsy's Payments, and what is the expected timeline for that? Rachel, would you like to address this or should it go to Josh?

I'll take that one. Depop currently has a solid payment system in place. Each business operates with its own CEO and management, which allows them to optimize their individual operations. We are considering potential improvements in a few areas. First, there are back-office functions like general and administrative tasks where we can streamline operations corporate-wide instead of replicating them in every business, such as legal, finance, and treasury services. The second area involves services that could be managed across all our brands, with payments being one potential example. We will also consider other services like member support, trust and safety, and our advertisement network. Lastly, some areas, including product and engineering, will require direct oversight and creative input from the management teams. Since we've only had ownership for two weeks, we plan to continue identifying ways to optimize and scale as we advance. Payments could be one of those focus areas, and we will gladly share more details as we delve deeper into it.

Okay. Great. Josh, did you want to add anything on that one, or are we good?

Thank you very much for your interest. Looking back to a year ago, we frequently heard questions about whether the surge in Etsy's users was just a temporary trend, with people flocking to the platform out of necessity. The concern was whether they would leave once the world reopened. While we may not be completely past the pandemic, and the world has not fully reopened, it's clear that people have many options available now. I am thrilled to see that despite this abundance of choices, Etsy is experiencing significant growth. Customers are returning to Etsy more frequently, even when there are many more alternatives than before. This bodes very well for our future.

Great. All right. Thanks, everyone for your questions and your attention. We will talk to you, I'm sure, very soon. Take care.

Thank you.