Etsy Inc Q3 FY2021 Earnings Call

Hi everyone, and welcome to Etsy's Third Quarter 2021 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and SG Engagement, and joining me today are Josh Silverman, Chief Executive Officer, Rachel Glaser, Chief Financial Officer, and Gabe Radcliffe, our Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via this Q&A window chat displayed on your screen. Feel free to use it at any time as it will remain open throughout the entire conference. I'll be reading your questions and Gabe will help me try to get to as many of them as we can. Please keep in mind that our remarks today are forward-looking statements related to our financial guidance and key drivers thereof. The uncertainty impacts of the ongoing COVID-19 pandemic or its eventual abatement may have on our communities, business, strategy, or operating results. The potential impact of our strategic marketing and product initiatives, our ability to integrate and benefit from our acquisitions of Depop and Elo7, and their impact on our market opportunity and our 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 which are described in today's earnings release and our 10-Q filed with the SEC on August 5th, 2021, and which will be updated in any future periodic reports 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. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR 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 very strong third quarter. Last year, Etsy dramatically outperformed e-commerce industry benchmarks. Now, in 2021, we're lapping that performance with flying colors, reinforcing the significant market share gains we've made. These great Q3 results further reflect that we're moving the needle on frequency. And that many of the millions of buyers who found us during the pandemic are sticking with us, and performing even better than historical cohorts. Our consolidated Gross Merchandise Sales (GMS) was $3.1 billion, up 17% on a year-over-year currency-neutral basis. With the core Etsy marketplace being the main driver of GMS growth for the consolidated business and responsible for the outperformance compared to our guidance, excluding masks, GMS for the Etsy standalone marketplace grew 24% year-over-year and 138% on a two-year basis. This continued strengthening of our core on a two-year basis is one of the main takeaways that we want to highlight today. Revenue grew 18% and our adjusted EBITDA margin was 33%, with the sustained momentum in etsy.com's top-line growth, contributing materially to the bottom line. Etsy has truly listened to the moment, in large part due to the focused investments we've made over the past four years to execute our long-term strategy. As you know, this strategy hinges on building a sustainable competitive advantage around four elements that we believe differentiate us from our competition, what we call our 'right to win'. In Q3, we again saw significant evidence that the strategy is working, and we believe we're just getting started. We’re investing aggressively to strengthen each element of this strategy, all to continue elevating the customer experience. And we've driven significant gains in visits, purchase frequency, and average order value. In fact, GMS per active buyer for our etsy.com marketplace was up 20% in the quarter, sustaining momentum over the past year. We've been speaking to you for a while about our focus on frequency, or better said, how we're working to position Etsy as a starting place for commerce. We believe that there are several factors that contribute to habit-forming behavior in e-commerce and move the needle on frequency. First, inspiration. Having a fun and engaging experience that keeps you coming back for more. Second, efficiency. Helping the buyer to quickly and easily get in, buy, and get out when they already know what they want. And third, reliability. Ensuring a stress-free and dependable purchase. We've invested in frequency-driving initiatives in each of these three areas, and these investments are made even more impactful by our increased traffic and much larger scale. We now have more slots and more product teams focused on frequency than ever before. We know that changing habits takes time, and it's early days for this work. But we're seeing very encouraging signs of progress. Here are a few examples of our frequency initiatives. We're investing in multiple areas focused on driving buyer inspiration, engaging buyers early in their life cycle, and bringing them back to Etsy. For example, our new personalized onboarding allows the buyer to engage with Etsy to discover new trends and styles while giving us insights into their tastes and preferences. This new customer journey has driven increases in repeat visits and purchase frequency. We've also had great success with our updates tab, which prompts buyer actions such as completing a purchase and in turn, helps us to improve the relevancy of their Etsy news feed. And we're leveraging machine learning to personalize the updates feed for each user. These initiatives collectively have enabled us to have a deeper understanding of our buyers, which we then used to segment and target them with relevant content on and off of Etsy. Many of our visits are from buyers on a discovery journey, and there's so much more we can do to make this experience more fun and inspiring. In the past, Etsy recommendations have often felt like a rearview mirror based on things you've recently bought or searched for. Today, we're investing aggressively in machine learning tools attempting to understand your tastes and preferences in order to anticipate and inspire your next purchase. We want to make Etsy feel truly made for you. For those buyers on a specific shopping mission, we're focused on driving efficiency—a fast and easy shopping experience. During the third quarter, we launched real-time personalization, which leverages in-session data about our buyers' tastes and preferences to help them find what they're looking for more quickly and easily. For example, if a user first searches for leather accessories and later in the session enters a search for wallets, we now incorporate the prior search to prioritize results for leather wallets, knowing the buyer's previously stated preference for leather. This can be especially relevant from a time-saving perspective when shopping for multiple items that have a shared theme, style, or preference. Turning to reliability, we entered 2021 with a strong focus on making Etsy a more reliable place to shop. While our competitors invest capital in building out logistics systems designed to ship one-to-many, we believe that our massive peer-to-peer fulfillment ecosystem is a core part of building Etsy's sustainable competitive advantage. We'll likely never promise to deliver every item on Etsy in two days or less; it's not what we're about. But we do think it's very important that we set clear expectations for when an item will arrive and reliably live up to those expectations. And we're doing a far better job of that. For example, we talked about estimated delivery dates on our last call and we continue to make progress. Looking at the left side of the slide, you can see that as recently as January of this year, we couldn't tell our buyers when an item would arrive on nearly 25% of U.S. listings. Now, just in time for the holiday season, nearly 100% of U.S. listings show an estimated delivery date. This year, we've also markedly improved the accuracy of estimated delivery dates we provide to buyers while prompting sellers to ship on time. We’ve cut in half the number of shipments that arrive past their estimated delivery date. In addition to our fulfillment goals, our Star Seller program, which launched in July, motivates sellers to deliver exceptional customer service, thereby creating a race to the top that elevates the shopping experience and enhances reliability for buyers. In just 90 days, we've already seen the appeal of earning a Star Seller badge alter seller behavior, delivering meaningful improvements to several key customer service metrics critical to buyers. For example, the percentage of buyer messages that got a response within 24 hours increased by 600 basis points in the two months post-launch of our Star Seller initiative. And there's real tangible value for our Star Sellers; the September month-over-month repeat purchase rate for Star Sellers was 25% higher than the rate for non-Star Sellers. We also recently launched a preview version of our new Sell on Etsy app, an area we haven't invested in for a while, and it's trending positively in seller engagement. We mentioned our Buy on Etsy app on the last earnings call, and it's great to see this work continuing to pay dividends. We're driving buyers to the app at a higher rate than ever before. We believe there's no better place to experience our improved customer journeys than the app, which is why we've been aggressively promoting it to buyers. We've seen a 36% increase in app downloads year-to-date, and it has surpassed mobile web GMS share, now making the app the most used mobile channel for purchases on Etsy. Once buyers transition to the app, their engagement and frequency are higher relative to our other platforms. Ultimately, as app usage increases, we can begin to inspire our cross-category browsing earlier in the buyer journey, which has historically led to increased frequency and retention. Moving on from frequency, as you know, we often talk about our impact initiatives being part and parcel of our business strategy. What I would like to mention this quarter is tied to our efforts to lower our carbon footprint. In September, we launched an exciting sustainable packaging initiative. Etsy now offers planet-friendly packaging made from responsibly sourced and 100% recycled materials to enable U.S. sellers, the majority of whom believe it's important to run an environmentally friendly business, to join us in reducing the environmental impact from e-commerce. This initiative is not just about helping us to achieve our goal to be net zero by 2030. We know that consumers care about the impact of their purchases. In fact, 90% of Etsy's U.S. buyers have told us that they care about sustainability. We have a lot of conviction that an initiative like this can drive business growth, so we'll be highlighting it in the buyer experience with a focus on driving conversion and loyalty. Turning to our marketing initiatives, we've invested in creative new approaches to broaden the global reach of Etsy's brand. One great example of our team's innovation is the exciting launch of the Etsy house, our first-ever interactive augmented reality experience that allows buyers to shop a digital home filled with curated Etsy items. We see this as a beautiful, powerful way to showcase the breadth and depth of high-quality items on Etsy and one more example of how we're evolving the perception of our brand so that buyers think of us not just for the occasional purchase, but also for the meaningful, personal gifts. And while I don't have time to mention them all, other examples of novel approaches we're taking to attract new audiences and drive top-of-mind awareness, frequency, and loyalty include testing ads on buses and trains in London, as the city comes back to life, mail-focused brand campaigns in the U.S., placements on ESPN and the History Channel, as well as marketing partnerships with leading consumer brands. We've kicked off an exciting holiday season on Etsy. With our product development initiatives, improved user experience, and multichannel full-funnel marketing campaigns, we believe we will once again make Etsy a meaningfully better place to shop for the holidays. We've been encouraging buyers to start shopping earlier than last year and are leaning into gift guides and personalized shopping missions, creating localized experiences in our key geographies outside the U.S. One initiative we're really excited about is our new gift finder feature—a fun and interactive way for us to help you find surprising and delightful gifts tailored exactly to the interests and tastes of the recipient. A uniquely Etsy way to help you get to the good stuff from among our almost 100 million items. We'll continue to reinforce what is different and special about Etsy during the holiday season through many channels, including TV and digital video, with our new 'Give More Than a Gift' campaign. Turning to our house of brands, we've identified meaningful areas where we can share knowledge and expertise as we work to accelerate growth in Depop and Elo7. In fact, these initiatives will sound very familiar to our playbook for etsy.com and Reverb. Maria and Collago, the CEOs of Depop and Elo7, and their teams are concentrating on conversion rate optimization to increase the value of a visit. For example, things like signals and nudges, and search relevancy. Another key focus area for Depop is laying the foundation to invest profitably in performance marketing with improved LTV attribution models and better MarTech. A top priority for Elo7 is to lower shipping costs through expanded carrier relationships. The Reverb team continues to invest in platform engagement, optimizing the conversion rate, improving the user experience, advertising, and driving international growth. I've always said that the important thing is to keep the main thing the main thing. And for our subsidiaries, the main things are the same as for Etsy. In conclusion, it's gratifying to see how shoppers have loved the experience they've had on Etsy and are coming back for more, even in a world of greatly expanded choice. Etsy is getting better as it gets bigger. As fast as e-commerce has grown over the past 18 months, we have grown substantially faster, indicating that we're gaining and expanding our total addressable market with depth across many categories and geographies. We're moving in a different direction than commoditized marketplaces and have more conviction than ever to invest with discipline in what we see as a multi-trillion-dollar market opportunity and to strengthen our positioning for further growth in 2022 and beyond. Before I turn the call over to Rachel, I wanted to welcome our two recently announced board members, Andy Ballard and Marla Blow, who bring great expertise to Etsy. I couldn't be more excited to have them joining our board. I also want to take a moment to thank our incredible global team for their efforts to make the year-to-date outstanding. We've accomplished so much, and it's particularly heartening given the continued uncertainty in all of our lives. With that here's Rachel.

Thanks, Josh. And thank you to everyone for joining us on our call. My commentary today will cover consolidated results, key drivers of performance, and Etsy marketplace standalone results where appropriate. As a reminder, Reverb, Depop, and Elo7 are all reflected in our consolidated financial results and KPIs for the third quarter. Against the backdrop of continuing volatility and uncertainty, Etsy's consolidated GMS outperformed our expectations in the third quarter, and we see notable stability with significantly less impact from reopening dynamics than we had been anticipating. As we often say, we love our marketplace model for its capital-light structure, with no logistics or warehousing, low infrastructure costs, the distributed nature of our sellers, and the diversity of their products, which offers significant reach and depth to satisfy increasing global demand. This model is proving to be resilient in today's economy as constraints on the global supply of goods increase and create supply chain bottlenecks and cost escalations in fulfillment. Etsy is uniquely positioned with over 5 million Etsy marketplace sellers distributed around the world, most of whom are working from their homes. Further, over 90% of U.S. Etsy marketplace sellers tell us that they source the materials locally and have limited overhead. As a result, we believe Etsy sellers stand ready to serve the world in ways many others can't. So how did this drive our results in the quarter? On a consolidated basis, Etsy's third quarter GMS grew 18% year-over-year to $3.1 billion. Revenue grew 18% year-over-year to $532 million, and adjusted EBITDA was $174 million with a margin of about 33%. Excluding the acquisitions of Depop and Elo7, but inclusive of Reverb per our guidance, the take rate was 17.5%, and adjusted EBITDA margin was approximately 36%. The primary driver for the significant improvement in adjusted EBITDA margin was the sustained momentum in the Etsy marketplace's top-line growth, contributing significant flow-through to profitability. The majority of Etsy's GMS is derived organically. This quarter represented 83% of total GMS. We plan to provide you with GMS and select KPIs for our subsidiary businesses on an annual basis, so you will be able to track the success of our house of brands portfolio companies over time but we do not plan to provide quarterly details. The Etsy marketplace remains the vast majority of our business. Reverb, Depop, and Elo7 collectively represented approximately 12% of Q3 consolidated GMS as Elo7 closed on July 2nd and Depop closed on July 12th. Integration is going well, and our teams are collaboratively developing product and operating plans to drive future growth and profitability improvements. Our two new subsidiaries are experiencing slightly different market conditions at present. Depop is facing reopening headwinds similar to other e-commerce players, particularly as it compares to its enormous 2020 growth. Elo7 has begun to see improved conditions in the Brazilian market toward the tail end of the quarter as more of the population became vaccinated. Last but not least, Reverb continues to outperform the musical instruments industry on a two-year basis. My next few slides will focus on the performance of the Etsy marketplace. During the third quarter of 2021, GMS grew 12% year-over-year and 24% year-over-year, excluding face masks, and the take rate was 18%. GMS was underpinned by continued strength in our top six categories, led by homewares and home furnishings, our largest and fastest-growing category on a trailing 12-month basis, jewelry and accessories, and apparel. Fall and Halloween themes drove buyer demand in Q3, as there was a notable uptick in seasonal home decor such as ornaments and seasonal accent items. Halloween also drove our apparel category as it is an annual purchase occasion for many of our repeat buyers. When you look at the monthly performance for the Etsy marketplace, excluding masks, strength in Q3 shown on the right of this slide, July saw a two-year GMS growth of 138%. August was also 138%, and September slightly accelerated to 139%. It was more stable than we had anticipated when we set guidance in early August. At that time, it was reasonable to expect that reopening trends would have had a more material impact on online shopping behavior and Etsy's performance in the third quarter. While we don't yet have full Q3 data for e-commerce growth, on the left side of this slide, we've mapped our two-year performance to an e-commerce benchmark, highlighting continued share gains. We've also continued to track the impact of face masks on our business and provide transparency around that. While face masks did gain some momentum in certain regions at specific times during the quarter due to changing COVID-19 guidelines, overall, they represented less than 2% of Etsy marketplace GMS in the quarter. In Q3, non-mask GMS was up 138% on a two-year basis, which is relatively stable compared to prior quarters. This growth was underpinned by significant growth in the UK despite all mobility restrictions being lifted early in the quarter. This is quite encouraging, and we believe our brand is becoming more prominent and Etsy is gaining share in our largest core geography outside the U.S. Consolidated Q3 revenue was again driven by growth in both marketplace and services revenue, with Etsy ads, GMS volume, and the incremental benefit of Depop and Elo7 being the primary drivers. The average take rate for our subsidiary businesses is lower than the Etsy marketplace's and was approximately 10% in Q3, with marketplace fees representing the majority of their revenue. Transaction fee revenue, inclusive of all ads, grew 18% year-over-year, driven by higher GMS from frequency and average order value. In Q3, our offsite ads revenue offset nearly 40% of Etsy marketplace performance marketing spend, which contracted slightly compared to last year as we ran incrementality tests and pulled back performance marketing on several chargeable channels. The reduced marketing spends from our incrementality tests also contributed to a reduction in clicks on Etsy ads, driving a modest contraction in take rate. However, Etsy ads revenue was up 28% as ad relevance continues to drive improvements in click-through rates. Our disciplined investments in product and marketing continued to deliver strong returns and serve as a foundation for future growth, with many initiatives focused on conversion rates and frequency. Q3 consolidated marketing spend was $132 million, up 4% year-over-year, and contracted as a percentage of revenue by 700 basis points sequentially. The Q3 spend reflects the pullback in performance marketing for our incrementality testing. After running successful television campaigns in the U.S., UK, and Germany, we paused some campaigns for 2 to 3 weeks to measure the interaction effects between marketing channels and the incrementality of our brand spend. In the fourth quarter, we're leveraging these learnings and applying them to our placements for the new holiday creative. We're also investing in other marketing programs in the fourth quarter, like expanding our Etsy Coupons tool to proactively target new buyers. We'll continue to leverage our CRM capabilities to segment and target specific buyers on and off our platform. Q3 consolidated product development spend was $74 million, up 60% year-over-year, reflecting our success in expanding our team to invest in critical areas that we believe will increase GMS. As of the end of Q3, consolidated headcount was slightly over 2,300, up 70% year-over-year, with much of this increase sitting in product development. Note that the large increase in consolidated headcount includes nearly 600 employees at Depop and Elo7. The competition for talent is fierce, but we have been pleased with our ability to attract, retain, and engage our employees in what has clearly become a very tight labor market. Similar to our marketing investments, we apply an ROI lens to product and engineering development spend. As shown on slide 23, we have significantly grown our product and engineering headcount and feel confident that we can generate a strong ROI even as we scale our spend. I'll also note that we continue to make strategic investments that don't directly generate incremental GMS but are necessary to effectively run and scale the business. These investment areas include development infrastructure and support, cloud costs, trust and safety, and financing compliance. We have seen very encouraging performance in all of our Etsy marketplace buyer segments, particularly on a two-year basis, as we compare previous year pandemic-driven peaks. In Q3, active buyers grew 30% year-over-year to 89 million, stable with Q2, 2021. Repeat buyers, those who made purchases on two or more days in a 12-month period, grew 35% year-over-year to 36 million, and habitual buyers, our most loyal buyers, remained our fastest-growing buyer segment, up 65% for the quarter to nearly 8 million, and up 237% on a two-year basis. These three metrics show flexibility in our buyer base over the past few quarters, a signal we've all been looking for to gauge the retention of our 2020 cohort. We're also pleased to see healthy trends and stability within our new buyer cohorts on the Etsy marketplace. We acquired 7 million new buyers in Q3—very strong performance considering how many millions of new buyers we have attracted in the past year and still well ahead of our pre-pandemic quarterly new buyer acquisition rate. We're seeing particular strength internationally as Etsy's new buyer growth outside the U.S. expanded as a percentage of total new buyer growth, driven by performance marketing investments in several new markets. In fact, new buyers outside of the U.S. have expanded 600 basis points year-over-year as a percentage of total new buyers. Even more noteworthy, new buyer repeat purchase rate was up 25% in 2021 compared to 2019, further evidence of our success driving frequency. When measuring the performance of the 2020 active buyer cohort, early data suggests they are outperforming our historical cohorts. In fact, of our 69 million active buyers in Q3, 2020, 56% made another purchase over the next 12 months. This compares to 43% for our historical cohorts—a clear improvement. As we've talked about in recent quarters, we've also had great success reactivating buyers. For instance, in Q3, we reengaged 4 million buyers who hadn't made a purchase in over a year. With our investments in product and marketing, we are more able to reactivate a growing buyer base. We're very encouraged to see that when compared to the historical retention of active buyers over time, this newer cohort is significantly outperforming. GMS per active buyer on a trailing 12-month basis expanded to $132, up 20% year-over-year, driven by frequency and average order value. Among our repeat buyers, we continue to see growth in the average number of purchase days per year, from 4.6 purchases in 2019 to 5.2 purchases in 2021. Including all buyer segments, buyers now buy an average of 3.1 times per year, which is up nearly 25% since 2019. Now moving to the Balance Sheet. As of 9/30, we had approximately $907 million in cash and cash equivalents, short and long-term investments in addition to a $200 million revolver that is currently undrawn. Note that the acquisitions of both Depop and Elo7 closed in July and are reflected on the quarterly ending Balance Sheet. Also, in the quarter, we had several uses of cash that did not impact adjusted EBITDA. These include approximately $32 million of transaction expenses related to our acquisitions of Depop and Elo7, a portion of which were accrued in the prior quarter, as well as the cash tax payment of approximately $60 million. In addition, we repurchased $54 million in shares during the quarter under our board-authorized repurchase plan. Our model remains highly cash-generative, asset-light, and generally converts the majority of adjusted EBITDA into free cash flow. Turning to our outlook, we currently estimate that our Q4 consolidated GMS, which will now include Etsy, Reverb, and a full quarter for Depop and Elo7, will be $3.9 billion to $4.1 billion, up about 12% at the midpoint compared to Q4 of last year. We expect our Q4 revenue to be $660 million to $690 million, up about 10% at the midpoint versus Q4 of last year. Our adjusted EBITDA margin will be about 26%. Within our Q4 GMS guidance, we are forecasting very solid growth for the Etsy marketplace of high single-digit GMS growth, implying relatively stable two-year growth when compared to Q3. We think this is excellent, given our year-ago performance. Drilling in a bit more on our guidance, the holiday season has kicked off early on the Etsy marketplace, and we have had a strong October. We note that during the month of October, keywords that have holiday terms in them have increased nearly 100% year-over-year. Buyers are anticipating longer shipping times driven by constraints in the supply chain. We recognize several important tailwinds, including external forecasts for strong holiday spending, consumer behavior that continues to rely on e-commerce—a habit that is not just a substitute, and Etsy's distributed supply chain that may be less impacted than others in this environment. On the flip side, we're also keeping an eye on several potential headwinds, including those associated with inflation, retail reopening, potential carrier constraints, and consumer confidence. It's important to keep in mind that Etsy's November and December year-over-year comps are challenging, so we factored this into our guidance as well. Within the context of our guidance, here are a few additional items to keep in mind. Note that 4% of Etsy's marketplace GMS, or $133 million, was from face masks in Q4 2020, and we expect face masks to be relatively inconsequential in Q4 2021. Also, keep in mind that Depop and Elo7, while accretive to our top-line, will be with us for a full quarter, meaning they will be dilutive to adjusted EBITDA margins similar to the impact they have in Q3 as we invest in their future growth. The majority of the contraction in take rates is driven by our subsidiary marketplaces, which have a lower average take rate than Etsy standalone. Additionally, we expect an increase in amortization based on the allocation of purchase price for both Depop and Elo7. Refer to our 10-Q, which will be filed shortly for more details. You will see us stepping back up our marketing spend in the fourth quarter, and hiring will continue to be at an elevated pace. As a reminder, in the fourth quarter of 2020, U.S. stimulus checks were a significant boost to consumer spending that is not expected to repeat this year. Stimulus checks also remained an important factor in our elevated growth in Q1 2021 and a bit in the early part of Q2. So please keep the high growth levels in mind as you model 2022.

Thank you all for your time today. I will now turn the call over to Deb so we can take your questions. Hi, everyone. Thank you so much for your time. I'm going to dive right in. We have a lot of questions in the queue. So, I'm going to start with this one—and we've got several versions of the Q4 guidance question. I'll take this one from Laura Champine of Loop Capital. Josh, let's put this to you. Why do you expect GMS growth to decelerate despite the advantages of your mom-and-pop sellers when compared to big retailers that are facing major supply chain problems this holiday?

Thanks, Deb, and thanks to all of you who asked that. I think one of the most popular questions on the earnings call award. We feel great about our Q4 guide. And let me start with, as Rachel said, we're off to a strong start in October, and we feel great about that. Let's remember what we're comping. Last year, we had a really solid October followed by a remarkable November and December. If we go back and remember why it was: a tragic reason—COVID cases were spiking dramatically. There were lockdown orders going into place in many parts of the country. Hospitals were overflowing. As a result, people were largely trapped at home and had very few places to shop. Many people turned to Etsy, often for the first time, due to the lack of a lot of other options. November and December last year were remarkable, and we delivered a fourth quarter at Etsy of 111%, vastly outstripping most of the e-commerce. We're off to a strong start in October; the comps get a lot harder in November and December. What we've found is that looking at our growth rate relative to 2019 is the most helpful way to look at our growth rate. Because 2020 was so volatile with so many external factors. So, if you look at the midpoint of our guidance, what we forecasted is that Q4 is absolutely stable to Q3, and we think that's great news. In a world with so much more choice, where people are moving about largely freely, where hopefully COVID cases continue to decline, and people are moving about and shopping wherever they want, they continue to choose to come back to Etsy again and again. We're growing meaningfully over those remarkable comps from last year, and we feel really good about the fourth quarter. Could it come in stronger than what we guided to? Absolutely. It could turn out that people are spending more, that they're turning to Etsy more and more than the trends we saw in October could continue in November and December. October could have been a pull-forward of the holiday, and a lot of people may be spending much earlier in the holiday. November and December could turn out to be weaker months for e-commerce generally. Yes, that's possible. We live in a world of unknowns. We're giving you the best guidance we have with the information available. Our main focus is to make sure that our customers, our buyers, and our sellers have a really good experience this quarter. So that's what's under our control, and that's what we're focused on. And again, I'm so delighted that so many people had such a great experience on Etsy back when they had relatively few choices; now that they have many choices, they're choosing to come back even more often. That’s encouraging.

Great. Thanks, Josh, let me go to the next question from Maria Ripps at Canaccord. So, Josh, I think this one's for you too. Can you comment on what you're seeing across the digital advertising landscape, particularly with IDFA and changes and whether that's impacted your marketing strategy?

Yes, digital marketing has continued to be very effective. Performance marketing has continued to be very effective for us. I know that there's a lot of discussion about CPCs going up a lot over the marketplace and other people's margins being under pressure with that. Etsy is so long-tailed that we have felt a lot less of that than others. We continue to see very strong returns from performance marketing. In terms of IDFA, I would describe that as a future opportunity cost to Etsy more than a present headwind. So really where IDFA is challenging is at least for us and I think for many others, for paid app marketing efforts. It's hard to tell when you spend money to market your app how effective that performance marketing is. Truthfully, we've not been paying to market our app, so it's not a present headwind. Now, maybe we should be paying to market our app. Maybe that's something that would help us to grow even faster. We've talked about our earned efforts to market our app through our own channels, and we've been seeing great success. So, IDFA might be a headwind to the opportunity for us to be investing even more to market our app, but it hasn't been a material headwind to our present performance.

Great. Moving on, I got a question from Nick Jones at Citi. Last 12-month GMS per Active Buyer continues to increase. How should we think about how high December can get? Is a reasonable frequency level once per quarter or once per month? How are you thinking about habitual buyer growth from here? Rachel, let's start with you on that one.

That one is good. Hi, Nick. Thanks for the question. We did say GMS per Active Buyer was up 20% in Q3 even though some of our buyer segments actually decelerated in the quarter, so it was a really strong quarter for GMS per Active Buyer. One of the factors that drive GMS is frequency. So, more and more buyers are buying more frequently, which is so heartening; so many of our cohorts are seeing more choices in share of wallet. Reminder that the average number of purchase days for all of our buyers increased from 3.1—it’s now up from 2.5 a year ago. And for repeat buyers, it went up to 5.2—another solid increase, up from 4.6 a year ago. We're seeing improvement in frequency across the board. It's still low. So, 3.1 is still far lower than we hope it can be. Your question was, could it be once per month, and we see no reason to think that it couldn't be. Another important factor is that habitual buyers, again, our fastest-growing segment, grew 237% on a two-year basis and represents about 40% of our GMS. That's really strong testimony that the most important segment is growing fastest.

What did I just pile on there? As you pull back and look over the long-term buyers, it looks like our consolidating their shopping behavior around fewer and fewer places. Most of those places are playing the same playbook; they're trying to sell you commoditized products that are cheaper to buy and arrive faster. The more people consolidate their purchases there, the more they're going to create an alternative. If Etsy is the leading alternative to commoditized commerce, I think we're better positioned than others. I personally believe we're as well-positioned as any to be the leading alternative to that commoditized habit you go to all the time. I think that's a huge opportunity. And when you look at GMS per active buyer at only $130 per year, it doesn't take much to believe that that can go up substantially.

Thanks both. Okay. The next one is from Anna Andreeva from Needham. It's a two-part question. I'm going to give the first part to Rachel. Can you talk about how we should think about seasonality of your new brands as we model out 2022, both on GMS and take rates?

Great question. So, as you know, for Etsy, Q4 is our strongest quarter for GMS. It is a little lighter on take rate, traditionally seasonally for Etsy in the fourth quarter, simply because we get so much more GMS than we get on transaction fees. Other segments are also skewed a little bit higher in the fourth quarter, but not as demonstrably as Etsy does. So, Depop, Elo7, and Reverb all have slightly higher fourth quarters than they do the rest of the year, but not as pronounced as you would see in Etsy.

And just to follow on that one, the take rate being a little softer typically on Etsy in the fourth quarter, I would classify as a high-class problem. Transaction rates are based on purchases, and advertising is based on views. Because conversion rate historically goes up in the fourth quarter, GMS grows faster than views. Our sellers are happy to advertise, they're putting in a budget to advertise—it's simply that GMS grows even faster than views, which is another way of saying conversion rate is strong in the fourth quarter, which means buyers are finding what they like, which will be historic.

Great, Josh. While I have you, the second part of this question was related to the top priorities for our Depop Elo7 and the sellers while we're there?

Absolutely. The priorities across the new subsidiaries look a lot like the priorities in Etsy. They're very much focused on increasing conversion rate through a better customer experience, and there's a lot of opportunities that Etsy has to help them. We're working closely with them, looking at their search technology to figure out how we can deliver more relevant search experiences, and things that streamline the path to purchase so people can go from view to purchase even faster and more easily. By improving the conversion rate, we improve the value of the visit and that allows us to market more effectively and get a higher ROI. The other area that we're very focused on is helping them with performance marketing and marketing attributions so that we can lean more into performance marketing in a way that drives growth and value in an ROI-positive way. Specifically looking at Elo7, they're very focused right now on shipping and how to lower the shipping costs through increased relationships with carriers in Brazil, which we think is a meaningful opportunity. Also, as Brazil hopefully emerges from the pandemic, as vaccination rates grow, people will get back to events, and the Depop business is much more event heavy than Etsy or the other subsidiaries.

Great. Next one is from the analyst from Wedbush. Can you discuss more on the app strategy? How much more room is there for growth in that channel? How does it help drive frequency and growth in habitual buyers? Josh, do you want to start with that one?

Yeah. I'd say our understanding of the app has evolved a bit. We've historically thought the app was the best place for experienced buyers to go. So, you start on the mobile web or on the desktop, and after you've made a couple of purchases, you migrate to the app. That works, and definitely more experienced buyers are having a really good experience on the app. We see that once they download the app, their engagement goes up in almost every metric. What's been an interesting finding over the past couple of quarters is even newer buyers seem ready to download the app and benefit from it. You're seeing us lean into marketing the app even for people who maybe haven't thought before: our first-time buyers. For those communities, when they download the app, we see more engagement from them. It does make sense that with the app, we have more opportunities to provide triggers for them to use the app through things like badging to notify them about updates waiting, which then drives them to the updates tab, telling them what's happened since they left. Just a more dynamic and rich experience is possible in an app rather than in mobile web. It was just this quarter that the app became the largest platform as measured by GMS, overtaking mobile web and desktop. Mobile web is still the largest platform by visits, so there are meaningful opportunities still for the app to grow, and it's something that we think we're only just beginning to really lean into and tap into its full potential.

Great. Next one is from Naved Khan at Truest. Can we talk about the impact we're seeing from the economic reopening and improving consumer mobility across our marketplaces? Josh, why don't you take that one?

Sure. I think consumer confidence has held up better than many of us feared. Our consumer spending has held up better than many of us feared, and that's certainly reflected in Etsy's Q3 results where you saw us come in over the top of guidance based almost entirely on the strength of the core Etsy business and the organic Etsy business. We pulled back on performance marketing to test incrementality. Even in light of that, the organic strength of the Etsy brand in this market is holding up really, really well. I would say we think it was reasonable to assume that as the world reopens and people have many more choices, they would avail themselves of that choice, and Etsy would face headwinds and see some deceleration. We expected that, and we thought it was reasonable. It's been delightful to see that, certainly relative to 2019, that hasn't been the case. In fact, we've seen a lot of stability—in fact GMS per active buyer is growing. Reverb is growing on a two-year stack substantially faster than the musical instrument industry itself, which is great. They see a little variability as musical instrument stores open and close. But as we said with the Etsy marketplace, we also find measuring them on a two-year stack or measuring them relative to 2019 is the easiest way to forecast that business, and we continue to see it grow substantially faster than the musical instrument industry as a whole. Elo7 in Brazil has faced headwinds because a substantial part of that business is based on events: people buying things for birthday parties, baby showers, quinceaneras, etc. And obviously, with the pandemic and lockdowns, there have been far fewer events. We saw toward the end of the third quarter vaccination rates accelerating fairly rapidly in Brazil, and we did see the beginnings of an uptick in Elo7 as vaccination rates spread, and we think that's really encouraging. At Depop, we also feel very good about their two-year growth rate. They had an exceptional 2020, with over 100% growth, and far faster than all of the publicly traded re-commerce peers. As we expected, they did decline in the third quarter, and that was expected as their user base is disproportionately teenagers. It's Gen Z and heavily weighted toward the U.K., where teenagers were pretty much locked at home for a substantial part of 2020. The stay-at-home orders began to ease in the third quarter, and it's not surprising that teenagers, after being locked at home for a year, want to go out, want to be with their friends, and want to go to the mall. They're seeing some temporary headwinds from that. We continue to think re-commerce is an amazing space, and that apparel is the most attractive part of re-commerce, and we continue to think that Depop is the best brand in re-commerce and apparel.

Great, thanks, Josh. Next, I guess, a two-part question from Marvin Fong at BTIG. The first part, I'll give to Rachel. You mentioned pulling back on performance marketing spend to measure incremental performance. What were some of your learnings and how do we think about this pullback in the context of how offsite ads are performing?

Overall, it's extremely validating that even as we scaled spend significantly over the past 18 months, we're getting the incremental return we expected. Tweaks and tunes in various channels to make them more accurate are really helpful, and we do that all the time to optimize. But nothing changes the thesis overall. So, we learn it helps us optimize our model. We might change a threshold here and there based on what we learned. You can see that by doing that, we actually left profitable growth on the table. We want to keep a very dynamic investment model in marketing where we spend up until the last marginal dollar spent is no longer reaching our ROI thresholds; it’s very dynamic. It pulls back automatically depending on where we set our ROI threshold. And so, we'll keep investing using those learnings to optimize and grow the channels that we think are the most profitable.

Great. Thanks, Rachel. The second part of Marvin's question is really for Josh. Rachel said we're planning to increase marketing spend in Q4, but Josh, maybe you can comment a little bit about half our marketing plans in general for the fourth quarter?

Sure. Like Rachel said, it's really encouraging that as we've increased our performance marketing spend, we continue to see good returns on that. To say differently, incrementality testing can sound like—what does that really mean? But it just means if we hadn't spent the money, might those people have found us anyway? Are we truly getting additive buyers for the money we're spending? We're constantly asking ourselves that question. I'm sure you're constantly asking it: Did you really need to spend that much on marketing? We're testing that. We're testing at the margin, not just the overall thesis. The other thing I will add about the third quarter is that we did very little TV advertising. We were dark most of the third quarter on TV. We've just launched a brand-new campaign. We showed you one example of that campaign, and that will be live for most of the fourth quarter. You'll see us much more aggressively on TV in the fourth quarter, and you will see us lean into performance marketing. We think our brand is super relevant all the time, but it's especially relevant during the holidays. We want to make sure that we're really in front of people. Performance marketing works really hard for people that are already down the purchase funnel and thinking about buying something. What you're seeing in our TV ads is that we also want the chance to tell our story. We want to remind people why we're different. We want to ensure that there's an emotional connection with people, and we want to ensure that there's organic love for the Etsy brand while people continue to come directly to our brand rather than finding us downstream. I will continue to point out how special we think that is for Etsy: such a high proportion of our traffic comes directly to us, and we're not dependent on downstream channels, which we think is a real strength. So, you should expect to see us lean more into marketing in the fourth quarter, as we typically do, as reflected in our merchant guidance.

And I just want to add, I think part of this question was asking about the impact on OSA in the third quarter from our pullback because OSA is cooperative. Our standalone leash spends on TLA, and there's a successful sale for our sellers. We charge an incremental transaction fee for our pullback on performance marketing, which means that fee also went down a bit. However, we did say that 40% of our performance marketing spend now is offset by ads, so that's a healthy program for us with still less than 2% churn from our sellers who participate in the U.S. program.

Rachel, while I have you, the next question is from Jason Helfstein at OpCo. Marketing spend was pulled in quite dramatically in Q3. What did you see that gave you confidence that demand will continue given the lack of performance marketing spend?

Thanks, Jason, for the question. Just as a reminder, the vast majority of our traffic comes to Etsy organically; I think it was 17% paid and the rest organic traffic. So, we have a significant amount of demand that is coming from top-of-mind awareness or our investments in other forms of marketing. Other marketing channels, like our CRM efforts, social efforts, and our brand marketing drive top-of-mind awareness. And those things are working together. We didn't pull performance marketing all the way back, so we still spent significantly in the quarter. It's dynamic—we can just change the ROI threshold to bring the spend down; it will dynamically reduce. So, we're still feeling that we got great traffic. In fact, we added 7 million new buyers in the third quarter even though our marketing spends came down.

Okay, great. The next one is from Ed Yruma of KeyBanc. You have historically had a Q4 that ends early at Etsy compared to other retailers. How do you feel about your ability to extend the holiday season this year?

Great question, Ed. One of the things we talked about in the recorded part of the call was doing a better job of setting expectations and meeting expectations. When we talk about truly becoming a habit, when we talk about taking that $130 of GMS per active buyer and making it something much, much larger, if you know it’s worry-free to shop on Etsy, you'll know when it's going to arrive, and that we’re going to live up to those expectations. I think we can grab a much, much larger share of people's wallets over time. That's a big focus of ours. The fact that we have so much more estimated delivery date coverage and that we're doing a better job of meeting those expectations is really helpful. We're never going to promise to deliver everything on the site within two days or everything in the site within 24 hours. Looking at our environment and sustainability, teaching the world to expect everything to arrive in a day is not good for our environment and largely not necessary. A lot of people are questioning right now with all the supply chain issues, thinking maybe I should shop a little earlier, and maybe I don't need to wait until the very last minute. That's likely helpful for Etsy this year. Hopefully, I think for the long-term, people will start considering whether they really need to wait for the last minute. I think that would be good for the world and certainly aligned with Etsy.

Great, I know we're at time, but we have a few more that I want to try to squeeze in here. First one is from John Clatoni from Jefferies. It's truly about the Star Seller program, and how do we think that could drive frequency?

Yes, I'm super excited about the Star Seller program and what it can be today and even more important, what it can become over time. I want to start with seller agency; sellers really want to know what they can do to make their shop more successful. The more transparent we can be, the better they're going to be doing their job, right? They're busy; they have relatively little time. If we can focus their efforts on these two or three things that will drive the most improvement for them, that’s really helpful for them and something that Etsy is uniquely positioned to do. By giving them a few key customer service metrics to focus on, we're already seeing very meaningful improvements. For example, responding to a buyer's message within 24 hours, we've seen a 600-basis point improvement across the entire marketplace on that metric within two months of launching the program. That’s a good example of how this can really lift all boats. We see that surfacing and promoting sellers that provide the most reliably good customer service leads to a better buyer experience and a better seller experience. Sellers that are Star Sellers have a 25% higher repeat purchase rate. I think that’s due to two things: 1. The recognition of the Star Seller giving buyers confidence, and 2. The consistent delivery of good customer service, earning repeat business. The more we can get every seller to look like a Star Seller, the better off we all will be.

Great. Thanks, Josh, we are over time, so I'm going to cut it there. If anybody has any questions, you know where to find us. Thank you all so much, and we will talk to you in the other quarter. Have a happy holiday everyone.

Thank you.

Thanks, everyone.