Etsy Inc Q1 FY2022 Earnings Call

Hi, everyone, and welcome to Etsy's First Quarter 2022 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, our Chief Financial Officer; and Jessica Schmidt, who joined us in March as our Senior 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. I'll be reading your questions, and Jessica will help me to try to get to as many of them as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the global macroeconomic uncertainty, including additional or unforeseen impacts of the COVID-19 pandemic and general market political, economic and business conditions may have on our communities, business strategy or operating results, our opportunity, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic marketing and product initiatives 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-K filed with the SEC on February 25, 2022, 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 we'll find on our Investor Relations website, along with a replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. In recent years, it seems one of the only real certainties has been uncertainty. You could say it's the new normal. We believe that over the past 5 years, our team has demonstrated its agility and adaptability, and our business model has shown resiliency through many types of macro conditions. In Q1, we rose to the occasion once again to deliver solid results in a challenging quarter, maintaining almost all of the gains reported during the extremely strong year-ago period. Our consolidated GMS was $3.3 billion, up 3.5% year-over-year or approximately 5% on a constant currency basis, with the Etsy marketplace GMS down about 2% as we lapped the exceptionally strong growth of the prior year. Consolidated revenue grew 5.2%, and our adjusted EBITDA margin was 27.5%. Rachel will cover the results in more detail shortly. Etsy experienced a tidal wave of growth over the past 2 years. As much of the world shut down, we went from serving 2.6 million to 5.5 million active sellers and from 47 million to nearly 90 million active buyers, and etsy.com GMS grew from about $1.2 billion in the first quarter of 2020 to $2.8 billion this past quarter. We have provided a pathway to economic opportunity for millions and a meaningful alternative for buyers looking for something distinct in the complex and increasingly commoditized global supply chain. As we transition from the COVID pandemic to what appears to be an endemic, people have regained their mobility. And with that come many more choices for where to spend their hard-earned dollars. This is a wonderful development for humanity, and I am personally relieved to see it. However, it also means that in the near term, we'll need to work harder and invest more to continue to grow Etsy's share of consumer spending, which is essential for our larger base of sellers to increase their sales. We're prepared for this challenge. The current macro climate makes the coming months more challenging to predict. Nevertheless, we remain confident that in the long term, the number of online shopping options will consolidate as the world becomes increasingly commoditized. The pandemic may have given us a glimpse of what the future could look like for Etsy, where in a more consolidated, commoditized environment, Etsy could thrive as one of the few meaningful alternatives in a sea of sameness. Throughout this transition, our mission has remained the same: to keep commerce human. We continue to believe that the strategy we outlined in 2019, focused on our Right to Win, keeps us aligned. The key change is that we now have even greater conviction that the opportunity ahead is substantial. We aim to pursue that opportunity with focus, discipline, and passion. Regarding the situation in Ukraine, it weighs heavily on us all. Our thoughts are with everyone affected in the region, particularly Etsy sellers and buyers, as well as the family and friends of our global team. Being part of a community means stepping up to support one another during difficult times. To do our part, we've taken numerous steps to assist Ukrainian sellers facing tremendous hardship. Our financial support, which includes providing listing credits and waiving current owed balances, totaled $4.6 million in the quarter. Enabling sales has become crucial for Ukrainian sellers. While shipping physical goods has become challenging for some, many sellers have adapted by listing digital items from printable art to embroidery patterns as a means to earn income. We've also seen a strong interest from buyers wanting to directly support small businesses in Ukraine. Our team is working diligently to ensure our sellers feel supported and to promote their listings to buyers. In total, our Ukraine-based sellers generated over $11 million in sales in March, averaging nearly $1,400 per seller. In 2019, we also presented our strategies for GMS growth, focusing on bringing more active buyers to the marketplace, encouraging more frequent shopping, and building trust for both larger and smaller purchases. Since then, we've shown that we can cater to the everyday needs of millions of buyers across a wide range of buying occasions, and that Etsy sellers offer delightful products. We've made significant strides in driving frequency but still have much work ahead. I wanted to spend some time today discussing how we see these opportunities progressing. Etsy is often labeled as a niche marketplace, suggesting that we might not be relevant to most individuals, or at least not very often. I strongly disagree and believe our recent performance proves how relevant the Etsy marketplace is to a diverse range of people for various shopping occasions. Let's examine the numbers. Currently, we have about 89 million active buyers in nearly 250 countries. Just in this past quarter, we added 7 million new buyers, building on the 73 million added over the last 2 years. Looking at our categories, 15 Etsy marketplace categories each attracted over 1 million unique buyers in 2021, with 7 categories having over 15 million unique buyers, showcasing Etsy's relevance to a broad audience across numerous categories and occasions. Regarding the demographics of our buyers, recent surveys indicate approximately 75% of etsy.com's U.S. and U.K. buyers identify as women while 25% identify as men. Although we recognize gender identity exists on a spectrum, this data pertains to the two largest groups. Among our core women buyers, we estimate that around 30% of adult women in the U.S. and U.K. shopped on Etsy at least once in the past year. Of those, about 58% made purchases on two or more days and approximately 56% bought items from two or more Etsy categories during the same timeframe. To me, that doesn’t fall under the category of niche. On the flip side, about 70% of women in our top two markets did not shop on Etsy during this period, which leaves room for significant growth. Focusing on the other half of the population, those who identify as men, is an extensive opportunity we are just starting to explore. We estimate that approximately 10% of adult men in the U.S. and U.K. shopped on Etsy at least once in the past year. Around 37% of these men made purchases on two or more days, and 35% bought items from two or more categories during the same period. Our recent research into men's shopping habits revealed that men value handcrafted items, support small businesses, and seek to make meaningful purchases reflecting their personalities, similar to women. Our data indicates that among potential buyers aware of Etsy, there’s no difference in likelihood of visiting the site by gender. The top three reasons men state for not shopping on Etsy are similar to women's reasons, mainly focusing on awareness: Etsy hasn't come to mind, they haven't had a need for the items sold, and they are unaware of what Etsy offers. We estimate that 35% of our new U.S. buyers in 2021 identify as men. We are just beginning to understand these buyers and are developing product and marketing strategies to help them learn the when and why of Etsy, ensuring we stay top of mind. For instance, we've seen a positive return on investment from recent tactics utilizing gender-neutral TV advertising and media placements on NFL and Hulu. This year, we’re piloting male influencer content to build trust and encourage trial on Etsy for men. There’s still ample room for improvement regarding engagement and conversion. While nearly 90 million active buyers is impressive, we estimate that etsy.com sees about 180 million unique visitors each month, indicating room for significant improvement in engagement and conversion. Moreover, we have over 100 million lapsed buyers, individuals who have shopped with us before but haven’t made a purchase in the past year. Looking at our geographic opportunities, Etsy's overall buyer penetration remains below 50% across all seven of our core markets. The majority of our active buyers are still in the U.S. Most of the data reviewed today relate to the U.S. and U.K., our two largest markets. For instance, in France, our prompted awareness is only about 40% compared to about 90% in the U.S. and U.K., and the conversion rate there is 50% lower than in our primary markets. In fact, penetration rates in the next 15 markets beyond the U.S. and U.K. are approximately 80% lower than in those top two Etsy markets. To clarify this further, these 15 countries have a combined population 58% larger than that of the U.S. and a similar GDP of around $20 trillion. This observation does not indicate any change in our near-term strategy to focus on our seven core markets. It merely illustrates our strong belief that we are only starting to harness Etsy's long-term growth potential. In addition to the sheer size of potential buyers, another key growth area is frequency. As I mentioned earlier, the Etsy Marketplace has much to offer across various buying occasions. Over the year ending March 31, 2022, 44 million of our repeat buyers made purchases on Etsy an average of 5 times, with around 8 million classified as habitual buyers. For habitual buyers, making a purchase on Etsy on six different days and spending $200 within a year suffices, but our habituals typically shop approximately once a month. They’ve discovered the magic of Etsy, yet many others have not. In fact, half of Etsy's first quarter active buyers made only one purchase in the trailing 12 months, and the vast majority of habitual buyers are still in the U.S. We believe our potential to boost frequency is still in its early stages. Our final growth lever is average order value. As we mentioned earlier, earning buyers' trust on both larger and smaller purchases, known as our cushion-to-couch strategy, is crucial. Most of our initiatives in this area stem from other Right to Win strategies. Over the years, we’ve implemented a few specific actions, such as multi-shop checkout and Buy Now, Pay Later, directed specifically at increasing AOV. We see significant opportunities to invest in cross-category experiences and initiatives like Shop the Look, which we believe could yield substantial benefits in the future while providing our sellers with better tools to display their high-quality differentiated products and services. Returning to frequency and increasing our share of wallet, we previously stated our investments would focus on inspiration, offering an enjoyable and engaging experience that encourages repeat visits; efficiency, ensuring a quick and straightforward shopping experience; and reliability, guaranteeing a smooth and dependable purchasing process. Concerning inspiration, many visits come from buyers on a discovery journey, and there’s much more we can do to make the experience enjoyable and inspiring. Recent buyer survey data revealed that those who visited Etsy just to browse or find inspiration are 1.3 times more likely to make a purchase on Etsy in the next three months. Our teams are actively working on new discovery pathways to enrich the Etsy experience, making it more visual, dynamic, and inspiring while enhancing the stories our sellers are uniquely positioned to tell. For example, some of you might have seen the beta version of our new Explorer feature in the Etsy app. It represents an early attempt to make Etsy a starting point for browsing and discovering, providing a mall-like experience with a continuous scroll of short videos by sellers showing their products being made. Etsy sellers are already producing this content for other channels, with nearly 15 million seller videos on the site by the end of the quarter, and buyers are showing interest in watching this content. It's quite engaging. We aim to create a unique environment on Etsy that fosters experiences at the intersection of sellers’ creativity and buyers’ inspiration. This work is still in its early phases. While some buyers come simply for fun or inspiration, others arrive knowing exactly what they want. For these visits, we need to enhance shopping on Etsy to be more efficient, less overwhelming, and easy to navigate, ensuring that customers can quickly find what they need and continue on their way. We continued to enhance our search features this past quarter by applying personalization to browsing behavior for U.S. searches on etsy.com, focusing on a buyer's immediate interests to improve conversion rates for signed-out or new buyers. This ties back to my earlier comment about engaging the millions of visitors who come to Etsy but do not convert into active buyers. We can now increasingly refine our search results as a potential buyer browses in real time by leveraging signals gathered during their visit to focus on their current shopping intent. Previously, we needed a buyer to have engaged with Etsy before personalizing their results. This change will help us better serve about 75% of etsy.com web traffic coming from buyers who are signed out or have never shopped with us. We're constantly innovating our XWalk real-time retrieval engine to not only utilize billions more data points but also to refine our search engine for specific attributes, helping buyers find a high-quality brown full-grain leather wallet that is available in time for an upcoming anniversary, as illustrated in this slide. We firmly believe that making Etsy a more trusted and reliable place to shop could significantly unlock growth. Three in five Etsy buyers are uncertain whether we would assist them if something went wrong with their transaction. Likewise, sellers worry about situations when issues arise through no fault of their own, and we want them to know that we will support them. Later this quarter, we'll announce our plans for investments in a new purchase protection program that will generously extend to both buyers and sellers. Furthermore, we'll continue to enhance customer support this year, focusing on reducing time to resolution, ensuring Etsy Handmade and other policies are enforced, and helping sellers manage shipping settings and delivery dates to provide buyers with the necessary information to make purchase decisions, among other initiatives. We recognize that to increase our share of wallet, we must enhance Etsy's reliability. We cannot develop habitual buying behavior unless we do better for our customers. We have numerous other work streams aimed at buyer engagement, frequency, and trust. In the first quarter, we continued to connect with buyers throughout their Etsy journey by improving our app with new features designed to increase purchasing confidence, such as driving buyers to reviews, enabling more ways to sort and filter reviews, and collecting additional review photos. Reviews have been an especially fruitful area for us. In fact, since 2021, we have improved our global review rate by 50%, which we estimate has resulted in $200 million in annualized GMS. It’s more important than ever to invest in remaining top of mind with consumers to continue expanding the market for our sellers. We are deepening our investment in full-funnel marketing to engage existing buyers, reconnect with lapsed buyers, and attract new buyers to the Etsy marketplace. This year, we have introduced many new marketing strategies to better link off-site and on-site experiences. I will highlight a couple that I am particularly excited about. The first is our new Creator Collective Program, which utilizes influencer and seller-generated content to attract new buyers to Etsy. We have also begun testing performance marketing efforts in regions beyond our key markets, including Italy, The Netherlands, Spain, Ireland, Switzerland, Belgium, and Austria. So far, we have seen very promising results from these initiatives. In the first quarter, approximately 50% of paid GMS from these markets originated from new buyers. As discussed, our brand campaigns are aimed at fortifying the Etsy brand in our primary markets while identifying efficient avenues to broaden our reach in ways that will ultimately promote long-term growth. Here’s a brief clip of one of the new campaigns currently underway called Live in Original. You’ll see us ramping up placements throughout 2022. We are navigating an unprecedented period, and during this time, Etsy has experienced remarkable growth. We anticipate this year to be unpredictable for us, with numerous factors at play, both advantages and challenges, making it hard to forecast. People continue to be apprehensive about global events and economic conditions, and we’ll need to strive harder for consumers’ attention and spending. Yet, we have ample reasons to remain positive. We have a talented team with the creativity and commitment to invest purposefully on behalf of our seller community. We genuinely believe we offer something unique across every brand in our portfolio and that the opportunity for Etsy is vast. This is why I am excited to come to work each day. I’ll now turn it over to Rachel to discuss the results and provide our outlook.

Thanks, Josh. And thank you for joining us on our call. My commentary will cover consolidated results, key drivers of performance, and Etsy Marketplace stand-alone results where appropriate. As a reminder, Reverb, Depop, and Elo7 are all reflected in our consolidated financial results and KPIs for the first quarter. On a consolidated basis, our first quarter GMS grew 3.5% year-over-year to $3.3 billion. Revenue grew 5.2% year-over-year to $579 million, and adjusted EBITDA was $159 million with a 27.5% margin. On a currency-neutral basis, GMS increased 4.8% year-over-year. As we explained on our last call, the first quarter of 2021 was an anomaly, with 132% year-over-year GMS growth fueled by pandemic lockdowns and tailwinds from stimulus checks. Flash forward to the first quarter of this year, which was marked by a rebound in global mobility and headwinds from the highest inflation the U.S. has seen in over 40 years. Further, geopolitical events appear to be causing additional headwinds, particularly in Europe. We estimate that the direct impact of the crisis in Ukraine, including lost GMS from both Russian and Ukrainian sellers, was about 40 basis points versus the forecast when we set guidance for the quarter. In short, disposable income is lower and competition for share of wallet is higher across our markets. In that context, we're pleased with our consolidated GMS growth of over 200% on a 3-year basis. Moreover, we delivered better-than-anticipated adjusted EBITDA margins, demonstrating the strength of our marketplace model. So let me double-click on our performance, starting with revenue. Marketplace revenue grew 3.4%, in line with GMS, while services revenue increased 11%. Within services revenue, consolidated ads revenue increased 14% year-over-year, primarily the result of continued improvements to ad relevance and expansion of ads in the buyer experience. Etsy Ads strength was a factor in driving consolidated take rate of 17.8% for the quarter, slightly ahead of the take rate of 17.5% implied by the midpoint of our first quarter guidance. Before closing out on revenue, let me discuss the recent increase to our transaction fee, which went into effect on April 11. We're committed to nurturing our marketplace in a way that enables millions of creative entrepreneurs to succeed. We're incredibly proud that over the past 2 years, the number of sellers on Etsy Marketplace has more than doubled, and the number of listings is up 55%. With more sellers on the platform than ever, we need to continue to grow the size of the pie. This requires us to invest more to scale our platform and most importantly, bring them even more buyers than the almost 90 million we bring them today. When the fee change went into effect, we saw less than 1% of sellers go into temporary vacation mode. Active listings dipped less than 1% during that week and returned to the prior level when the week was over. Based on past experience and significant research leading up to the change, this was all within our expectations. The overall impact to our GMS for the week was not material, and seller churn remains at normal levels quarter-to-date. At quarter end, we had well in excess of 95 million listings on etsy.com. And as you know, we have no shortage of items for sale. And while no one likes fee raises, we actually heard from thousands of sellers supporting our efforts to invest in them. We really value input from our sellers and are confident in our investment plans. We trust that sellers will judge us by our outcomes when they see the value we are able to provide. Turning now to our consolidated adjusted EBITDA. Our first quarter adjusted EBITDA margin was 27.5%, ahead of expectations, but well below the prior year. As we have described, the first quarter of 2021 was very strong GMS growth quarter, which drove commensurately high margins in last year's first quarter. This year, we have consolidated 2 new subsidiaries into our results, which were not in our prior year numbers. Neither Depop nor Elo7 are currently profitable, and they are, therefore, a drag on our bottom line consolidated margins. In addition, we continue to invest in headcount growth and increased compensation, including stock-based compensation, with the largest portion in product development. We also saw growth in our cloud computing costs due to increased development activity. Finally, there was about a $5.6 million impact to our adjusted EBITDA directly attributed to the crisis in Ukraine, including Ukraine seller support as well as bad debt expenses related to closing seller shops in Russia and Belarus. We are also investing in our subsidiary brands. While they are experiencing similar reopening headwinds and other macro factors, each made strides in product and marketing, incorporating the Etsy playbook into their own growth strategies. We summarized their recent focus areas on Slide 28. During the quarter, Reverb launched a new Google integration to further optimize performance marketing efficiency, as well as scaled tests of new advertising channels, which are realizing promising early results. At Depop, the recently launched Make an Offer feature, where buyers seamlessly submit product offers to sellers, led to a meaningful uplift in both conversion and frequency and was an encouraging needle-mover for GMS. We also launched Depop's first-ever digital video campaign in select local U.S. markets. Early results are positive, showing an improvement in brand familiarity. And Elo7's expanded shipping options for sellers resulted in cheaper shipping costs and faster delivery times, improving the overall buyer experience and driving an increase in conversion. And for the Etsy Marketplace, we have a balanced portfolio of product initiatives, some of which we expect to deliver in-year GMS and others such as visual discovery or improving the foundation for our development capabilities are expected to take a longer period to bear fruit. You can see on Slide 29, how we have scaled our product development investments over the past 4 years and how it has increased as a percentage of revenue in the first quarter of 2022. During the first quarter, we increased our consolidated marketing spend to $154 million, up from $151 million in the first quarter of the prior year. Our brand spend, sometimes referred to as above-the-line spend, represented 16% of our consolidated marketing spend, up from 13% in the prior year. For our Etsy Marketplace, we were on air during the first quarter of 2022 in our core markets, including a male-focused campaign, which shows signs of real promise in that demographic. We plan to expand placement of our brand marketing campaign for the Etsy Marketplace as we go through the year, particularly in the back half. First quarter 2022 performance marketing spend was down year-over-year as it dynamically adjusted with demand, and the decrease was partially offset by an increase in social media marketing spend. In terms of our performance marketing spend, we maintain our general rule of not leaving profitable marketing dollars on the table. And similarly, we don't chase unprofitable buyer acquisition or engagement. In addition to our investments in product and marketing, we have made deliberate bets in other areas such as investing in being a trusted brand. These investments are meant to ensure that our customers, both sellers and buyers, find a welcoming home and have a delightful shopping experience even post purchase. To that end, we are investing in the support apparatus we need to create a streamlined and efficient experience if something doesn't go right, including in compliance, both people and systems to keep the marketplace safe and advocacy efforts to support our sellers globally as the regulatory landscape evolves around privacy, taxation, and content. I'll dive in deeper now on Etsy Marketplace performance on a stand-alone basis. During the first quarter of 2022, Etsy marketplace GMS declined 2% year-over-year and increased 177% on a year-over-3-year basis. That is when compared to the first quarter of 2019. The deceleration we started to experience in February 2022 worsened throughout the quarter, which we attribute to headwinds related to increased reopenings, high levels of inflation weighing on consumer purchasing power, and consumer mind share loss due to the crisis in Ukraine and its reverberations throughout the global economy. From a geographic perspective, 45% of Etsy marketplace GMS in the first quarter of 2022 was from transactions where either the buyer or the seller or both were outside the United States. Non-U.S. GMS was up 5% year-over-year on a currency-neutral basis, which was driven in part by strength in Germany, offsetting weakness in the United Kingdom, which was facing much tougher prior year comparisons. Etsy Marketplace category performance was marked by strength in paper and party supplies for in-person events such as baby showers and birthday parties, as well as in apparel and jewelry and accessories, consistent with reopening trends. We've seen strong buyer demand for fashion subcategories and travel-related needs, including tote bags, passport cases, and backpacks. Wedding items are also a bright spot for year-over-year growth, including wedding party gifts, wedding favors, and decorations. The Home & Living category declined slightly for the quarter on a year-over-year basis, although we are seeing relative strength in items related to Outdoor & Garden; in fact, ERTs were particularly hot sellers in the quarter. We believe the diversity of our listings and Etsy's sellers' ability to rapidly shift to meet changing buyer demands is an important competitive advantage, especially now. GMS per active buyer on a trailing 12-month basis for the Etsy Marketplace increased to $137, up 10% year-over-year and up 37% on a year-over-3-year basis. Etsy.com ended the first quarter with 89 million active buyers, largely flat to year-end, which includes 8 million habitual buyers and another approximately 36 million repeat buyers, those who made purchases on 2 or more days in a 12-month period but were not habitual buyers. The stable performance across all of these buyer cohorts is encouraging, providing additional proof points that we are maintaining most of the gains we made during the pandemic, despite there being so many more options for consumers' time and money. 46% of GMS came from habitual buyers in Q1 '22. Our growth of habitual buyers in core non-U.S. markets held up well in the first quarter of 2022, including 55% year-over-year growth in habitual buyers in Germany. We're also pleased to see continued healthy new buyer acquisition and reactivation of lapsed buyers. In the first quarter, we acquired over 7 million new buyers, almost 60% greater than the number of new buyers acquired in Q1 2020. We are also continuing to reactivate lapsed buyers. In fact, we reactivated a healthy 5 million lapsed buyers in the first quarter. Okay. So moving to our outlook. While in the second quarter of 2021, Etsy reported consolidated GMS growth of 13% on a year-over-year basis, GMS increased 178% from the second quarter of 2019. The strength in the second quarter of 2021 was partially driven by the tail of economic stimulus payments in the U.S., which hit consumer bank accounts in early April, as well as high COVID case counts and low vaccination rates that continued to keep many at home. Contrast that with now, where mobility indices are approaching 2019 levels and pent-up demand may drive this even higher, meaning the possibility of more movement and travel and less time for at-home shopping. We also see increasing headwinds related to broader macroeconomic issues in our core markets impacting Etsy, Depop, and Reverb. We started to see headwinds in February, which worsened in March and again in April as well as unusual levels of volatility in our weekly GMS performance. To be sure, it's been a bit of an unpredictable and volatile start to the year. As such, we currently estimate that our second-quarter consolidated GMS will be approximately $2.9 billion to $3.2 billion, about flat at the midpoint compared to the second quarter of last year and up 179% compared to the second quarter of 2019. In a world of so many more choices, our guidance implies somewhere between a decline of low to high single digits for Etsy marketplace GMS year-over-year, retaining over 90% of the gains we have made over the past 2 years. We are forecasting revenue of $540 million to $590 million, up about 7% at the midpoint compared to the second quarter of last year and up 212% compared to the second quarter of 2019. We currently expect an adjusted EBITDA margin of about 25%. Here are a few additional items to keep in mind as you model the rest of 2022. Assuming macro trends do not worsen, we would expect our GMS growth rate to improve for the second half of 2022, as we have said on our last call, with revenue outpacing GMS. We've outlined today that despite the near-term headwinds we are experiencing, we remain committed to increasing investments in core Etsy and our subsidiaries. The reopening and macroeconomic headwinds we experienced as a company are, of course, also being felt in the households and wallets of our small independent sellers. Our take rate increase enables us to lean deeper into marketing, product development, and member support to invest for growth at a time when our sellers need it the most. We are playing through, as they say. I am noting this here so you can model second-half adjusted EBITDA accordingly. In an environment where top-line growth is constrained by external factors and with an intent to stay the course on growth investments, we would not expect margins to expand materially other than potential improvement in the fourth quarter. As always, we operate with an ROI discipline and expect that our current period investments will have a payback in the future. Lastly, for your models, we also expect our stock-based compensation expense to increase sequentially in the second quarter as a result of our annual refresh grants that were priced in March. Since this expense will now have a full quarter impact, we currently forecast approximately a $0.15 pretax impact to our second quarter EPS compared to the first quarter, assuming stable share count.

I'm going to dive right into questions. Good to talk to everybody. So the first one is from Maria Ripps from Canaccord. Josh, this one is for you. Can you talk about how the near-term uncertainty embedded in your Q2 outlook impacts your investment planning and considerations as you look towards the second half of the year?

Absolutely. Thanks, Maria, for the question. If the pandemic has taught us anything, it has really strengthened our conviction even more in the enormous size of the prize that we believe we have at Etsy. And just to dimensionalize for a second, in the second quarter, pre-pandemic, Etsy sellers sold $1.1 billion worth of product on the core Etsy marketplace. And at the low end of guidance, we're projecting for Etsy consolidated $2.9 billion worth of sales. Etsy has been transformed, and maybe that is a glimpse towards that future we keep talking about, where we say in the future, we don't think there's going to be an unlimited number of places to buy things online. Amazon is going to likely continue to succeed. And it's not likely that there's thousands of places selling the exact same thing as Amazon, trying to compete head-to-head with them. Etsy offers something truly different, something really meaningful across many categories and many purchase occasions relevant to many people as we talked about in this call. We think the size of that prize is absolutely enormous. And so we have our eye on that prize, and we're investing for that future time. The next couple of quarters, absolutely are turbulent. We're facing reopening headwinds, we've got a war in Europe, we've got inflation. It's turbulent times for everyone, but the strongest companies invest with conviction and discipline through turbulent times with their eye on the medium term. And we think the opportunity for Etsy is enormous, and we are absolutely investing for that. And this is, by the way, the time when our sellers need us most to be investing, and that's absolutely what we're doing.

Okay. Great. Thanks, Josh. Next one was also from Maria, but I will add it from several other people, including Naved Khan, and we want to talk about the sellers' reaction to our recent fee increase. How do sellers view all the incremental investments that we're making? And has there been any impact from the boycott that we saw in the middle of the month on our GMS growth? And we'll start with Josh on that one.

We announced a fee increase in mid-February, and the response from sellers was less intense than in previous instances of fee hikes. While price increases are never popular, this time the seller reaction was not as negative as it has been before. As we have stated prior to the pandemic, we have a vast number of sellers with many items for sale, and they depend on us to attract more buyers. This is especially crucial now, with Etsy having 5.5 million sellers relying on us to expand their customer base at a time when buyers have many more options than they did just a few months ago. Buyers are feeling financial pressure and have the ability to travel, dine out, and shop in person, which makes it vital for us to invest in bringing buyers to our sellers and providing attractive offerings that can help them grow. The sellers are asking Etsy to invest in their growth. Many of our sellers, including the larger ones, also sell on platforms like eBay and Amazon, have their own websites on Shopify or Wix, and participate in craft fairs. Our sellers have various sales channels available to them. However, they recognize that Etsy provides more value compared to these alternatives. This was the case before and remains true after the fee increase. Although they have multiple selling options, they tend to be more successful on Etsy. Our top sellers report that approximately half of their sales come from Etsy, while the remainder is from other sources combined, because we invest in attracting buyers who appreciate handmade, vintage, and artisanal products—consumers who value a more personal shopping experience. Therefore, it is increasingly important that we continue to invest to support our 5.5 million sellers. As noted, while a few sellers received substantial media coverage, less than 1% opted to put their shops on vacation mode during that week. We did not observe any significant impact on sales for that week or for the quarter, nor a material effect on seller churn. We attribute this stability to Etsy's compelling value proposition. Whether the transaction fee is at 5% or 6.5%, what sellers primarily need is for us to bring in more buyers, helping them generate more sales and ultimately benefiting everyone involved. Thank you for the question.

Okay. Next one is for you, Rachel. This is from Naved Khan at Truist. Why are margins lower in Q2 '22 despite the higher take rates?

Hello, everyone. Thank you for the question, Naved. The reduced margins are part of our ongoing strategy. We will keep making our investments despite facing some top-line constraints. Our primary focus is investing in our workforce. We have increased our headcount throughout 2021 and continued to grow in 2022, including the staff from our recent acquisitions, Elo7 and Depop. Many of these new team members are focused on product development, particularly in product and engineering, which are crucial for our growth as they are responsible for creating products that will increase active buyers and purchase frequency, ultimately boosting GMS per buyer. Additionally, we plan to continue investing in marketing. We showcased one of our new advertising campaigns, and we are also running campaigns in the U.K. and Germany. We tested some primary marketing for Depop in the first quarter and are looking to scale and enhance that effort. Our performance marketing investments are adaptable, and we will continue to focus on marketing where we see a good return on investment. Furthermore, we are significantly investing in our trust and safety and member support teams. We are committed to ensuring our customers feel supported like never before, and we will provide more details about this externally. Although this investment impacts our P&L in the short term, we believe it will offer long-term benefits. As we onboard more product engineers, we will also incur higher cloud computing and hosting costs. While these expenses may not show an immediate correlation with GMS in the quarter, we trust in the long-term advantages of these investments.

Okay. Great. Thanks, Rachel. The next one I'll give to you, Josh. It's from Shweta Khajuria from ISI Evercore. Could you please provide more color on the most impactful initiatives that have driven buyer frequency growth so far? And of the upcoming product improvements, which ones do you think could be meaningful purchase frequency drivers?

Thank you for the question. Let me begin by discussing awareness, as one of the main reasons we hear for not shopping on Etsy more often is simply that customers forget about it. This has been a consistent observation, even before the pandemic. Our television campaigns and other marketing strategies are increasingly essential to remind potential buyers about the various occasions when Etsy is a relevant choice. For instance, we found that 30% of women buyers in the U.S. and U.K. shop on Etsy at least once, with 58% shopping multiple times. We recognize that we are relevant to many people frequently. Those 8 million regular buyers have made an average of 13 purchases in the past year, indicating they shop with us more than once a month, and many do so even more often. What sets these habitual buyers apart is their familiarity with Etsy. They think of us often and know how to effectively use our search engine to find what they want. We need to simplify the experience for those who don't shop on Etsy regularly, helping them achieve the same search results as our more experienced users. Our search engine continues to improve, including features like XWalk, which allows for multiple search criteria at once. For example, users can search for a leather wallet that's nearby, available in a specific color, and has a certain delivery time. This enhancement will allow the search engine to better interpret natural language and connect users with desired products. We are also finding ways to encourage users to engage with the platform more, such as favoriting or creating lists, which helps us learn more about them and tailor our recommendations. I'm particularly optimistic about our efforts to enhance the experience for new buyers or those with minimal purchases. Given that we see over 180 million unique visitors each month, improving personalization for these users is crucial for increasing conversion rates and purchase frequency. A significant point we hear from buyers is the need for increased trust in Etsy as their go-to shopping platform. Although issues are rare, buyers need assurance that we will support them. Unlike individual shops, Etsy is a recognizable brand that builds trust, which we extend to our sellers. This is a vital part of our work, and we promote standards among sellers to maintain a reliable brand presence. We plan to announce an initiative later this quarter aimed at reinforcing this support for both buyers and sellers, ensuring they feel protected should problems arise. I'm excited about the impact this could have on increasing purchase frequency over time. While we may not see immediate GMS growth, establishing a trustworthy brand can yield significant long-term benefits.

Okay. Great. Thanks, Josh. The next one I want to give to Rachel is a couple of questions that have come in on the Q2 guide. So I'll read the one from Marvin Fong of BTIG. Could you discuss how April GMS performed? And what are the assumptions driving both the high and the low end of your Q2 GMS guidance?

Thanks for the question, Marvin. I want to highlight that at the low end of our guidance, it's $2.9 billion. Three years ago, in Q2 of 2019, we were at $1.1 billion. Even at the low end of our guidance, we are nearly three times larger than we were three years ago, and we are very proud of maintaining that growth. We mentioned on the call that we experienced a gradual decline in GMS starting in about February, and this trend continued into April. It's been a volatile and unpredictable quarter, which is part of the reason we provided a wide range for our guidance and have refrained from giving full-year guidance, as there are many unknowns and factors beyond our control. However, there are positive aspects in the numbers we shared. We added millions of new buyers last quarter, a 60% increase compared to the same quarter three years ago, and we see significant growth opportunities as Josh outlined. We are pleased with our results and anticipate that the second half of the year will generally outperform the first half, as is often the case. Additionally, we expect lower year-over-year comparisons in the second half than we experienced in the first half. These factors still hold true, and we remain committed to our investments and are satisfied with our achievements thus far.

Great. The next question is from John Colantuoni at Jefferies. Can you discuss how performance marketing ROI has changed for Etsy throughout 2022 and whether there were any significant alterations in ROI that corresponded with the reopening after the pandemic? How are the trends in ROI influencing your strategy for using incremental marketing from the revenue generated by the recent increase in take rate compared to allowing it to fall to the bottom line or investing in product initiatives?

Great question. We're excited to discuss marketing at Etsy. To clarify, we don't assign a fixed budget to our marketing teams. Instead, we set a return on investment threshold for performance marketing. Our spending adjusts dynamically based on demand. As we noted, the first quarter was challenging with a slowdown in demand, which led to a reduction in performance marketing spending. Conversely, we increased our investment in brand marketing, which accounted for about 16% of total spending this quarter, up from 13% the same period last year. When we announced the price increase, it raised our take rate, enhancing our capacity to invest further into the ROI curve without jeopardizing our ROI thresholds. We began spending more in anticipation of this take rate increase even before it took effect, starting in March. Now that the price increase is in place, we can allocate more resources to performance marketing. So far, we haven't observed any significant rises in cost-per-click, meaning it hasn't become more expensive to acquire traffic. As we've emphasized previously, we will not exceed our marginal ROI. Additionally, I want to highlight our off-site ad program, which subsidizes about 40% of our marketing expenditures. This means we can invest more aggressively into the ROI curve. This program operates on a success-based model, so sellers only incur additional fees for successful sales. The subsidy isn't reflected in our marketing expense but in our revenue, which further assists in managing our marketing spend. Lastly, we are increasing our investment in brand campaigns. We plan to intensify our above-the-line marketing in the latter part of the year, as is our usual practice.

Great. Thanks, Rachel. Next one is for you, Josh, from Victoria James at D.A. Davidson. How is inflation affecting your business? To what extent are you in a relatively favorable position versus your e-commerce peers because your sellers allow consumers to save money when they buy things like apparel or home goods? To what extent are you relatively favorable versus your e-commerce peers? Yes, that's basically the question.

Thanks for the question. I appreciate it. And I appreciate the context behind the question because I think for the past maybe roughly 100 years, the world has been well schooled in the benefits of mass production. And there's been a lot of focus on mass production, making things cheaper. But it's also true that when something is produced in mass production overseas to get on a boat, to end up at a port, to get on a train, to get on a truck, to finally make it to your house, and there's maybe 3 markups along the way, the opportunity to buy directly from the person who made it without all those markups along the way, can offer that seller the chance, that maker the chance to earn a fair price and a fair living, while also offering great value to the buyer. So that's a story that we want to tell, and we want to make sure that the world understands. To be clear, Etsy sellers set their own prices. That's not something that Etsy is directly involved in. We have said in the past and it continues to be true that our sellers have so far on average, if you look at a basket of goods analysis, not chosen to take their prices up by much at all and far, far less than what you're reading in terms of consumer inflation. And as a result, the relative value proposition of things on Etsy is getting cheaper relative to the market, which can increase appeal for those products. Some sellers may also choose to raise their prices as their inputs go up, and that's perfectly fair and appropriate. It's a big market with 5.5 million sellers, each making their own decisions on that. But if they choose not to raise their prices, the value proposition of their items can get more compelling. Also, it can be very fair as the competition on and off Etsy, if their prices go up, that our sellers can take price and maintain margins, and that's appropriate as well. Either way, we think that our sellers have a tremendous amount to offer the market, and our job is to make the market aware of that great value available on Etsy, and we're investing with discipline and with conviction to make sure that the market is aware of that.

Great. I'm going to ask the next question from Lauren Schenk from Morgan Stanley. This is for Rachel. Can you clarify the marketing commentary for the second half regarding margins, specifically that you don’t expect margins to expand significantly? Is that a comment for the second half or for the entire year? And are fourth-quarter margins expected to increase compared to last year?

Thank you for the question, Lauren. This is a comment about the second half of the year, with the understanding that seasonality could lead to a slight expansion in margins, which we sometimes see in the fourth quarter. I also want to highlight that we achieved 27.5% margins in the first quarter of this year, compared to about 33% in Q1 of 2021, and we even reached 37% margins at one point in 2021. We have significant control because our costs are variable, allowing us to manage the margin we want to achieve. We believe there is substantial growth potential, and we are committed to our investment strategy despite any challenges that may arise this year. These investments focus on our people, who are essential to driving growth, especially in marketing. We think these efforts will enhance awareness and engagement in the market, supporting our customers and sellers throughout their purchasing journey. Our margin guidance reflects our commitment to these investments.

Great. Thanks, Rachel. I know we're out of time. I think moving buyers influences habitual purchasing among buyers on the platform.

We're really focused on offline stores. Many states were in lockdown, and even if you could go to offline stores, it wasn't very pleasant. Online shops often faced significant supply chain challenges, which really highlighted the benefits of the Etsy model as we were not dealing with those issues. We maintained ample supply throughout the entire period. Our sellers did a fantastic job producing great products, responding to the demand, and being ready to ship. As a result, Etsy became one of the few reliable shopping options for much of the past two years. I’m thrilled that a large majority of our buyers are choosing to return now when they have many more options available, especially with pent-up demand to travel, dine out, and visit stores they couldn’t go to before. Even at the lower end of our guidance, we project that we will retain 90% of those purchases despite the increased choices and inflationary pressures on consumers’ budgets. We are really pleased that people want to return to Etsy, as they recognize that we offer something unique and appealing in a meaningful way during a critical time. We believe this opportunity is vast, and we will continue investing to foster its growth.

Okay. Great. Thank you all for staying on with us a few extra minutes and we will talk to you during the quarter. Thank you very much.

Thank you.