Etsy Inc Q1 FY2023 Earnings Call

Hi, everyone, and welcome to Etsy's First Quarter 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. And joining me today are: Josh Silverman, Chief Executive Officer; Rachel Glaser, Chief Financial Officer; and Jessica Schmidt, 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. Questions can be submitted via the 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 call. I'll be reading your questions, and Jessica will help me try to get to as many as we can. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-K and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted on our IR website, along with a replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. We're pleased to be reporting another quarter of healthy performance to start the year. Etsy's consolidated GMS was $3.1 billion. Revenue grew nearly 11% to $641 million and our adjusted EBITDA margin was again strong at 26.6%. Etsy marketplace GMS was $2.7 billion this past quarter, down about 3% on a currency-neutral basis as we've once again maintained the vast majority of our pandemic gains in the face of stiff macroeconomic headwinds. As Rachel will review, some of the volatility and headwinds the Etsy marketplace experienced in February eased in March, enabling our consolidated GMS to come in above the midpoint of guidance. The Etsy marketplace is starting to see some green shoots in our biometrics as we move past pandemic period comparisons, including the first year-over-year increase in active buyers in 5 quarters. In the last few years, we've all faced continued uncertainty, which, frankly, is feeling like the new normal, but despite the ups and downs, Etsy has thrived. I believe this has everything to do with our agility and resilience, both in our business model and the way we run our company. We stand apart because we offer something different, something we believe is evergreen and enduring. Summing up our core Etsy marketplace plans for 2023, we'll work hard to knock down barriers that have historically made Etsy your once in a while rather than your every day. These barriers can be summarized in 3 main areas: first, buyers too often think of us only for very specific needs or at the end of their shopping journey when they can't find the item somewhere else; second, it simply takes too much time and effort to find the best things among our over 100 million items; and third, buyers worry about the post-purchase experience. Given our breadth and depth of merchandise, we're confident that we should be more relevant, more often to many more millions of buyers around the world. And if there's anyone who doubts this point, I challenge you to review your recent purchases and search on Etsy to see whether you might have found something similar yet more special and possibly better value if you had purchased it from a creative entrepreneur on Etsy. I bet you'll be surprised how often the answer to that question is yes. As we lessen these barriers to purchasing more frequently, we believe we can earn the right to gain a far greater share of our buyers' wallet, and to reach our aspiration to become the starting point for many more of their e-commerce journeys. This year our product roadmap is focused on welcoming new buyers to the joy of Etsy, deepening buyer curiosity and engagement, instilling trust when transacting with us and being a platform sellers love to sell on, where they can most effectively and efficiently grow. We're doubling down on initiatives from our core female buyers, building awareness among male buyers and driving the two-sided marketplace flywheel in more of our 7 core markets. I'm excited to tell you more about some of our plans today. Improvements to search technology are obviously central to this roadmap, and you'll see us invest here in a big way. Many of you asked, 'What inning is Etsy in, in making search better?' For the past 6 years I've consistently answered very early innings. We've been at the cutting edge of search technology for the past several years, and while we use large language models today, we couldn't be more excited about the potential of newer large language models and generative AI to further accelerate the transformation of Etsy's user experience. Even with all our enhancements, Etsy search today is still keyword-driven and text-based and essentially the result is a grid with many thousands of listings. We've gotten better at reading the tea leaves, but it's still a repetitive cycle of query result reformulation. In the future, we expect search on Etsy to utilize more natural language and multimodal approaches. Rather than manipulating keywords, our search engines will enable us to ask the right question at the right time to show the buyer a curated set of results that can be so much better than it is today. We're investigating additional search engine technologies to identify attributes of an item, multi-label learning models for instant search, graph neural networks and so much more, which will be used in combination with our other search engine technologies. It's our belief that Etsy will benefit from generative AI and other advances in search technology as much or perhaps even more so than others. Why? Think about the way you shop. You don't walk into a store and yell, 'Blue, shirt, cotton,' the way you search on Etsy today. In a store, you walk in, explain to a salesperson that you're going to a cocktail party at a chic place in Brooklyn and are looking for a shirt to fit the vibe, what do you recommend? And you certainly don't expect the salesperson to show you 90,000 options. They'll show you the best handful of items that match the vibe. What if we can bring the human aspect of retail boutiques to e-commerce? What if buyers could tell us what they want in real time and adjust their search results that way? What if they could show us images during the conversation? And particularly intriguing for Etsy, what if buyers could better visualize products that might be similar to but not exactly like the ones initially displayed in response to a search such as, 'I like that planter. But do you have it in the shape of a duck and not a cat?' With over 100 million items, chances are, whatever you're imagining is already for sale on Etsy. We'll help you find it more easily. While we're in the early days of thinking through how these advances might impact Etsy, you can imagine how conversational search can help bring the human aspect even further into our marketplace or how visualization can enable more seamless product discovery. Summing it up, we're excited. Combining natural human language with progress on search is pretty on brand for Etsy, tying back into welcoming new buyers to the joy of Etsy and deepening buyer curiosity and engagement for those coming back to us. For every buyer, we should be able to show you the very best of Etsy for you. We have the opportunity to be far more curated and organized, to reduce the clutter in order to be the place you come to more often for your head queries and not just your tail queries. To that end, we have 2 very exciting cross-functional initiatives in 2023 that aim to unlock the best of Etsy. The first, we're calling curation at scale. You may be familiar with our Editors' Picks features. Items we select for Editors' Picks have traditionally fueled content for on and off-site merchandising and marketing strategies. These features as well as the Etsy Pick badges we use throughout the site are fueled by a dynamic library of a couple of hundred thousand listings curated by humans, Etsy merchandise experts. Etsy Pick badged items show meaningfully higher conversion rates than nonbadged items. Why? Because our merch team knows how to select the very best inventory, items with true craftsmanship, those that are well photographed to display key features and are from sellers who adhere to our policies and provide excellent customer service. Our experts also know how to incorporate market trends, localization and diversity of merchandise into the experiences we're creating. So our search experience and merchandising teams are working together to feed the best of Etsy human curation into our ML and AI datasets in a highly scalable way, with a goal to train our algorithms to better detect the quality of items as perceived by humans such that we showcase the best of Etsy in every search. Over time, we believe this and other work streams will help make search more personalized for each type of buyer on Etsy, further identify what quality means for you, enable us to make better recommendations, help buyers move more easily from inspiration to purchase and enhance the brand perception of Etsy. We'll also share insights with sellers on what being the best of Etsy looks like for their type of item, so over time, we can help lift our entire seller community. The second area we're working on to unlock the best of Etsy is related to creating shopping experiences that make Etsy feel more organized. To set the stage, it's worth taking a look at our brand awareness data. While Etsy's aided awareness is now quite high, particularly in the U.S., our largest market. When we ask consumers the open-ended question, name the top places to shop for gifts, only about 11% will name Etsy, and only about 3% name us for home furnishings or for style in spite of these being some of our most popular purchase occasions. This lack of top-of-mind awareness represents a tremendous opportunity for us. We believe we have both the merchandise and a differentiated shopping experience to warrant significantly greater buyer consideration. So this year, our product teams will create new pathways or wayfinding to give buyers easy ways to understand our sellers' inventory by surfacing category-specific information and removing friction in the purchase experience in order to surface high-quality items and provide inspiration. For example, a complete-the-look recommendation model is showing early promise to help Home & Living buyers shop more effectively. And in gifting, we're testing new ways to narrow broad gifting missions, such as gift for mom, to filter by a hobby or other interest or in jewelry, one of the most common gifts on Etsy to help a buyer more easily find a specific type of jewelry. We'll also leverage our marketing channels and campaigns to associate Etsy with specific purchase occasions, starting with Home & Living, Style and gifting. Here are a few of our new TV spots, which seek to raise awareness that Etsy has it for those purchase occasions. Moving now to the ways we'll seek to instill more trust when transacting with us, to build that peace of mind when shopping on Etsy. 90% of active buyers believe items on Etsy are unique, high quality and handmade. That said, mass-produced items, which make up a very small percentage of items on Etsy do continue to find their way onto the marketplace. We know it weakens trust when a buyer or a seller encounters one of these items. Utilizing state-of-the-art ML and AI technologies, we've been dialing up enforcement of our handmade and other listing policies even more in 2023 to remove items more quickly and accurately. Our 2022 transparency report was published 2 weeks ago. It's a great source of information regarding our efforts to take down listings that violate our policies. We removed 1.9 million listings for violating our policies in 2022, a 16% increase from 2021. This work is never done, but I'm confident that we're taking the right steps to ensure that Etsy remains a safe and trusted place for our communities. Another focus for us this year is to improve awareness of Etsy Purchase Protection. So buyers and sellers know when their orders qualify, feel confident in the process and can more easily resolve any issues that arise. For those buyers familiar with Etsy Purchase Protection, over half are likely to say that Etsy has their back if things go wrong compared to about 30% among buyers who are not familiar with the program. As we tracked data from this program through the end of last year, we found that prepurchase messaging about Purchase Protection improved conversion rate and our post-purchase emails spurred buyer frequency over a 90-day period. We have so much more to do to make sure buyers and sellers know we have their backs and that we consistently keep pace with expectations across the e-commerce landscape. And while we've also made meaningful progress over the years on the cost and timeliness of shipping, we still see significant opportunity for improvement. In the first quarter, we saw a nice conversion rate win from making it easier for buyers to filter for free shipping items with no minimum purchase requirement. We could do even better on the timeliness of shipping. For example, by continuing to improve the accuracy of how Etsy sellers set their processing or make times versus their actual times, using ML to get even more precise in predicting point-to-point shipping times and prioritizing items in search results located closer to the buyer for time-sensitive purchases. Our job is to create an ecosystem with the right incentives so sellers with the skill and will can be as successful as possible. Last year's transaction fee increase, where most of the incremental revenue was reinvested back into the marketplace, enabled us to increase investments in critical areas such as marketing, customer support and making Etsy more trustworthy. 2022 was exactly the right time to do it, when the world was reopening after the pandemic and sellers needed us to step up our efforts to engage and retain buyers. Given that seller growth continues unabated, up about 8% year-over-year, and our future intent to sell metric is consistently high, we believe we're on the right track. Yet we know we can do even better. So this year, we've got a jam-packed to-do list, which includes investing in our seller growth suite, education, tools and the personalized insights they need to market their shops, improve their listings and grow sales on Etsy. We'll make it easier than ever to list items and will provide best practices on pricing strategies and discounting. In addition, we've recently started testing a new make an offer feature that will give vintage shop owners the option to receive offers from buyers. Since launch, thousands of sellers have opted into the initial test with more than 1 million eligible listings included so far. And we're also planning our second virtual Etsy Up seller event this month and will try to outdo our wildly popular 2022 event. We're proud of our marketing team, which continues to deliver great value, bringing buyers to our marketplace and keeping them coming back. We've never been a growth at all costs company, and I'm confident that our disciplined approach has and will continue to serve us, our communities and our shareholders very well. This slide shows just a small sampling of our team's creative work across on-site experiences, CRM tools, social media and brand, including digital TV and out-of-home. And we love partnering with style influencers of all shapes and sizes who want to align their brand with ours. For example, Martha Stewart was our first celebrity collections curator in 2023, this time with a twist. Martha will curate not 1, but 20 collections over the year filled with items she deems worthy of her coveted Good Things stamp of approval. Moving to our House of Brands. Reverb and Elo7 kicked off the year with strategies to drive long-term engagement with their respective communities. Reverb has been focused on affordability, helping musicians find good deals through initiatives that have provided solid GMS wins such as showing more instruments with price drops and great value badging. In addition, Reverb has been testing initiatives that could help sellers better understand pricing trends, and we also made it easier for them to engage with budget-conscious buyers interested in specific pieces of gear in order to negotiate prices. The Reverb team has had meaningful success with affordability and price discovery initiatives, so we'll be studying some of these for relevance to the Etsy marketplace. The Elo7 team is making progress in search, such as improving app listing page speed, implementing user search interpretation, such as did you mean interface that automatically corrects misspelled search terms and introducing filtering capabilities to allow narrowing of search by category or other characteristics. I'm really excited to report significant progress at Depop, the result of new leadership, new organizational structure, new experimentation tooling and better focus. In just the first quarter of 2023, Depop completed almost as many experiments as in all of 2022. Kruti and her team have not only launched many more experiments, Depop has also improved experimentation metrics and tracking to better align the work with customer outcomes. In fact, Depop's conversion rate is improving, which will be critical to accelerating Depop's GMS. Longer-term efforts to improve product search using machine learning have started to really pay off. We're exposing buyers to more relevant and personalized content to browse and explore and we're making the seller listing process better to improve the quality and quantity of listings. We also launched an exciting new feature called Repop, which enables users to seamlessly relist a Depop purchased item, a good thing for GMS and the planet. We're testing and leaning into new marketing formats, such as our I got it on Depop social campaign, and we're seeing better returns from digital marketing investments, and sellers are reacting well to the opportunity to boost their listing with adoption picking up steam. With economic and geopolitical turbulence continuing to dominate the headlines, it's ever more important for us to find space for the things that bring us joy. Enter Etsy. We're built on joy, whether in the form of discovering that perfect gift for a loved one, talking directly with a maker who can craft an item just for you or turning a long-time hobby into a thriving online business. Our success to date fortifies our long-held belief that as the world shifts towards fewer, more commoditized online brands, the need for Etsy is even greater, and our disciplined investment approach can enable above e-commerce industry growth and best-in-class profitability on average and over time. I want to take a moment to thank our team across our House of Brands for continuing to drive innovation and bring more buyers to our millions of sellers around the globe in ways that are inherently human, special and different. We believe people will crave an alternative to mass-produced products, and we feel well positioned to continue to invest wisely for the future, even in unstable times. Thanks for your time. And with that, I'll turn it over to Rachel.

Thank you, everyone, for joining our first quarter earnings call. I will discuss the consolidated results for our House of Brands, key performance drivers, and the stand-alone results for the Etsy marketplace where relevant. In the first quarter, our consolidated Gross Merchandise Sales were $3.1 billion, reflecting a 4.6% decline year-over-year. Revenue rose nearly 11% year-over-year to $641 million, resulting in an adjusted EBITDA of $170 million and an adjusted EBITDA margin of roughly 27%, indicating solid profitability, with EBITDA dollars increasing at a 36% compound annual growth rate since the first quarter of 2019. Currency exchange rate pressures have lessened, contributing 200 basis points in the first quarter, down from 330 basis points in the previous quarter of 2022. Looking into revenue growth for the first quarter, marketplace revenue grew over 9% year-over-year, mainly due to an increase in the Etsy marketplace transaction fee from 5% to 6.5%. Services revenue outperformed marketplace growth, up over 14% year-over-year, largely driven by enhancements to Etsy Ads, such as using in-session buyer behavior to improve ad personalization and integrating larger ads into our app. The strength of Etsy Ads and a positive contribution from Etsy Payments, attributed to the mix of international transactions with higher fees, pushed the consolidated take rate to 20.7%, surpassing the midpoint of our guidance. The consolidated adjusted EBITDA margin decreased about 90 basis points compared to the prior year, mainly because of higher costs in revenue and product development. In addition, there were some specific tax items that positively impacted General & Administrative expenses in the first quarter. Our subsidiaries continue to have a headwind of approximately 300 to 400 basis points on our consolidated adjusted EBITDA margin. Additionally, stock-based compensation rose by 39% year-over-year due to an 11% increase in our consolidated headcount and substantial refresh grants made in March 2022, which were only partially accounted for in the prior year. Although the grants in March 2022 were larger due to a tight labor market at the end of 2021, our March 2023 grant pool was significantly lower and more aligned with the current market conditions. Our consolidated product development expenses increased by 30% year-over-year to $116 million, partially due to the higher headcount, though this was somewhat offset by lower professional services costs. During the quarter, we continued to hire modestly for critical roles aligned with our top priorities, seeing a slight sequential increase in headcount. It's important to note that most of our engineers are in the product development area, which represents the largest share of our headcount growth. Product development spend was about 18% of revenue, up from 15% of revenue in the year-ago period. We carefully measure value creation per squad, and we continue to see great returns even as we have scaled. Resource allocation is one of the levers we use to drive growth, and we have done that judiciously as we continue to deliver strong profitability. The chart on the right of this slide compares revenue growth with headcount growth from 2019 to 2022. You can see that revenue growth has meaningfully outpaced headcount growth well above the peer group average. During the first quarter, consolidated marketing spend increased by 11% year-over-year to $171 million, primarily driven by an 11% increase in our performance marketing spend, which represents the majority of our spend. Investments in brand marketing grew 20% year-over-year as we launched new creative campaigns aligned with our category-focused messaging. We'll leverage that creative investment in future quarters. While total marketing spend was up in absolute dollars year-over-year, it's largely flat at 27% of revenue. By the way, you should also keep an eye out for some fun TV spots where we will be highlighting our search by image feature. As you review our marketing investments, it's important to remember that for Etsy marketplace, we employ a full funnel approach, as shown on Slide 21, targeted to all buyer cohorts, new buyers, those that have lapsed and to keep existing buyers coming back. Brand marketing builds top-of-mind awareness, helping all our other channels work harder. While we have incrementally leaned into brand marketing since 2018, it remains a small portion of overall spend. We leverage paid social media channels, and I would characterize this spend as early days with a lot of future potential. And the majority of spend drives traffic to marketplace listings. A few things to note here about our performance investment. First, our attribution models use buyer lifetime value. So some return occurs beyond the first 30-day window and may not be reflected as paid GMS in that quarter. Second, some of that performance marketing investment works like display advertising, driving awareness and traffic to etsy.com but the GMS is attributed to the direct channel rather than to paid. And third, marketing spend is also a revenue driver as more traffic fuels Etsy Ads and Etsy Payments as well as Offsite Ads revenue, which offsets approximately 1/3 of our performance marketing spend. Here, we continue to get more efficient as we expand channels and geographies. In fact, the Etsy marketplace performance marketing ROI has improved over 40% since 2019. That said, we are still early days gaining efficiencies in our channels as well as the markets where we spend. For example, in 2022, about 20% of paid marketing dollars for the Etsy marketplace were spent beyond our top 2 core markets, the U.S. and the U.K. Moving to our Etsy marketplace GMS performance. We once again maintained the vast majority of our gains. During the first quarter, GMS declined approximately 5% year-over-year and was down about 3% on a currency-neutral basis. Some of the headwinds we experienced during February eased in March, causing us to deliver results above the midpoint of our guidance. 3 main headwinds impacted these results. First, consumer wallet share shifts from goods to services; second, year-over-year declines in some of our larger categories such as Home & Living and craft supplies; and third, pressure on consumer discretionary spending, particularly for lower household income buyers. In fact, our data supports that we have seen an impact from lower tax refunds, the ending of certain tax credits and similar items that pressure the lower household income buyers. Double-clicking on categories for a moment. While first quarter GMS trends were weak in Home & Living there were pockets of strength in home improvement and enhancement items. We also saw solid trends in apparel, particularly in items such as tops and tees and hoodies and sweat shirts with personalized and pop culture-related themes as well as in bags and purses and gift items. For comparison purposes, we look at Consumer Edge's U.S. e-commerce retailer data for pure-play competitors in some of our top categories in order to benchmark how we are tracking. For example, in 2 of our largest categories, Home & Living and apparel, we believe we are at least holding our own. Further, despite our tremendous growth over the past few years, when we look at the market size of our top 6 categories compared to Etsy marketplace's Global GMS, we estimate that our aggregate current share is still very small at about 2.5%. So we see significant room to grow. From a geographic perspective, 46% of Etsy marketplace GMS in the first quarter was from transactions where either the buyer or the seller or both were outside of the U.S. GMS, excluding U.S. domestic, was up 3% year-over-year on a constant currency basis, driven in part by the particular strength in Germany and France, partially offset by softer trends in the U.K. Growth in our non-U.S. active buyers continued to outpace trends in the U.S. as the majority of our active buyers are still in the U.S. In 2023, we remain focused on creating domestic vibrancy in more of our non-U.S. core markets. The Etsy marketplace ended the quarter with 89.9 million active buyers, up slightly year-over-year for the first time since Q4 2021. We're also pleased that buyers who identify as men continue to be a bright spot in active buyer growth with a 6% year-over-year increase. We added 6.7 million new buyers, over 50% above our pre-COVID average quarterly new buyers. We pay a lot of attention to new buyers since those who make a second purchase within the first 6 months are more likely to become habitual buyers. We reactivated 6 million lapsed buyers, up 21% year-over-year. It's great to see reactivated buyers continue to grow since they have about 35% higher lifetime value than new buyers in their first year on the marketplace. Our active buyer retention rates on a trailing 12-month basis remain above pre-COVID trends. On a quarterly basis, retention trends improved both from the prior year and the prior quarter. We ended the quarter with 7 million habitual buyers, up 238% from the first quarter of 2019 but down 10% year-on-year as strong pandemic-related periods rolled out of the trailing 12-month figure. We've seen a year-over-year increase in the number of habitual buyers who identify as men and our habitual buyers accounted for 43% of the first quarter GMS. While there is some degradation coming from habitual buyers moving into the repeat category, all it actually takes is 1 less purchase day or spending $199 instead of $200. It's important to note that very few of these habituals lapsed entirely, and we also saw many buyers graduate from repeats to habituals. Repeat buyers remained largely unchanged at approximately $36 million with strong quarterly growth in Germany and France. Our GMS per active buyer on a trailing 12-month basis for the Etsy marketplace was $129 in the first quarter, down 5% on a year-over-year basis and up a strong 30% from the first quarter of 2019. The year-over-year decline is partially due to the fact that non-U.S. buyers, which represent a larger portion of our buyer mix versus the prior year, generally have a lower GMS per buyer than buyers in our more mature U.S. market. Plus, we've also seen some FX headwinds. As of March 31, we had $1.1 billion in cash, cash equivalents and short- and long-term investments. In March, we entered into a new $400 million revolving credit facility that is currently undrawn. During the first quarter, we repurchased $148 million in stock under our $600 million Board authorized repurchase program as we effectively utilized a portion of our cash to repurchase shares to offset dilution resulting from stock-based compensation. Our free cash flow this quarter was a healthy $47 million. We are converting nearly 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis as our marketplace operates with minimal capital requirements. Now turning to outlook. We currently estimate our second quarter 2023 consolidated GMS to be approximately $2.85 billion to $3.1 billion, about $3 billion at the midpoint, down approximately 1.8% compared to last year. Given that our year-over-year comps get somewhat easier as we move through the rest of Q2, the midpoint of guidance implies our year-over-year growth rate will improve a bit in the remaining part of the quarter even without any improvement to the macro environment. We are forecasting revenue of $590 million to $640 million, up about 5% at the midpoint compared to the second quarter of last year, which implies a relatively stable take rate on a sequential basis. We are lapping the transaction fee increase that we made in April of 2022, which impacts our revenue growth rate. Lastly, we expect an adjusted EBITDA margin of around 26%. About half of the anticipated sequential margin decline stems from increased marketing investment at Depop, including the "I got it on Depop" campaign mentioned by Josh in the U.K. and the #DepopThisLook campaign in a major U.S. city. We are eager to test and measure our returns from these initiatives. Additionally, we anticipate higher employee compensation costs. It’s important to note that the discrete tax benefits we observed in the first quarter are not included in our guidance for the second quarter. While we continue to strategically increase our workforce and account for last year's hires, we are observing consistent productivity from our product and engineering teams. In conclusion, we are very pleased with our progress this year. We've noted positive trends in our Etsy marketplace active buyer count. Our investments in product development have yielded steady value creation, as evidenced by our marketing program producing a positive return on investment even while we expanded our campaigns to enhance top-of-mind awareness. Overall, we are excited about our robust revenue growth and profitability. Despite a fluctuating macroeconomic landscape, we remain focused on our goals. Thank you for your time today, and I will now hand the call back to Deb for your questions.

Hi, everyone. I'm hearing an echo. Are we okay now? Okay. Great. I'm going to kick off the Q&A with the first question going to Josh from Anna Andreeva at Needham. Josh, great to hear about stabilization at core Etsy in March. Can you talk about what you are seeing quarter-to-date? And what is the low versus the high end of the Q2 '23 guide based on?

Sure, I'd be happy to. Thank you for the question. The past couple of weeks have been very strong for us. For instance, it seems we are on track for a solid Mother's Day. If this trend continues, we should be at the upper range of our guidance. However, as we've mentioned, there has been some volatility. Looking back at May last year compared to 2019, we noticed a slowdown in May. It's difficult to determine if the situation in 2022 will predict what we can expect in 2023. 2022 had many unique events, such as reopenings and a shift from goods to services, which posed challenges because there were notable events in both 2021 and 2020 as well. Therefore, 2019 remains the last year that can be viewed as 'normal,' making long-term forecasting more complex for us. We've continued to experience some fluctuations. We are now 2.5 times larger than we were in 2019, making us a much larger business. While it's possible that the sequence of our quarters could align similarly, we can't say for sure at this point. We are encouraged by recent trends and are particularly pleased that, despite the current macro conditions, we have maintained a significant portion of the gains since the pandemic and have many returning buyers. We have successfully reactivated past buyers and attracted new ones. Overall, we are optimistic about what lies ahead, especially in the medium and long term for Etsy.

Okay. Great. Thanks, Josh. This next one is from Maria Ripps from Canaccord, and this also is for Josh. How are you thinking about the cadence of brand investments in 2023? And is there any one strategic goal you're more focused on in trying to drive progress of using brand spend in terms of whether it's getting earlier in the consumer awareness or increasing category awareness and so on?

Yes. We're seeing good returns and success from our brand spend. So we tend to run brand in each of our 4 quarters. We're, I think, going to move to more of a pulsing strategy, but you should expect to see us continue to invest in each of our quarters, and I would expect the investment to be the heaviest in the fourth quarter as usual. But the strategic intent is really Etsy has it. That campaign, Etsy has it, is so important. The fact that Etsy sellers sell billions of dollars of home furnishings, it's our largest category. And when you ask people name 3 places to shop for home furnishings, only 3% of people unprompted will name Etsy. There is a massive opportunity. So I know we've said before, people love Etsy. They just don't know when to think of Etsy. And connecting the dots much more specifically, when you think of home furnishings, think of Etsy. When you think of style, think of Etsy. When you think of gifts, think of Etsy. And I don't want to be confused that, that is exhaustive or that those are the only 3 categories that we would market. Of course, you can buy so many things on Etsy for so many occasions. But we want to start being much more concrete with people because when you just say, come to Etsy for virtually anything, people don't really know what to do with that. The more specific we can be, I think there's a tremendous opportunity because we know when they do come to Etsy for home furnishings. When they do come to Etsy for style, when they do come to Etsy for gifts, when they do come to Etsy for pets and babies and all weddings and all of the other things, there's a tremendous experience. There's a tremendous experience. And as I said on the call, look back over the things you've bought in the last 90 days, and I'm willing to bet that there are many times when something you bought, if you went and looked on Etsy, we had something that was more special, great value, and you just didn't think of us.

Okay. Great. Thanks, Josh. The next two I'm going to combine. They're from Kunal Madhukar at UBS, and I'm going to give this to Rachel. Can you talk about trends in habitual repeat buyers as well as composition of new buyers by geography?

I appreciate the question. To begin, active buyers have increased to 89.9 million, marking a positive quarter. Additionally, we gained 6.7 million new buyers, which is a 50% increase compared to pre-COVID levels. We also reactivated 6 million buyers, up 21%, who are particularly valuable as they have a 35% higher lifetime value in the first year after repurchasing than new buyers. In terms of active buyers on a trailing 12-month basis, we remain above pre-COVID levels, with improved retention trends both compared to the prior year and the prior quarter. Lastly, regarding habitual buyers, we reported 7 million, reflecting a 238% increase from the previous quarter, although this is down about 10% year-over-year. They make up approximately 43% of gross merchandise sales for the quarter.

Rach, I think you mentioned that the 200% figure was likely the year-over-year number over a 4-year period.

Yes.

Okay. And then the other part of the question was new buyers, U.S. versus non-U.S.

We have mentioned in the past that we haven't shared information about buyer cohorts by geography, but we have indicated that a larger percentage of our new buyers are coming from outside the U.S. That is the information we have provided on that topic.

Perfect. Thanks, Rachel. I have a question from Deepak at Wolfe Research. Can you comment on the factors influencing the Q2 EBITDA margin guidance? With GMS nearing positive growth, is the deleverage primarily due to planned marketing investments or is there something else at play? Additionally, how do you view the long-term returns on your investment?

So we guided to 26%, approximately 26% EBITDA margins in the second quarter, and we delivered 26.6% in the first quarter. So there's a slight contraction to margins Q1 versus Q2. About half of that decel is coming from investments we're making in marketing campaigns at Depop, so that's about half of it. And then the balance of it is coming from the fact that in Q1, we had a discrete tax event that gave us some benefit in Q1 that will not repeat in Q2. And we talked about headcount being up about 11% year-over-year in Q1. We did slow our hiring starting last Q2, and we've kept a slower hiring pace, but we are annualizing the hires that we made, and we've continued to strategically invest in hiring. We are experiencing growth in our product development area, which is where most of our new hires have been in product and engineering. We have carefully assessed the return on investment from this product development spending and are very satisfied with the results. The returns we see typically take about 18 months to realize, so while we do track them, it takes some time for the benefits to materialize.

Okay. Great. Thank you, Rachel.

I would like to add that, as Rachel mentioned, we focus on value creation for each squad. Each squad is assigned a specific customer problem to solve and a financial metric to assess their success. This approach has contributed to Etsy's success. We are not hesitant to shift a squad's focus if they are not able to deliver value. The team performed exceptionally well in the first quarter, and we are pleased with the value creation achieved. We recognize that this improves the customer experience and positively impacts our financial metrics. We are proud of this and believe that this investment is beneficial for shareholders.

Great. Thank you both. I'm going to ask a question that came in from a few different people, but I'm going to go to Rachel next from a question from Laura Champine about take rate keeps expanding. Where is the ceiling likely to be for that metric?

The guidance we provided for Q2 suggests a relatively flat sequential take rate. We have observed growth in take rate primarily driven by improvements in Etsy Ads. We are focusing on enhancing the relevance of promoted listings to match the relevance of our regular listings, which increases the click-through rate and positively impacts our revenue. As Etsy Ads performance improves and the take rate rises, it allows us to invest more in marketing, creating a beneficial cycle. Additionally, Etsy Payments experienced some growth this quarter, attributed to a higher proportion of our Gross Merchandise Sales (GMS) coming from international sources where the fees for Etsy Payments are slightly elevated. When we increase the take rate, we typically reinvest most of that additional revenue back into the marketplace, benefiting both sellers and enhancing the buyer experience. This strategy aligns with our commitment to a fair exchange of value, where we introduce products or services for our sellers that we believe warrant associated fees. This approach has been consistent, and you can see it reflected in the growth of Etsy Ads.

Okay. Great. Thanks, Rachel. The next question is from Tom Forte at D.A. Davidson, and it's about frequency. That seems to be an area of focus for us. Josh, how confident are we that we can make any changes?

Yes. So I think it is the question, what gives us confidence. And what gives me confidence, first and foremost, is that we have a great product that meets a really wide variety of purchase occasions. We don't need to go and figure out how to be good at weddings or good at babies or good at home furnishings or good at style or good at pets or good at gifts or good at Mother's Day or other things. Hardly a week goes by when there aren't multiple good purchase occasions to shop on Etsy. So that's the first pillar of strength that gives me confidence. So what do we need to do then to unlock it? Well, there's, first, I think, a big consideration challenge. While people love Etsy generally, they don't know when to think of us. And again, 3% of people unaided when you say home furnishings, will name Etsy as a top-of-mind place to go for home furnishings. Similar for style, and these are 2 of our very largest categories. So I won't bore you with all the rest, but if we have such low awareness in our largest categories, gifting is the only one where we get to even 10%, we're only 11% there. So I think there is an enormous opportunity in simply achieving better top-of-mind consideration. In addition to that, Etsy can feel more organized and more curated and we can convey more trust. So when you think, I want to come to Etsy for home furnishings, knowing that we're going to have easy wayfinding that's going to make it easy, knowing that the best of Etsy, the high-quality stuff pop and come to the top is important and having confidence in the post-purchase experience. And we have really exciting, great plans to tackle each of those.

Okay. Great. Thank you. We had a question from Noah Zatzkin at KeyBanc. Josh, can you expand on some of the recent initiatives for the House of Brands, particularly around Depop?

Yes. And again, we're really excited about the progress at Depop, the Kruti and the leadership team there have really been making a lot of progress, and it's very exciting. So we talked in our prepared remarks about the increase in velocity. They are shipping a lot faster now to improve the customer experience, and they're doing it in a way that's highly focused on things that we think are really improving the quality of the experience overall, and it's showing up, as I said in the call, in terms of conversion rate already moving. So we're getting you faster to the products you want to buy and there's a big focus right now on affordability. So search and affordability are both big focuses at Depop. I will say on affordability, that's also a big focus on Reverb right now. How do you make sure that sellers are pricing at a price that's attractive to buyers? And in a period where we had supply chain issues a year ago, a lot of sellers have perceptions in mind of what an item might be worth where it's worth less now than it was a year ago. So how do you coach sellers in the right way to make sure that they set the pricing that's attractive and it's going to actually sell. Were able to learn from each other now, and in fact, Etsy is experimenting now with make an offer, and we're excited, allowing vintage sellers to opt in to make an offer, and that's actually based on the learnings we're seeing from Depop and Reverb. So I think the opportunity for us to share learnings in some of these core strategic areas is super exciting.

Okay. Great. Thank you. I'm going to give you another one, Josh, and I know we had a lot of content on this on our call, but I'm going to do it anyway because it's a fun topic from Maria Ripps of Canaccord again. Can you provide us with a little bit more detail on the roadmap for introducing conversational search functionality into Etsy? What are some of the key milestones in the development process? And are you envisioning a broad launch when the tech is ready? How should we think about that?

We are focused on making machine learning accessible at Etsy. We've been utilizing various machine learning techniques for some time and have established a solid infrastructure that allows us to adapt quickly. Our team has the necessary expertise to effectively use these tools. The goal now is to ensure that all our engineers are equipped with the right tools, training, and processes to incorporate machine learning into their work, which is relevant beyond just generative AI. This approach can significantly enhance the customer experience. I am particularly enthusiastic about generative AI, and we have designated several teams to concentrate on it. In our search function, we already implement multiple machine learning techniques, so generative AI will complement our existing efforts rather than replace them. At times, the process of traditional search can be unsatisfactory, and having a more conversational interface can enhance the experience, especially for Etsy, where we do not have a fixed catalog. We prefer to foster an agile environment where teams can start implementing and testing ideas rather than waiting for a large-scale release. We encourage them to identify customer problems that our tools can address and to launch solutions. We have already tasked a couple of teams to explore ideas for improving the search experience with this technology and to begin testing those innovations. Our aim is to move quickly, learn from the process, and while we won't get everything perfect right away, I am confident that this will serve as a significant boost for Etsy over time.

Okay. Great. Rachel, I'm going to come to you with a question from John Colantuoni at Jefferies. Last quarter, you provided some color around second half GMS expectations. Can you update us on your outlook for GM for 2022 to 2023?

Thank you for your question, John. We haven't provided guidance for the second half at this time. In this quarter, we issued a broad range, with a low of negative 6% and a high of 2%, and we've experienced some positive growth days as well. The situation is quite volatile, making it challenging to offer a clear perspective on what the quarter might entail even with a third of it already passed. We've shared the best information we have, and extending that to the entire second half leaves us with an even wider range. We are preparing for potential scenarios in which macroeconomic conditions could worsen or improve, and this variability will be reflected throughout the year. We look forward to a time when we can provide full-year guidance, but for now, it remains too unpredictable for us to determine.

Okay. Great. Thanks, Rachel. Josh, I'm going to turn to you for one from Nick Jones from JMP Securities. In international markets, how should we think about Etsy's ability to drive similar penetration rates as you have today in the U.S.? Is there any structural challenge in these markets, maybe non-English markets, in particular to drive penetration for Etsy?

Yes, in my experience, there are many international markets that are very well suited for a two-sided peer-to-peer marketplace like Etsy. The U.K. stands out as our penetration rates are nearing those of the U.S. I believe the U.S. is still in its early development phase, with only one in three women and one in ten men actively shopping on Etsy, indicating a significant growth opportunity. We can increase the frequency of transactions in the U.S., which is also true for the U.K. It’s impressive how much progress we’ve made in the U.K. with penetration rates approaching those of the U.S. Next, we looked at Germany and considered increasing our TV marketing efforts earlier than usual. The results over the past year or two in Germany have been very promising, despite various macroeconomic challenges. The Etsy business in Germany is performing well. Currently, we are focusing on France and have started investing in India, which we view as a promising market. Western European and North American markets, including Canada, tend to operate similarly to the U.S., especially in terms of high trust where the postal and payment systems work effectively, and people are confident in receiving packages from strangers. These factors contribute to achieving relatively high market penetration. We see a lot of potential in these Western European markets, but I am enthusiastic about opportunities in many global markets. As commerce becomes more commoditized, people will increasingly seek special and human-centered experiences in their shopping. I believe Etsy has what many consumers need.

Well, I have someone slacking me saying that we might have said that stat wrong about women. So it's 3 out of 10 women in the U.S. and yes. Yes. Did Josh say something different folks? I think possibly, but I just want to make sure that's right. U.S. and U.K. Okay, correct. So make sure we had it right. Okay. Next question is for Rachel from Shweta Khajuria at Evercore ISI. Rachel, you've suggested in the past that Etsy might be on a different seasonality now. I assume we mean post pandemic, because the company is bigger. Anything you can comment about that seasonality, whether it's fourth quarter or Q4 to Q1? And how should we think about seasonality and GMS growth for this year?

Thank you for the question, Shweta. We are considering the possibility that our business is becoming more seasonal since we observed a larger Q4 followed by a more significant decline in Q1. It’s been challenging because each quarter seems to bring unique, impactful events like wars, pandemics, reopenings, and substantial tax relief, making it difficult to identify any consistent patterns. However, what we noticed was a notably large Q4 and a greater decrease in Q1 compared to previous years. It might be that as our brand awareness increases, more people turn to Etsy during times when they are willing to spend on gifts, leading to a more pronounced seasonality, similar to trends seen in other e-commerce and retail sectors.

Okay. Great. Thanks, Rachel. Josh, regarding this question from Steve Forbes of Guggenheim Partners about macro-related challenges, can you provide a preview of your upcoming Etsy Up event?

Yes. We were very enthusiastic about Etsy Up last year. It was extremely well-received by sellers, so we plan to continue it. Our main objective is to empower sellers who are determined to succeed by providing them with as much autonomy and information as possible, enabling them to be both effective and efficient. Currently, we are focused on helping them identify the next steps they can take to achieve more success. For instance, I mentioned earlier how the merchandising team has identified high-quality items through Etsy Picks and is using machine learning to highlight these items to buyers. I'm very excited about this initiative as it holds the potential to enhance the Etsy brand and improve conversion rates. Additionally, we aim to share insights with sellers about areas for improvement, such as enhancing photography or meeting buyers' service expectations. We have launched a new Sell on Etsy app, allowing for quicker updates for sellers, which includes providing relevant data and dashboards. This is a significant investment for us, aimed at equipping sellers with the tools they need to manage pricing effectively. All of these efforts are designed to empower our sellers so they can achieve the highest level of success possible.

Okay, great. I think that's a wonderful note to conclude on. Thank you, everyone. Thanks, Josh. Thanks, Rachel, and we look forward to speaking with you all in person and virtually very soon.

Bye, everyone. Thank you.