Etsy Inc Q4 FY2023 Earnings Call

Hi, everyone. And welcome to Etsy's Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been pre-recorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, our CFO. Once we are finished with the presentation, we will take questions from our publishing sell-side analysts on video. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business and our operating results as noted in the slide deck posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-Q and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also, during the call, we'll present both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or the slide deck posted on our IR website, along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb. We're pleased to speak with you today about our recent performance, but more importantly, to preview some of our exciting initiatives for 2024. We've built an ambitious portfolio of growth initiatives, what we consider some very bold moves, while staying focused on protecting or expanding our overall profitability. We've done a lot to set Etsy up for success, making some difficult choices last year to be able to invest in our Vital Few with an eye to getting Etsy back to growth. We enter 2024 energized, with the right team, a highly relevant and differentiated Right to Win strategy, a disciplined investment approach and a resilient business model. Our focus will be to make Etsy even more Etsy, leaning into our core strengths to get even better at what we do, that is unlike anyone else in e-commerce. We had a strong finish to 2023 in the core Etsy marketplace, as well as at our subsidiaries, which collectively brought Q4 in a bit better than expected, as Rachel will review shortly. The Etsy marketplace performed well during the holiday season, with our highest-ever Cyber 5 GMS up about 4% year-over-year. Both Cyber Monday and Gifting Tuesday set new records. We know Etsy is a great place to shop for gifts and our focus on this message paid off. More to come on Gifting in a moment. With this strong finish to 2023, consolidated GMS was $13.2 billion, roughly flat with 2022. Revenue was a record $2.7 billion, up about 7%. Adjusted EBITDA was about $754 million. And free cash flow was very strong at about $666 million. Etsy's ability to deliver healthy revenue growth and strong levels of profit and cash flow gives us great confidence in the power of our special financial model and our ability to invest in long-term sustainable growth. 2023 was a banner year for our Etsy marketplace product development teams who delivered our highest-ever level of incremental annualized GMS. We dramatically improved experiences for buyers, making it easier to find what you're looking for, better at highlighting the best stuff, using new signals and nudges to drive conversion rate, improving reviews and recommendations, and developing new category purchase pathways and experiences. We built entirely new ways to feature handcrafted high-quality listings at great value. Our marketing team was also extremely productive, with memorable above-the-line campaigns contributing to our highest-ever level for buyer intent to purchase on Etsy in our top three countries, increased visibility for seller-funded promotions, scaled social spend and new tools for buyer engagement. All in all, a respectable year in a tough environment. By any measure, Etsy starts 2024 a much more meaningful e-commerce company than we were just a few years ago. We've doubled our buyer base, which has now grown on a year-over-year basis for four consecutive quarters. And buyers on average are still shopping more frequently and spending much more on Etsy now than they were before the pandemic. Our $12 billion in 2023 Etsy marketplace GMS was roughly $3 billion more than we outlined in the three-to-five year target we set in 2019. As you can see on this chart, after many years of over-performing our sector, it's been difficult to outgrow during the past few years, particularly given the tepid macro climate for consumer discretionary products. But this just means we have to work even harder and more efficiently to deliver accelerated top-line growth. So where do we go from here? Let's start with the size of the prize. We all know that e-commerce is a massive business still taking share from traditional retail. We estimate that the TAM in our core geographies and categories is $500 billion just online, with our market share sitting at just about 2%. So we still have a very long runway for growth. Most other players are competing head-to-head to sell the exact same merchandise, focused on selling at $0.02 cheaper or shipping it two hours faster, and this has resulted in the commoditization of the entire experience. But that's just not Etsy. While we have an opportunity to continue to enhance our offering to deliver on the table stakes e-commerce expectations, we also stand for something more: we offer something different in a sea of sameness. Which is why highlighting the best stuff remains one of our top focus areas, and we're confident that we can get back to growing faster and taking share more broadly. We believe Etsy's differentiation is partially why, based on Consumer Edge's U.S. e-commerce retail data, we largely continued to gain share throughout 2023 when compared to our pure-play competitors in most of our top categories. Competition is indeed fierce, yet we're up for the challenge. I'm excited to tell you how and why we believe we can win. As we built our plans to reaccelerate growth this year, we've been very clear-eyed about where we are today, where our competitors are and where our strengths lie. Some of what makes us special is also what's historically held us back from being thought of for everyday purchase needs. Buyers too often think of Etsy only for very specific needs or at the end of their shopping journey, or it simply takes too much time and effort to find the best things among our now over 100 million items. Our buyers worry about the post-purchase experience. And because of that, the number of times buyers purchase from Etsy per year as well as what they spend with us are both still much lower than for some of our peers. We know Etsy has many millions of high-quality listings that offer great value. We also know that if we can provide these in a way that's both reliable and dependable, we should be able to earn both more frequency and higher AOVs, while also still having significant room to continue expanding our active buyer base. As we work to gain share in 2024 and beyond, we'll stay focused on our Vital Few, making some bold moves to break down brand barriers so that buyers will think to shop with us even more often across a wider range of purchase occasions, leading to significantly improved consideration and ultimately, increased frequency, which we believe is one of the keys to unlocking growth for Etsy. So while we'll continue to focus on adding more buyers around the globe, expanding seller services and revenue streams and so on, today I'll focus primarily on this consideration opportunity. In fact, we've got a portfolio of compelling initiatives lined up, designed to move the needle on consideration and frequency. In addition to Gift Mode, which I'll tell you more about in a moment, we're also hard at work researching options for a buyer loyalty program to give buyers explicit reasons to come back and shop more often. We'll do a lot more on the value and the reliability front, for example, with innovation planned to improve the predictability of shipping costs for both buyers and sellers, as well as work to improve shipping timeliness, for example, shortening our estimated delivery dates this year by at least two days. While we've made great progress in both of these areas, we have significantly more room to go to make sure we can meet buyers' expectations and drive significant GMS while doing it in a way that remains very Etsy. We've also seen some really strong growth in international markets over the last few years, and are particularly excited about plans we have to not only concentrate on building domestic vibrancy in our core markets but also some new initiatives to drive cross-border transactions and further growth and vibrancy across key geographies, especially in Europe. We've got a lot in store, but for today, the one bold move I'm thrilled to tell you about is Gift Mode. As you've likely seen over the last few weeks, Etsy is all-in on gifting. Our goal is to evolve Etsy from being one of the places you can go to find a gift to being the indispensable partner for all of your gifting missions. Not only is Gift Mode an important product launch, it represents a significant deviation from our normal approach where we historically launch a series of measurable, incremental product improvements with minimal fanfare. With Gift Mode, we've meaningfully augmented our playbook to not only create a great new product experience but also to create consumer buzz about the product in a way we've never done before, with unmissable stories, content and moments to build excitement. Why gifting for Etsy? Gifting can be stressful and fundamentally different than buying for yourself in multiple ways: knowing what to buy, the logistics of how, when and where your gift will arrive, what if the gift recipient doesn't like it, and so on. A gift can be perceived as a representation of yourself or how much you care for the recipient, all of which makes it important and stressful. Given we're known for that special item made and sent with a human touch, we believe we're uniquely positioned to take the stress out of gift buying. Data supports that buyers crave help here. Two-thirds of Americans struggle to find the perfect present. And the vast majority, 71%, have felt anxiety about gift shopping in the past year. We believe gifting is an ideal use case for Etsy. We have an enormous conviction that this is a space we can and should own and, if done well, can lead to market share gains across our core categories. After all, do you really want to buy that special gift at a mass retailer whose brand primarily stands for commoditized and cheap? Not only is gifting a perfect Etsy use case, it’s an always-on opportunity for us to add value. Gifting is not just a seasonal buyer need. There are reasons to give gifts nearly every day of the year. According to our survey work, about 45% of gifts are purchased for personal occasions, such as birthdays, births, weddings. Another 45% of all gifting happens for holidays, both seasonal and secular holidays: Valentine's Day, Mother's and Father's Day and more. And the remaining 10% are just-because gifting occasions: missing a loved one, or sending a thoughtful item to a sick relative. Further, our data shows that U.S. consumers spend an average of $1,600 a year on gifts. We estimate that on average, Etsy's U.S. buyers spent about 2% of that, just $38, for gifts on Etsy. There are literally millions of high-quality items on Etsy, made and designed by real people, that make great gifts for every occasion, budget and interest. Yet, because we sell so many things for such a vast variety of purposes, it's difficult for people to know when to turn to us, and we often aren't the first place people think of or come to when they're on a gifting journey. Only about 10% of U.S. shoppers name Etsy top-of-mind as the place to shop for gifts. And there is no single brand that really owns gifting. So we see this as an early-stage opportunity. Another way to look at this opportunity, we estimate that only 43 million of our global Etsy buyers bought a gift from our sellers last year, which means that over half of our active buyers didn't. And that's not even counting the tens of millions of other shoppers for whom gifting can be a compelling reason to start shopping on Etsy. Gifting represents a huge TAM. We estimate the relevant opportunity to be about $200 billion in the U.S. alone. We believe our market share is about 1%. So even moving up to 2% would be a $2 billion growth opportunity for us. Obviously, that $2 billion is already captured in the very large TAM mentioned earlier. But by defining this space and investing with focus in gifting, we believe we can move the needle on growth. So what's Gift Mode? It's a whole new shopping experience where gifters simply enter a few quick details about the person they're shopping for, and we use the power of artificial intelligence and machine learning to match them with unique gifts from Etsy sellers. Creating a separate experience helps us know immediately if you're shopping for yourself or someone else; hugely beneficial information to help our search engines solve for your needs. Within Gift Mode, we've identified more than 200 recipient personas, everything from rock climber to the crossword genius to the sandwich specialist. I've already told my family that when shopping for me, go straight to the music lover, the adventurer, or the pet parent. We've incorporated some great new ways to help the procrastinator or alleviate the general concern that Etsy gifts won't arrive in time. Let's show you how it works. Early indications are that Gift Mode is off to a good start, including positive sentiment from buyers and sellers in our social channels, very strong earned media coverage and nearly 6 million visits in the first two weeks. As you test and shop in Gift Mode, keep in mind that this is just the beginning. We have an exciting roadmap planned for gifting discovery journeys, logistics and experiences to gift to make Gift Mode easier and more delightful for both the gifter and the giftee and to get both coming to us more often. Before closing, I'll comment on the solid recent contributions from our subsidiaries. Depop's performance significantly improved in 2023, returning to healthy year-over-year GMS growth, with very strong double-digit growth in the U.S. and strong growth in revenue. The U.S. is a large opportunity for Depop, with the resale market forecasted to be over $40 billion by 2027, growing nine times faster than the broader retail clothing sector. For the full year, Reverb significantly outperformed the musical instruments industry, and while GMS was about flat, revenue increased on a year-over-year basis. Reverb returned to GMS growth in the fourth quarter, primarily attributable to their focus on used and outlet inventory. The Reverb team made some organizational changes late in the year, which we currently expect will help the business achieve adjusted EBITDA profitability this year. We believe the best is still ahead for Etsy. Right now is the moment when many consumers are feeling stretched, with low confidence in the economy and less money to spend on discretionary items, but it's a moment that we believe will pass. Etsy's mission and compelling Right to Win remain relevant and sound. I'd like to officially welcome Marc Steinberg to Etsy's Board of Directors, and believe he'll bring unique and valuable experience as an investor and Board member in the technology, digital media and e-commerce industries. And most importantly, he shares our passion for Etsy's mission and excitement about our future growth opportunities. I want to thank the Etsy Reverb and Depop teams. You've all worked with incredible heart, creativity and determination to delight our buyers and help our sellers grow. We're going to lean in hard to our differentiation and believe we have the financial strength to do so in a sustainable way. We've started the year off with a bang with Gift Mode, and that's just the beginning. I'm confident we can get back to the kind of growth that we and all of our stakeholders can be proud of. With that, I'll turn it over to Rachel.

Thanks, Josh. And thank you, everyone, for joining our fourth quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace standalone results where appropriate. As a reminder, we divested Elo7 on August 10, 2023. So please take that into consideration when you compare year-over-year and quarter-over-quarter consolidated results. Etsy delivered $4 billion in consolidated GMS, roughly flat to the fourth quarter of 2022. FX benefit moderated to 90 basis points in the fourth quarter, down from the 130-basis-point tailwind in the third quarter. Revenue increased 4.3% year-over-year to a record $842 million. And adjusted EBITDA grew to an all-time quarterly high of $236 million, up nearly 4% from the prior year. Note that Elo7's divestiture resulted in small headwinds to both GMS and revenue for the quarter, and was modestly accretive to consolidated adjusted EBITDA margin. Following a challenging October, Etsy's marketplace's year-over-year GMS trendline improved in November and December due to the solid holiday performance Josh described earlier. We had a nice end to the quarter with better-than-expected GMS growth across all of our brands, enabling us to come in slightly above our mid-December revised guidance for GMS and revenue. Within our consolidated year-over-year revenue growth of 4.3%, consolidated marketplace revenue grew 2.6% due to higher payments revenue related to a mixed shift of more international transactions that yield higher fees, growth in subsidiary payments fees and higher offsite ads revenue. Services revenue was once again a key contributor to growth, increasing 9.4% year-over-year. Etsy Ads was the primary driver of this strength, with continued improvements to add relevance. We delivered a consolidated take rate of 21%, largely flat to the prior quarter and slightly above the take rate implied at the midpoint of our quarterly guidance provided in mid-December. For the full year, our consolidated take rate increased approximately 160 basis points due to strong growth in Etsy Ads, our April 2022 transaction fee increase that was incremental for most of the first half of 2023, as well as payment fee expansion. Fourth quarter consolidated adjusted EBITDA margin was 28%, at the high end of our latest guidance, but down about 10 basis points from last year, partially due to a lower gross margin, primarily the result of an increase in the cost of refunds for orders not covered by Etsy Purchase Protection, as well as higher marketing spend. Note that due to a discrete non-income tax benefit related to Depop, our subsidiaries represented only about a 200-basis-point margin headwind in Q4. Overall, we are very proud that even with investments in important product and marketing initiatives to make Etsy a great holiday shopping destination, fourth quarter 2023 adjusted EBITDA of $236 million was higher than any quarterly period, including pandemic peaks. During the fourth quarter, consolidated product development spend increased 4% year-over-year to $117 million. As a percent of revenue, we gained about 10 basis points of leverage from the prior year, largely due to the Elo7 divestiture. On a full year basis, Etsy marketplace product development investments delivered approximately $1.5 billion in incremental annualized GMS, a significant increase from last year. Stiff headwinds pressuring our baseline GMS offset some of these excellent gains. And we are also very pleased to report that product development launches increased approximately 30% from the prior year. Fourth quarter consolidated marketing spend increased 7% year-over-year to $261 million, which drove marketing spend as a percent of revenue to increase modestly from the prior year. Given our focus on building Etsy's brand awareness for specific purchase occasions, our consolidated brand spending increased 24% year-over-year in the fourth quarter, with the vast majority of this increase coming from Etsy marketplace spend. Our holiday campaigns, which highlighted Etsy as an indispensable partner for all gifting missions, resonated with buyers. Further, we significantly expanded Etsy's ROI on U.S. above-the-line spend during the quarter as our media efficiencies continued to improve. Consolidated performance marketing spend decreased 4% year-over-year in the fourth quarter as we adjusted our strategy and improved ROI efficiencies. We dynamically pulled back on PLA spending as competitor spending pushed CPCs higher than the normal seasonality we see at this time of year. Offsetting this, we were able to lean into new channels and geographies, increasing spending in certain geographies and ramping mid-funnel investments with several social media partners. Our site-wide 24-hour Cyber Monday promotion, funded with a small amount of Etsy marketing dollars, delivered solid incremental GMS and a strong ROI. For the full year, consolidated marketing spend increased 7% year-over-year, and our consolidated marketing spend as a percent of revenue decreased modestly to 27.6%. Etsy standalone marketplace performance marketing spend delivered approximately $2.6 billion in incremental annualized GMS, up roughly 5% from 2022. Moving now to our Etsy marketplace GMS and buyer metrics. During the fourth quarter, Etsy marketplace GMS decreased 1.4% year-over-year to $3.6 billion. Overall, headwinds continued, including pressure on consumer discretionary product spending, softness in the Home & Living category, and a highly competitive retail environment focused on deep discounting. Our year-over-year Etsy marketplace GMS trendline improved in November and December following the challenging October that we described on our November call, bringing results in ahead of our internal expectations. International markets were once again a bright spot, with Etsy marketplace GMS, excluding U.S. domestic, up 4% year-over-year in the fourth quarter. The growth was led by positive trends in the UK, and strength in the Netherlands, Switzerland, and Austria, with largely flat trends in Germany. This slide shows full year 2023 Etsy marketplace GMS performance for our top six categories, which represented approximately 87% of GMS. Positive year-over-year GMS trends in Apparel and Paper & Party were offset by softness in Home & Living, Jewelry & Accessories and Craft Supplies. We ended the year with a record 92 million active buyers, up 3% year-over-year, marking the fourth consecutive quarter of year-over-year growth. U.S. active buyer trends continue to improve. International buyer growth remains strong. And we had 6% growth in buyers who identify as male. We added over 8 million Etsy marketplace new buyers in the fourth quarter, up over 40% from the fourth quarter of 2019. And we reactivated nearly 10 million lapsed buyers, a record number, up 13% year-over-year and up 122% from 2019. Lastly, habitual buyer trends remained stable in the quarter, with over 7 million of these loyal buyers at the end of the quarter, largely in line with the prior two quarters. Our number of repeat buyers continued to grow a healthy 4% year-over-year to 37 million. GMS per active buyer on a trailing 12-month basis for the Etsy marketplace continued to stabilize sequentially, but declined 4% year-over-year to $126 in the fourth quarter, yet remains 22% higher than the fourth quarter of 2019. Additional Etsy marketplace metrics can be found in the appendix of this deck, as posted to our website. Moving now to the balance sheet. As of December 31, we had $1.2 billion in cash, cash equivalents and short and long-term investments. During the fourth quarter, we repurchased a total of $93 million in stock under our $1 billion June 2023 Board-authorized repurchase program, of which approximately $724 million remained available as of December 31. Our operational rigor and capital-light business model allowed us to deliver about $754 million in consolidated adjusted EBITDA in 2023 and a 27.4% margin, and to convert nearly 90% of that EBITDA to free cash flow. Our free cash flow in the fourth quarter was a healthy $283 million. As we continue to focus on growing our EBITDA and cash flow, all else being equal, we would likely see our gross leverage ratio continue to trend down. We also expect to retain a strong balance sheet with ample liquidity relative to our current leverage levels to manage the business across various macroeconomic cycles and support continued organic investments, as well as capital return to shareholders. We remain committed to an active and disciplined capital allocation strategy that prioritizes opportunities we believe will generate the highest level of long-term shareholder value. In the past, we have communicated our philosophy to offset dilution from stock-based compensation by repurchasing our shares. In 2023, capital return accounted for nearly 90% of our free cash flow, demonstrating a shift in our capital return strategy to more intentionally return a higher percentage of free cash flow, especially during times of volatility in our stock and when valuations are meaningfully below our view of fair value. We continue to see attractive organic growth opportunities for Etsy, and we expect to balance capital return, appropriate leverage and liquidity and investments in our business to deliver a long-term shareholder value. Before turning to our guidance, I'll discuss our recent workforce realignment, which brought core Etsy marketplace headcount to about 1,780 employees at the start of 2024. As you know, we were lean even during the high-growth periods, consistently maintaining a disciplined approach to headcount and then pulling back our pace of hiring proactively as we experienced GMS headwinds in early 2022. For 2024, we wanted to build a roadmap designed to reaccelerate growth while also delivering very strong levels of profitability. We made some tough choices about how to organize our team from the top-down, focused on driving efficiencies to further speed product development, and creating more impactful marketing and customer experiences designed to build frequency and loyalty, as Josh described. In addition to our focus on people costs, we've taken a number of actions intended to ensure margin holds stable or expands in 2024, including reducing certain benefits and continuing to optimize our cost base. All in all, we reduced our previous internal projections for total 2024 operating costs by over $90 million. Most of these savings are being reinvested back into the all-important growth investments we plan to make this year, including the modest addition of critical hires. We are optimistic that the significant productivity and measurable value creation we see from our team can fuel Etsy's growth this year. Now turning to our outlook. It remains a challenging macro environment, with consumer sentiment in the U.S. and international markets remaining low, making us cautious in our forecasting at the start of the year. Consolidated GMS for the first quarter of 2024 is currently estimated to decline in the low-single-digit range on a year-over-year basis. This guidance reflects our slow start to the quarter, and our current expectation that GMS for the core Etsy marketplace improves as we move through the rest of the quarter as a result of our planned product and marketing investments. However, if our trends fail to improve as we currently expect, this could become a mid-single-digit decline. Reverb and Depop are expected to provide a tailwind within the consolidated performance. We estimate Q1 2024 take rate to be between 21% and 21.5%. This can be used to estimate revenue range for the quarter. Note that earlier today, we announced to our seller community that we are strengthening our new shop onboarding process to continue to promote as trusted marketplace, including introducing a seller onboarding fee. This initiative requires certain new technology investments, particularly for seller verification, so the net benefit to our margins will be nominal. We currently anticipate that our consolidated adjusted EBITDA margin will be approximately 26%, reflecting a heightened level of investment in the launch of Gift Mode, particularly costs associated with our big-game advertising. Our subsidiaries are expected to pose about a 300-basis-point headwind as their revenue flows through at lower margins, largely because of lower take rates. We currently expect the first quarter to be our low point in year-over-year growth for both GMS and revenue as we begin to see the expected benefits of our product and marketing investments kick in starting in the second quarter. We currently expect that consolidated revenue growth should outpace GMS growth in 2024, with full year take rate at or ahead of the Q1 level, with further expansion of Etsy Ads and the annualized impact of the recent Etsy Payments expansion into seven new markets being the primary drivers of improvement. Beyond this, we'll continue to look for ways to drive a fair exchange of value for all three of our marketplaces. We currently expect to maintain very healthy margins, with consolidated adjusted EBITDA margin in 2024 at least similar to the level we delivered in 2023. We are energized by our portfolio of growth initiatives for 2024, which we believe can reignite our growth despite the continued challenging macro. Thank you all for your time today. I'll now turn the call over to the operator to take your questions.

Thank you. Our first question will come from Nikhil Devnani with Bernstein. You may now ask your question.

Hi there, thanks for taking the question. Appreciate it. And thanks for providing '24 commentary as well. I just wanted to ask about the GMS outlook a little bit more. Can you talk about the kind of magnitude of improvement that you're expecting to see in GMS as the year goes on? Do you think that there is line-of-sight back to positive year-on-year growth as well at some point in the year? And then as a follow-on, could you provide some clarity around product and marketing initiatives that are backing up this outlook for improvement in GMB? Thank you.

Okay, so in terms of the magnitude of the growth, we gave you what we're comfortable giving you right now. So anything more than that, if we could have been more specific, we would have in terms of when do we get back to positive growth and et cetera. It's certainly our aspiration. We believe we have every right to be growing not just positive but faster than e-commerce. And we think, especially when our categories stop being under such pressure and when discretionary consumer product spend in particular stops being under so much pressure, that's going to be very helpful. We do think we outgrew our categories yet again, our pure-play competitors in our categories yet again in the fourth quarter. In terms of the product and marketing initiatives that we expect to drive a lot of growth, we laid them out in the call. And so first on consideration, that is the biggest thing; people thinking to look on Etsy. Because when they do think to look on Etsy, they usually find something really compelling. So Gift Mode is a great example of us giving you a moment in time when you should really think, I need to buy a gift, I want to go to Etsy. And gifting is an all-year kind of thing. It's not just Mother's Day and Christmas. There's birthdays, anniversaries, back-to-school and on and on. And on other key elements in consideration, we've said we're in early stages of planning a loyalty program, which is designed to drive consideration among loyal users, more value, more on quality and more on reliability. And I think that that portfolio of bold initiatives, I think can do a lot to continue to drive growth, combined with compelling marketing campaigns. We're going to continue to work through the funnel on really compelling marketing campaigns as well.

Thank you.

Our next question comes from Ygal Arounian with Citi. Please unmute your audio and video and ask your question.

Thank you for your patience. I want to follow up specifically on the first quarter guidance. Currently, it appears we're down in the mid-single digits, but the expectation is that this will improve as the quarter progresses. I'm curious about what might cause such a quick turnaround between now and the end of March, which is just a little over a month away. Additionally, I'd like to delve deeper into the marketing strategy. You've reduced spending on performance marketing for reasons related to efficiencies and increased competition, opting to invest more in brand marketing. Typically, the return on brand marketing takes longer to realize, and you're expecting it to contribute to growth both this quarter and for the year ahead. Are you beginning to see the benefits of this strategy, considering it's been a long-term investment? How should we view this progress? Thank you.

I can definitely contribute to that. January was a bit challenging, and that serves as our baseline for providing guidance for the remainder of the quarter. Our planning involves estimating the additional gross merchandise sales generated from each specific product and marketing investment we make, and these estimates build on one another. We conduct thorough estimations and testing before we set our forecasts, ensuring we have a high level of confidence in the outcomes we expect. Looking ahead to the rest of the quarter, we feel optimistic about increasing our gross merchandise sales from our current position. We have adjusted our marketing spending; for example, in the early part of the quarter, some of our paid search spending was higher than usual, but we are now back to our regular levels, and we anticipate gaining some incremental benefits from typical marketing activities. Additionally, we ran a significant television advertisement during the big game for the first time ever, and that ad will continue to run through the rest of the quarters, earning recognition and awards within the advertising industry while starting to gain traction. Research indicates that it takes about 7 to 11 views for an ad to create a lasting impression, so we're enthusiastic about the impact of this campaign on brand recognition among our customers. We've also incorporated various promotional efforts, including initiatives featuring our Chief Gifting Officer, Drew Barrymore, to attract customers. Overall, we believe that our marketing and product efforts will contribute to gross merchandise sales this quarter.

Yes, to expand on that, we have been consistently focused on the value creation of each squad and every dollar spent on marketing. This has been a significant priority for us and we believe we are doing well in this area. However, we cannot predict with complete certainty what will happen with the baseline or the overall consumer discretionary spending in our categories. That remains uncertain, and we will have to wait and see. Nevertheless, we provided you with the best guidance we have. We have reasons to be optimistic that we will see trends improve in the latter half of the quarter based on our ongoing efforts.

Okay, great. So you might step back a little bit further into performance. Has the environment there changed at all?

Performance varies significantly on an hourly basis, influenced by the return on investment from each dollar spent. We utilize advanced algorithms to assess whether a bid or click is currently worth the investment and to adjust our bids accordingly. When cost-per-click increases, we tend to reduce our spending, and conversely, when it decreases, we generally increase our investment. It's important to note that we also consider conversion rates. During times of budget constraints, we observe a decline in conversion rates as consumers engage in more comparison shopping. Our systems, powered by AI, continuously analyze the current state of conversion rates and cost-per-click to gauge the value of each visit, which informs our bidding strategy. This dynamic nature makes it challenging to predict our margins each quarter, as they depend on the current ROI. Our approach is to avoid unprofitable spending. We strive to understand the returns we're generating, and if we perceive that the market is behaving irrationally, we will reduce our investments accordingly.

Thanks, Ygal. Operator, next one?

Our next question comes from Lee Horowitz with Deutsche Bank.

Great. Thanks for taking the question. Maybe two, if I could. Josh, you highlighted two charts in the deck, one that shows the Etsy's share gains versus pure-play comps. It seems to stand somewhat in contrast to the overall e-commerce market where Etsy is growing more slowly. It seems that would suggest that big-box non-pure-play competitors are taking share of the overall. I guess, why do you think consumers are leaning into these platforms that, as you say, compete on shorter speeds, perhaps a couple of bucks in price and not leaning into things like product quality or uniqueness? And maybe how do you think that may evolve in '24 and beyond? And one follow-up, if I could.

Great question. Let's set aside travel and online dining for a moment. When considering e-commerce broadly, it includes many aspects unrelated to Etsy. Focusing specifically on products, it's clear that Amazon, Walmart, Temu, and SHEIN are gaining market share, while almost everyone else is losing it. The few companies that are experiencing growth are few in number. Most are losing share to those four. Amazon and Walmart, in particular, are the major winners as they are selling essential items. Their earnings calls highlight that essentials are driving their sales, whereas discretionary products are posing challenges. Additionally, all four brands are known for deep discounting. Current trends indicate that consumers feel financially strained, and tax returns are expected to be lower this year than last. There are continued concerns about inflation impacting core necessities like food prices. Consumers with discretionary spending tend to prioritize travel and dining. In this climate, many are looking for the most affordable options for discretionary purchases. Despite this, Etsy welcomed 8 million new buyers, and those buyers spent $3.6 billion on the platform in the fourth quarter. This means tens of millions, specifically 92 million, are choosing to shop on Etsy even during these challenging times. Moreover, the average Etsy buyer is spending over 20% more now compared to pre-pandemic levels. However, it's notable that at present, products that are not the cheapest are less favored. I don't believe this trend will persist indefinitely. While it may seem that consumers always seek the most affordable versions of products, I anticipate this is a temporary cycle, and we will hopefully see more favorable moments soon.

Let me briefly highlight a few key points regarding developments in January and Q1 activities in the broader market. First, during the Christmas season, many people receive gift cards, but currently, Etsy does not offer a gift card program. As a result, in January, these consumers tend to spend their gift cards at retail locations like Walmart and Amazon. Second, there is a significant volume of returns happening as customers are returning items in-store. Lastly, large retail chains are clearing out inventory with substantial discounts, as mentioned by Josh. These three factors indicate that Etsy was not effectively engaged in these areas during the early part of this year, which likely had an impact on our January's gross merchandise sales.

Very helpful. I have a follow-up question regarding marketing. How do you approach efficiently allocating performance marketing dollars in 2024? You mentioned that your models are dynamic, but do you believe it might be necessary to adjust the ROI thresholds, considering the weaker consumer environment you've mentioned alongside rising auction costs from competitors? I would like to understand how you're adapting your marketing strategy in light of the challenging dynamics of increased costs and weaker demand.

The models automatically adjust, but there is some lag involved. It takes a few weeks for them to reflect changes in conversion rates. For instance, if demand weakens, resulting in lower conversion rates, the models will incorporate this automatically. We continuously refine our understanding by conducting incrementality tests. For example, we run tests on product listings twice a year by holding back part of the pantry and evaluating whether we would have still achieved those clicks without purchasing them. Often, we find that the answer could be yes. Additionally, if someone sees Etsy without clicking, it might prompt them to think of us anyway and visit without direct interaction. This can lead to over- or under-attribution of sales. Therefore, we perform these incrementality tests several times a year to assess how much of the final sale value we should attribute to ad clicks, which can change depending on competitive factors. We constantly adjust based on these findings. Another factor we consider is the potential future take rate. Understanding what you are currently paying can influence the lifetime value of a buyer, especially if you anticipate changes in your take rate or purchase frequency. While there's a degree of judgment involved, the models carry out most of the calculations, and we aim to rely on them to avoid irrationally over- or under-investing in any given quarter.

That was an excellent point regarding the lifetime value. We are continuously updating the model to enhance the lifetime value with each new product launch. As the lifetime value increases, it gets factored into the attribution model. This is already in progress. Also, while you mentioned performance ads specifically, we've started allocating more funds to new channels such as paid social and expanding into new regions. Additionally, we are trying out different types of marketing, including utilizing Etsy's profit and loss for Etsy-funded promotional campaigns. We are always looking for ways to improve our experimental marketing investments to optimize and make those channels financially beneficial. It’s less likely that we would simply lower our return on investment threshold and accept a loss.

Right.

All right, great. Thanks, Lee. Next question?

Our next question comes from Shweta Khajuria with Evercore ISI.

Thanks for taking my questions. Let me try two, please. On the GMS growth for this year, has the visibility for you changed, and I guess what gives you the confidence in improving GMS growth? If you could please lay out the key drivers, is it consideration and the gifting initiative primarily driving it and/or quality, value, reliability drivers? If you want to point to any of those. And then the second question is on the $90 million in savings that will largely be reinvested, could you please provide a little bit more color on biggest buckets of investments? Thank you.

Yes, I'm happy to take the first, if you want to add. So, yes. So we laid out, - first, Shweta, thanks for the questions. And, that slide that had consideration and quality, value and reliability with key initiatives under each, that's a pretty good roadmap for some of the bigger levers of the year. There are a lot of other things we're constantly doing to just incrementally get better in ways that drive real measurable value. But the way we run this business is we task every squad in the company with a value-creation goal. So if you're working on shortening expected delivery date or surfacing higher-quality items higher in search, there's a customer metric, but there's also a, how much extra GMS does that need to produce? And the sum total of that for last year is we think the team produced about $1.5 billion of incremental GMS. We've tasked the team with more, even more efficiency than that this year. We continue to find ways to get more efficient, leveraging new tools and techniques, leveraging new processes. We're pretty agile and we work on getting even more agile and even more focused. And then with performance marketing and above-the-line marketing, we're also always working to get more efficient. And I'm realizing now is when I talked about how the algorithms are doing the work, I don't want you to think it's static. We also have multiple squads working on MarTech. And they're constantly focused on things like, how can we make our landing pages more efficient? How can we perform better in SEO? How can we make our bids, you know, even more sophisticated, segment our audience even more? So we're constantly driving efficiency gains from each of our teams and each of our dollar spend. And so what we've done is we've looked at our plan for the year, what we think it's going to deliver in terms of incremental GMS. The assumption on that, again, is what's going to happen with the baseline, and that is the part that's hard for us to know. So the risk in this plan is, you know, I think we're going to execute on the plan and I think we're going to drive a lot of value. And what's going to happen with the baseline and to what extent is that a tailwind or a headwind to us for the year is still yet to be known.

Regarding the $90 million, I want to highlight a few points. We reduced our workforce by approximately 12% and made cuts to various operating expenses wherever possible without compromising our productivity or efficiency. In addition to the workforce reduction, we also scaled back on future open hires. This allows us not only to save current dollars but also to conserve future funds. Our primary focus remains on the Vital Few. Our guiding principle is to reprioritize and realign our teams to concentrate on the fewest initiatives that create the greatest impact. This doesn’t mean we have halted hiring or investment; there is significant room for growth. We mentioned our $500 billion total addressable market, and we're currently penetrating less than 2% of it. We have numerous ideas, as Josh outlined during the call, and we are committed to investing for growth. We lead in revenue per headcount in the company and operate very leanly. Etsy alone employs just about 1,800 people, and our revenue per head figures are hard to match within companies of our size. We are performing exceptionally well in that regard. However, if we reduce our investments too much, it could hinder our ability to pursue growth. Therefore, we are consistently seeking operational efficiencies and are confident in how we have reprioritized our expenses and the level of investment we are making moving forward.

I find the discussion about efficiency intriguing because for us, every year and every quarter focuses on efficiency. We have never decided to invest recklessly and hope for positive outcomes. For over seven years, Rachel and I have prioritized efficiency and value creation for every dollar invested. Every quarter, we examine how we can enhance efficiency and reduce costs. When we identify cost-cutting opportunities, our first thought is whether we can reinvest those savings in a way that drives growth. The key to moving our stock price is fostering growth, particularly in gross merchandise sales, which will impact our valuation. We aim to maintain cost discipline and avoid irrational investments that yield poor returns. Whenever we see a chance to reinvest in initiatives that promote growth, we will seize that opportunity. As a result, our core marketplace on Etsy currently generates an EBITDA margin over 30%. It's rare to find a marketplace of our size achieving such margins. We remain committed to reinvesting to drive growth while carefully balancing our investments and seeking advantageous opportunities.

All right, great. Thanks, Shweta. Because you got two in there, we're going to go to the next question.

Our next question comes from Steven Forbes with Guggenheim Partners. Please unmute your audio and your video and ask your question.

Good evening, everybody.

Hi, good evening.

I mean, maybe just to expand on some of the initiatives, you know, like Gift Mode and loyalty, you mentioned the investment in the Big Game advertising. You know, anytime you sort of hear loyalty, you know, it helps if you can maybe contextualize what you're thinking of doing with loyalty as we, you know, potentially have like timing disconnects with the benefits and, you know, maybe some market implications. So, you know, just any sort of expansion on what you mean by loyalty.

Sure. I would say we don't have anything to announce yet. And I know that's not going to be very satisfying, but we pay a lot of attention to loyalty economics in a lot of places, having cited Amex, where not only does Amex run really big loyalty programs and things like membership rewards, but we partnered with when I was at Amex Delta and Starwood and a lot of other places. Had a chance to study a lot of loyalty programs. And thinking hard about, which are the ones that truly drive more return and truly drive more consideration, is a big focus for us. It's got to have both rational and emotional benefits. It can't be just rational. There's got to be some yearn to it. And the goal is to get people to consider Etsy more often. People love Etsy. Talk to buyers and they're all going to say, I love Etsy. Why didn't you shop in Etsy more often? I didn't think of it. So committing to some form of loyalty program, we think can get them to prioritize Etsy and say I'm in this loyalty program, I should stop by Etsy and see if they have something to offer. If we can just get them to stop by, and see if we have something to offer, the answer is going to be yes, a whole lot of the time.

And then maybe just a quick follow-up, right. A lot of noise out there in terms of AOVs or ticket-related challenges, across the discretionary landscape, or just where deflation is, right, within the respective categories. You mentioned sort of this optimism around stabilization in GMS per active buyer. Curious if you could maybe expand on what's giving you the optimism, and what you're seeing with price behavior across the product categories you serve.

It has stabilized a bit. If you look at the last four quarters, GMS per active buyer have been relatively stable at $126. So that's good news. And by the way, that's up from about $100 before the pandemic. So in spite of all the headwinds, and everything we've talked about with the macro, still spending 20% more, more than 20% more than they were pre-pandemic. In the headwinds for the beginning of this quarter, when we said we were off to a slower start, AOVs are down slightly. So when we talk about starting from a low - down mid-single digit and guiding to - we think we will get back to low single digit, by the end of the quarter. One of the headwinds we're seeing is AOVs are down. The good news on that is, it means transaction volumes are actually holding up better than, what those numbers would suggest. Buyers are still coming and buying on Etsy. They're just even more price sensitive in this moment. And that, I think, is pretty consistent with what we hear with a lot of others.

Our next question comes from Anna Andreeva with Needham & Company.

Great. Thanks so much. Thanks for the color guys. We had one question on take rate. Came in a little bit better than expectations in the fourth quarter. What's driving that expectation for the year to be at or higher than Q4 levels? I think you mentioned some of the seller onboarding fees. And then secondly, the number of churn buyers, I think, increased a little bit in 4Q. Can you further elaborate on that? Thanks so much.

I'll take the first, you take the second. Okay. So the - we rolled out Etsy Payments to nine more markets. So that helps us a lot with incremental transaction fees that we just weren't getting before. And today, we launched the seller fee, which not only has the benefit of incremental take rate, which, by the way, completely is reinvested back in safety of the marketplace. But it creates - did you call it friendly friction earlier? Friendly friction so that we create a little speed bump, for not just any seller can create a listing for $0.20 and some kind of product. It's a moment to think about, well, I'm going to have to make payments fee. And that helps us with bad actors on the site, so that we get both the benefits of that.

Yes. And that, by the way, is not a big take rate driver. I think the revenue in that is going to be relatively small, but it's going to be good value exchange, making sure it's really secure to become a seller on Etsy. And I think that's good for all of the sellers and the buyers on Etsy, and the fee we're charging is nominal. If it's not worth $15 to create a shop on Etsy, then maybe you're not committed enough to likely succeed on Etsy. But that's not a huge revenue driver. We'll continue to see payments coverage expand in other markets and other areas where we think there's fair value exchange, and we think we'll achieve the take rate that we guide into.

Let me add a quick one to that. Just also when we see international business increase, we get a slightly higher take rate on Etsy Payments where the buyer and the seller are two different currencies, because we have a premium that we charge for that currency exchange. So that's another thing affecting take rate. And lastly, we did see nice lift from Etsy ads again, and we'll continue to see Etsy ads improvement, as we continue to make investments in the better - and better the search broad relevancy is for Etsy ads higher the conversion rate.

And on active buyers, we ended the quarter - ended the year with about 92 million active buyers on a trailing 12-month basis. So at an all-time high. Roughly stable. I don't want to crow too much about it, roughly stable from the prior quarter. But I'm not sure where the comment about more churn was, but I'd say active buyers have been stable.

Okay. Thanks so much guys.

Thanks, Anna.

Again and I think last one is going to be from Jason, right? Operator?

Jason Helfstein with Oppenheimer is our next question.

Hi Jason.

Hi Jason.

Hi, thank you. So two questions, really one is a question everyone's going to ask. How are you thinking about helping sellers correct - use correct pricing and not just undercut each other and just be more sophisticated with optimum listing prices? And the second, really, to ask, a common investor concern we hear is really around the ability to grow cohorts. Is it something you would provide in the future, perhaps like annual GMV, by cohort on the year of acquisition, I think would help people better understand...?

We have that in our 10-K. We have GMS retention in our 10-K, which will be filed tonight, tomorrow morning.

Yes, you'll receive it very soon. It will be a stacked bar every year. The class you joined in 2017 has delivered certain results to the class in 2018, and what you'll notice in those cohorts is that, unlike many e-commerce businesses where performance tends to decline over time, Etsy shows more of a smile curve, which we believe is very positive. There was a significant increase followed by a slight decrease, making things a bit messy and harder to interpret. However, we think it's quite powerful that the cohorts generally stack up nicely, contributing to Etsy's appeal. We have been experiencing some challenges due to a slight compression as we emerge from the post-pandemic period, which creates a bit of a headwind. Regarding your first point… Helping with seller pricing. Great. Great question. So a couple of things. One, we've had a very big focus on not hand made. And we've shared in the past that the percentage of views that encounter an item that's not handmade is - I think the last time we gave an update, it was cut in half. We've made even more progress since then. So it's a very big focus of our, to make sure that mass-produced items are not visible on the site. It's bad for the brand. And it's not helpful for our sellers in terms of price competition. But another thing I talked about very briefly in the call, let me unpack that a little bit more, is really elevating quality even more in search results. And what I mean by that is our search algorithm today, is designed to pick items you're likely to buy, right? So the search algorithm using cutting-edge machine learning is saying, what's Jason likely to purchase. What we wanted to do is say, what's Jason likely to love, purchase and loved. And so forming more of a point of view around does the seller give consistently good quality service, is the item consistently delightful and that leading to frequent - more frequent purchases. Gaining that kind of fidelity and filling a point of view, what's the quality of photography here, what's the quality of the return policies? Does the seller consistently ship on time? And using that to create an explainable AI model, to rank who should be on top in search, we think can unlock a ton of value, especially as you then start to expose that to sellers, and say to sellers in order to rank higher, the way to do that is to get better on one of the following metrics. Here's how you're currently doing. And the better you do on these metrics, the better you will rank in search. That creates a race to the top. And I think that's an incredibly exciting thing that, we're going to do that we're very focused on right now. It's one of the initiatives I talked about this year, and I think that over the kind of next couple of years can have a very big impact. So Etsy does far, because our unexplainable machine learning model is incredibly sophisticated at picking the thing you're likely to convert most at. And so, we've got to come up with an explainable version of the model that doesn't do any damage at least, right, that can largely match our black box model. And then get better from there. And there's some R&D that needs to happen, and that's the kind of R&D that's happening right now.

All right, great. All right. Thanks, Jason. I think we went over time, so operator, I think we're going to cut it here.

Thank you. That concludes the call for today. We appreciate your participation. Have a great evening.

Thanks, everyone. Thank you very much.

Thank you.