Hi, everyone, and welcome to Etsy's First Quarter 2024 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, 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 on 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-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 and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or 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, and good afternoon, everyone. Etsy's consolidated results, while within our guidance range, were not where we wanted them to be. GMS was just shy of $3 billion, down 3.7% from last year. Revenue grew a bit up 0.8% to $646 million, and we delivered $168 million in adjusted EBITDA, a very healthy adjusted EBITDA margin of approximately 26%. Etsy marketplace GMS was down 5.3% year-over-year, a bit of a disappointment as March GMS trends did not improve as we had anticipated. That said, I'm encouraged that the Etsy marketplace's record-high level of 92 million active buyers held up very well in another challenging quarter for our type of goods, signaling to us that while buyers shopped a bit less with us than they did in the prior year period, we have some comfort that these trends are cyclical rather than structural. To that point, while U.S. unemployment is low and inflation data is mixed, consumer sentiment remains depressed, which some speculate can be attributed to the very high cost of money. Consumer wallets remain squeezed so there's often a little left after paying for food, gas, rent, and child care. And there's significant data indicating that the largest e-commerce platforms have primarily been able to grow by selling everyday essentials at very low prices. Macroeconomic conditions also continue to be quite challenging in our other top markets, the U.K. and Germany. These headwinds are real, do not appear to be abating and are impacting our sales. Stiff headwinds mean that our product and marketing initiatives have to work even harder to drive growth. In the first quarter, we shipped meaningful improvements to the customer experience, positively impacting GMS. Just not enough to offset the headwinds to our baseline business performance. I'm particularly pleased that our leaner and more nimble Etsy marketplace product development organization was off to the races. We had double-digit growth in the number of experiments per product engineer that utilize machine learning as well as in our annualized gross GMS from experiments. And the total number of experiments run per engineer increased 20%. Some of this progress can be directly tied to work we told you about last year to democratize ML. These metrics give me confidence that the bold moves to improve customer experience can build over time and play a key role to get Etsy growing again. Our marketing team also kicked into high gear, in-sourcing Etsy paid search efforts and scaling mid-funnel channels, expanding our product feed testing across PLA and paid social to improve the quality of inventory we're showing users and developing engaging and creative full-funnel activations across channels. Our key focus for 2024 is to continue to build consideration for Etsy, to help buyers think of us more often by making it easier to find the best stuff, driving association that there are great deals on Etsy, and making shopping on Etsy more convenient. We believe that changing buyer perceptions is eminently achievable, making us more of a go-to shopping destination, and we've made excellent progress kicking off bold initiatives to do just that. Thanks to the great work our product team did on the initial launch of Gift Mode, combined with creative and engaging marketing campaigns to raise awareness of Etsy as a key gifting destination, we're off to a good start evolving Etsy from being one of the places you can go to find a gift toward being the indispensable partner for all your gifting missions. Gift Mode is, by far, the most unique and varied subset of inventory we've ever curated and shown on Etsy. Organized around a set of gift ideas and not just items in order to help you feel like you're shopping for a person and not a thing. We're pleased to report that Etsy's total site-wide gifting GMS in the first quarter grew in the low single digits year-over-year, significantly outpacing our site-wide performance and data we're tracking for select U.S. online gifting-focused peers, who all saw year-over-year declines. We're seeing quarter-over-quarter increases in U.S. consumer perceptions that Etsy is making it easy to find great gifts, a key Gift Mode value proposition. Importantly, our research tells us that Gift Mode expands buyer understanding of the breadth of our offering, which is very helpful as, of course, we're about so much more than just gifts. We utilized full-funnel marketing strategies to tell the world there was something new at Etsy, such as securing the most visible advertising position in football's big game, making an estimated 100 million-plus impressions. Gift Mode's launch generated over 4 times as many news articles as any of our prior consumer PR campaigns, and we had an over 200% increase in conversation volume around Etsy and gifting in our social channels compared to this time last year. As we've said before, this was a kickoff, not the mic drop, and we're in the early days of driving brand awareness to make Etsy more top of mind for gifts. We've got a robust roadmap for Gift Mode to improve the experience and get more buyers into the funnel, from recently optimized gift teasers to additional Gifty profiles, reminders, video and audio message capabilities, new occasion pages, and much more. Turning to our quality-focused initiatives, which we believe represent a tremendous unlock to drive buyer consideration. We stand for keeping commerce human and believe that doing this in a way that no one else can is our most important competitive advantage. We're focused on creating cleaner shopping aisles for buyers. When you visit Etsy, your search is often cluttered, showing you too many items that feel very similar, increasing cognitive load while failing to highlight the incredible diversity that is a towering strength for Etsy. You might not be clear as to why each of these items belong on Etsy. For example, which are handmade by the seller themselves, which are designed by the seller but produced in close collaboration with a production partner, and/or which are personalized and customized by the seller. While there's demand on Etsy for each of these categories of items, it depends greatly on the buyer's shopping mission. With the tremendous growth in sellers and inventory we've experienced over the last few years, this challenge has gotten more real and complex. The great news about this challenge is that large language models and generative AI techniques provide so much opportunity for Etsy to better understand both the shopping mission and our inventory. This year, we're going on the offense in an even bigger way to make sure Etsy lives up to our promise from an inventory and quality perspective along these four key focus areas. First, we're doing more than ever to suppress and remove listings that violate our policies, and advances in ML have been particularly powerful enablers here. In the first quarter, we removed about 115% more listings for violating our handmade policy than in the prior year. Buyer views of listings that violate our handmade policy are now just a few percentage points of total listing views. Our improved enforcement capabilities have resulted in the cumulative removal of millions of listings and tens of thousands of active sellers. While there's a strong replacement factor to fill in for any removal of seller listings on our marketplace, we estimate that the heightened level of takedowns we've initiated over the last 6 to 9 months has represented about a 50 basis point headwind to our annualized GMS. We see this as a very important investment in our future with significant progress made, but still more to do to keep making Etsy different and special and even more Etsy. Second, we need to elevate listings that represent the best of Etsy. Over the past several years, we've dramatically improved our search relevance, ensuring that buyers can more easily find what they're looking for. We believe there's a huge opportunity to build on this work by factoring attributes such as the quality of the listing and photography, shipping price and reliability, and customer reviews into our organic search algorithms. All of this will help buyers find something that's not only relevant but will also lead to a purchase experience they're likely to love. We also want to empower sellers through transparency and education so they know exactly what actions they can take to improve their visibility, creating opportunities for more sales on Etsy. The third and fourth items on this slide, curation and organization, work together to do an even better job showing the newest and best merchandise available from sellers on Etsy, whether through home and landing page experiences, category shopping, initiatives like Gift Mode, our Deals tab, and more. While we've made incredible strides in directed search on Etsy, we have a very significant opportunity to focus more on window shopping, creating engaging buyer experiences that spark imagination, capture impulse buys, get to know customer tastes and preferences better, and expand buyers' understanding of the breadth of products available on Etsy. This is an area where we intend to fight much harder, making Etsy more fun, engaging, inspiring, and surprising. We want customers to come to Etsy when they have five minutes to spare just to be entertained, so they’ll continue to return. I'm confident that with our sellers' incredible merchandise, our large buyer base, brand strength, and our team's creativity, we can make this happen. It's imperative that we continue to widen the gap between Etsy's offering and that of the competition, so our site always feels inherently different, fresh, special, and even more human. Better organizing our diverse listings into cleaner aisles will declutter our site, enable buyers to find something they love with less friction, and keep them coming back. We believe that supporting small businesses and shopping unique goods are our strongest levers to get buyers to think of Etsy more often. We're planning to be quite loud with this message, reestablishing our point of differentiation in clear and compelling ways. We're also making great progress in our other key focus areas to drive buyer consideration, highlighting great value and reliability. In keeping with the times, during the first quarter, we promoted special and hot deals from our sellers, with discount-related signals continuing to drive significant GMS impact. We also introduced new functionality for sellers, such as a growth page with customer insights they can use to inform actions to grow their business, including a new earnings calculator to assist sellers in understanding the various inputs that go into their profitability. I'm pleased to report that our initiative to tighten estimated delivery dates, which we believe are an important effort to improve buyer perceptions of our reliability and to grow GMS, are already paying off. Our fulfillment team recently launched a new machine learning model which reduced our estimate of USPS transit times by greater than one day, resulting in nearly tripling the percentage of eligible orders for which Etsy can now show an estimated delivery date of 7 days or less. Driving consideration is all about inflecting the curve, capturing more new buyers, helping browsers convert to sales, engaging our existing active buyers—half of whom still only shop on Etsy once a year—and retaining and reactivating more buyers every year, working to get another bite at the apple with our more than 100 million lapsed buyers. We're excited about the road ahead with our Buy on Etsy app. Since purchasing days per app user are 75% higher than our non-app users, and only 45% of active buyers use our app, we have ambitious goals for 2024 to increase user penetration of our app and drive incremental downloads, including strategies to improve how and where we show app download prompts, increasing the reach and effectiveness of our push messages, and improving the experience for first-time app users. We have massive pools of buyers to fuel these strategies and look forward to the opportunity to own our own destiny, particularly as some top search engines have lost a bit of their potency to drive traffic for e-commerce players. In closing, while so far 2024 is proving to be a cyclically challenging period for us, rest assured that we are clear-eyed about what we need to accomplish to set Etsy back on a growth path. We're confident we're working on areas that will positively impact Etsy in the months and years ahead. We're leaning in more than ever to what makes Etsy, Etsy. We are not deterred. Proving doubters wrong is energizing for us. Even as I celebrate my seventh Etsy anniversary this month, I'm encouraged by the many opportunities we still have to grow. I'll now turn the call over to Rachel.

Thanks, Josh, and thank you, everyone, for joining our first-quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace stand-alone 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 consolidated results. Etsy's first-quarter 2024 consolidated GMS was $3 billion, down approximately 3.7% year-over-year with a 40 basis point FX benefit. Revenue increased a bit year-over-year to $646 million, and our adjusted EBITDA of $168 million was in line with expectations and roughly similar to last year. Note that Elo7's divestiture resulted in small headwinds to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. While strong external headwinds pressured Etsy marketplace's GMS trends throughout the first quarter, solid year-over-year GMS growth at our subsidiaries provided a tailwind to consolidated results. Our $2.6 billion in Etsy marketplace GMS represented a 5.3% decline on a year-over-year basis. I'll cover this in more detail later. Within our consolidated year-over-year revenue growth of 0.8%, consolidated marketplace revenue was flat, with growth in payments and offsite ads revenue offset by declines in transaction fees given lower GMS this quarter. We had a nominal benefit related to our new seller setup fee experiment launched in late February, part of our efforts to keep Etsy safe and secure. This fee is meant to introduce healthy friction into our process, facilitating enhanced security checks and continued support for new shops. Tests indicated it resulted in an expected decrease in new shop openings and a significant decline in fraud attempts. Based on this successful outcome, we rolled it out in all eligible countries in early April. Consolidated services revenue increased 3% with our ad platforms being the primary contributor. During the quarter, we continued to enhance Etsy Ads, including refinements to our data retrieval engines that improved conversion predictions and the pace of spend for sellers' ad budgets throughout the day. The first quarter 2024 consolidated take rate was 21.6%, slightly ahead of guidance and above the 20.7% reported in the first quarter of last year. Our first quarter consolidated adjusted EBITDA margin was 26%, in line with our guidance, down 60 basis points from last year. We gained leverage year-over-year on employee costs and variable cost of revenue, offset by higher marketing expenses, primarily from our big game advertising. Our subsidiaries represented an approximately 300 basis point headwind to our consolidated adjusted EBITDA margin. We're encouraged that our efforts to effectively manage our cost structure and look for efficiencies are helping us to make important investments while also delivering very healthy profitability in this challenging environment for our discretionary goods. During the first quarter, consolidated product development spend decreased 5% year-over-year to $110 million, primarily as a result of our December Etsy marketplace restructuring. We are gaining leverage on this P&L line, as you can see from this slide. Our first-quarter consolidated headcount was approximately 2,400, down 15% on a year-over-year basis. For the Etsy marketplace, headcount was down approximately 9% year-over-year to a bit under 1,800, with revenue per headcount increasing about 2% year-over-year. We continue to make deliberate and judicious decisions related to our hiring, focused on selective skills and the very best talent for our significant opportunity ahead. First quarter consolidated marketing spend increased 12% year-over-year to $192 million, largely driven by a 59% year-over-year increase in our consolidated brand spend, primarily related to our above-the-line big game campaign in support of the Etsy marketplace's launch of Gift Mode. Our consolidated performance marketing spend increased 2% year-over-year. Performance marketing was a headwind for January as we conducted core channel optimizations, but it became a tailwind in both February and March as we expanded Etsy marketplace product feeds testing across PLA and paid social and scaled up push notifications and mid-funnel investments to diversify our marketing portfolio mix. Etsy marketplace paid GMS was about 20% of our total, similar to our normal trend line. Moving to Etsy marketplace GMS and buyer metrics. Etsy marketplace GMS declined 5.3% in the first quarter, with the negative trends we experienced in January and February continuing through March. While we saw positive GMS impact from our product and marketing initiatives in the quarter, we were pleased with the performance here, our baseline GMS levels continued to be pressured by macro factors specifically related to consumer discretionary product spending that made it harder than we expected to bend the curve, which was disappointing. Further, we saw greater-than-expected volatility around the timing shift of Easter from April to March. While this was a headwind to March, it has also provided a helpful tailwind for April, which I'll cover in our Q2 guidance. Diving in a bit further on the consumer discretionary headwinds we are seeing, particularly in our categories, these charts are probably the most informative to help us explain the overall GMS pressure we've been experiencing. On the left, you can see the steady decline in U.S. consumer discretionary spending as a percentage of total personal consumption expenditures, including through the first quarter of 2024, which supports our belief that much of our deceleration in the quarter was in line with the larger trend for discretionary goods. On the right, you can see that Consumer Edge pure-play peer sales data for our top 6 categories in Q1, with low to mid-single-digit declines in every category except for craft supplies, which had a slightly positive result. These headwinds were stiffer than we had anticipated when we set guidance for the quarter. Here, you can see that Etsy marketplace GMS was down across our top categories. When we map our performance to the Consumer Edge data on the prior slide, we believe that we performed similarly, if not better, than peers in 4 of our 6 categories: home and living, apparel, paper and party supplies, and toys and games, while we underperformed a bit in jewelry and craft supplies. Overall, we see this as a tale of broad weakness in the types of merchandise we sell. Etsy sellers generally have not raised prices in keeping with inflation as peer retailers do. Etsy marketplace GMS, excluding U.S. domestic, declined 1.5% from the prior year, with particular weakness on a year-over-year basis in our key markets of the U.K. and Germany. We did see growth in Switzerland, Austria, and the Netherlands. While our U.S. domestic GMS continues to decline on a year-over-year basis, we are seeing healthier performance in our U.S. import trade route with a high percentage share of imports from sellers in the U.K., Canada, and Turkey. It's encouraging that Etsy marketplace active buyers grew 2% on a year-over-year basis, roughly flat to the fourth quarter, equaling about 92 million active buyers. U.S. active buyers have grown a bit now on a year-over-year basis for three consecutive quarters, and we continue to see healthy additions outside the U.S. We reactivated over 6 million lapsed buyers, up 6% year-over-year, and we added nearly 6 million new buyers in the first quarter, down year-over-year, but still a healthy proof point in this macro climate, well above pre-pandemic levels. Habitual buyers decreased by 3% year-over-year. We are observing a trend where some habitual buyers purchased slightly fewer items or spent slightly less, no longer meeting our habitual buyer definition and moving to the repeat buyer category. We also retained slightly more habitual buyers in the first quarter versus our retention of habituals in the fourth quarter and the prior year period. Lastly, GMS per active buyer was down 3.5% in the quarter. Additional Etsy marketplace metrics and trend charts can be found in the appendix of this presentation, posted on our IR website. Our subsidiaries both had encouraging momentum to start the year. Both businesses delivered year-over-year GMS growth, with Reverb continuing to outpace the musical instruments industry and Depop growing faster in the U.S. than their comparable resale players. They are providing good lift to consolidated results, affording exposure to different categories and buyer purchase behavior than our core marketplace. Both Reverb and Depop appeal to value-oriented shoppers with great deals, with Reverb highlighting news and outlet merchandise, establishing itself as a destination for affordable and discounted music gear. Depop continues to be a home for discovering affordable fashion, with success helping users to set fair prices and more easily negotiate. As of March 31, we had $1.1 billion in cash, cash equivalents, and short- and long-term investments. During the first quarter, we repurchased a total of $158 million in stock under our $1 billion June 2023 Board-authorized repurchase program, of which $566 million remains available as of March 31. Our capital-light business model allowed us to deliver strong free cash flow this quarter of approximately $59 million. We continue to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis. Now turning to our outlook. As mentioned earlier, the larger-than-anticipated headwinds the Etsy marketplace experienced in March due to the shift in Easter and spring break timing had the inverse effect on our consolidated GMS for April, which was down about 2% year-over-year, pacing ahead of our consolidated Q1 results. While we are encouraged by this performance and have much conviction about our product and marketing investments, which stack each quarter, we remain cautious given how challenging it has been to predict the outlook for our business. We currently expect the year-over-year decline in consolidated GMS for the second quarter to be similar to our actual first quarter performance, with the downside being a mid-single-digit decline and the upside being the top end of a low single-digit decline. Reverb and Depop are again expected to provide a modest tailwind within the consolidated GMS performance. We anticipate consolidated take rate and adjusted EBITDA margin for the second quarter to be similar to our actual performance for the first quarter. Our subsidiaries are expected to post about a 300 basis point headwind to adjusted EBITDA margins as their revenue continues to flow through at lower margins. With the range of potential outcomes for the full year, our current view suggests a modest acceleration in year-over-year consolidated GMS in the second half. We’re reiterating our prior commentary about full-year take rate revenue and adjusted EBITDA margin. Built into the take rate expectation for 2024 are our Etsy Payments expansion plans, including the recent addition of China and the seller setup we described earlier. As we continue to build exciting initiatives, we will look for opportunities to deliver a fair exchange of value, which enables us to invest in growth. Our team is highly engaged and energized, and we will continue to keep our eye on the prize. Thank you all for your time today. I will now turn the call over to the operator to take your questions.

Our first question will come from Maria Ripps with Canaccord.

So yes, first, kind of understanding that we're sort of in a tough environment right now for consumer spending, I just wanted to ask about the competitive environment. It seems like the Temu competitors started becoming a little bit more aggressive throughout Q2 of last year. So as we start to sort of lap that, do you anticipate maybe a more favorable or a little more stable competitive backdrop? Is that becoming less of a headwind as we move through the second half of the year?

It's possible. I think what we've been saying all along is that we think that the Chinese competitors are more symptoms than a root cause. I think what we're observing again and again, both at Etsy and in the commentary from so many others in our space, is that consumers feel really pressured despite what we're seeing about a generally healthy economy. Consumers feel pressured and are seeking value in deep discounts and deep promotions. So yes, the Chinese competitors are offering that, but Amazon and Walmart are too. It looks like the people driving most of the growth in e-commerce are those able to offer everyday essentials at very low prices. There’s probably some trip consolidation happening too. While you go into Walmart to buy your groceries at a cheaper price, you may pick up some other items as well while you're there. The Chinese competitors are a competitive headwind, no doubt. They've been a headwind to us and to everyone else in e-commerce. It would be great to see them not investing so aggressively in marketing. But I think the root cause of consumers feeling a ton of pressure and seeking deep discounts will remain regardless of what the Chinese players do. Our focus is not to chase them to the bottom, not to be the very cheapest place to buy things. It's to make Etsy more Etsy. It's to lean into what makes Etsy different and special. I'm incredibly excited about all the initiatives we have going to really elevate the very best of Etsy, suppress the things that are not the best of Etsy, and make the aisles easier to shop so people can see the wonderful products that we have on offer. The more that they find really, really cheap and disposable things, the more they will crave an alternative to that, and we're bound and determined to use this moment to get even stronger as that alternative.

Great. And then for my follow-up, I just wanted to ask you about your product roadmap. Is there any additional color you can share regarding the expected structure and timing of your loyalty program? Which cohort of customers do you think this loyalty program will have the most tangible impact on driving increased frequency? Is it one-time buyers turning into repeat buyers, or repeat buyers turning into habitual buyers?

Yes, great questions. The team is making good progress. I don't have specifics to announce, but we are on track to launch in beta form in the second half of the year. The focus will be on occasional shoppers to turn those who shop on Etsy occasionally into more loyal buyers.

Our next question comes from Nick Jones with JMP Securities. My apologies, I'm waiting for him. Our next question comes from Laura Champine with Loop.

So the question is about the implication that GMS improves as you move through the year? I know that's not what you're saying for Q2. But upon what kind of macro changes is that predicated, if any?

I am very excited about the initiatives the team is working on this year. I think the things we've talked about with gifting, getting even more known as the place for gifting, the things we've talked about with quality really leaning into the differentiation of Etsy. There's a lot of really good work going on, and that work stacks. So it is our current expectation that we would grow in the second half of the year as a result of that. Headwinds to that would be if the consumer discretionary environment gets even more challenging. It's just hard. Things have been pretty volatile even week-to-week right now. So it's difficult to know how that will shape up.

Just to ensure I'm understanding this, you're anticipating similar macro conditions to what we're experiencing right now, but starting to see the impact of your own initiatives. Is that fair?

That's fair. I'm very excited about what we're doing this year. I think it's really relevant and impactful. The product and engineering teams generated an incremental $1.5 billion of GMS from the work they did last year. We're lapping that, and I think the work we're doing this year is going to be even more impactful. I believe that can lead to accelerated growth in the second half. That's our hope, and we think it'll happen.

A quick follow-on, something Rachel called out was positive friction with sellers with this incremental fee. It's been 12 quarters in a row that your sellers have been outgrowing your buyers. Is that making it tougher for search to improve? Would you prefer to see a narrowing of that gap?

That's such a good question, Laura. Yes, we have been saying for quite some time that we have a lot of sellers and quite a lot of inventory, and we want to ensure that we have enough demand to match supply. Seeing low effort sellers come on the platform that may not have the skill or the will means more data we have to process and more handholding we have to give. Having a group of sellers with higher skill and will, these sellers are the most likely to succeed on the platform anyway. We believe that's very helpful. The early results from having just a small fee of $15 to set up a shop on Etsy reveal that those unwilling to invest may not have the required skill or will to succeed.

Josh talked about a few things regarding our quality and curation, improving the ability to find the good stuff and elevating that to things you see first while suppressing lower quality items. We also actively remove items that don't comply with our handmade policy. Some of these upfront initiatives support our downstream efforts in focusing on quality and organization of the best sellers.

I’m passionate about this. We have many listings on Etsy, often thousands, and when buyers search for something, the first page may show 30 similar items. This can lead to cognitive overload for a buyer. It's harder for us because we don't map to a catalog, but I think with the latest machine learning techniques, it's easier for us to show fewer choices of just the best items. In doing this, we can also better showcase the diverse offerings that we have on Etsy.

Our next question comes from Michael Morton with MoffettNathanson.

Perfect. Two questions, if I could. Jeff, you spoke to seller removal, I think being a bit of a gross margin headwind. It was our interpretation, looking at some of the comments last year, that some of the fraud created from poor behavior from noncompliant merchants could have been a gross margin headwind last year. So just curious, as you work through this process, if this could be a tailwind to gross margins as you get some of the noncompliant sellers off, who may have elevated return levels outside of Etsy's protection program?

Yes, in terms of gross margins, possibly. It may not be noncompliant sellers, but sellers with higher levels of refunds or consistently shipping late. We want our search engine to favor sellers who consistently ship on time, consistently get 5-star reviews, and rarely receive returns. We've been very focused on relevance. In addition to relevance, we want the quality of the purchase experience to be a priority. This should lead to more satisfied buyers who return more often and reduce our cost of revenue through fewer refunds. What I was specifically referring to in my comments was doing a better job taking non-handmade items off the site. New technologies make it easier to spot items that exist on AliExpress, which we assume are mass-produced and remove from our listings. Sellers can appeal this, but we assume right now to take it down as our default policy. Generative AI is increasingly helpful in understanding the value a particular seller adds to a product. We want to prioritize original items where the seller really added value and explain to buyers where this value lies.

We've been leaning into takedowns for at least the last 2 or 3 quarters, and we've progressively improved in this area. We often talk about the substitution effect. Takedowns do not always mean a direct loss of GMS because customers can often find very similar items to substitute. While we've taken down many listings and sellers, this has represented about a 50 basis point impact.

That's great. Is it safe to assume that the removal of these merchants has any impact on on-site revenue due to the auction dynamic?

Yes, most of the time when we remove an item, another seller is ready, willing, and able to take that sale instead. As we've taken down millions of listings and tens of thousands of sellers, there has been about a 50 basis point headwind. We see that as a worthwhile investment to ensure that Etsy remains different.

We are publishing a transparency report next week, so keep an eye out for that.

Our next question comes from Naved Khan with B. Riley Securities.

Can you hear me?

Yes.

Two questions, maybe just to kind of clarify some of the noise. So Q1, did you also have some impact potentially from tax refunds? I heard that tax refunds were up 6% this year. And then you also had an extra day. If you're talking about as a baseline, GMS being similar in terms of year-on-year growth, does it mean it is actually improving trend-wise? How should we interpret that?

There were things that benefited Q1 that won't repeat in Q2 and things that will, like Mother's Day, that didn't happen in Q1. Leap Day was a small benefit to Q1, less than 1 point. Tax refunds were up a bit and came later in the quarter, which can be a longer-term benefit. We didn't analyze it that granularity, but our current expectation is similar to the guidance we provided in Q1.

You point out some fair things. It's also true that comps get a little harder each month this quarter. May was a little stronger last year than April, and June was stronger than May. We’re implementing many good things to make the business better, improve customer experience, which we think is crucial as well. Net-net, as we said, we think it'll be roughly similar−it could be as high as the top of low single digits or could be mid-single digits, especially if discretionary gets more pressured.

Understood. A quick follow-up on app downloads. What are the things you look at in terms of driving those downloads?

Yes, great question. Someone who is an app user produces about 75% more GMS than someone who isn't. So we believe having someone on the app is valuable. We've leaned into app downloads a fair amount in previous years, but we are making it a big focus again. We can promote downloads through screen real estate more effectively, using benefits of being in the app, such as app-only specials and tracking packages. We have squads working to develop value propositions and promoting these to drive downloads, as our penetration is lower compared to peers. Closing that gap will help drive more lifetime value and frequency.

Our next question comes from Trevor Young with Barclays.

Just to clarify on the full-year guide commentary and accelerating in 2H. Is that to be interpreted that we'll still be slightly negative in the back half? Or do you think we'll get to flattish GMS by year-end?

The guidance we provided indicated that we could be slightly better than Q2 or slightly worse than Q2. Our current forecast expects some acceleration in the second half.

What we said is a modest acceleration in the second half of the year.

To clarify on the 50 basis points headwind from removing listings that violate policies, is that expected to continue throughout this year? Is that what's baked in?

That has been happening for about 6 to 9 months. We put that data point in to convey that we're leaning in a lot, but there's still quite a high replacement rate. So even as we take things down, we see another seller ready and willing to take that sale, but it has a slight headwind. I wouldn't be surprised to see it continue.

Our next question comes from Ken Gawrelski with Wells Fargo.

Can I ask, it’s clear to me that you see yourselves as a growth company, right? Unfortunately, you haven’t been growing. The question I have is whether you feel you have enough certainty around the macro and even micro factors to be more aggressive, right? To take— to be a bit bolder in your initiatives. I’m not suggesting that you’re not making real attempts to get back to growth, but I’m getting at whether you’re willing to bet now to say either we’re going to increase marketing spending because we have a better feel for the landscape. I know you stomach the Temu excessive spending for multiple quarters, and now we know what it looks like, and where the macro consumer opportunity is or is not.

We want to move to bigger, bolder, more eye-catching releases. Fewer incremental steps have been driving substantial progress over the past several years, which isn’t going to catch consumer attention and drive the step changes we are looking for. Gift Mode is a good example where we launched it quickly in MVP form. I’m proud of our team's execution in a short time. We’re going to enhance customer experiences further to differentiate ourselves from the rest of the market. Spending more is not a solution. We spend rationally on marketing, ensuring we get returns on our investments. Minimizing waste is an important value for us. We look at every dollar spent each quarter, so we can't just ramp up spending. We decide on a few initiatives to lean into that we believe will drive growth. The innovative work we did last year generated an incremental $1.5 billion in value, and we believe the initiatives this year will generate even more, despite having a smaller team.

The definition of MVP is minimum viable product. We operate with agility, not waiting for everything to be fully baked. We feel internally that we are building great products and marketing initiatives as we deal with macro pressures. As these pressures ease, we believe we'll be well-positioned for growth with a strong product offering.

Yes, the big game ad did what we wanted: ignite a national conversation about Etsy's new product, Gift Mode. We secured the most viewed spot during the big game and our ad tested well for recall and breakthrough. The goal was to position Etsy as the go-to place for gifting, and we’ve seen positive data points indicating that the ad generated interest to try, with a significant increase in conversations about Etsy as a gifting platform. A big game ad isn't a make-or-break decision, and we'll evaluate future advertising strategies based on the relevance of our upcoming launches.

I know we went over, but we did have one more in the queue we want to try to get to. So operator, can you give us the last one?

Our final question comes from Mark Kelley with Stifel.

My first question, and I know you touched on this a little bit in the prepared remarks, but can you just walk me through the dynamics of Easter a little bit? Was it not as much of a tailwind because it was the exact last day of the quarter and some shipments occurred in Q2? I guess maybe some dynamics there would be helpful just to start.

The headline is that it was a bigger headwind to March than we expected and an equal better tailwind to April than we expected. We forecasted Easter accurately, and it had a bigger impact than anticipated. While it provided a tailwind for April, it negatively affected March. We haven't spent much time dissecting it because ultimately it's just a timing shift.

It's not just Easter; spring break also impacted sales. When people travel, they tend to spend money on travel rather than on Etsy, affecting March results but positively impacting April. Easter isn't a major gifting holiday for us, leading to more focus on the timing of spending.

Travel during that period impacted this holiday more than others. As spending discretionary budget on travel increases, customers have fewer funds for discretionary products. We can definitely showcase large language models' contributions moving forward. For instance, our development of Gift Mode relied heavily on large language models for generating gift ideas across different personas. The productivity gains from large language models have extended to coding as well. Our key paths and democratizing machine learning have notably aided our progress, allowing us to develop ideas like Gift Mode more effectively. This is part of our agile culture that allows teams to move quickly.

Thank you all.