Etsy Inc Q3 FY2024 Earnings Call

Hi, everyone, and welcome to Etsy's Third 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 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 in our 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. We're pleased to have delivered solid consolidated revenue and profit, despite a challenging GMS quarter for the Etsy marketplace, with overall performance roughly in line with our guidance. Consolidated GMS was $2.9 billion, down about 4.1% year-over-year. Revenue grew 4.1% to $662 million, benefiting from continued take rate expansion. And we posted a very healthy adjusted EBITDA margin of approximately 28%. While Etsy marketplace GMS was down about 6% year-over-year, it's encouraging to see our active buyer levels remain solid at approximately 91 million. We maintained strong revenue flow-through and profitability, despite continued macro headwinds and multiple mindshare events this quarter. I'm excited to tell you more about how we're investing focus and discipline in the things that we believe truly differentiate Etsy to get us growing as quickly and strongly as possible. Earlier this year, we outlined our commitment to driving consideration among our customers, centered around highlighting Etsy's quality, value, and reliability. We said we would elevate gifting, prioritize quality in search, foster loyalty, and improve shipping. Fast forward to today, we have delivered on those goals. We have created a more intuitive gifting experience, enhanced our search algorithms to showcase higher quality and more diverse listings, launched the Etsy Insider Beta Loyalty program to encourage repeat purchases, and reduced estimated global shipping times and charges on millions of items. Achievements like these are part of a bigger story. At a time when it feels like everyone else in retail is focused on slashing prices and offering steep discounts, we are approaching things differently. We know that our strength lies not in a race to the bottom. It's simply not who we are; it's not who our sellers are. Instead, we're choosing a different direction, choosing to double down on the things that make Etsy markedly different and markedly better as the best path to restarting our growth engine. So far this year, I believe we have done more to holistically improve the customer experience than in any other year of my tenure. A lot of this work has been foundational in nature. Throughout the year, you've heard us talk about our journey to evolve from a historical focus on in-period conversion and incremental GMS banking to infuse engagement and better customer experiences as core metrics of success for our team. We've shifted the ways we hire, manage, and set goals for our people, how we manage our portfolio of product development investments, how we operate and measure success across teams, and how we deploy technology on the Etsy platform. We've moved with urgency, taking the steps that we believe are necessary to build a springboard for future growth, even as there has been some opportunity cost related to these initiatives. Two areas where you will start to see the shift are within our app and search. For the Etsy app, while it's early days, we've started making real progress. Getting a buyer to download the app increases their lifetime spend on Etsy by at least 40%. Yet less than half of our GMS is transacted on the app, so there's tons of untapped potential. We've tasked our teams with revamping the app homepage to dedicate far more screen real estate to inspiring new shopping missions, but to do so without hurting conversion. That alone was a big undertaking. Just in time for the holidays, millions of users now see a dramatically improved experience, with a 33% reduction in what we call rearview mirror impressions, when we show you items influenced by your past shopping missions. Instead, we're using that real estate to offer fresh, exciting shopping inspiration, perfect for those who arrive without a clear idea of exactly what they're looking for. We also stepped up efforts to secure incremental app downloads by increasing the rate at which we intervene in mobile web visits, prompting more shoppers to download the app mid-journey. We're willing to briefly interrupt the shopper cart mission to promote better overall experiences. Initial experiments showed these bolder prompts led to incremental lifts in app downloads, which we believe is very promising. For example, in one experiment, we drove three million incremental app downloads by placing a prompt on the signed-out listing page on mobile web. We're also testing and learning with paid ads to drive downloads while we optimize our presence and placement in the App Store. The other major area where we're building engagement more intentionally is within search. We've historically built our algorithms to help buyers find the specific thing they’re looking for. Now, we're working to also show the wide range of items that we have to offer. To do that, we're taking a three-pronged approach focused on diversity, quality, and agency. Let's touch on each one. Starting with diversity, our teams are leveraging GenAI to increase variety in search results, creating a more inspiring and engaging, and less repetitive shopping experience. We shared last quarter that we drastically reduced search results that have identical images. To further diversify results, we've been casting a wider net to incorporate items with similar images, not just those that feature exact matches. We believe the impact of this work will better expose our buyers to the incredible breadth of offerings on Etsy, leading to increased consideration and visit frequency over time. Regarding quality, this year, we've retrained our search algorithms, adding indicators of high-caliber listings, like having a shipping charge that aligns with buyer expectations, providing return policy, and the shop's level of customer service. We want to match you with not just an item you're likely to buy, but with an overall purchase experience you're likely to love. We're encouraged that our experimentation in these areas appears to be leading to an increase in four and five-star buyer reviews, and decreases in both the number of reviews that are three stars or lower, as well as the rate at which buyers request refunds. These signs indicate we're doing a better job delivering consistently delightful buying experiences on Etsy, which ought to lead to more purchase frequency and even better word of mouth. A key ingredient to bring these quality efforts to life is giving sellers more agency over what affects their search ranking. In late August, we launched the Etsy Search Visibility page within the seller dashboard. This new page features tailored actions sellers can take to improve their position in search, such as listing image quality and quantity, return policies, message response times, and shipping charges for domestic listings. If sellers make these changes, they'll have the ability to track improvements in real-time. In one example of this work in action, since launch, sellers have lowered shipping charges on approximately 2.5 million items to better meet buyer expectations. We've already seen excellent overall uptake in sellers taking actions we've suggested, beating our internal adoption target by approximately 60%. We're positioning ourselves to evolve from being a place you come after you know exactly what you want and haven't been able to find it elsewhere, to also being a place you come early on for inspiration and to discover what you want in the first place. Connected to our focus on highlighting what makes Etsy different and special, in July, we introduced creativity standards to help fortify our position as the marketplace for original items from real people. We pulled these creativity standards through to the shopping experience, adding descriptors for each item to underscore the role the seller played in making or designing that item and to show buyers why what they're seeing belongs on Etsy. We spent much of the third quarter refining label accuracy and are continuing to explore how to highlight them to buyers in areas like search, discovery, and new marketing experiences. This effort involving dozens of product development and marketing staff exemplifies this year's shift towards long-term customer experience improvements, prioritizing fundamental changes that will benefit Etsy in the long run, rather than focusing primarily on short-term metrics like conversion rate and GMS. These updates were accompanied by what I consider to be our most profoundly human marketing campaign to date, featuring real Etsy sellers creating their bespoke items. The campaign resonated with buyers. Our research shows that supporting small was among the top recalled messages, along with themes of originality and handcrafted goods. These findings align with our belief that there is no one better positioned to tell the world what creativity means than Etsy and our sellers. Now let's talk loyalty. In mid-September, we began officially inviting a highly targeted group of occasional buyers to join Etsy Insider through email, push, and on-site prompts, with the app driving the majority of signups across platforms so far. We're just beginning to glean insights on how to best approach buyers and pique their interest. We plan to evolve our beta offering along the way as we formulate a rewards program that is uniquely Etsy, encouraging buyers to think of us first and shop with us more often. Our gifting strategy is the gift that keeps on giving. With the number of product improvements this quarter, we've introduced new ways to browse and discover unique gifts, while tripling the number of gift ideas available to buyers. We've also increased buyer adoption of existing gifting features. For instance, approximately 1.1 million gift lists have been created, and 1.3 million incremental visits came from people who received a gift teaser, then went directly to the site. We have just started rolling out physical Etsy gift cards at more than 20,000 stores in the U.S., including major pharmacies and retailers. Starting today, U.S. consumers can also purchase and ship physical cards directly from Etsy.com, helping people give the perfect gift as we head into the holidays. Gift cards represent less than 1% of our GMS compared to industry estimates of a few percent of GMS for peer specialty retailers. So, we see significant opportunity here. Naturally, gifting takes center stage in our holiday marketing this season, with an amazing lineup of creative content, onsite and off. Turning to our house of brands, Depop has been a stellar top-line performer, with GMS growth accelerating on a sequential basis. In July, the marketplace removed U.S. selling fees and introduced a small buyer marketplace fee following their U.K. model. These changes made Depop more appealing to sellers, increasing listings and giving buyers a wider selection. Since launch, U.S. listing growth has accelerated by 26 percentage points. In August, Depop rolled out its biggest-ever U.S. marketing campaign, amplifying the no selling fees proposition to more than 70 million people, building on its position of strength as a market share gainer in U.S. resale. On Reverb, used music gear sales growth in the U.S. continues to outpace new gear sales, and outlet and exclusive music gear is seeing double-digit year-over-year growth. In August, Reverb partnered with Fender, one of the world's leading guitar manufacturers, to launch Fender Certified Pre-Owned on Reverb, helping musicians access affordable pre-owned music gear directly from a trusted brand. Reverb continued to focus on operational efficiencies to drive profitability and value-added services for its community. In closing, I'm extremely proud of the progress we've made so far this year to make Etsy even more differentiated. Our right to win is more important than ever as we work to restart our long-term growth flywheel by shifting our energy towards cohesive, engaging experiences. While the rest of the world is obsessed with discounts and promotions, we're obsessed with making our customer experience even better, making Etsy even more Etsy. In doing so, we honor our promise to keep commerce human. While the tide is out right now for discretionary products, we're hard at work ensuring our boat is large and strong, ready to sail even further and faster as the tide comes in.

Thanks, Josh, and thank you for joining our call. My commentary today will cover consolidated financial 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 consolidated results. Etsy's third quarter 2024 consolidated GMS was $2.9 billion, down approximately 4.1% year-over-year with a 30 basis point FX tailwind. Etsy marketplace GMS was down 6% year-over-year. Strong Depop performance contributed a nice benefit to consolidated GMS as they delivered excellent top-line growth in the U.S. and also performed well in Australia. Third quarter consolidated revenue increased by 4.1% year-over-year to $662 million and adjusted EBITDA was $184 million representing a very healthy 27.7% margin, down 90 basis points year-over-year, and ahead of our guidance. We gained leverage year-over-year on employee costs and cost of revenue, which was offset by a higher level of consolidated marketing spend this quarter. Note that Elo7's divestiture resulted in a small headwind to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. Digging into the consolidated revenue growth, marketplace revenue increased 3.3% year-over-year, primarily driven by payments fee revenue. We continue to drive Etsy payments expansion with penetration of our payments platform now at about 99% of Etsy marketplace GMS, compared to 93% in the corresponding prior year period. Our new seller setup fee and offsite ads fees also contributed to marketplace revenue expansion. In addition, an increase in GMS and resulting transaction fee revenue for the Depop marketplace was a tailwind to our consolidated performance. The growth in consolidated services revenue was even faster at 6%. For the core Etsy marketplace, as revenue performance accelerated on a year-over-year and sequential basis, the results of significant strides made in optimizing how we bid on behalf of our sellers, which resulted in better balancing seller ad value across seller segments, all while maintaining consistent seller ROAS. As you can see in the chart on the right, our consolidated Q3 '24 take rate improved to 22.7%, above our guidance of approximately 22% and 180 basis points above the 20.9% reported in the same period last year. This strong year-over-year performance demonstrates how we have been able to drive value for our sellers and improve their experiences while also delivering more revenue and a higher take rate for Etsy in a win-win manner. We are proud that Etsy has been able to invest with discipline in bold initiatives Josh described while managing our spend during a challenging macro and economic time for our core Etsy marketplace. For example, we continue to drive leverage within consolidated product development spend, which decreased approximately 6% year-over-year to $107 million during the third quarter, primarily due to decreased employee compensation expenses connected with our 2023 workforce reductions. You can see from the chart on the right that revenue per headcount for the Etsy marketplace continues to grow on a year-over-year basis and remains well above many of our peers, even those of significantly larger size and scale. Third quarter consolidated marketing spend increased 22% year-over-year to $197 million. In addition to increases in Etsy marketplace performance marketing spend, Depop had a large step up in its spend versus last year in support of its U.S. fee change announcement. As we highlighted on our last call, we also expanded mid-funnel and newer performance channels, particularly within paid social, which increased meaningfully. We have been increasing our paid social spend throughout the year as we test and learn, but it is not yet fully matured and optimized. This investment is well aligned with our overall push into discovery and inspiration, solving for our buyers' more generalized needs, such as the recent addition of a new baby in your family, rather than helping you find a specific personalized onesie. Paid social is having a positive impact on our buyer reactivation, which is beneficial since a reactivated buyer spends 40% more with us in the next 12 months than a new buyer. Consolidated brand spend increased 21% year-over-year, also connected to Depop's higher level of spend. As previewed on our last call, Q3 brand spend also includes the creative costs we incurred for our Etsy seller-focused campaign. Moving to Etsy marketplace GMS performance and related metrics, we had a year-over-year decline in our top categories, and GMS was down in our U.S. domestic-only trade route, as well as non-U.S. trade routes. We did see some modest growth in our international non-domestic trade route as well as U.S. imports. Digging into this performance, there are three primary factors at play. First, overall macro conditions, which influence consumers' budgets, continue to weigh on the wallet share we can win. The percentage of U.S. personal consumption going to discretionary spend continues to decline versus the COVID peaks. Second, there were a few discreet mind-share events during the quarter, which we believe created additional headwinds for our business. These included general elections in the U.K. and France, a host of major sporting events, including European football, the highly popular Olympics, events tied to U.S. politics and the general election, and Hurricane Helene at the end of September. Third, as Josh described, we are really focusing on shoring up the core Etsy marketplace, leaning into item quality, and making sure we have a great cohesive experience, especially in the app. These are pretty large shifts in how we run the company, and they're putting some pressure on in-session conversion and creating some modest headwinds to GMS. That said, we are pleased to have been able to drive some pockets of GMS strength in the quarter. Our focus on making Etsy the destination for gifting again resulted in site-wide GMS growth, albeit not as strong as experienced in the second quarter, which featured very important calendar-driven holiday gifting occasions, such as Mother's Day and Father's Day. To help fill such gaps, we will continue to focus on driving more evergreen gift purchases, such as for birthdays and anniversaries. We've also seen personalized and customized items continuing to outpace site-wide performance, up 4% year-over-year, reinforcing one way our brand can resonate with buyers. In the U.S., back-to-school merchandise GMS grew 5% year-over-year. We have continued to see resilience in our Etsy marketplace active buyer count, which was approximately 91.2 million, ticking down only slightly on a year-over-year basis. We reactivated over 6 million lapse buyers in the quarter, up close to 6% year-over-year. We added over 5 million new buyers in the quarter, down around 13% year-over-year. Habitual buyers decreased by about 5% year-over-year. However, our retention rate of habitual buyers was slightly better on a year-over-year basis, and habitual buyers remain a very healthy 43% of our GMS. Lastly, GMS per active buyer was down 3.4% in the quarter to $123. The decline in GMS per active buyer is predominantly due to buyers visiting us less frequently and spending less per purchase day. I want to take a moment to talk about the Etsy seller community. Our heart goes out to those in regions hard hit by recent hurricanes. As is our normal course, we have adjusted their billing schedules, offered disaster grants to sellers in need, extended star seller status as relevant, and proactively provided guidance around managing or taking a break from their businesses. We hope that these steps provide impacted sellers with the flexibility they need to focus on their health and safety. As you may have noticed in our press release, the active seller count for the Etsy marketplace was 6.2 million, down 8.5% versus the prior year, and down sequentially. We have long asserted that when we lose a seller, we rarely lose a sale, given the large amount of substitution available. In fact, we believe that the decline in our active seller count is actually a helpful byproduct of our focus on quality and stepped-up enforcement actions, including our new seller setup fee and other actions we are taking to ensure that the right sellers, those with the skill and will to succeed on Etsy, can win. We are pleased to see a year-over-year increase in the percentage of sellers who made a sale during the third quarter, a metric that has been moving in the right direction this year. We also see strong pockets of seller growth, such as in Ukraine and other emerging markets. As of September 30, we had $1.2 billion in cash, cash equivalents, and short- and long-term investments. During the third quarter, we repurchased a total of $156 million in stock under our $1 billion June 2023 Board Authorized Repurchase Program, of which approximately $260 million remained available as of September 30. Our capital-like business model allowed us to deliver strong free cash flow this quarter of approximately $204 million. We also continued to convert approximately 90% of adjusted EBITDA to free cash flow on a trailing 12-month basis. Our net income was impacted by a non-cash foreign currency loss compared to a non-cash foreign currency gain in the prior year. Earlier today, our Board of Directors approved a new stock repurchase program authorizing Etsy to repurchase up to an additional $1 billion of our common stock. We see significant value in our shares, and we and our Board have confidence in the growth plans we have underway. Given that we have $1.2 billion in cash and generate such strong free cash flow, this new authorization will give us the flexibility to potentially go beyond our already high level of share repurchases. And it's worth noting that these repurchases do not come at the expense of important investments in our business. Turning to our outlook, our guidance is that fourth quarter consolidated GMS will decline in a low to mid-single-digit percentage range on a year-over-year basis. We're confident that Etsy is the best we've ever been for holiday gifting, which gives us reason for optimism. We know there's a lot of pressure on consumers in our core markets, and they appear to be prioritizing deep discounts and value within tight budgets. Etsy will present gifting front and center, on-site and off, and we will be running cyber sales and highlighting our sellers' great value and highly differentiated products. With that said, our brand stands for special and unique rather than cheap and deals. One other unknown is how the U.S. general election may impact the consumer psyche or holiday spending trends. Q4 '24 consolidated take rate is currently estimated to be 22.3%, up versus the prior year result, but a slight step down from Q3 '24, with our normal sequential seasonal trend coming into play with higher levels of organic GMS in the fourth quarter relative to revenue we earned from Etsy ads in the quarter. Consolidated adjusted EBITDA margin will be in the range of 28% to 29%, ahead of the Q3 '24 and prior year Q4 performance. The sequential improvement in adjusted EBITDA can be attributed to seasonal volume and cost efficiencies, as well as Depop scaling back on performance and brand marketing spend after the higher than normal Q3 spend tied to their buyer fee campaign. For the full year, using the midpoint of this guidance, we will have withstood a host of stiff macro headwinds with consolidated GMS down roughly in the low single digits, while still driving very respectable growth in revenue, all as we created fair value and fair exchange for our sellers, made critical investments that we believe can reignite future growth, and delivered strong adjusted EBITDA profitability, at least as good, if not better, than our commitment for the year. While we're not satisfied with the lack of GMS expansion, we take comfort that if this is what our business can deliver in an extremely challenging period, the future for Etsy will be bright indeed. Thank you all for your time today. I will now turn the call over to the operator to take your questions.

Thank you, Rachel. As a reminder, we are allowing analysts one question today. We will wait a moment to allow the queue to form. Our first question will come from Nick Jones from JMP Securities.

Great, thanks for taking the question. Could you speak to the leverage you're driving in product development? I think you've pointed out in the past that you're able to do a lot with kind of a relatively lower headcount to other platforms. How do you rank or order what you want to invest in, particularly as eye accelerating GMS growth over time? And should we be thinking about a potential investment cycle at some point as you get your arms around a lot of this new technology, and potentially maybe a bigger lift to move the needle more? Thanks.

Yes, thanks, Nick, great question. We go through a process at the beginning of the year where we identify what customer experiences we really want to uplift that we think are going to translate into more lifetime value, more GMS, and more revenue. Then, we have a top-down bottoms-up approach to challenge the team with what are your best ideas. Based on the quality of the ideas, we decide how many squads to dedicate to those tasks. The unit of work at Etsy is a squad; it's roughly eight to ten people. And those atomic units can operate really quickly; the velocity is usually really good. We empower them to improve customer experience by set metrics within certain time frames. You're right that we are seeing some leverage in product development this year based on the reduction in force that we did last year. We've always believed we've never been a growth-at-all-cost company. Scarcity breeds focus, and that focus is a great thing. We also care a lot about the productivity of the team and measuring team productivity. This year, we decided to invest in some foundational experiences that we believe are critical to setting us up for growth in the years to come. For example, adding a Q-score to search is foundational and expects to drive improvements in the marketplace and lead to more GMS growth in the future as sellers know what they can do to earn a higher spot in search. We think that’s a foundational investment, but it took months of work from multiple squads to implement successfully. In normal times, getting to neutral or zero loss was not the goal; everything was about incremental growth. Much of the foundational work we've done this year will position us for future growth next year. We've made a lot of progress on that and are well-positioned to have our existing squads contribute more next year. We are doing some incremental hiring. We continue to be cautious about that. For example, we decided we don't have enough app engineers. So, we are hiring more app engineers. We're also hiring more machine learning personnel. We're always working to strike the right balance. We've always been disciplined about our investments. We'll continue to lean in where we think it's going to drive real growth.

Just to add, being disciplined about investments means ensuring we're optimized in terms of the cost of a full-time employee. We've discussed before that we have development centers outside the U.S. where the cost per employee is different than what we pay in the U.S. We try to load-balance and open up the aperture on where we can get talent in places like Mexico City and Dublin, in addition to the U.S. The talent markets have different compensation levels, so we lower the effective cost per employee. Simultaneously, we're always assessing what the right market price is for the talent we need, and we do that assessment every year, making adjustments as needed.

Great. Thanks, Nick. Operator?

Our next question will come from Anna Andreeva from Piper. Please go ahead.

Great. Thanks so much, and great to see you guys. Good to hear about the progress in search and profitability. A couple from us, just curious any color that you can share what you're seeing in the business quarter-to-date, and what's implied at the low end versus the high end of the GMS guide for the fourth quarter? If I'm not mistaken, last year, October started off tougher, but then the business improved in November and December. But then you have the gift mode that's incremental, which should be helpful. And then, just as a follow-up, could you elaborate on the physical Etsy gift card launch this quarter, just sounds pretty interesting? Curious how you plan to be marketing that, and if any of that upside is implied in the guide? Thank you.

I'll pick gift card. We're not going to give quarter-to-date how October has gone so far, but I will say that the holiday season this year is later than normal and shorter than normal. We think November and December, particularly mid-to-late November and December are going to loom largely in the quarter. This is always the case, but probably even more so this quarter. Obviously, we have an election going on in the United States, which is distracting and may affect shopping behavior in early November. We will see how that goes. Of course, we consider that in the guide, but it's challenging to know exactly how that will impact things. We consider the shorter Christmas period in our projections as well. Regarding the gift card, it is built into the guide. Over time, we think it's going to be exciting for Etsy. We are marketing through a third party that has deep relationships with retailers. Building awareness and mindshare takes time. Gift cards for us are about 1% of GMS, maybe even a little less. For many of our peers, it's two or three percentage points, so we see real upside potential, though I doubt it happens all at once. It will build over time.

I wanted to quickly remind you about the accounting for that because we don't recognize revenue from a gift card until the gift card is redeemed. Some people redeem immediately; some sit in a desk drawer for a while. We recognize breakage over some period of time. So, it's not a straight sale from the gift card to hit the P&L directly.

What we find is that people redeeming a gift card tend to buy more than the value of the gift card. We see this as a great opportunity to bring new clients to Etsy and gain more frequency. We also have started testing refund to credit. In cases where someone is not happy and gets a refund, sometimes they prefer a refund as credit, which can lead to more incremental purchases. Gift cards are interesting for Etsy, and we see potential in the years to come.

To add on the shorter shopping season, we have a gift teaser in our gift mode. This feature allows people to buy something and get it delivered on time for Christmas, which is exciting.

All right. Next question? Thanks, Anna.

Our next question comes from Scott Devitt from Wedbush. Please go ahead.

Hi, everyone. Hope you're doing well. I have one question regarding the growth in the business, which seems to be related to just the categories where Etsy sellers do well. That will take care of itself over time. You have initiatives you're pushing, and when that happens, they can be more stimulative than they are now. You talk a bit about gifting, search, shipping, loyalty, and the app. If you were to look at those five categories, what would be the one or two that really stand out as capable of moving the needle?

One that I'm most excited about is consideration. I'm excited to build consideration on the site and in the experience itself. We have the opportunity to inspire new shopping missions as well as fulfilling existing ones. The advances we're seeing in GenAI are really helpful here. For example, typing in 'wedding cake topper' is common on Etsy. GenAI understands this search may relate to planning a wedding, allowing us to suggest other popular items for buyers planning weddings. Thus, we free up screen real estate to show more than just cake toppers, suggesting items like table stakes, table scapes, stationery, or bridesmaids gifts. This involves realigning the use of screen real estate to drive more shopping missions. We are excited about the foundational work we've done this year to prepare for expanding the types of items we can present to customers.

Thanks, Scott. Next one?

Our next question will come from Nikhil Devnani from Bernstein. Please go ahead.

Hey, guys, thanks for taking the question. Josh, it's encouraging to hear about your incremental hiring plans. How do you view the right margin level for Etsy here? Is there room to be more aggressive, even if it means trading off some margin? Each segment seems to be doing quite well, which could inform the overall structure for Etsy if executed correctly. Thank you.

Yes. We're aiming to grow the market cap of the business. We care about profitability and free cash flow, but also significantly about growth. This year, we've been investing in foundational initiatives that we believe are vital for future growth. I'd like the foundational work to translate into growth moving forward, and as we see proof of that, leaning further into hiring may make sense. We're very data-driven, so we seek proof of ROI, at least green shoots, before making additional investments. We will continue to strike the right balance.

Regarding Depop and seller fees, we see the excellent growth performance in Depop. GMS at Depop is growing more than 30% year-over-year, with significant U.S. growth outperforming that. It's exciting what’s happening there and validates our portfolio strategy of gaining exposure to resale. We also see the current market being extremely promotionally driven, where Depop offers brand name clothing at discounts, which appeals to consumers focused on value.

Okay, great. Next question?

Our next question comes from Maria Ripps with Canaccord. Please go ahead.

Great. Thanks so much for taking my questions. As you approach your first holiday season with gift mode, what are your expectations for the offering and how are you measuring success? Is it in terms of GMS, in terms of percent of GMS, number of active buyers? Also, could you expand on marketing efforts surrounding this offering?

We measure based on absolute GMS. In the third quarter, gifting GMS grew substantially faster than the overall marketplace as it did in the second quarter. We've launched several product features to have the best gifting experience this year, including a gift finder with three times more gift ideas—5,000 different gift ideas. Adoption of wish lists and the gift teaser feature are also promising. The gift teaser is particularly valuable this year with a shorter shopping season that allows buyers to give gifts on time for Christmas. We plan to discuss gifting heavily in our marketing efforts through various channels in the fourth quarter and have a campaign launching that emphasizes thoughtful, personalized gifting.

I wanted to clarify about active buyers in gift mode; we don't track that metric. We track gifting GMS instead because users engaging in gift mode can still purchase items elsewhere on the site. Therefore, the best measure is if they select an item as a gift for someone else.

Exactly. Engaging with gift mode is just one part of the funnel that leads to other items they might purchase.

Yes, exactly. Okay, cool. Next question?

Our next question will come from Naved Khan with B. Riley Securities. Please go ahead.

Hey, it's Ryan on for Naved. Thanks for taking the question. I wanted to ask about Etsy Insider and seller reactions initially. Also, any insights on seasonal versus monthly subscription numbers. Any clarity you can provide would be appreciated.

We're very early in, effectively in spring training, not even in the first inning yet. It's been live for six weeks, and by design, we have been inviting only a limited number of people. We're still learning about the potential of free shipping, subscriber interest, the value propositions driving subscriptions, and the accompanying economics. The initial seller reaction has been primarily positive. We focused on ensuring seller margins don't suffer. In our research with buyers and sellers before launching, we found that buyers wanted free shipping but didn't want it to come at the expense of sellers’ margins. This genuine connection between buyers and sellers reflects Etsy's unique marketplace. The seller reactions have been positive, but loyalty programs often take time to develop and scale significantly, which will be our expectation as we move forward.

Thank you. Next question?

Our next question will come from Robert Coolbrith with Evercore. Please go ahead.

Hi, good afternoon. Thanks for taking our questions. Josh, I think you just confirmed it earlier, but wanted to check if the Q score has remained conversion and GMS neutral as you scaled that up. Also, any additional color on the scale of GMS headwind from changes in the mobile app and web? Do you expect this to be a consistent headwind into Q4, or will there be a shift back to focusing on conversion versus downloads as the year progresses?

Yes, we have been able to get the Q score in search launched to be roughly neutral to conversion rate. We have added some friction in the mobile web experience to drive people to download the app. For example, an interstitial on the signed-out listing page is driving 3 million annualized downloads. The cost to conversion rate is not high; we think this is an appropriate and ROI-positive trade-off. I believe the headwinds from our changes this year are relatively modest. The larger cost we've felt is opportunity cost. Had we maintained the operation as in prior years and focused on GMS wins, we could have seen a several percentage points less decline in GMS this year, but would we be in a strong position moving forward? The changes we have implemented enhance differentiation on Etsy and I believe will yield growth in coming quarters.

Great. All right. Next question?

Our next question will come from Laura Champine from Loop. Please go ahead.

Laura, are you on mute?

Laura, your line is open. Feel free to unmute. Okay, we can return. We'll take our next question from Marvin Fong from BTIG.

Can you hear me?

All right. Please go ahead, Marvin.

Okay, awesome. Well, thanks for taking my questions. I really appreciate it. Just two quick ones for me: you gave out the category numbers, which I always appreciate. I know you just provide full numbers here, but perhaps there was some small marginal improvement in the home category. As a broader question, are you seeing anything different among different categories in terms of pressures on your business, or am I over-reading into that? And then, second question, just on the buyback, you’re generating north of $700 million, $800 million in free cash flow. What’s the appetite to perhaps outrun that free cash flow generation and possibly leverage up the balance sheet? You’ve mentioned that you think the stock is undervalued. Just thoughts on how you want to structure capital and deploy the buyback.

I'll take that last one first. We did say in the call that the Board approved an additional billion. That gives us the flexibility to go beyond our current level of share repurchases, which we've been doing about 90% of our free cash flow return to shareholders. We can do that while continuing to invest in our organic investments. We feel good about that. The balance sheet is leveraged up. We have three outstanding converts, with the first due in the fall of 2026. We want to be thinking about that. We don't need to increase leverage now to lean more into share repurchases, as we have the flexibility to do so at current levels.

It's a great characteristic of this business that our capital requirements are low. Many companies have EBITDA that doesn't translate into free cash flow. For Etsy, it largely does. The cash flow gives us flexibility. As to category performance, we haven't seen anything particularly interesting to highlight. One consistent insight is that value is essential. For instance, we are growing in what we call demi-fine jewelry, which features handmade engagement rings from goldsmiths priced between $100-$500. In this more competitive market on our platform, we see demand for quality items reflected as our jewelry offerings under $20 face more pressure. Buyers must consider shipping costs when purchasing cheaper items on Etsy, while they may opt to buy face-to-face for something cheaper without shipping.

Cool. I think we'll take one more question, operator.

Our next question comes from Shweta Khajuria from Wolfe Research.

Hello, Shweta.

Hey, Shweta.

Hey, everyone, this is Brian Kraska on for Shweta. Congrats on the quarter; really nice to see the upside in the take rate, both in Q3 and the GAAP for Q4. I was curious if there're any incremental drivers beyond advertising and payments that you noted in the letter to consider on the seller side, with the quality score or other initiatives and how to think about that into 2025. Thank you for taking the question.

Thanks for the question. I'm excited about the significant gains we've made in take rate this year, increasing 130 basis points without impacting sellers' margins. It's a common belief that if Etsy's take rate rises, it harms sellers, but that is not true this year. Payments coverage has gone up, so instead of third-party payments, sellers are paying Etsy directly, ensuring a better experience without increased costs. Our Etsy ads have improved significantly, meaning our sellers' return on ad spend remains consistent while Etsy benefits from a larger take rate. The seller onboarding fee is another small contributor. It effectively stops bad actors without deterring good ones. We've noted that the sales volume from new sellers hasn't been adversely affected. Overall, we feel good about the sustainability of our take rate gains and potential for further value exchange.

Just adding that our payment schemes in 2024 will fully annualize in 2025, as we didn't implement them all at once. OSA, or offsite ads, is another revenue source—our performance marketing boosts our OSA revenue.

Great, we are at time. Operator, I think we’re going to call it an evening.

Thank you.