Etsy Inc Q4 FY2025 Earnings Call

Hi, everyone, and welcome to Etsy's Fourth Quarter and Full Year 2025 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. It's my pleasure to introduce Kruti Patel Goyal for her first call as CEO, and of course, to have our CFO, Lanny Baker here as well. Once we are finished with the presentation, Kruti and Lanny 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 slide deck posted on our website, along with the replay of this call. With that, I'll turn it over to Kruti.

Thanks, Deb, and hello, everyone. I'm excited to be here with you today, 50 days into my role as Etsy's new CEO. This morning, I want to primarily focus on three things: what we're doing to improve the performance of our core marketplace, why I'm confident in these actions, and what you can expect as we go forward. But first, I'll take a few minutes to review yesterday's announcement of the definitive agreement we signed to sell Depop to eBay for $1.2 billion in cash. This transaction will allow us to focus exclusively on the compelling opportunity we see in front of us to grow the Etsy marketplace in ways that matter most to our buyers and sellers. We believe it's a great outcome for Etsy's shareholders and a positive next step for all involved. Of course, it's also a bittersweet moment for me personally given my time as Depop CEO. I am incredibly proud of what the Depop team has built, a truly differentiated brand and product grounded in clear purpose and strong community. We've been proud to support Depop's evolution, helping it reach the next generation of shoppers and become the fastest-growing fashion resale marketplace in the U.S. And we believe that eBay's desire to invest in Depop will further strengthen its position in the circular economy. Lanny will cover more specifics on the transaction a bit later. Now back to Etsy. When I returned last year as Chief Growth Officer, I conducted a deep diagnostic of the business to better understand the root causes of recent growth challenges and where our biggest opportunities are. I spent time speaking directly with buyers and sellers, listening closely to our teams and pressure testing what I was hearing with customer research, data insights, and trend analysis. The top takeaway for me was that Etsy's value proposition for buyers and sellers remains differentiated and deeply resonant. At the same time, the diagnostic made clear that we hadn't translated that strength consistently through our customer experience. For instance, we saw that buyer appreciation for what makes Etsy special remains high, but perceptions of differentiation have softened over time. As our sellers' inventory has grown significantly in both scale and breadth, we haven't reliably helped buyers understand what they're seeing, why it belongs on Etsy or how to find the right item for their intent. That clarified a major opportunity. If we get better at how we match buyers to the right items and make the human story behind our sellers more visible, we can turn our scale back into an advantage and reassert what makes Etsy distinct. As another example, we've seen our buyer demographics aging with older users growing faster than younger ones. Our research shows that's not an appeal problem, it's a presence gap. Hence, our work to improve our app and shift our marketing mix to more intentionally engage and acquire younger shoppers. We've been weighted toward lower-funnel moments, showing up once a buyer already has something specific in mind. The opportunity is to move earlier and in some cases, before a mission even begins using inspirational content to spark shopping journeys, not just respond to them, in the places and formats where discovery increasingly happens, especially for younger buyers. On top of that, frequency and retention, even among our most valuable buyers, have not been where we want them to be. We've become much more effective at closing a transaction but under-invested in creating reasons to return. Optimizing for conversion alone isn't enough. Long-term growth requires making Etsy a destination for inspiration, discovery, and ongoing engagement. Finally, it was clear that as Etsy grew, a disproportionate share of our investment went toward improving core e-commerce table stakes, things like conversion, price competitiveness, reliability, and shipping. Those investments were necessary but not sufficient. And we didn't invest enough in the aspects of Etsy that make Etsy feel special and different. I believe that trade-off helped us compete more effectively on fundamentals, but it has also limited our ability to fully capture demand for unique, meaningful commerce and unlock more of the e-commerce total addressable market. These learnings directly shape the strategic priorities we introduced last spring, designed to turn Etsy's strengths into more durable long-term growth. As a reminder, these four priorities are: showing up earlier in the shopping journey, increasingly meeting customers at the start of their missions wherever they begin; working to get much better at using machine learning to match buyers with the right items, mirroring their interests and their intent so we can turn the abundance of our marketplace into a clear advantage; deepening loyalty with our most valuable customers so they feel seen, appreciated, and genuinely valued; and leaning into the human connection that differentiates Etsy, so shoppers experience the stories, creativity, and passion that make every item and every purchase feel special. Alongside these priorities, we've made important changes to how we operate to drive clearer focus and better execution. At a high level, we've reorganized the company around customer outcomes rather than functional silos. We consolidated product and engineering so that teams own end-to-end experiences and can move faster and with clear accountability. We unified the teams responsible for trust and safety and customer support under one leader, protecting our community while delivering fast, thoughtful help when it matters most. And we realigned marketing from a channel-first model to a customer-first one with teams anchored to outcomes like frequency, trust, and lifetime value rather than optimizing individual channels in isolation. The result is an organization with clear ownership of customer outcomes and fewer handoffs, built to move faster and execute more consistently against our priorities. That increased focus and execution is beginning to show up in our results. Our goal last year was to return our core marketplace to growth, and we achieved that in the fourth quarter. While we still have work ahead, the trajectory is clearly improving. From the first to the fourth quarter of last year, Etsy's marketplace gross merchandise sales comparisons improved by 9 percentage points. And Q4 U.S. buyer gross merchandise sales grew for the first time in four years. As Lanny will cover in more detail, our consolidated Q4 performance met or exceeded our expectations across the board. We delivered record revenue, and we did so while continuing to invest for growth at both Etsy and Depop, all while maintaining very healthy profitability. This performance reinforces our confidence that the changes we've made so far are working and that we are headed in the right direction. For example, the work we've done on our app is making it our most personalized and engaging platform with year-over-year gross merchandise sales growth accelerating to 6.6% in Q4, and homepage clicks per visit increasing 14% year-over-year and gross merchandise sales share continuing to grow. Our personalized owned marketing programs are doing a better job engaging buyers with push and email clicks up more than 25% while message volumes stayed disciplined. And satisfaction with our customer support is improving for both buyers and sellers with particularly strong gains on the seller side, up 15.5% since last year. These are all indicators that we are on the right track, which is why we're doubling down on our priorities for 2026. We have a clear plan to drive more visits, better engagement, higher conversion and spend, and healthier retention. What matters now is continued discipline and execution quarter after quarter. When we do that well, we feel confident that those investments will compound into the kind of sustainable growth we all believe Etsy is capable of: growth rooted in Etsy's differentiation and unique value to our customers. Etsy began with a simple belief that technology should empower creative entrepreneurs, not replace them. Just over 20 years later, we're at an inflection point, one where the power of AI technology has the potential to make commerce on Etsy more human than ever, enhancing our differentiation and strengthening our unique customer value. On the seller side, AI is already helping to automate routine tasks. So sellers can spend more time on what only humans can do, creating, designing, and connecting with customers around the globe. On the buyer side, it's making discovery easier and more relevant, helping Etsy show up in more of the moments where inspiration begins. At the same time, AI-powered and agentic shopping presents meaningful opportunities for the unique items on Etsy to shine. These tools offer deeper insights into our listings, enabling our sellers' items to starkly stand out against the sea of undifferentiated mass-produced goods. So we're moving fast to stay at the forefront of this inflection point. Since our last call, we've expanded our agentic shopping partnerships, adding integrations with Microsoft Copilot and Google as well as an agentic payments agreement with Stripe.

Thank you, Kruti. We have a lot of ground to cover today, so I'll dive right in. As we review our results, please keep in mind that we completed the sale of Reverb on June 2. We've provided Reverb's gross merchandise sales and revenue for Q4 2025, so you can separate the impact of that sale from the results of our ongoing business. Fourth quarter consolidated gross merchandise sales was $3.6 billion, up 2.4% year-over-year, excluding Reverb. This was above the midpoint of our guidance range and up 1.3% year-over-year on a currency-neutral basis. Consolidated revenue was $882 million, up 6.6%, excluding Reverb, a new quarterly record. Adjusted EBITDA was $222 million, representing a consolidated adjusted EBITDA margin of 25.2%. Our decision to accelerate brand marketing investment at Depop was the largest factor behind the year-to-year contraction in consolidated adjusted EBITDA margin. Etsy marketplace's adjusted EBITDA margin was slightly above 30% in the fourth quarter, our high point for the year, though slightly lower year-over-year, primarily due to higher cost of revenue as well as higher general and administrative expense. Etsy marketplace gross merchandise sales was up 0.1% year-over-year in the fourth quarter, our first positive comparison since Q3 2023. On a currency-neutral basis, Etsy gross merchandise sales was down 1% year-over-year, which is a 220 basis point improvement from the third quarter's currency-neutral comparison and extends the positive momentum established earlier in 2025. While several factors have contributed to that sequential improvement, including easier comparisons, FX tailwinds, and beneficial competitive dynamics in the U.S. PLA auctions, we believe that progress on the four priorities Kruti described earlier is also contributing to better marketplace results. Notably, our trailing 12-month active buyer count in the United States increased slightly from Q3 to Q4 and U.S. buyer gross merchandise sales grew 0.3% year-over-year, marking the first quarter of positive growth in four years. In the details of Q4, we see further validation of the notion that when Etsy leans into its strongest points of differentiation, we win, with gross merchandise sales strength concentrated in areas where we already stand apart. Etsy buyer engagement skewed toward personalized and sentiment-driven items with personalized gifts, artisanal finds, and milestone categories resonating the most with buyers. Home and Living, our largest category returned to positive year-over-year gross merchandise sales growth led by strength in high average order value subcategories where Etsy has high-quality differentiated items, such as vintage home decor, rugs, and lighting. Mobile app downloads grew 4% year-over-year and app gross merchandise sales growth continued to accelerate in Q4. App users consistently visit more often, engage more deeply, and convert at higher rates than non-app users on average. And the app's contribution to total gross merchandise sales reached 46% in Q4. That's 5 percentage points higher than at the end of 2023. Importantly, as Kruti discussed, our app strategy is central to showing up earlier in the shopping journey, particularly with younger buyers. More broadly, Etsy marketplace customer metrics are also beginning to move in a healthier direction. The year-to-year rate of decline in active buyers improved for the first time in over a year with active buyers largely flat sequentially at $86.5 million. Our active buyer base benefited from improved acquisition and reactivation. We added 6.8 million new buyers and reactivated 10.4 million lapsed buyers for a combined total of 17.2 million gross additions, which is up 2.7% year-over-year and growing again for the first time in over 2 years. We had 5.9 million habitual buyers, down 8.6% year-over-year, though the sequential quarter-to-quarter decline was a more modest 1.4%. Trailing 12-month gross merchandise sales per active buyer was $121, marking the third consecutive quarter of stable to improving trends and moving above the trough that we hit in the first quarter of 2025. The stabilization in gross merchandise sales per buyer continues to be driven by higher average order value, while purchase frequency remained slightly lower than a year ago. On the seller side, we've begun to see healthier trends as well. We ended the period with 5.6 million active sellers, up 1.5% sequentially, reflecting an increase in both U.S. and international sellers. Additionally, the retention of active sellers improved throughout the year. Turning to Depop, we delivered another quarter of excellent growth, with Q4 2025 gross merchandise sales up nearly 38% year-over-year to a new record of $300 million. In the U.S., which is Depop's largest market, gross merchandise sales grew 60% year-over-year. We saw initial wins from our surge marketing investment including Depop's Taste Recognizes Taste campaign with U.S. brand awareness accelerating even at this early stage of investment. I'll take a couple of minutes to provide additional information about our agreement to sell Depop to eBay. The sale is currently expected to close in the second quarter of 2026, subject to regulatory approval and certain closing conditions. The cash consideration to Etsy is to be paid at closing. And in keeping with our capital allocation approach, we plan to use the proceeds of the transaction for general corporate purposes, continued share repurchases, and investment in the Etsy marketplace. Etsy will continue to own and operate Depop through the completion of the transaction. However, Depop will be classified as a discontinued operation and its results will be separated from those of Etsy's continuing operations in our future financial statements. For historical reference, we've provided Etsy standalone gross merchandise sales and revenue in the appendix to today's slides. For the full year 2025, Depop generated $1.1 billion in gross merchandise sales and $187 million in revenue. Depop's lower take rate and negative adjusted EBITDA margins represented a drag of 80 basis points on our consolidated take rate and 350 basis points to consolidated adjusted EBITDA margins in 2025. With the excellent offer presented to us by eBay and in light of the significant opportunity we see at Etsy, we made the decision to sell Depop and fully prioritize our core marketplace. We believe that obtaining strong value for Depop now and focusing on Etsy, where we believe we can achieve a higher rate of return on invested capital will best enable us to maximize shareholder value in the long term. Circling back to fourth quarter consolidated financial performance. Services revenue grew 9.9% year-over-year, while marketplace revenue grew 0.8%. Consolidated fourth quarter take rate was 24.5%, in line with our guidance. Compared to one year ago, the take rate expanded by 170 basis points. As outlined on the slide, the year-over-year consolidated take rate expansion reflects a step-up from the Reverb divestiture, continued momentum in on-site advertising across Etsy and Depop, and broader gains at Depop overall. Turning to fourth quarter operating expenses. I'll start with product development, where spend was largely flat as a percentage of revenue. Higher employee costs were offset by leverage in other areas. In marketing, the increase in brand spending at Depop shows up as a key driver of the deleverage you see in our consolidated marketing line. At the same time, the Etsy marketplace delivered meaningful year-over-year leverage on the marketing front. That improvement is reflective of targeted shifts in portfolio mix and efficiency, cornerstones of our priorities. We leaned into favorable paid search dynamics, shifted linear TV spending towards OTT, YouTube, and TikTok, and targeted our paid social spend to new and lapsed buyers to drive incrementality and higher returns. Our investment into TikTok has been very effective, both from an ROI perspective and also in targeting younger consumers. Last and definitely not least, we continue to drive stronger retention and engagement via our highly personalized owned marketing channels, which delivered meaningful incremental gross merchandise sales and reinforced the effectiveness of these levers when used alongside paid channels. We plan to further these efforts with an expansion of new marketing channels in 2026. As of December 31, Etsy held $1.8 billion in cash, cash equivalents and short and long-term investments. In 2025, we generated $735 million in adjusted EBITDA converting approximately 87% of that to free cash flow and returning more than 100% of free cash flow to shareholders. During the fourth quarter, Etsy repurchased a total of $133 million in stock, bringing total share repurchases for the year to $777 million, which reduced the outstanding share count by approximately 14.4 million shares over the course of the year. Now for our outlook. As we've described, we believe that the priorities we've been executing against are beginning to turn the Etsy marketplace in the right direction. As we enter 2026, we have a focused set of product and marketing initiatives in flight and several early indicators of progress. However, we expect that the full impact of these efforts will take time to translate into stronger sustainable growth. And all of this is reflected in the outlook we are providing today. With the anticipated sale of Depop and its classification as discontinued operations in our financials as of January 1, 2026, the guidance we're providing today relates only to continuing operations or in other words, the core Etsy marketplace. We currently anticipate that first quarter 2026 gross merchandise sales will be in the range of $2.38 billion to $2.43 billion, representing year-over-year growth of approximately 2% to 4% for the quarter. The anticipated step-up in Etsy gross merchandise sales growth in Q1 2026 reflects the contribution of our four priority areas as well as the effect of strong FX tailwinds and comparing against a particularly weak start to 2025. We expect the first quarter of 2026 take rate to be approximately 25.5%, and adjusted EBITDA margin between 28% and 30%. Looking beyond the first quarter, with a singular focus on the Etsy business, growing confidence in our operating priorities, and ongoing stabilization in customer metrics, we feel more comfortable to provide high-level commentary for the year. We've improved the Etsy marketplace's annual gross merchandise sales performance from down 6% in 2024 to down 4% last year, and we expect to further improve our performance this year, achieving slight growth for 2026, with positive year-over-year gross merchandise sales comparisons in each quarter of the year.

Thank you all for your time today. We'll now take your questions.

Our first question will come from Trevor Young with Barclays.

I guess starting with the improvement in gross buyer adds, the reactivated buyers accelerating and the declines in new buyers kind of improving meaningfully. I appreciate some of that as comparison dynamics, but could you maybe unpack a little bit what changed in 4Q? And similarly, some of the actions that you alluded to here in 1Q that are driving an improvement? And just relatedly, like how durable will this improvement be?

Thanks for the question. The trailing 12-month buyer account gives us a view of buyer trends, including comparisons from 12 to 24 months ago. During this time, we've been focused on enhancing the product experience, increasing app usage, improving personalized marketing, and expanding our social media efforts. The gradual improvements you're noticing are the result of all these combined investments and strategic moves. Looking ahead, we believe these trends are sustainable and have been building over time. Specifically regarding reactivated buyers, we've found social media to be particularly effective in re-engaging those who have previously had positive experiences with Etsy. We aim to make Etsy top of mind for these users again by reaching out to them at the right moment in their journey. Once engaged, we then guide them into our app, where we can offer personalized recommendations and shopping suggestions, which we believe will foster increased frequency and retention over the long term.

Your next question will come from Bryan Smilek with JPMorgan.

It's great to see improvements in gross merchandise sales. Could you discuss the main factors that will help maintain growth in gross merchandise sales each quarter until 2026? Additionally, how are you enhancing the dynamics between sellers and buyers as we move into 2026? Also, Lanny, while you noted positive growth each quarter in 2026, is there a chance that the first quarter might be the peak? Can you provide more details on when we can expect the effects of your product and marketing initiatives to significantly influence gross merchandise sales growth beyond the first quarter?

Sure. There's a lot to go through that.

Yes. Let me start by discussing the factors driving sustainable growth in our gross merchandise sales. As mentioned in our prepared remarks, our overall strategy, which includes four strategic priorities, is designed to function as a cohesive system aimed at enhancing the entire ecosystem to achieve this goal. We are concentrating on discovery, matching, loyalty, and differentiation to boost visits, engagement, conversion, and retention. I encourage everyone to view these priorities as a collective system rather than isolating them as individual contributors. Delving into the details, as Lanny noted, we have seen the most significant momentum and impact in the initial two priorities of discovery and matching. This involves ensuring that consumers can discover products more effectively, thus making Etsy a destination for inspiration through enhanced personalization facilitated by machine learning-driven matching. And there, I think it's really critical to understand that we're really leveraging the capabilities, new capabilities of AI and the advancement in LLMs to really do things that were very, very much harder to do in the past, really deeply understand our inventory, which is incredibly unique and broad-based, much more deeply understand our buyers, their interests and their taste, and match that with a stronger understanding more quickly of their intent to deliver a much more personalized content, really at every touch point off Etsy and on Etsy. And so where we're seeing that show up the most right now is in our app and in our owned marketing channels, right? So in our app, what you've seen us do is really make the home screen experience much more discovery-focused. We've really redesigned that experience to give you more windows and doorways into Etsy based on what we know about you. And create an entire discovery feed that is much more personalized to your interest and taste. And we're seeing that work really well with app home screen clicks up over 14% year-over-year. And then in our owned marketing channels, what you've seen is we've made the recommendations that get you to come back to Etsy much more personalized. And not only have we done that, we've increased the coverage of those personalized recommendations so that our push notifications and emails have gone from less than 1/4 of them being personalized to now over 3/4 of them being personalized. And all of that is driven by the advancements and investments that we've made in our machine learning-driven models. These are really durable sources of growth that we expect to continue to invest in and build on. Now loyalty and human connection are two areas that we're earlier on in our journey with and they're areas where we're starting to see encouraging signs, but I would expect those to build more over time.

You inquired about the seller and buyer ecosystem, particularly in relation to loyalty. It's a great aspect to consider as we aim to recognize, retain, and reward our top customers. For the first time, we're focusing on both the buyers and sellers who significantly impact our marketplace and its growth. It's a new area for us, and we're still early in this journey, but we feel very encouraged and excited about it. I believe that when considering our four priorities, which Kruti mentioned in relation to engagement, conversion, and retention, we can also think about how they fit into our financial model. This model is comprised of the number of buyers, the average order value, and purchase frequency. In terms of long-term sustainable growth, we have stabilized the number of buyers. You may have noticed that U.S. buyers have increased sequentially from quarter to quarter. However, the overall total has decreased by about 100,000 compared to the previous quarter, and we are still down over 3 percent year-over-year. Thus, we have work ahead to achieve year-over-year growth in the total buyer count, but stability is present. The average order value has been stronger, having risen with inflation, likely influenced by tariffs and foreign exchange rates. As for purchase frequency, we are also stable, though still slightly down year-over-year. The initiatives Kruti outlined are aimed at improving this frequency as well. The growth formula will align when we see progress across each of these areas. We have transitioned from declines to stability in two areas and growth in one, and we are focused on improving the remaining aspect.

Our next question will come from Michael Morton with MoffettNathanson.

Thank you for the question. There are many exciting developments regarding the fundamentals this quarter. I would like to ask Kruti about the traffic from AI platforms and how these consumers are interacting, as well as what it signifies for Etsy's relationship with them. This is the top question from investors concerning marketplaces. Specifically, what does it imply for on-site ads, which are sold on a cost-per-click basis? As consumers become more knowledgeable and receive quicker answers, it could potentially lead to compression in the funnel. Etsy is at the forefront of collaborating with these platforms, being a leader in adoption. While I understand it's early, we would appreciate any insights you can share about this consumer behavior. Also, are we incorrect in our assumption that this could pose a risk to the on-site ads business? If that's the case, it would be helpful to know what measures could offset any challenges to on-site ads.

Yes, that's a great question. You're correct that it's a topic many are discussing, and we are excited to be early adopters in this area. Firstly, I want to emphasize that it's still very early in the development of agentic platforms in relation to commerce. We are observing encouraging signs that support our belief that agentic could serve as a valuable and additional discovery channel for a business like Etsy. Even though it's early, we're witnessing significant growth in agentic traffic, with a 15-fold increase compared to last year at this time, although it currently accounts for less than 1% of our total traffic. This indicates that consumers are interested in engaging with and finding value in this platform. Moreover, we are seeing early evidence that these consumers may be valuable customers, demonstrating higher intent and average order values. Engagement is being noted among both new and existing buyers, suggesting it can function as both an acquisition channel and a means of reengagement and retention. Most importantly, there's a notable flow-through effect, meaning that many users discover Etsy items on agentic platforms and subsequently visit Etsy, where they continue to explore and make purchases. This makes sense to us because shopping doesn't happen in just one way. When you're looking to buy something with a simple set of criteria focused on price or speed, and the items are mostly interchangeable, it's easy to see how you would let a third party handle that purchase. However, the items on Etsy carry more significance and value. This means you tend to want to take your time when buying a gift for your mom on Mother's Day; you are more inclined to explore the item and understand its story before completing the purchase. That engagement we are witnessing is a strong indication that our hypothesis holds true. You mentioned being early movers, which we believe is crucial. The world is changing rapidly, and we don’t think it’s beneficial to sit back and watch. Being an early participant allows us to collaborate with these platforms to help shape the experience in ways that we think benefit buyers.

Yes. Regarding the question about what we should do with Etsy Ads during this transition and learning phase, I want to reiterate that we are currently only utilizing a small fraction of what our sellers are willing to invest in advertising to generate additional gross merchandise sales. It is essential for our machine learning and ad system to enhance the way we connect customers with those sellers who are ready to advertise in order to achieve higher visibility in search results. There remains significant potential for us to improve the performance of Etsy Ads internally. Secondly, as Kruti indicated, the behavior that we're seeing in the agentic shopping world is a combination of sometimes, hey, this convenience of being able to check out right in the midst of the agentic experience, that's wonderful. Other times, like Kruti just said, hey, that's a great idea. I hadn't really thought of that. Let me go to that source and learn more about that high considered purchase. And that bringing them on to the Etsy product services where our ads model is designed to help them navigate that journey to what arguably will be the best fit in products for them. The third thing I would say is that it's really interesting to see at a relatively early stage of the development of the agentic world, the people who operate those models starting to include advertising and trying to figure out how to bring advertising into their ecosystem. I think that as we think about the paid search world, sort of inclusion of an advertising-driven component of the search world has been really favorable for Etsy over time. So I think there are on-site things that we can do. There are interface things that we can do. And then there's sort of structural ecosystem things that are evolving right now. It's very early days, but we feel like we're about a very defensible position with our Etsy advertising product.

There's one other thing that I just want to add on here, which is a lot of the focus is on agentic commerce, like commerce that's happening on those platforms. What we're talking about in addition to the commerce is agentic discovery. And then the third piece that we're not talking about here is agentic capabilities. And those capabilities are not proprietary or owned by those platforms. There are capabilities that any company can use. And so I think a lot of what we are thinking about where we're spending our energy today is on applying those advancements and capabilities to the experience on Etsy across the platform. So we've talked a lot about how we're using machine learning to power much more personalized user-aware recommendations. We're also using that to make our selling experience much better, much more efficient so that our sellers can spend their time doing what only they can do and really enhancing and amplifying the differentiation of Etsy and using it behind the scenes to make how we operate more effective, to make our support and trust and safety better, and to make how we all operate day-to-day much more effective and efficient. And I think that's a really big part of the agentic story and maybe one that we should be talking about more.

Great. Exciting topic.

Our next question will come from Rick Patel with Raymond James.

Congrats on the progress. A couple of questions around buyer acquisition. First, can you talk about the commentary around acquiring younger buyers, which channels do you see as having the biggest opportunity? And what are you going to do differently in 2026 to capture that? And as a follow-up, how much room do you see to reengage lapsed buyers? You touched on social being an effective tool there, but just curious how big that opportunity is.

Sure. Regarding lapsed buyers, there are over 100 million of them on Etsy. It's worth noting that around 50% of our buyers make a purchase just once a year. Therefore, if we can encourage them to shop two times a year, it not only increases buying frequency but also boosts our overall buyer count. These are some strategies we are implementing. You mentioned a specific interest in reaching younger audiences. Kruti highlighted the mobile app's crucial role in engaging them. Depop, which has a significantly younger demographic, sees 90% of its gross merchandise sales through the mobile app. Our experience shows that the mobile app is where this customer base primarily interacts. Mobile engagement is essential. Additionally, we are actively utilizing social channels to introduce Etsy more frequently to younger buyers. This quarter, we doubled our spending on TikTok to reach that audience compared to last quarter. The great news is that we were able to double our spending while maintaining a similar return on investment as in the previous quarter. It's sometimes challenging to increase spending on a channel like that without losing some efficiency, at least in the short term. Additionally, the buyers coming through that channel tend to be younger, which is also true for Pinterest and some other social platforms. Therefore, I believe that social media and the app will be the two most significant factors for us moving forward.

Yes. I want to also just add to that and zooming out for a second. I talked about how this isn't an appeal gap, it's a presence gap. And so the channels that we show up on really matters. The other thing that I would add is I think there's an opportunity to really leverage our sellers and leverage influencers to really speak more directly to those younger buyers. And the content matters as well. So this is where we're focusing on more discovery-oriented content also really matters. So I just wanted to add on that it's both where we're present and what we're showing and making sure that it's more personalized and relevant to this audience. But we're really excited about all these efforts.

Your next question will come from Ken Gawrelski with Wells Fargo.

Could you discuss a couple of points? First, let's reframe the conversation about the agentic aspect. It appears to me that there is a competition between site search and discovery versus what's done through agents. Considering the unstructured data and listings, how do you ensure that the on-site or in-app experience for search and discovery is superior to what agents can offer externally? For my second question, I understand there may be limits to what can be shared, but regarding cash usage, $1.2 billion is a significant amount compared to your market cap, and you are already well-capitalized. How should we think about the opportunities for effectively utilizing that incoming cash? Can you provide any timeframe for when you might be able to offer more details on cash usage?

Thanks for the question, Ken. I'll take the first one, and Lanny, you can take the second. I think this is exactly the right question. The insight and the data that we have should enable us to always offer a much richer and better experience when you know that you want something that Etsy can offer. And this is exactly one of the reasons that I think agentic can be a really great discovery platform. But what makes it such an appealing platform right now is they've really tapped into this conversational interface that allows us to get much deeper and richer insight into intent. And so when you look at what we are doing at Etsy, our first step is leveraging AI capabilities to pull that deeper understanding of our buyers' interests and of our inventory and to get signals of intent. But then the next step is to bring that same kind of interface to be able to capture even richer understanding of intent.

And from a capital allocation standpoint, I think we start out with the thought that we have $1.8 billion in cash and $3 billion of debt and $650 million of free cash flow per year. And those are the raw materials of how we think about returning cash to shareholders and managing what's on our balance sheet. Now with the addition of proceeds from Depop, that will refactor that whole equation. What you've seen over the last couple of years is Etsy say, we can invest in the business through the P&L, and there aren't big acquisitions that we have thought of, there aren't big sort of capital outlays that we have been making. And so with the excess cash that we have relative to the future needs that we see from the balance sheet perspective, we've been returning that really aggressively to shareholders. I think the reduction in share count over the past few years is quite significant. This reflects the inherent profitability, scalability, and capital-light nature of the core Etsy business, all of which remain intact. Looking ahead, we will continue to analyze our cash position, determine the appropriate level of leverage for the business, and prioritize returning excess cash to shareholders. If an attractive investment opportunity arises that promises a high return on capital, we would consider it. However, currently, the best returns are from investing internally in the Etsy business, which generates substantial cash flow. We will return any excess cash flow to shareholders.

Your next question will come from Jason Helfstein with Oppenheimer.

So now that you don't have to decide between allocating marketing between Depop and the core marketplace, how does that impact your strategy and outlook for '26 and beyond, and maybe kind of connect that back to the prior question around new customer acquisition, reactivation, and investment in technology, LLM, etc.

Let me start and say, I think it's really important to point out that while similar in nature, the conditions around Depop and the condition around Etsy are quite different. Depop had and has a tremendous product experience, the best in the business. It did not have the level of awareness across all the different audience opportunities that we saw that we thought it needed and we thought it could benefit from. And so when you want to drive awareness, the brand activity and is exactly what I think we believe one should do. And the early results from that are really encouraging. We are expanding the awareness of that product. Etsy's situation is quite different. Awareness of Etsy is very, very high. Most people have heard of Etsy, most people have bought on Etsy. The product experience, you've heard us talk about, is not where we think it should be in terms of personalization, in terms of retention, in terms of rewards for loyalty, in terms of discovery, all of those things. And so the comparison is Etsy, the investment need is more on the product side. Last year, we invested over $400 million in product development, and we're starting to see some early signs of progress from that investment. We plan to keep investing significantly in enhancing the product experience, and we believe we will continue to make strides in that area. It's not accurate to think that just because we're spending on Depop marketing, the same will automatically apply to Etsy marketing. The situation with Etsy is different; we are making substantial product investments that are beginning to yield results. The potential for advancements through machine learning is a new area where we plan to allocate resources. Currently, we believe we can manage this within the margin outlook we provided, while also achieving a combination of sustainable growth and healthy EBITDA margins.

Your next question will come from Deepak Mathivanan with Cantor.

Great. Just wanted to ask a follow-up to Ken's question. Kruti, can you talk about the learnings from the traffic you're seeing from agents as it pertains to potentially building the experience on Etsy with the native and conversational experiences? What signals are you watching to integrate AI native experiences in the platform? And also broadly, how should we think about Etsy's technical approach here using our own models built on top of open source to power the business logic or perhaps using all those like Gemini and GPT models?

Some of the early signals that we're seeing, like I said, are really related to these channels as strong discovery channels. So higher intent, higher order value, really good engagement, really good flow-through. And so those are the biggest learnings that we're seeing that there is interest and excitement about the differentiation of our inventory as people discover it in the context of other inventory. So that's where the greatest learnings are, which they think a little bit of a different category than the learnings are more generally from these AI platforms around the value of conversational interfaces to really more deeply understand intent. And those are things that we're playing with across all parts of the experience. And really the deepest learnings are coming from those on-site experiences rather than off-site experiences.

I want to highlight that we've observed from our partners that consumers who participate in agentic shopping tend to return for more of the same. This suggests a level of satisfaction with the service. Once they try it once, they come back for a second experience, and even after two tries, they keep returning. Early indications show that this type of experience is resonating well with customers. This insight gives us confidence that we can leverage agentic shopping on Etsy to enhance our user experiences. As we implement the ideas Kruti has discussed, we expect it will aid in customer retention and overall product experience.

Your next question will come from John Colantuoni with Jefferies.

Okay. Great. I wanted to ask about channel trends. With the app up nearly 7%, it implies gross merchandise sales on the website were down around 5%. And I'm curious if you see an opportunity to accelerate growth on the website and how a normalization and competition across performance marketing channels in a year ago period could impact your approach to driving this potential acceleration?

Maybe I'll start. And then Lanny can continue. Okay. Look, our app is our most valuable platform. We see that app users have a 40% higher lifetime value than non-app users. And that's because as Lanny was saying before, users engage with the app, they visit more, they engage more deeply, and they convert more. And we think that it's really attractive to a younger audience. As we have grown app share of gross merchandise sales, we have continued to see that higher level of value and engagement. So we think that there is a lot of runway to continuing to both invest in making the app more personalized, more discovery-oriented, more engaging and leveraging our own channels to drive more people to the app, and to invest in all of the channels and opportunities that we have to drive more people to the app.

We'll take one more question here before the bell rings.

Your final question will come from Shweta Khajuria with Wolfe Research.

I have two questions. The first is about agentic commerce. A significant portion of the decline we've seen in Internet stocks this year stems from concerns that some business models might face disruption from AI agents. For those considering Etsy's long-term value, how do you perceive the risk that an AI agent could affect your take rates, or that a seller might choose to interact directly with an AI agent, thereby putting pressure on your take rates or your business model outside of advertising? This could happen on an AI agent's platform instead of Etsy.

How do you view the sustainability of frequency as you continue to enhance your app, along with your product and marketing investments? Is there any reason why Etsy's frequency could not exceed past levels? What is your perspective on that trend? I'll take the first one. So Shweta, like you said, we're in very early days in agentic. And what I would say is the early indicators that we're seeing are really encouraging in terms of supporting our hypothesis that this can be an incremental and powerful discovery channel. And because it's so early, no one knows at this moment in time what aspect of how things are going to evolve or what aspect of the businesses might come under pressure. What I do know is that being in there early, we have proven that as the world changes, we have been really capable and effective at adjusting really adjusting to things that are unknown and unexpected that come our way. So we're really confident that as the world evolves, we will evolve with it. But it's impossible to predict right now for every one of those situations, what might happen.

Good. All right. That's it for today. Thank you all for joining.