Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the at Sea third quarter Conference call.
At this time all participants are in a listen only mode.
Later, we'll conduct a question answer session and instructions will follow at that time.
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I would now like to turn the conference over to Mr., <unk>, Vice President of Investor Relations.
Thank you good afternoon, welcome to infuse third quarter 2019 earnings Conference call. Joining me today are Josh Doberman CEO , Rachel Glaser CFO in grade Ratcliffe, our senior manager Investor Relations before we get started just a reminder that her remarks today includes forward looking statements related to our financial guidance and key drivers thereof.
The impact of our strategy marketing and product initiatives and product development velocity on conversion rates in our future financial results, including Gms in revenue growth.
Improvements to our recent initiatives and the anticipated benefits of our recent acquisition everywhere. Our actual results may differ materially forward looking statements involve risks uncertainties, which are described in our press release or 10-Q filed with the FCC on August 2nd 2019, and subsequent reports that we filed with the FCC any forward looking statements, we make on this call or piece.
And our beliefs and assumptions today, and we don't have any obligation to update them.
Also during the call will present, both GAAP and non-GAAP financial measure measures reconciliation of non-GAAP to get measures is included in today's earnings press release, which you can find on our Investor Relations website.
To the replay of this call will also be available there and if you prefer to access the replay by a phone you can find that information in the press release as well you create a slide presentation to accompany today's opening remarks and recommend you follow along no and much of today's discussion will focus on as whose results. Excluding these six week impact of our recent acquisition of Reaper unless we specify.
Otherwise with that kind of color, but you Josh.
Thanks to good afternoon, everyone.
[laughter] Q3 was another eventful quarter, it's improving underlying fundamentals coupled with transformative updates to the business, which we believe laid the foundation for strong growth into the future.
That's these currency neutral Gms growth was approximately 23% another quarter of sequential acceleration and our overall take rate expanded 60 basis points to 17.1 person.
This resulted in revenue growth of 28% with healthy adjusted EBITDA margins of 22%.
It's extremely rare to see a company in our sector with such strong sustained revenue growth, while simultaneously delivering such solid profitability. We believe that this is continued evidence of the strength of our fundamentals our execution and our two sided marketplace model.
When talking with many of you we're often asked how much more runway as he has to grow and 27 team our team right reorganized to prioritize faster execution streamlining and focusing on the areas of the business that had the highest probability of driving gms growth.
Many 16, our product development velocity was delivering approximately 200 experiments per year. We're now at a rating much faster shipping an average of about 100 experiments per month in 2019 more than five times and she's 2016 velocity with only about 6% more headcount.
We continue to focus on what our buyers need and have a long road map of ideas that are in turn delivering incremental gms growth for our sellers. So lets dive into some of those initiatives.
That's he's collection of unique items is the foundation of our right to win.
As of September Thirtyth, we had over 2.4 million sellers offering over 63 million items. The vast majority of which are unique or one of the time.
In Q3, we launched variation photos, enabling buyers to visualize color or design variations without requiring a separate listing for each variation and we launched a tool that makes it easy for sellers to adopt this feature this initiative simplifies the buying experience, making it easy to find exactly the right item designed just for your taste.
And over time as we drive penetration of variation photos, we believe it will have a positive impact on conversion rate as well.
Search and discovery is our second right to win as you know those 63 million items I. Just mentioned don't have skew numbers warm up to a catalog, making etsys search challenge different from others in E Commerce.
Overtime, we've seen our improvements in search unlocked significant value as a key components of that she's competitive advantage.
Following about nine months of iterative development in August we launched our next evolution of our search capabilities. We've upgraded our context specific search ranking algorithms from linear to nonlinear models, which now leverage a deeper understanding of the relationship between items attributes and users.
We believe that as we continue to reiterate on this new even more sophisticated modeling approach our algorithms will learn and deliver more personalized shopping experience showing results more specifically tailored to each individual buyers taste and preferences, we've already seen a meaningful impact the conversion rates with our first launch of this new model and.
That's just the beginning.
Similar to our prior CSR work, we expect to apply these search model improvements to other areas of the business like promoted listings in order to increase the relevance of AD results and drive more revenue.
This new approach would not have been possible without our move to the cloud and demonstrates that we are still in the very early days of unlocking meaningful improvements to search.
We continue to make progress and leveraging human connections. Our next right to win we believe that fostering and elevating the quality of human connections on our platform will enable us to drive fire engagement loyalty purchase frequency and continue to differentiate at sea from other e-commerce platforms.
In the third quarter, we did work to rebrand our conversation tool to at sea messages transforming to look and feel of the interface from an email like platform to a chat like experience, enabling faster interactions that are more focused on shopping.
Since our buy on Etsy up is the method with with our most loyal buyers shopping Betsy we see investments here as a way to deepen the connection between buyers and sellers.
2019 has been a big year for improving the app continuing to create a more rewarding and engaging experience tailored to our best buyers.
Of improve the buyer onboarding experience homescreen feed search dropdown menus recommendations cart modifications and a host of other changes that will enable us to more proactively market the gap in 2020.
Next some of our work on human connections laid the foundation for building a brand that inspires trust across a buyer's journey our final right to win another area, where we had some important milestones during the quarter is our work on reviews. Our data shows that the conversion rate for an item with multiple reviews is significantly higher than a listening with nowhere.
Abuse, it only about 15% of purchases on Etsy result in a review.
So in Q3, we kicked off a significant track of work focused on this area.
First we made major changes to the listing page expanding the available real estate and making reviews more prominent.
We elevated reviews that were more helpful for buyers for example reviews with more text and those that included buyer photos were elevated over reviews with the star rating and no text.
And third we're finding ways to encourage buyers to wait more reviews. These initial changes to our reviews experience made in Q3 are already expected to yield meaningful incremental gms and we have many more improvement in the pipeline.
We introduced two big bets on our last call, which we kicked off in Q3.
Our free shipping initiative, giving sellers tools to offer free shipping to buyers, who spend $35 or more and their shop was the first of these.
We've just started making free shipping the norm on etsy, rather than the exception, let's run through some of the highlights of where we are an adoption and impact.
At the time, we launched our free shipping initiative in July only about 24% of items were available to ship for free to the U.S. by the end of the third quarter. This number had increased slightly over 60%.
Importantly, 74% the betsy's total U.S. lifting views feature items eligible for free shipping to the U.S.
For buyers are number one lens for evaluating the success of this initiative is are we driving a better overall experience and early indications are encouraging we're making progress, but with plenty more to be done.
Encouragingly, we've seen that the purchases per visit have increased as a result of the free shipping initiative.
In addition, our recent buyer surveys show improved sentiment around shipping and buyers report higher future intent around visiting shopping and adding more to their card.
Interestingly habitual buyers are most loyal buyers are the segment that have reacted most positively to our free shipping initiative showing improved conversion rates.
For sellers, who offer the free shipping guarantee our data shows that on average their gms is disproportionately up from the prior year and they are seeing an increase in their upsell rate in other words the number of items per transaction has improved for these sellers.
As a headwind we see that sellers are absorbing more of the shipping price than we expected or that buyers likely value rather than passing those costs along to buyers.
For instance, sellers with many or most of their listings under $35 sellers with expensive or heavy items and international sellers are having a hard time figuring out how to incorporate shipping costs into their item prices. So we could go we launched a tool to help sellers with items under $35 and in 2020, we expect the launch it too.
To help international sellers individually implement their preferred pricing strategies.
We also continue to provide educational materials to help our sellers to build out price and display their inventory in ways that maximize the benefit of the free shipping guarantee.
Now that penetration is high we can begin to market free shipping to our buyers in mid September we launched our first campaign focused on elevating buyer awareness of free shipping leveraging all of our owned channels as well as our online ads and TV campaigns, we're incredibly excited about the potential for free shifting to unlock future.
Growth and loyalty as awareness build overtime.
In addition to the free shipping initiatives, we're very focused on expanding the shipping solutions, we offer sellers to ensure that they get the best rates and improve their efficiency.
This quarter, we've added Pitney Bowes, you ship and chit chat three new solutions to help sellers save even more time and money throughout the fulfillment process.
Overall, we're very encouraged by the progress we've made with our shipping initiatives and believe we're well on track to unlock significant value for both buyers and sellers through this program.
We also recognized for its early days with much more to do I know, it's a bit complicated with many puts and takes Rachel will talk more specifically about these in a moment.
Our second Big bet launched in the third quarter was at CES with streamlines, our to add products promoted listings and Google shopping to one unified ad platform.
Rather than having our sellers managed to budgets and see ads Optimizes, a single daily budget across all advertising channels.
This enables us to utilize a higher percentage of a seller's budget election and improve their return on investment.
Our at Sea adds initiatives is taking place in three distinct phases.
The first phase migration of existing sellers into the new platform is complete we are pleased with this first phase as we saw a minimal but did churn and the vast majority of sellers have continued to participate in the program, we're making progress improving the ROA osten, Google shopping to match the levels of promoted listings and as a result, we're seeing meaningful.
Oh progress improving the aggregate return of the program, which is fundamental to our ability to scale as he adds over time.
As Ross improves we will expand the second phase, which is to help sellers grow their budgets with positive returns our data indicates that many sellers are already earning very strong returns for each dollar invested and yet their budgets are too low we see opportunities for them to invest more with attractive results and our.
Goal is to help them understand this and raised their budgets as a result.
The third phases to add new sellers NCS, our research indicates that a lot of sellers are at a stage of maturity, where they are ready for etsy ads, but have not yet adopted it which in turn is limiting their growth, we'll look to communicate the etsy adds value proposition to this population and expect adoption to grow overtime. These.
The last two phases could take the better part of 2020 and beyond and we will communicate progress as we go.
As budgets and adoption increase we're able to divert more of our marketing dollars to upper funnel channels that promote the etsy brand to the benefit of all of our sellers top of mind awareness intend to visit and intend to purchase our metrics we measure every month.
Our investment than brand marketing campaigns on television and digital video are moving the needle on these metrics, but thats. He adds we expect to further accelerate the shift overtime as sellers drive more of the incremental performance marketing spend in the marketplace.
Earlier this month, we implemented a new shop analytics interface that gives sellers much clearer visibility the how their dollars are performing and clear attribution for what traffic is from etsy versus the results of their own investment the new shop analytics feature give visibility to visits conversion rate orders and revenue.
Details on traffic sources that show sellers, where their buyers are coming from by channel.
And improve listening performance metrics detailing sources of traffic and success metrics by channel.
At a glance sellers are now able to know the next one or two actions. They can take to be more successful. This work is essential and helps to raise all boats, which in turn improves the health of the whole marketplace. Early results are encouraging it's an incredibly simple effective platform for sellers to use.
Confident it will benefit the many sellers seeking to drive their growth as well as have a positive impact etsys overall growth and profitability.
We're very excited for the holiday season, with our product development improvements multichannel marketing campaigns and free shipping initiatives. We believe we've again made at sea a meaningfully better place to shop for the holiday.
Our new brand campaigns TV spots will run through the holiday season, and connect with those who want their gift, giving and celebrations to feel special.
We aim to drive frequency during the busiest shopping period of the year by standing out in buyers minds as the destination for unique products made especially for you buy a creative entrepreneur from a brand you can trust.
In addition to our own marketing investments and B C has released dates for the second season of making it a reality competition celebrating the joy of making and creativity, starring Amy Poehler Nick Offerman.
The show premieres December 2nd and features Etsys resident trend expert Dana Isom Johnson as a judge we're excited for the exposure and hope you'll soon.
We're currently developing a strong 2020 product roadmap to continue to deepen and strengthen atsis right to win.
And with our bold initiatives and improved marketing capabilities, we expect the transfer our momentum into next year and set ourselves up for great went btwenty and beyond.
I'm excited to share that Crazy Patrick Doyle, who many of you met at our March Investor Day has been named Chief product Officer crude these deep knowledge and proven leadership have made a tremendous impact than our ability to meaningfully improve the experience for buyers and sellers on etsy.
Lastly, theres a lot of excitement with reverb, we're already sharing best practices across the business, specifically in product development and marketing.
I firmly believe we have the tools in place to continue to execute our long term growth strategy driving further value for our stakeholders. Thank you to our team for all the progress you've made so far this year with that I'll turn the call over to retool.
Thanks, Josh and good evening, everyone before I begin please note that unless I say, otherwise all comparisons I'll be referencing here for the etsy marketplace only excluding reverb.
Our disciplined investment in product marketing and technology have enabled steady growth of our marketplace and another quarter of strong result.
In this third quarter Gms accelerated on a currency neutral basis to approximately 23% driven by continued execution in our product portfolio and improvements in marketing and efficiency.
Revenue grew 28% year over year and take rate expanded 60 basis points sequentially, driven by both marketplace and services revenue.
Adjusted EBITDA margin was 21.9% or $42 million as we continue to deliver solid revenue growth and gained opex leverage.
Let me give you more detail on our financial performance beginning with more color on our free shipping and that's the ads initiatives.
First on free shipping.
Since launching our new seller to all on July nine we've been educating our sellers on the benefit of offering free shipping to buyers and how they can easily incorporate the cost of shifting into their item price if they determine its right for their business.
Initial impact of free shipping has resulted in lower prices for buyers.
Also since June a percentage of Gms with three or eligible for free shipping in the U.S. more than doubled to 81%.
And in Q3 over half of our U.S. and global Dms ship for freed up from 32% only one quarter ago.
As far as Josh mentioned, we are seeing more purchases for visit increases to in cart conversion rate and improved by or sentiment, which we expect will have a beneficial impact to our business.
We're pleased with that result, and expect to see further benefit as consumers understand that the shipping experience on etsy has improved considerably.
There are however, a few offsets to this.
First as I mentioned last quarter.
In our prelaunch test, we observe sellers moving about 84% of the cost of shifting into their item price, resulting in a modest contraction to revenue.
In practice this transfer rate has been much lower.
On average as as of the end of Q3, we have seen sellers move approximately 60% the shipping cost into item price.
Our data shows this inc. driven by various circumstances and mostly within groups of sellers with very high priced items and also sellers with items under $35.
40% of shipping cost that is not transferred to item price result at about a 100 basis points contraction to Gms was an associated negative impact to revenue and EBITDA.
The 60% of Gms at its transfer from the shipping cost into the item price is dilutive to take rate because it creates incremental gms without incremental revenue as we were already charging a 5% transaction fee and shipping.
We're hard at work educating sellers on how they use our tools to recover costs and that setting prices is generally generally about recovering all of their cost including shipping costs.
A second had mentioned the free shipping initiative relate to search ranking we have you search shrinking as a key incentive for sellers to adopt the free shipping guarantee.
As expected. This has had the effect of pushing a large number of relevant listings off the first page of U.S. search result.
We slightly over 60% of items listed as free shipping eligible. This means 40% of items are not given first page placement, even if our search algorithm algorithms might have previously ran some higher.
This has a negative impact the conversion rate.
He adds with another large initiative launched in Q3, we've migrated sellers, who use promoted listings and or Google shopping through our new ad platform.
We have achieved this first phase with no material churn in aggregate budgets.
There are actively working to optimize returns for our sellers to improve it ever turn on AD spend and in turn facilitate phase two which is to grow sellers budget and utilization and time drive an increase in advertising for the marketplace overall.
During the initial phase we've identified a group of sellers that have had very high return on ads.
That are capped out either election.
We are beginning to educate these sellers on why we think they connect and their budgets, while still maintaining attractive returns.
For the balance of sellers, we have a set of initiatives designed to improve never out.
And we have developed a clear roadmap in partnership with Google, which has already produced meaningful gains.
Overall in Q3.
Add including including both the former Standalone versions that promoted listings and Google shopping with a significant driver of revenue growth promoted listings increased over 30% again, and Google shopping contributed $3.7 million, which carried an associated offset in cost of revenue.
Moving to another area of focus for ATSI, our own marketing spend in Q3 marketing expense grew 17% year over year to $46.2 million contracting as a percentage of revenue both sequentially and year over year.
Third quarter, we invested $28.1 million in performance marketing, an increase of only 5% year over year.
Our marketing and continued to drive strong visit growth and according to Comscore unique visit in the U.S. increased multiple aster and other marketplaces.
The balance of our marketing budget reflects our investment in CRM initiatives, including email and social display and our investment in upper funnel marketing.
In late Q3, we resumed our brand marketing campaign on television and digital video video and this campaign will run through most of Q4.
The efficacy of our marketing and is demonstrated in several metrics as shown on slide 22.
First we acquired 4.2 million new buyers in Q3, the delivered 15.6% of overall Gms.
Active buyers those who made at least one purchase in the past 12 months grew 19% again this quarter.
Dms per active buyer on a trailing 12 month basis increased for the sixth consecutive quarter by nearly 2% in a third quarter and nearly 4% on a two year basis.
Taken together these metrics reflect the fact that our marketing investments are moving the needle on both new and repeat purchase behavior.
Second lets double click on some indicators of improvement in frequency habitual buyers those buyers that purchased six or more times than a year and spend more than $200 in a year grew 24% this quarter and our again, our fastest growing buyer segment.
Third we also observe that our more recent cohorts have had very strong retention rate.
Typical coworker with the K overtime. However, our co workers showed the most that most recent cohort retaining as strongly as the prior year cohort. We believe this is a further proof point that our brand ads and investments in social R&D, providing that tap on the shoulder to remind buyers why ATSI and when it see.
Fourth organic CMS as a percent of total gms expanded to 86% our investment in brand marketing on television and digital video driving more direct traffic to the site and give us by or a broader view of Betsy.
We're very focused on the ROI of our marketing investment even with our brand campaigns, which are typically more difficult to quantify and measure.
We are continually optimizing our bidding algorithms refining our attribution models based on insights being yield from testing and revising our model as product improvements positively impact lifetime value of a customer.
We believe that we are investing appropriately for long term growth.
A few of our key operating metrics further demonstrate the impact our product and marketing investments.
Generated just over 1.1 billion in Gms in Q3 up 23% on a currency neutral basis, driven by approximately 19% growth in both active buyers and active sellers.
As shown on this slide you aspire Gms grew 21% in Q3 and has accelerated for two consecutive quarters. This includes all U.S. buyers, who bought from a U.S. seller for in international seller.
Is approximately 100 basis points higher compared to the prior quarter. We believe this growth in U.S. domestic demand is related to our investment in upper funnel marketing, which for now is only happening in the U.S.
International Gms continued to perform quite well, representing 38% of overall gms and delivering 31% growth.
Third quarter, we fully anniversary that the Wanda transaction and continued to see two sided vibrancy in the German domestic market.
Moving now to our financial metrics Etsy revenue was $192 million, 28% driven by marketplace revenue and services revenue, which includes the partial quarter of at the ads.
As a reminder, in the beginning of Q3 the anniversary the increase to our transaction fee, which was a significant driver of marketplace revenue growth over the past year.
Cost of revenue increased 38% driven primarily by variable costs related to etsy payments.
Our ongoing investment in Google cloud usage, and a partial quarter of the Google shopping offset related to at the ads were also drivers.
Back to leverage the benefit of both cloud usage, and Google shopping chopping to drive Gms growth to Etsy.
As we mentioned on our last call in the middle of this year, we revised our approach to capitalizing product development costs to align with our entered its veritiv product development environment, which create smaller tranches of product development spend on a more frequent basis, resulting in less capitalization.
We want to make sure you are clear about this impact that this that at this change has had to our profitability. This year given the additional costs flowing through the DNL.
Our original guidance assume capitalization of about 14% of product development costs and the revised approach means only about 7% or recapitalize for the year.
This results in approximately approximately $7 million to $8 million more expense flowing through the TNL in the back half of 2019, a contraction of about 100 basis points to EBITDA margin for the full year.
Note that this change is neutral the free cash flow.
We included this in our August guidance, we are restating it here for clarity.
Moving to the consolidated consolidated balance sheet during the quarter, we issued $650 million of seven year convertible senior notes.
The transaction had favorable economic terms with a one eight coupon and a 47.5% premium.
We used some of the proceeds to purchase a capped call extending our premium to 150% of our closing stock price on September 18 or $148.63 per share.
We also used at about $124.5 million for a concurrent share repurchase.
Net cash to our balance sheet was $439 million in our current cash balance as of September Thirtyth was $672 million.
We have an existing share repurchase authorization from our board and repurchased approximately $3 million of our stock in Q3 against that authorization.
Our capital structure provides for good liquidity and flexibility.
You opportunities for investment.
We generate solid operating cash flow, which was $47 million in Q3 and $128 million year to date.
Before moving to our outlook, let me share a few notes on reverb the acquisition we closed on August 15.
Earlier today, we filed pro forma condensed combined statements of income for 2018 and the six month ended June Thirtyth, only 19, giving effect to the acquisition as if it had occurred January Onest 2018.
These filings should be helpful. As you reflects the addition of reserve into your financial models.
For the 45 days of the third quarter that reserve has been part of at these enterprise they delivered $77 million in Gms and $6 million in revenue.
Their marketplace had nearly 600000 active buyers and 155000 active sellers.
Approximately 17% of their Gms international.
More detail on the financials for the 45, they stepped period can be found in our 10-Q, which we will file soon.
We think it is a great early stage business significant competitive advantages and a similar business model to ATSI.
Turning to our outlook, we are raising guidance for 2019, Gms growth to 25% to 26% approximately 4.9 billion, the 5 billion and revenue growth to 34% to 35% approximately 809 million to 815 millions.
Note that we expect revert to contribute approximately 5% to 6% gms growth and 2% to 3% to revenue growth.
Our adjusted EBITDA margin guidance is now 20% to 23% or $183 million at the midpoint, reflecting about a $2 million headwind due to reverb, which has adopted at tiet and if its program and aligned with at these capitalization guidelines for internal development, which drives slightly higher expenses the PNM.
We expect revert to reach EBITDA breakeven exiting 2020.
Also that at these take rate is 17.1% versus 7.9% for reverb with a blended take rate 16.4%.
Included in our guidance is an adjustment for what we see is a moderately stronger headwinds from marketplace sales taxes.
On October Onest, 11 states initiated marketplace sales tax laws, including two of the largest state, Texas and California.
Based on what we have observed in October we now estimate an additional 100 basis point headwind versus what we expected when we issued August 2019 guidance.
The sales tax effect, a little more pronounced for refer you to higher item prices and higher percentage of U.S. exposure.
The impact of sales tax complied with the combined with the discrete headwinds I cited on our free shipping initiative mean that Etsy, Standalone Gms and revenue will likely come at the lower end of our prior guidance range.
We're pleased with our performance for 2019, which include strong growth in our core business. Good progress in our key new initiatives plus strategic acquisition.
We love our two sided marketplace model and now we have another one in reverb.
We sustained growth faster than the ecommerce sector, while expanding profitably.
You can find ecommerce businesses growing the top line faster than at the or you can find businesses that have margins higher than it is that it's incredibly rare to find both robust topline growth and attractive margins.
He is one of the very few at achieving that and that is truly special.
Thank you for all your time today, we will now take your questions.
Ladies and gentlemen, if you have a question at this time, Please press star and the number one key on your Touchtone telephone. If your question asked and answered or you wish you would move here. So from the Q. Please press the pound key.
We ask that you. Please limit your question to one plus one follow up.
Your first question comes on line Okanagan that occur with Deutsche Bank.
Hi, Thanks for taking the question.
A question, we've been getting from a number of investors regarding its yet.
Oh that that's going to look.
So.
One is what has been vicinity action to the change, especially US also shown takes have suggested that some centers would be cutting back on that ad budgets.
We'll see how that all the way that changes under the new mortgage.
And as a follow up.
This initiative resulted in even more just it seems that explained on the news to date.
Okay, great great questions. Thanks.
On the first question.
We're really pleased with the what we've seen a seller so far so as Rachel mentioned, we've seen no material churn in seller budgets and no material churn in seller adopt.
So that's really good news.
And consistent with what we had hoped sellers are largely taking a wait and see approach and we want to make sure that were sensitive in respectful to that so we want to make sure that we take budget utilization up slowly only as we're able to deliver.
Good returns to them and you saw that you know Rachel shared the Google spend number in Q3 of $3.6 million, which shows that we're stepping our way into it in the part of the third quarter of which at Seattle was was lives.
Your second question, which is how does it impact our overall marketing spend that's a great question and let me take you through that a little bit. So first we believe that etsy ads is foundational to our future and grows the pie of marketing spend in a really powerful and really important way. So we want to make sure we get it right in that.
And.
Part of that means pulling back on our own pls spend to provide an incentive for sellers to adopt at so yes. It's really important that we do that now we also recognized that our own delay spend is highly efficient. So what that means is that we're leaving profitable growth opportunities on the table, because we want to make sure.
Our sellers are incented to lean into that so yes.
At the same time, we're really excited about television advertising is a profitable form of growth for etsy.
And we think now is the right time for us to be doing that because both when you look at our brand opportunities in our brand. The challenges television is an effective channel to go and attack those and also because as we're asking sellers to invest in that she adds it makes sense that we are investing in upper funnel and television as well.
We also recognize the TV has a longer payback period, we're really encouraged by the results were seeing but it takes a little longer to pay back then and what we see with Google Pls toward your net that out we might be pulling back from T.L.A.'s or leaving some profitable growth on the table in the near term and investing in TV in ways that we think there really great.
For the long term health of the business and really important for the business, but might lead to some growth and profit trade offs you know in in the very near term.
Operator next question. Yes. Your next question comes in the line of Heath, Terry with Goldman Sachs.
Hey.
Yes, I am here sorry, thanks for that I was just made it for a second.
Wondering if you could dig a little bit more into obviously improving trends in buyer frequency.
And just if you could dig and maybe disaggregate for us some of the the actual functional things that are that are driving that for you. You know in terms of personalization search marketing spend and then just how we should think about that improvement relative to the guidance that you're giving us for for the seller.
And in the core business growth in the fourth quarter, what's offsetting that that piece of it. So I'm just sort of help us understand sort of the the.
Counterbalances between those two things I'd I'd really appreciate it.
Hi, he gets Rachel and thanks for the question.
Let me just start with the second part of your question first and then maybe Josh can talk a bit about the product improvements that have been driving what we see as frequency gains.
We pointed at two specific things that we think our headwinds that you're I guess, you're backing into what you see as deceleration in the fourth quarter of course, we haven't given fourth quarter guidance, but one of those things as the marketplace sales taxes that we see as creating an additional 100 basis point headwind to what we had gone.
Right into at the beginning of the year, we those they're certainly macro factors that all the other than are not something that we can control, we think weve appropriately forecasted that now that that's one of the of the items that is causing a little bit of progression to for the other item that we talked about relates to the free shipping initiatives.
That we see because we one of the levers that we have to incentivize sellers to increasingly adopt free shipping we've pushed some of the really good search result off to a second page or further and that causes a decrease in conversion so.
That search ranking is something of a headwind for us and overall our expectations on.
Gms growth had been higher we thought more of the shipping cost is going to transfer into the item pipe price than we're seeing today, which means from the original forecast. We gave that Dms is a little softer because that transfer isn't happening. So those are the I think they're not substantives business.
Softness, but there are two discrete items that are causing some headwind in the fourth quarter, yes. The other thing I'd point out about those two items is that there are headwinds that you know last a year and the new up them.
So these are not existential are fundamental changes to the business you know what we've seen with state sales tax in the past is it's a headwind that last a year and then you lap. It. So we're kind of one month into that let's say and the same thing with the what regional talked about with free shipping you know sellers are choosing to absorb more of the costs than we thought or pass along more so.
Savings to buyers than we expected.
Does make the marketplace, even more competitive overtime.
And that's a headwind for one year and then you lap. It. So I think it's important that kind of have that context in terms of frequency.
You know, we're really encouraged so what we're seeing is first you know gms per active buyer overall is rising and that's great, but I'm, particularly excited that we're seeing the greatest strength among habitual buyers so you've seen us.
Talk about for several quarters now that habitual buyers our fastest growing segment than what that means as the people that know us best and love US faster growth is the group that's growing the fastest.
We think that she can be a habit for a whole bunch of people and it's about getting out there and telling the story of just the great breadth and depth of items that exist on Etsy, and I think we're doing a better job than ever of.
Telling that story I do think it's early days.
I think there's a lot more to do there.
But but I'm encouraged by the results were seeing.
Great. Thank you both.
I am.
Your next question comes from Edward Yruma with Keybanc capital markets.
Hey, good afternoon, guys. Thanks for taking my question I know lots of puts and takes less all the changes, but I guess I know you tend not to comment on intra quarter trends, but any sense as to how gms changed once he started either our advertising free shipping or layer. It in and then I guess second rate just want to clarify a point you made I think you said that reverb was a 2 million dollar headwind.
With that it on and on its kind of as acquired basis and really didn't hardy, they're going on it for the year or is that just for I think some benefit change. It indicated just trying to kind of strip that out and understand maybe the core etsy gross margin. Thank you.
I can take the first maybe because it's so yes, an interesting insight and I alluded to this a little bit in the script, but how how are people reacting so far to free shipping well, we're seeing the the strongest positive reaction and two populations are habitual buyers and people that are brand new to etsy.
So let's start with a visual buyers.
No. These are the people, who know us and love us the most and there was a thesis that maybe they think differently about shipped in costa Nazi they hold us to a different standards and that does not appear to be the case. The fact that people who know us love us. The most of the people that are having the most positive reaction the free shipping as measured by increases in Gms.
Speaks to the fact that there's more goodness here.
Even for people, who know us they they really appreciate free shipping.
Good for people that are brand new to etsy their first ever experienced with that he is free shipping and that's having a positive experience, we're seeing that show up in Gms and conversion rate per visit and things like that so what population is left then it so people who visit at sea only occasionally and they are the ones, where we've seen the least gains so far about free shipping.
And I think that's natural because they have an experience of etsy that we have high shipping costs and they're not paying that much attention to us and we only a few weeks in the talking about the fact that now free shipping is is much more comment on etsy and so that's going to pick time, I think thats really natural to expect that choice.
Ranging perception takes you know a meaningful amount of time and we're just in the very first inning.
Of that.
I'll take this is.
I'll take the second question and I think maybe Ed you were also asking about at Ti AD and so and initial seller.
Uptake.
I'm sorry so.
So the second question related to reverse.
Margin contraction, there's two things one of which is sort of a it'll be a permanent and that's.
Their capital as a in capitalization of internal development we are.
For them to have a similar interactive product development culture like we have it ATSI between and now that they're part of that the materiality levels. The lower so that it will be less that we capitalize and more that we expensed in the panel and applying that philosophy to to reverb with an immediate.
Hit to the to EBITDA neutral to free cash flow that philosophy will that's what will carry through to get next year in the year. After so you would expect that the.
Compressed margins on an ongoing basis, the other piece, which is we well and the other pieces at their benefits program, which also would be a permanent increase to their total comp costs, because we've put them on etsy and if it's now what we did say was that we expect revert to be breakeven as we exit 2020, So you could model that into your.
Run rate for your for your future future modeling and it regarding at the ads you know Josh talked a fair it about its very very early days in the ads program we've seen.
Overall, the I think what are the best metrics that we observe is that there has been minimal budget term churns. So that means sellers that matter most are keeping their budgets in and now we're looking at you know.
Sellers that are getting very high returns that have kept their budget to demonstrate to them that they can actually spend more profitably and then for the rest of the population to optimize the ROE asset they're getting today to help improve that and then enable them to be able to spend more of their budget with confidence, yes overall engines.
Hello reactions, just what we expected which is.
No I think that they're waiting to see how the returns are going to be.
It's sort of a show me.
The thing and it's it's very much in line with with what we would expect.
Got it thanks, so much guys.
Thank you.
Your next question comes from the minus Shredder curtail area with RBC capital markets.
Great. Thank you.
Could you.
Give a little bit more.
Colour on the guidance the organic guidance or there is 100 basis points impact from the back than 100 basis points from the shipping initiative, but just if you could discuss you know what gives you conviction that that could improve so for example, maybe you'd do show search results for those who.
Sure.
Not offered free shipping because division is better and it back CMS, but you offset it it's something else or that international tool that you're you're planning to launch in 2024 National Sellers can you talk about what gives you conviction that there could be a greater transition from 60% today do probably 80% interview that.
Good help gms growth. Thanks.
Absolutely. So if you're speaking about the long just so I'm curious when are you speaking about.
Conviction around penetration rates of free shipping over time getting from 60 present, the something higher or use or let me share get right. Yeah. Yeah. What are you expecting 100 basis points of headwind.
Based on the guidance the organic guidance is around 20% and some of it is 100 basis points from the lower than expected conversion from the search results as well as you know the 40% penetration so far because some international sellers may not have adopted it yet or people who have a heavy items may not.
So what gives you conviction that they're good there's more upside there in addition.
Habitual buyers also you know continuing to adopt benda in non habitual also continuing dog adopt this.
Got it yet so there's discrete populations and we've really worked hard to segment, who is having what issues and concerns until we talked about a couple in the script for example people who have items under 35, and that's complicated right I have an item its $20 and so if you'll by only one of them. It doesn't have free shipping, but if you buy two it does.
How should I think about incorporating shipping costs into the item price. If there's a chance you might get free shipping in a chance you might not so we've just launched a tool to help sellers think about that that uses things like historically, how many what percentage of your people by more than one item, we're doing similar things with international sellers and so.
We're going to do the best we can to educate sellers.
And give them tools, so that they can make good choices and why do I see a good choices because they seem to be absorbing more of the shipping cost than we think buyers value.
Meeting that there wasn't an indication before that buyers thought that things on etsy were too expensive.
And so we're going to do everything we tend to give them tools and education, but.
And I expect that that will improve overtime. However, let's say it doesn't it's a one year headwind and then you lap it and it passes and the result of it is that the etsy marketplaces, even more competitive. So ultimately we do a lot to give tools in education and training to our sellers. The ultimately their pricing strategy is there.
And.
You know in either case will make progress and things improve this year or we lap it and we're you know we continue on and now I'll just add to that the our search algorithms are composite of many factors that go into them right now free shipping is weighted.
More heavily in it pushes the lifting that are not free shipping our free shipping eligible to a lower.
Page, but we have.
Going forward a lot of other ways to incentivize sellers to it stopped there's a lot of things that we can do to that free shipping understood. It's hard to the search algorithm composite so over time, we could play around with that I call. It a cocktail of ingredients that go into that search result, and we will we test everything it ATSI and.
Going forward will be will be experimenting with that as well. The other point I would make is that we only started marketing to buyers that that ATSI as a place to think about for free shipping.
In September and so the more that buyer and we said 70% of listing views today are offering free shipping so that the for them at the more buyers understand resonate and he's a place where you can get free shipping like you cannot most ecommerce sites the more that becomes an incentive for sellers as well so over time, that's a little bit of nice virtuous.
The system that we expect to happen.
Okay. Thank you Josh Thanks Victor.
Thank you.
Your next question comes on line of Nick gallons with Citi.
Hi, Thank for taking my question I have one on search and discovery. This.
There's been an area for improvement that you know gets gets mentioned kinda each quarter.
And then we see things like promoted listings and free shipping impacting search results and then I guess on the other side I imagine maybe some infrequent buyers come to the site looking for maybe more random or eclectic thing. So how should we think about how you balance.
Making a t. a place where buyers common find things.
The maybe they're they're not quite sure that they want or they're looking for something that's really unique versus really provided kind of a tailored or curated experience it seems like that.
That's a challenge.
Well you know I think of work for the challenge, we're making great progress So I think.
You know two to what I read in the second part of your question. There is a treasure hunt versus the targeted search, which we think about a lot. There are people who show up in the state of mind. This just I'm.
Want to be inspired and there's people who shop with a very specific purchase occasion.
And we have a lot of science, we apply to that things like for example, what's ahead query versus what's a tail query and you respond to those very differently in terms of the breadth and diversity of search results that we offer. So we're you know I think.
We have a fantastic team and we're applying a lot of science to get ever better. Your second question, though about things like promoted listings and you know using saying that only free shipping items will be in the first page search results, we we make balanced tradeoffs for the.
The best interest of the business and we think that it makes sense for the business.
That we set an expectation that buyers will often find free shipping.
On Etsy, we think that is absolutely the right thing to do for the business into long term health of the brand and therefore for all of our sellers and in order to do that we have a set of characteristics.
At our disposal to encourage sellers to adopt that what shows up on the first major search results is one of those so we decided that we're going to reserve. The first page of search results for things that offer free shipping for.
At the moment and that's had a meaningful impact on seller adoption.
What it may take to get the next sellers to adopt might be different helping them think about their specific needs around items under $35 or or international items are heavy items for example.
Be different than using the first pages search results, but I think what matters is that we were very much building. This business for the fundamental strength for the business over the medium term and the long term and we think we're doing that in the right way in a very data driven way and you know we feel good about where we are.
Got it thank you.
Thank you.
Your next question comes from the lineup, Rick Patel with Needham and company.
Good afternoon, everyone. Thanks for taking the question.
Can you talk what the opportunities to improve margins reverb right off the bat your filings show that the transaction fee, there's about 3% to 5%. So curious if theres a plant near turned to make that comparable to etsys and as we think about the long term are there any structural reasons why margins there can't be comparable with that is.
Yeah, I don't want to comment on things like transaction fees right now what I would say is that we think that there's a lot of commonality between their two sided marketplace model and our two sided marketplace model. We think there's a whole lot in common between the way you won our two businesses and so the same kind of things we thought about it in terms of how to drive more cluster.
Fair value, a better buying experience better selling experience driving more marketing and then having a fair exchange of value. There was the kinds of things that I know that the team at we've ever going to think hard about but to your fundamental question have you know margin structure overtime. You know it's another two sided marketplace a lot like Etsy, and we think those are great business models and overtime share pretty soon.
More economic characteristics and then maybe a little more specific on take rate. We told you what the blend to take rate is for.
Plus at the it's about 16.4% then we expect that is a good a good number to think.
Use going forward for the time being.
And can you also talk about your outlook for the upcoming holiday season. So we have a much tighter shopping window between Thanksgiving and Christmas This year versus last so just curious if there's anything you're doing differently versus last year in terms of just the timing of marketing or conveying the importance of fat shipping tier sellers.
So one thing that we've done was we were we've been on television with our AD campaign.
Since the beginning of the quarter last year. We started it later, so there's more reach and frequency that will be accumulating over the quarter.
Versus what we had than last year.
Other thing when we think about the shorter time between.
Thanksgiving and.
And Christmas and as he typically has a shorter buying season anyway, because we do have a longer lead time for.
Ordering things that are going to be made and customized for you.
Yeah that might you headwind right now we expect we'd probably.
Experienced similar to what other ecommerce companies with experience with that and we don't know the last time that short window happened was a long time ago for US is I think what 2012 and so we were pretty young immature company at that time so.
We don't know how how heavily that could impact as we think we've got our quarter forecasted properly, but that could be potential downside.
Thanks very much.
Thank you.
Your next question comes on line of Laura Champine went live capital.
Thanks for taking my question is also on the reverb take rate I mean, that's 7.8% I think compares to your own 17.1 is that gap, mostly just the rate charged or do services makeup up very.
Portion of that gap as well and are those services.
Things that you would expect to add to re verbs portfolio products in a hurry.
Yes, it's a good question. So you know river was very intensely modeled after etsy and so you know their fee structure reflects that so theres, a 3.5% transaction fee. They don't call. It promoted listings they call it Bob.
But they have they have a set of.
Sir you know optional features and a couple of mandatory fees that.
Look a lot legacy.
So I don't want to comment on their take rate and it'll be up to that team to think about how to.
Make sure that we're doing the right value exchange and building value, but I would say is that we think there's a lot of commonality in terms of how we can drive a great customer experience and overtime make sure we get the value exchange right as part of that and we're excited about the future.
Got it thank you.
Thanks, Laura.
Your next question comes from Jeff, how staying with Oppenheimer.
Hey, Thanks, and great color in the side those appreciate more info.
I would just go over just some numbers so.
Even if we take the reverb revenue that you disclosed for this quarter I don't know seasonal that businesses well, let's just say we guess, it's like 12 to form at 14 million in the fourth quarter for a full quarter and then you've got the consolidation of ATSI adds what you said it was about 4 million.
How would you want to tell us what that was last year, otherwise, if we kind of guess call. It 6 million this year, but again don't know.
Seasonality would that imply that you're cutting organic revenue about 3% to 4% versus last guidance. So that's that's the question. However, you can how would it be appreciated and then in the deck when you talked about.
The the larger than previously expected impact from sales tax.
It's you did talk about what are you also seeing something on international because we did notice international was 36% of Gms yesterday last quarter.
Rob if you rebirth impacts that right because it's mostly you asked are all you asked and just anything you are different you're seeing internationally. Thanks.
Hi, Jason I think the operator blended gets married you and gem together or something [laughter]. Thanks for your question honestly I'm not sure I can precisely answer the first question could I didnt follow but maybe a follow up how we can get closer to the answer I would just remind you I think you were just doubling the revenue we got for.
Reverb at 45 days, a revenue we had for riverbend doubling that for the fourth quarter, but remember the fourth quarter would be bigger for them seasonally too so that would be one way to think about that on a in it on the and I know there was more to your question.
Kind of less the plot a little bit so, let's let's take it on a follow up and then on the international versus domestic.
Domestic one thing its remember we I think we had increasing U.S. demand I tried to point that out with the U.S. buyer Gms number because the U.S. is is demand has helped by a pretty robust television campaign that were only running in the U.S. right now.
So that would be hartley that when you're looking at it from that hurt that perspective that is something that would be impacting international first U.S. and you're absolutely right that.
Reverb is a much lower percentage international versus U.S. and it's been I.
I didnt, 100% follow either but I guess I would add his color that you.
We gave you we've tried to give you what roughly what percentage of Gms and revenue that in our guidance you could attribute to revert to try to really help the other thing I would add that I think might help is that we think that the third quarter take rate is going to be very indicative of the fourth quarter <expletive> .
And so if you think about where take rates are.
We said the Gms you know.
We feel really good about our vision for the fourth quarter. We think we're doing a lot of things that are working great and that there are two very discreet headwinds that state sales tax is about a 100 basis point headwind and that we think that the sellers absorbing more of the cost of free shipping is about another 100 basis points of Gms headwind. So if you think theres.
Maybe 200 basis points of Gms headwind.
That we're we're we're signaling anything to take rates are going to stay pretty consistent.
You know hopefully that that helps.
Okay. So maybe then just I'll ask a follow up you maybe you can talk about so given there is always questions about powersellers versus long telenets, the ads and everyone's got different Jackson et cetera.
Well, you're making a big bet on the long tail and kind of the medium to smaller seller would that the ads.
Yeah, just maybe talk about how long you expect that that to play out.
Again, you're seeing puts and takes right now between maybe happy versus unhappy powersellers.
But at what point like do you see it like additive.
Maybe that's going to add back yes, yes, that's a good would ask it look I mean, I I think seller reaction has been pretty good and I hope, we don't I hope I don't Miss signal that we always try to be muted in these calls for the solar reaction has been good.
So and the evidence of that is that.
As regional said.
Budget churn has been immaterial as part of this program. So sellers are waiting and seeing they're not pulling their budgets are not doubling down on their budgets there basically keeping their budgets the same and they're going to see how you know how much more of their budget, we're going to use and what they get for it.
And by the way when when a seller spends a dollar it takes about 30 days to see the results of that.
Flow through the model. So I think what what you should expect is that we're going to grow in scale. This program overtime, we're not going a step function. It because I think that's more than what our sellers want or would be prepared to absorb so you're going to see the scale over a period of time, that's going to go well beyond 2020, but certainly I think we're going to make mature.
Cereal progress.
Through 2020, but it'll scale I think that to the point of made earlier, you'll probably see us lean into TV and upper funnel and pull back a little bit from performance marketing. Even ahead of that she adds because we think we need to pull back on performance marketing a little bit help encourage sellers and lean into TV.
If that makes sense.
Super helpful. Thank you.
Thank you thanks, Jason.
Your next question comes on line of Mark Kelly with number.
Great. Thanks very much.
I just kind of one follow up on the puts and takes that no 100 basis points headwind from sellers absorbing too much of the shipping costs than the 100 basis points from.
The.
The sales tax issue is it safe to say that and this is just a Q3 question not about your outlook is it safe to say that you're up or upper funnel marketing campaign.
Drove about.
300 basis points of re acceleration.
Given where you guys shook out and if so did that kind of played out to see your expectations and the second one is.
Is there anymore color you can provide on what kind of changes you need to make to Google shopping ads I know you said, you're working with Google, but any more color there would be really helpful. Thank you.
Yeah. So on the first one I don't think we're prepared to sort of give that level of specificity on TV, what I would say as we feel good about the TV campaigns, we feel like they're delivering.
Just in line with what we'd hope so we feel good about that in terms of both.
On the actual impact on traffic in sales.
Which we have ways to estimate and approximate and triangulate and we feel good about.
As well as what we're seeing in brand sentiment. So if you look at the population who have seen the ads in the population who have not seen the ads and you look at things like awareness consideration and intent, we see meaningful lift among the population who have seen the TV ads.
And that's you know we feel good about that so as I said a minute ago.
In terms of how you attribute the math what might make it a little tricky this quarter as you saw us pull back on performance than maybe a little harder than.
You know we might have left some good spend on the table.
Because that's important for driving at sea ads.
And you've seen us lean into TV, which we feel good about and has a longer payback period and so both of those things need to net out.
In the second question.
Any more detail on how we can improve return on AD spend for our sellers Oh, yes, yes. So were early days of of working together with Google on Google shopping and we're really encouraged by the progress Weve already seen on that so you get a sense that you know that program has been relatively small in the past and we think it can be much much bigger and that's grounds for a really great partner.
Ship with Google, who have been great partners, so things like how we set up campaign structure bidding strategy what kind of.
You know targeting.
Data, Google are able to use and things like that.
You know, there's a lot of optimization that we can do together to make that.
Campaign perform even better and you know, it's performing well just better and better performance is is always helpful. And we're really pleased by the progress we've seen on that one other note I would add to that is at least I am just repeating what we said on the call, but theres a.
Significant group of sellers that are getting a significant return on their AD spend and they've elected to go to serve limit the amount of did that they're willing to spend so part of the jobs on us to demonstrate to them that they are leaving money on the table not spending more so.
Thats you know easier said than I think that we're working hard on giving them the analytics and the insights that we have because we can see it so that they can make those decisions.
Great. Thanks, Josh Thanks ritual.
Thank you.
And there are no further questions at this time.
Thank you all for your time.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may all disconnect.
Okay.