Q4 2019 Earnings Call
Name as Sheryl and I will be your conference operator today at this time I would like to welcome everyone to the C. Fourth quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question.
During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question press the pound Keith. Thank you I would now like to turn the call over to death Watson Vice President tough Investor Relations you May begin your conference.
Thank you good afternoon, and welcome to Etsys fourth quarter and full year 2019 earnings Conference call. Joining me today, our Josh the women CEO, Rachel Glaser, CFO and gave Ratcliffe senior manager of Investor Relations.
Before we get started just reminded that our remarks today includes forward looking statements relating to our financial guidance and key drivers thereof anticipated product launches our ability to bring buyers back to the assay marketplace anticipated continued benefits of all migration to the cloud anticipated benefit of our marketing strategy anticipated investment and the timing and benefits.
Our solar initiative, and the strategic benefit and impact on our financial performance.
Our acquisition of rebirth, our actual results may differ materially forward looking statements involve risks and uncertainties, which are described in our press release, our 10-Q filed with the FCC on October 31st 2019, and our 2019 10-K that we expect to file with the FCC in the coming to any forward looking statements that we make on this call are based on I believe.
Today, and we don't have any obligations.
Also during the call will present, both GAAP and non-GAAP financial measures reconciliation of non-GAAP measures and it is included in today's earnings press release, which you can find on our Investor Relations website linked 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 it's created a slide prison.
Station so companies today remarks, and recommend you follow along with that I'll turn the call over to Josh.
Thanks, Deb and good afternoon, everyone.
We believe actually is uniquely positioned to address a huge market opportunity last March we described that opportunity and laid out our long term strategy to capitalize on it underpinned by our marketing product and technology roadmap, which deepen our powerful rights to win giving us the confidence to sign up to ambitious growth targets through 20.
23.
We're off to a really strong start with our 2019 performance.
At Investor Day last March we targeted a five year gms growth CAGR of 16% to 20% faster than E commerce averages.
And in the first year, our core at sea marketplace delivered gms growth of 20.4% above the high end of the targeted range.
We also said, we expect revenue to grow slightly faster than gms over that five year period, and then 2019 the core at sea marketplace delivered revenue growth of 32% significantly higher than Gms.
Last August we also completed the acquisition of reverb, another very special marketplace, driving even more growth our full year Gms grew nearly 27% and revenue grew almost 36% on a consolidated basis.
And we had a very strong finished the year.
She reported fourth quarter consolidated Gms up 33% to $1.7 billion revenue up 35% to $270 million and consolidated adjusted EBITDA margins of approximately 23%.
The core and see marketplace delivered strong growth with fourth quarter, Gms up 20% year over year revenue up 28% and our take rate reached 17.2% all up from the high bar shut the prior year.
We're proud to be one of the handful of companies simultaneously delivering very strong topline growth and EBITDA margins north of 20%, you've probably heard of the rule of 40, Italy club and here in 2019, we were well with 50.
29 team was a big year, and we've made meaningful strides in keeping commerce human.
When I reflect on our efforts I'm really proud that our team tackles complex challenges head on with boldness and urgency.
I'm also inspired by the team's dedication to bringing world class experiences for our customers.
We do the hard things that set us up for success now and for years to come.
We're hyper focused on doing the fewest things that can make the greatest impact for example, we enhanced buying experience to capitalize on our unique indefensible right to win by making search more personalized.
Elevating human connections, improving trust and giving sellers a path for growth.
It seems mission is incredibly relevant and powerful we stand for something different we're just getting started leveraging our strength in the 100 billion dollar loss available market. We've identified for Etsys especial merchandise pulling our growth levers of more active buyers improved frequency entire LP.
We've done all of this while continuing to make strong progress on our economic social and ecological impact schools, which are deeply integrated into all aspects of our business.
We apply the same focus and discipline to our impact metrics as we do to our financial metrics and together they make a stronger and more resilient, which is why we now publish and integrated annual reports, including both our financial and impact metrics.
In that report, you'll see that in 29 team the I'd see marketplace drove over $6 billion in U.S. seller economic output and created 1.7 million jobs in the independent worker economy enough to employ the entire city of Phoenix, Arizona, The fifth largest city in the U.S. we.
We continue to attract and retain world class talent strengthened through diversity, leading the industry engender balance and exceeding our goal to double hiring for underrepresented minorities.
And in 2019, we became the first global ecommerce company to offset 100% of our emissions from shipping, but the introduction of carbon neutral shipping in the ATSI marketplace, We believe being a great corporate citizen in this is an integral part of being a great business and our results over the past year demonstrate that etsy is leading.
From the front.
[laughter] digging a little deeper into the drivers of our strong fourth quarter performance at sea Dot Com and our sellers had a great holiday season, all of the work we've done to make that see a great destination for holiday shopping paid off.
She was ready for the holidays with an improved search experience targeted multichannel marketing campaigns and product improvements, including onsite landing experiences free shipping and more.
And and see sellers were ready seasonal merchandise across home decor, and gifting and personalized items should poised to jewelry to leather goods topping our bestseller list.
As a result, cyber Monday and Tuesday at Sea Dot Coms first and second highest gms driving days ever in fact, we delivered approximately $20000 in gms per minute during each of these two days.
Also gms for the five days from Thanksgiving through cyber Monday was up 30% compared to last year.
Marketing played a big role in our holiday success, enabling at sea to reach more buyers and improved by or frequency. Our TB holiday campaign drove strong results attributable to increased efficiency stronger performing creative and expanded reach in fact, when measured by Gms per dollar of spend at cheese Q.
For holiday campaign included our best performing TV ads to date.
It's also worth noting that etsys migration to the cloud enabled us to spin up servers and add capacity just hours before we needed it compared with just two years ago. When heavy investments in hardware were acquired an advance to get us through the holiday season.
This cloud capacity is really important from a performance insight availability perspective, so fair to say, it's really an unsung hero of our excellent holiday performance.
In 2019, and she made valuable long term investments aligned with our right to win leading to material improvement in the customer experience. Just a few examples you made search and discovery better with our transition to non linear search models.
We made ecommerce feel more human with investments in our core app experience and the introduction of new messaging functionality and we leveraged buyer of used to build trust and the ATSI marketplace.
And we've become even more agile and efficient as a result of investments, we've been making and our platform and infrastructure.
As a result product development velocity more than doubled year over year, we tackled some complex challenges for customers and are showing continued progress on many other fronts such as free shipping and that's yes, I'll talk more about each of these.
As I mentioned at sea Dot Coms transition to the cloud has played a key role in our product development efforts last week, we reported that the migration is now complete.
During the migration, we moved 5.5 had a bites of data to GCP the equivalent of moving 22 times the data of the library of Congress.
We've increased our experiment velocity, but by fivefold over the past three years, well roughly doubling the size of the engineering team.
So while we are demonstrably more productive we feel that there are meaningful opportunities to further improve performance Unlevered machine learning to advance the customer experience most importantly in search and discovery.
Having successfully completed the cloud migration also means we can re purpose the people and time spent on migration for tech investments to keep experimentation high.
I'd like to congratulate our engineering team for pulling off this large and extremely complex tasks, so smoothly and on time and without any significant unplanned downtime.
When do you 19 was also a big year for at Sea and marketing, we hired a CMO and expanded investments across the full marketing funnel, we built a strong team equip them with better resources and our investments are bearing fruit.
In addition to the great progress we've made in TV and digital video. We've also begun to unlock and scale paid social in search engine marketing.
And we're hard at work improving our own channels, optimizing email and push notifications through the buyer journey, well building out an integrated buyer CRM strategy across channels Lifecycles.
We're confident that our marketing investments are fueling profitable growth with continued runway to scale and gain efficiency.
Turning to an update on free shipping and that's the ads, we believe that by changing customer perceptions of shipping costs and the etsy marketplace. We will increase conversion increased frequency and drive growth on the marketplace and we're making great progress at the end the fourth quarter, 74% of U.S. Lee.
Turning views were for items with free shipping.
About 65% of U.S. fire Gms shipped for free nearly half of all orders received by US buyers were delivered with free shipping.
The time, we launched our free shipping initiative last July only about 24% of items were available to ship for free to the U.S.
Now the free shipping has become commonplace on the etsy marketplace, we can really focused on evolving customer perceptions and there. It's still early days in fact in a survey conducted in January only 12% of Etsy buyers. We're aware that we offer free shipping.
We also have much more opportunity to help etsy sellers to a better job incorporating free shipping into their pricing strategy.
Now, let's turn to see ads.
More than many other features our sellers ask for the ability to invest to drive their growth.
The last August we launched its yeah, it's a product the combined our onsite promoted listings and Offsite Google shopping services.
Over the past six months at sea I'd, just delivered positive returns for sellers and solid revenue growth for Etsy.
As a result, we saw increased budgets and minimal seller churn throughout Q4, and we listened and learn a lot.
Well sellers viewed the advertising interfaces visually appealing and simple to use many sellers perceive offsite advertising is risky there uncomfortable spending money upfront the by traffic from Offsite ads, when they're less confident of buyers purchase intent.
As a result, we could see that it was going to take longer than anticipated to scale the program.
So in order to address this concern we rapidly iterative developing innovative solution, which we believe will deliver strong value to sellers, while mitigating their risk.
As announced to our seller community earlier today, we're introducing two updates to our advertising products.
First.
We're introducing an expanded advertising service off at sea called off site ads and she will pay the upfront costs to promote sellers listings on sites, including Google Facebook Instagram interest in being.
Well leverage our performance marketing budget and expertise to drive traffic to sellers shops.
When the shopper clicks on an online AD featuring a seller's listing and purchases from their shop, the seller will pay an advertising fee on that order only when they make a sale.
For sellers. This means that they will be getting a really competitive roll loss of six to eight acts utilizing the benefits of our marketing budget and expertise promoting their listings off site without the risk that it might not lead to a sale for them.
For Etsy. This means that we can rapidly scale, our offsite advertising program without any budget limitations a win win solution.
Second our onsite advertising program that you all know was promoted listings will now be called at sea ads.
An optional advertising product sellers can use to bring etsy traffic to their shop, we'll be investing in etsy ads and twentytwenty continuing to add capabilities and functionality going forward sellers at sea adds budgets will only go towards advertising listings to shoppers on etsy.
We're excited to be able to accelerate our growth marketing investments given we can now generate more leverage on our marketing dollars.
Turning to 2020, we entered the year on strong footing, the clear strategy and a focused set of investments designed to drive growth in the near and medium term, we'll continue to deepen our right to win by focusing on the four strategic imperatives that served as the foundation of our long term strategy search and discovery.
Human connections trust and our sellers unique collection of items, we plan to further deepen our competitive differentiation and our relationship with our customers attract more new buyers and increased fire engagement and frequency.
And we feel really great about river.
We're rolling out the Etsy playbook to drive additional growth and success, it's a great brand community and team.
On the product side, we're investing in the right infrastructure to enable a more iterative experimentation process that delivers faster returns and in marketing, we're focused on improving attribution models and developing integrated campaigns.
Two weeks ago, Dave Mandlebrot joined reverb as CEO, bringing more than two decades of marketplace leadership experience.
Extremely encouraged by the progress at Sea made in 29 team. Our team has always been very balanced in our approach. We are a growth company focused on growing in a sustainable way.
I'm highly confident in our ability to do that in Twentytwenty and beyond.
That will turn the call or for the Rachel.
Thanks, Josh.
I commentary today will cover consolidated results as well as key drivers of performance, which included at the marketplace results where appropriate.
You can find further details on refurbs contributions in our press release and seem to be filed 10-K.
On a consolidated basis at these fourth quarter Gms, great, 33% to $1.7 billion.
Revenue grew 35% at $270 million and we delivered delivered adjusted EBITDA of nearly $55 million, finishing a strong year, where we delivered profitable growth, while leveraging investments in product technology and marketing.
Let's see marketplace Gms growth in the fourth quarter on a constant currency basis was 19.7% and for full year 2019, we accelerated gms nearly 100 basis points to 21.3% compared to last year.
And a two year basis, Gms cagar any etsy marketplace has been greater than 20% for three consecutive quarters.
If he had an especially strong holiday season lapping a very strong Q4 last year.
Revenue for the core Etsy marketplace grew 28.4% year over year in the fourth quarter and our take rate extended 10 basis points sequentially is 17.2%.
You're going by growth in both marketplace and services revenue.
Particular, we reported strong growth in advertising revenue related to at the ads, primarily driven by promoted listing.
Motive listings revenue has increased 30% or more for 10 consecutive quarters.
Little shopping contributed approximately $13 million to advertising revenue for the quarter with your margin I think carries an equal offset in cost of revenue.
Operating metrics for the Etsy marketplace continued to show signs of improvement throughout the year.
For example, we made significant progress driving frequency on the platform.
He's gms corrective fire on a trailing 12 month basis grew 3.8% year over year.
On a two year stack basis increased by over 6% highest ever increasing this metric and sweep that public company.
If you shop on Etsy for Q were more purchased stays in a year grew nearly 20% in 2019, driven by habitual buyers, which grew 23% in the fourth quarter of 2019, outpacing overall active buyer growth.
The positive improvement in these metrics indicate that our investments in marketing and product development are delivering sizable returns and improving marketplace fundamental.
In Q4 active buyers on the Etsy marketplace grew to approximately 46 million and active sellers grew 20% to over 2.5 millions.
Percent International Gms for the Etsy marketplace was approximately 37% of total gms up from 36% a year ago.
There are three parts of our financial story I want to spend a few extra minutes on as they are an integral part of our 2019 performance and we'll continue to be in 2020.
These three parts are about profitability.
The impact of our new Offsite adds product on our financial and the performance of the free shipping initiative.
Oh and profitability and how we think about our investments.
It's it's been investing for profitable growth and this is evident in our adjusted EBITDA margins today.
2019, we made material investments in people, primarily product and engineering to drive growth in Gms and revenue.
Our free shipping initiative launch of a new AD platform and continued investments advancements in search and machine learning or a few of the results of these investments.
Revenue per average headcount for at the Standalone was over $800000 and play 19, 11% compared to 2018 and above our care benchmark.
This is one metric provides evidence that our disciplined investment process generate solid returns.
Another contribution to profitability is our marketing efficiency.
We've been expanding at these marketing initiatives for about a year and a half now, meaning and more heavily to new channels like paid social and it and have expanded our investments in upper funnel strategies like TV.
Total marketing expense grew from $158 million to $203 million for equity on a standalone basis in 2019 and decreased as a percent of revenue by 80 basis points.
Performance marketing and also decreased as a percentage of revenue in our frequency metrics continue to improve.
Implies improved efficiency in our marketing investments.
Overall, we grew adjusted EBITDA by 34% year over year and delivered margins up nearly 23%.
In fact, if not for the accounting impact that the AD.
Our reduced overall level of capitalized labor and to the 29 can impact from the shift digital cloud, which moves more infrastructure cost from the balance sheet and now we estimate adjusted EBITDA margins would have been approximately 300 basis points higher in 2019.
And as you know reverb has also impacted our adjusted EBITDA margins.
We've continued to convert a high amount of EBITDA into free cash flow I consolidated basis at these free cash flow conversion has been over 100% for the fifth consecutive quarter on a trailing 12 month basis as seen on slide 21.
All in and 2019, we generated $192 million and free cash flow.
Evidence of our financial discipline and strong business model.
We leveraged our cash flow went 2019th repurchased $177 million of stock or approximately 3.1 million shares.
The second topic I want to unpack is our new ad platform.
Launch the platform in late Q3, and it was alive and active in olive Q4, and in Q1 of this year.
And its current incarnation of the Offsite adds component of the product ads purchased on a go shopping is accounted for as revenue with an equal offset in the cost of revenue. So when these revenue was zero margin.
In Q2 as Josh explain we are evolving our offsite adds program to up cost per sale model. This interstellar only pays for the advertising if they have a successful transaction attributed to one of the ads we purchased.
Women ending the risk they will pay for offsite advertising without that making a sale.
Sellers will pay a 15% advertising fee. In addition to their normal fees only on transactions attributed to a visit from an Offsite ad.
Certain sellers, depending on their size will be required to participate in this program and are also eligible for discounted pricing.
At the same time this allows and seek to scale, our offsite advertising investments and fund upper funnel marketing programs such as TV ads.
Once the transition to our new advertising model the accounting for the Offsite portion will change in Q2, Wendy on and seed investment in Offsite ads will be accounted for as marketing expense and you will see an increase in our marketing expense line.
Offsetting some of this investment we will aren't incremental transaction revenue when a stellar makes a sale that was attributed to one of the product listing ads we purchased.
This new oxide adds model is accretive to EBITDA and EBITDA margins.
Previously as you recall it is all shopping component of our AD product had a dilutive effect EBITDA margin, but neutral to EBITDA dollars.
We will continue to have etsy adds revenue product, formerly called promoted listings in our services revenue line as it has an all along.
And lastly, the impact of the free shipping initiative on our piano.
Gms growth has benefited from the transfer of shipping costs in the item price.
Because some sellers have transferred left and 100% of the shipping costs into their item price. This has had the effect of reducing our overall take rate as we earned the 5% transaction on a smaller total order value.
Despite this headwind to revenue if you take rate grew 17.2% in the fourth quarter, an increase of about 70 basis points from the average in the first half of clean 19.
Expanding by or awareness, a free shipping options on etsy, and educating sellers on pricing strategies will take time and our teams will continue to make improvements on both fronts.
So a great Q4 capping off a really strong 2019 looking forward, we are forecasting twentytwenty gms growth in the range of 25% 28%.
Revenue growth of 27%, a 30% and adjusted EBITDA in the range of 220 million to $235 million, which implies a margin of approximately 21, 22%.
We are targeting at Ti Standalone Gms growth for 2020 to be inline with our long term gms target of 16% to 20% with revenue growing at a faster rate.
I'd like to provide some additional insights to help inform your 2020 model.
We currently expect at sea marketplace Gms growth will be higher in the first half of the year versus the second half you did a lapping of our free shipping initiative. In addition, keep in mind at our consolidated guidance for Gms include lapping the reverb acquisition in Q3 Twentytwenty.
Well marketplace sales taxes did present, the modest headwinds to our 2019 Gms, we do not expect this to be a significant factor to our consolidated growth and plenty plenty.
As a reminder, we will anniversary the launch of many of these tax loss in Q4.
Consolidated take rate will be approximately 16.7% for the full year.
On a standalone basis, we expect the at sea marketplace take rate, we approximately 17.5% on a full year basis in 2020.
As you think about modeling our profitability. Please remember that in Q1 of 2019, we conducted a number of experiments on our marketing portfolio to test the incrementality of certain performance channels.
This resulted in a significant decrease in marketing expense in that quarter.
We did not run any TV advertising in Q1 of 2019, but we did run a five week campaign for Etsy in January of this year.
This means that we expect Q1 2020 consolidated marketing expense will be higher year over year, and adjusted EBITDA margins will be lower.
Moving to cost.
Consolidated basis in 2020, we expect a gain leverage in cost of revenue and DNA.
Product development expense rule will reflect our continued investments in product and engineering to support improvements at the customer experience on both the at sea and Refurb marketplaces.
The impact of lower capitalization of our internal development labor into your forecasting product development modestly de lever in 2020.
We expect marketing as a percent of revenue will increase based on the revamp at the ads model as well as our continued investment to grow both new buyers and increased frequency.
And lastly, with many growth investments during the year, we continue to expect reverb to achieve breakeven exiting 2020.
We're really pleased with the growth we achieved in 2019 and have real confidence in the 2020 Road map, we expect to continued to drive topline growth, while also delivering attractive profit margins.
Thank you all for your time today, Josh and I will now take your questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. We can we ask you to limit your questions to one question and one follow up. The first question comes from Edward Yruma of Keybanc Capital markets. Please go ahead. Your line is open.
Hey, good afternoon, and congratulations great quarter lots to unpack here I guess first on Etsy ads I know one of the thought process is behind the legacy product was that you'd be able to pull back on SCM.
And spend more to top of funnel I know that's part of the objective with a retail program, but help US understand do you think that you'll find all of the S. E marketing today using that 15% you're charging in the new program or are you still expecting that kicks I'm in as well.
Yeah, Great question, so or the overall philosophy remains the same that overall you know sellers will take on a primary funding for advertising their individual listing off site and that will allow ATSI to invest more in upper funnel things that only ATSI can do like.
Advertising, the Etsy brand on TV or getting people to download the app for driving people to though to the homepage in terms of the structure of the Offsite advertising program. In particular, we do anticipate that there will continue to be some subsidy of at sea to the program. So that the the 15% and 12% be will cover.
Much but not all of the the cost and for example, if somebody clicks on Oh, Oh listing and doesn't buy you know there's cost in that and and that's you might absorbed better if they land on one sellers page they end up buying from another seller those are things, but we think that that's appropriate because you know you think about it it.
It's the case that the seller makes an incremental sale, which is great and gets a happy customer that they might be able to resell too, but that's the also is going to customer and so the idea that we're shipping and together with sellers to make this a great program.
We think is is important and we're really proud of this program I do want to say that a six to eight grow us we think relative to what sellers would get if they had their own standalone shop is a really strong Ross and we take on the risk that that the money they invest might not convert to a sale.
And that's exactly the kind of thing that a platform can do as pool the resources of the sellers together to deliver something that they each individually could never got on their own. So we're we're excited about this we think it does deliver great value for sellers and we think it's going to be really good for etsy.
Great and one follow up if I may you hinted at some innovations or some work you're doing a rob promoted listings are I guess, what you're not calling at Seattle.
And also it's obviously been impressed with the ground that's wrong as you have or the past 10 quarters I guess a with these innovations do you think it's likely that you continue that 30% type growth trajectory or are you starting hits in sealing off from an availability perspective. Thank you.
Thanks, Ed at so we're not we're not going to give specific guidance on how much. We think a promoted listings will continue to grow at the really.
Strong I wanted my call it a workforce product for sellers, they love the product and we've been able to improve continue to improve the efficacy of it for them I'm, making the promoted listings terms more and more relevant so that the even though they're promoted ads there, they're very relevant to the search query and so that.
Gets them, a better ROI, because they're getting more clicks from the placement of of their out and we have Josh is reference to continuing to innovate would be that because there were investing in machine learning is and on our search engineering team to continue to make those those results Oh, you know higher and more and more valuable and.
Higher and higher ROI.
Thanks, so much.
Your next question comes from Canal, Matt Kumar of Keybanc. Please go ahead. Your line is open.
Hi, Thanks for taking my question.
Kind of vacation Josh on what you just said 68 games auto awareness and you also said with the money being that maybe north cottonwood into assume that's it is so does that mean that the cielo will be a for the fourth directly.
Oh, and the Tropic, regardless of whether that is the sale or when they didn't have to be.
Oh, good North sea of that has no sale.
Thanks for that question, it's a really important clarification know the seller will only pay if they make a sale for offsite ads and we think that's really important what we heard from sellers is that there really nervous to put their money up front for Offsite ads, where they just don't know the intent of a buyer who's on Google or Facebook or other places.
And so etsy is taking on that risk for them and sort of pooling that risk. If you well. So they will only pay the 12 or 15% fee when the quick converts to a sale.
Okay, great. Thanks, Thanks, Josh and then on on the promoted listing so I wanted to understand how bad I'd growth, that's kind of trended in Oh in the fourth quarter and you mentioned that there was like only modest churn or or or actually maturing in oh modest joining the seller.
That's what it was promoted listing was concerned what did you hear from them down. So you know debt. Its buda that that's yards that led you to a bid or to go in and.
Come up with this new at see upside adds a program.
So let me start with churn it's the case that in any given month, there will be some level of churn in the program. There's just natural it's a very dynamic market, we've got sellers coming in and sellers coming out what I would say is that we did not see a material increase in churn through the fourth quarter.
And so you know churn did not materially change and budgets well. So we think that the program in that way was successful and yet we we are responsive to what we hear from sellers and what we heard was that a limitation to them continuing to enter the program and grow their budget was this.
Fear that they're going to spend money upfront and not have it convert to itself and not just a fear I mean, that's a reality for for for sellers that some of them, we'll we'll invest money and have not convert to a sale and so when we looked at that and said at the pace. We want the scale. This program, that's something that's going to limit us.
This is very reasonable concern that sellers have and we as a platform are positioned to take that off. So we think this is kind of in innovative program, but we think it's a great example of innovating to meet the needs of sellers in a way that's a real win win for threats the as well.
Great. Thanks, and a quick when in fact, what squeezed there's been a that has been increasing oh.
A concern about the impact of or the potential impact of corner why it is and you know it good good.
I've been in fact, a supply chain and and product availability.
As you think all good product, but on a on let's see.
What do you think is the estimate on like you know the beauty has been wrong repeated it might have emerged from China, which could potentially disrupt I'm going to what percentage of the GMB do you think that could potentially disrupt if that is that disruption.
So on a very very small percentage of both our supply and our demand is in China, where the majority of Corona virus has been cited we obviously keep a very close watch on all of this and we think Theres no impact at the at this point in fact, when you think about.
Yeah. It when you think about the response since that some of the CDC and others have talked about which is you know where mode ability to work remotely if needed <unk>. Yeah. We have most probably one of the largest remote workforces in the world. When you think about our sellers being already working from their homes. So they are uniquely September continue.
We continue business as usual of course any macro major macro trend that happens I think as he wouldn't be subjected to the the the waves of that is as well, but thus far we haven't seen any impact to our business.
Great. Thank you Richard Thank you Josh.
Thank you.
Your next question comes from Swift to South Korea.
RBC capital markets. Please go ahead your line is open.
Great. Thank you let me try to please first on the guidance regional for 2020 could you help us understand or get some direction on how much.
Taking the reverse contribution is for the full year and then on the and the second question is on EBITDA margins for 2020 gave some some oh you you hold but.
<unk>.
Where you expect leverage and de leveraged help us understand what the puts and takes a with we work with you know the cloud expenses at the ads with the Offsite product there quite a few things moving around and.
Some of them unlikely one.
Like 10, Chile allow for greater margin expansion 2021 beyond so there are you moving pieces I want to make sure its clarified thank you.
Yes, so for starters, we did say to give you some sense of how much at sea.
It's how much at these standalone business is growing in 2020, we said that it we believe that at Santa Standalone basis will grow in line with our long term guidance that we gave at our Investor day would have 16% to 20% for Gms and we we were very specific on take rate as well. So we said take rate.
We'll be out 17.5% for at Ti on a standalone basis for on average for the full year. So that sort of helps you with the revenue and Gms for for the Etsy Standalone pieces I think you've got enough data to figure out the back into it to re verbs gms from that and and reverse.
Take rate can be applied to develop their revenue. We've also said that river EBITDA is I'm going to be break even as we exit twentytwenty. So there is some headwind on EBITDA margins coming from reverb. The other headwinds to to margin. We did go into some detail on.
Which things would we get gain leverage on in 2020, and which things would de lever so because of the at the ads movement in all of Q1 and a portion of Q2, we have basically the old accounting treatment for at Ti ads, which would be.
Revenue with a corresponding equal amount of cost of revenues, so dilutive to margins going forward. It would actually be incremental marketing expense that would show up in Atsis marketing line and because of that we think we'll see a little bit of de levered in the marketing line, but accretive to EBITDA margins in EBITDA dollars product development.
We said might be modestly dilutive to our EBITDA margins because we are investing there and we are also a capitalizing less of our of our labor.
We're also taking a fair amount of the incremental revenue we expect from the new format of at the end and reinvesting that as we did when we did our pricing change last year.
Upper funnel marketing and back into our business to continue to do product development. So we think Oh, the marketing line and the product development line will have a small a modest amount to be leveraged, but we're going to gain leverage in cost of revenue because of the change at the as he adds and in our DNA function.
Okay. Thank you Rachel.
Your next question comes from Nick Jones of Citi. Please go ahead, Sir your line is open.
Hi, Thanks for taking my question is a one.
The off site as I think I read on a blog and the seller Handbook that every seller would be opted into this is there any color you can give around what you think kind of the roll off will be and how we should think about how that would trickle throughout the year from lodge to win.
Sellers made decided to opt out.
For this product.
Yeah, So I'd start by saying, we always start with what do we think isn't sellers best interest and you know when we look at the program. We think generally writ large this is gonna be upgrade program for for most sellers, but when we spent time with sellers and we spent a lot of time with them in and try to know them pretty well.
Sellers that are relatively small maybe early in their lifecycle or for whom this is something they don't dedicate a ton of time to.
Sometimes tell us and this might be little counterintuitive, but that they really don't want to grow more than a certain size.
And so they actually may not want incremental sales and that's true of some sellers.
And by the time, they hit about $10000 of annualized sales, they've sort of demonstrated a skill and well and desire to be growing and so the threshold, where we said under 10000 do you have the ability to opt out of the program because we we've seen some sellers, who said that that the growth is actually something that they're they're not.
Bob necessarily ready for by the time, if it 10000, a we see that growth is something they're typically ready for it something they're typically wanting and frankly the program works better when they're all in it together, we have more data on more ability to work together with partners like Google and Facebook and others to really scale that programs.
So it lifts up the whole program to all of the the the larger sellers in the program. So we allow for an opt out for sellers under 10000, and they have a 15% fee for sellers over $10000. They have a 12% fee, but they don't have the ability to opt out you know and we.
I think that opt out rates for sellers under 10000 will be very manageable you know, we're not sure what they'll be but it'll be manageable for for the program and I, just and just at a comment because we haven't had a room set up for the announcement day, where we have a very robust cross functional team monitoring forums our members.
Support organization has been ready to take calls and respond to emails immediately in the <unk> spending time with them there today and the overall tone and tenor has and we've been very pleased with you know not everybody loves it but just as we expected that there's I'd say with more positive than than dissension and positive in the X.
Stream. So we're very pleased with how the how the communication is going thus far.
Great. Thank you for taking my question.
Thank you. Your next question comes from Heath Terry of Goldman Sachs. Please go ahead. Your line is open.
Great. Thanks, just wanted to get a maybe back to some of the <unk>.
Right.
Frequency.
As you look at the components of that.
We're working on.
Personalization and marketing some of the search and really technology investments that you're making can you give us a sense of sort of.
The progress you've made so far.
Where.
The pipeline for the your your had sort of where do you see.
The biggest opportunities and if there are specific.
Road marks or or initiatives that you that you've got that we should be watching for this year, which ones you would call out.
I mean, I'd start by saying that we're really pleased with the progress we saw in 2019 and rental shared that like in the fourth quarter habitual buyers, where our fastest growing segment, yet again growing 23% year over year CMS per active buyer was up yet again and on the two year stack it was up 6%.
Percentage of people, who shops, two or more days in the year was up again. So you know we're we're very pleased with a lot of these leading indicators that show that we are in fact driving frequency and I'm happy with the way you you you led in the question speaking about both product and marketing lovers, because they're both important.
We are making search that or you know we've talked about some of the things we've done like nonlinear models and leveraging the cloud to just use more data in more robust models to deliver better search and that drives more conversion and nothing gets someone more likely to come back then having bought and been happy with that purchase so as conversion rate goes up you get turned visitors into buyers.
Buyers come back more often.
Lifecycle marketing is a big opportunity for US you know so we are bringing in a new set of technology around lifecycle marketing, that's going to allow us to be much more segmented and much more personalized and how we communicate through our own channels things like E mail and on the App and we're really excited to be able to take.
That to another level in 2020, and then if you looked at the.
Paid marketing that we are doing we're pleased with the progress that we're we're seeing there and that's all the way through the funnel. So for example, if you look at her television commercials. They really don't do anything to explain what at sea is there they're not really designed with someone who's never heard of Betsy in mind, they're designed for someone who is already Jeff.
I don't really familiar with that T to trigger very specific purchase occasions, so you're seeing very specific merchandise and purchase occasions, and we were seeing benefits from that the of the midpoint of work that we're doing as well so things like advertising on.
Facebook and other channels with with ads and video that my target for example people who are just didn't bring a wedding process. You know we're also seeing is triggering.
That I should I had a V eight moment Oh gosh of course, the I should think about see for that so it's it's a combination of the product work and the marketing work that we're doing that come together and drive that metric.
Great. Thank you bye.
Thank you.
Your next question comes from Maria reps of Canaccord. Please go ahead. Your line is open.
Great. Thanks for taking my question I wanted to talk about ROI lead to upside adds a with 60 times ROI sort of guaranteed to sellers, how you're thinking about your own ROI Route. This initiative back to remain sort of all other revenue associated with the transaction and a I guess, what's a reasonable ROI range.
Let's see that you'd be consider that you'd be willing to consider here.
So you know we're always very focused on if we spend a dollar are we getting more than a dollar back you know on a risk adjusted basis and this program, we have the ability to operate and decide how much to invest on a daily and weekly basis and in fact, it's much easier to operate.
And the than the program, it's replacing so if you think about the program that that Offsite advertising is replacing we had a couple of hundred thousand we'd hundreds of thousands of individual seller campaigns that we were executing and each one of them had its own budget and on any given day sellers are hitting their budget and you know, we're having to manage that.
And so the this new iteration of Offsite ads.
I will just to run one campaign that pools, the data and is there for a more effective and drives better robust overall for our sellers. So they benefit from that it's also much easier for us to manage and we now have one budget, we can spend and like we always do we'll be paying very careful attention to what is the return on the next.
Dollar that we spend in performance marketing this will change the ROI curve, a little bit it will allow us to invest a little more.
With sellers kicking in it allows us to invest more profitably to drive growth and we're excited about that and you do see that a bit in the margins you know when when Rachel talked about the fact that we'll be taking up marketing a little bit and so we'll be seeing a little bit of de leverage and marketing. It's because you know the take rate has changed and were yet.
More ROI.
We invest and just want to underscore two points. There one is that it. It is an effective take rate increase and just like when we did see pricing change last summer taking up the take rate created a larger LTV. So we can invest more at the same or higher ROI. So that's that's one thing the second thing is the the margin.
And it goes up not only because we're reinvesting but also because of the accounting so we'd be the way. This is accounted for now is our spend will hit the marketing expense line and formerly the portion of the spend that was for Google shopping what's hitting cost of revenue.
So and actually to draw that comparison out a little bit a couple of years ago. We change the commission on it but we told sellers were gonna be reinvesting the substantial majority of that money back into the platform in marketing to grow traffic and then product to make the customer experience better and we lifted that we did reinvest most of that money back and it has delivered.
Growth, we've seen great growth over the next over the past couple of years and you know at sea ads, the the and Offsite ads. The idea is we will now be able to invest more and we will use this money to reinvest in the business to drive growth because.
We are chasing what we believe is an absolutely enormous down we think the opportunity for this business is huge and we are in the early stages of unpacking, it and we see great opportunities to invest profitably for growth and we want to make sure we're capturing those.
That's very helpful. Thank you bye.
Thank you.
Your next question is from Tom Forte of D.A. Davidson. Please go ahead. Your line is open.
Great. Thanks for taking my questions. My first question is how should we think about your own advertising efforts and presumably the higher cost of TV and digital advertising during an election year.
Yep.
First let me say, we like what we're seeing so the results have been good and they were strong in the fourth quarter. So TV is always a little harder to measure precisely, but we use multiple different statistical techniques and they point to that having been a good investment in the fourth quarter. We're also learning I think our creative.
It is becoming more effective I think our media strategies are becoming more effective we're starting to buy up fronts, which means we get better prices. There's a lot happening in TV now that's getting us more and more efficient you're right that the election is you know throws some uncertainty into the year in several ways for US we did do some upfront.
Thanks for 2020, so we've locked in some capacity already and we're glad we did and we'll have to see how the the you know the election cycle plays out.
But we have built some buffer and for that as we've thought about the guidance we've given you.
Great and then for my follow up question.
No you said that online sales tax law changes was not a big headwind, but I was curious if you notice any noticeable trends.
She is lower conversion rates on higher priced items after online sales taxes were rolled out.
Yeah, we definitely do you see a bigger impact to hire a lv items. So as he has a number of categories, where that would apply to and reverb also because their average order value is significantly higher than average order value did see more impact than at the core Mark.
Placed in.
With that said, we think thats completely de Minimis.
Revert relative to <unk> overall size completely de minimis to our overall consolidated results and so we that's why we said we don't believe there's any.
Material impact from that down Saks going forward and the impact that we called out in the past year is gonna be last time, we get to cover one of them 2020.
Great. Thanks for taking my questions.
Okay do.
Your next question comes from Marvin Pong PPI Keith. Please go ahead, Sir your line is open.
Great. Thanks for taking my questions.
Jump on the call go live I apologize.
I've been asked already but.
Just wanted to drill down further on the repeat buyers I think or the people who shop.
Twice, a more year looks like it grew about in line with with the or the total buyer or so.
Population or actually a little bit better if you just comment on what you're seeing there and why you think be habitual buyer growth rate as you know the delta between that and the and the total pool of active buyers continues to widen that'd be great. Thanks.
Yeah. So he said habitual buyers on our growing 23% this year to about two and a half million, which I think.
I think the chart in the slide deck shows it is that it's in the quarter, we actually had some pretty big uptick and what we think that one of the metrics. We use for frequency, which is gms trailing 12 month gms per active buyer, which grew over almost 4% in the quarter and it's over.
Six percentage in a two year stack basis, so we're starting to see.
If you were plot those things I think it's about 130 basis points of growth in the quarter, where whereas previous quarter's have been smaller than that in some quarters. It has an increase it also we're starting to see some material in rose I think that important part is that the habitual buyers who are really the most valuable buyers for at the are the fastest growing segment. So we're making the message.
Which is resonating with the buyers that we care most about.
Great. Thanks for your so and then my follow up you know I was just kind of noodling around on on the community forms and what you guys published about the all side I think you said you expected to be about 10% of of a typical sellers volume.
It was going to elaborate on on is that kind of based on your experience with the PPL lately.
And and you know is there any upside to that possible. I know you guys are actually expanding the through two other platforms. Besides googles. So you could just kind of comment on that that'd be great.
Yeah. It is based on our existing experience with PL eight programs and so we're just trying to dimensionalize for sellers, what kind of impact this might be because they've got to think about pricing strategies and other things and we want to reassure them that for for most sellers. This is going to be a very small part of their sales.
And so we don't want them to jump to conclusions around things before they have a chance to experience. It. We're also going to give them a couple of weeks of.
Sort of free trial per year period will they will actually get to experience it and I think for folks who think that this is going to be.
A large part of their sales.
That will typically be reassuring.
Terrific. Thanks, Josh that thanks for thank you both.
Thanks Mark.
Your next question comes from Darren a hockey.
<unk> capital Partners. Please go ahead your line is open.
Hey, guys. Thanks, taking my questions a nice quarter I'm just to here just can you comment in a release took about the listings in the U.S. and that orders with free shipping just the disparity between the 74 and 40% for orders and then on the Offsite adds piece.
Josh you made some commentary on the call about subsidizing I'm, just kind of curious what kind of inherent risk.
Does this new have and what are your hedges in place to make sure that.
Yeah. This isn't can I get out of hand in terms of subsidizing. Thanks.
Yeah. So on the first question I, maybe I'll take the persistency on the first one the difference between 74 and 40 and that's a good catch thanks for hedging that you know the items under $35 typically don't ship for free and so and those have a fairly high conversion rate and kind of high velocity, because they're pretty cheap so that would explain the difference.
Between 74% of listing views offer a free shipping eligible, but only 48% orders, arriving our because of free shipping the delta there is really about.
About lower priced items quickly items under $35.
On the.
I'm going to you let me know if I don't answer that's the way you. It the way you are expecting is I'm.
Not quite sure what you were getting <unk> <unk>, we think that the new version of our Offsite adds program is actually.
Much lower risk for sellers, because they're not going to pay for the.
The AD and less they make a sale, but also lower risk for ATSI and a lot of ways, because we had performance P.L.A. program before.
And we were buying P.L.A.'s and driving you know gms for sellers, but also Gms ferretti. The way. This is designed now and then we we get our first version of that T ads, where we were basically asking sellers to opt in or adopt their own but signed their own budgets to pay.
Ladies and you know what as Josh said, we saw a nice healthy uptick in budgets and really minimal minimal churn, but we.
We needed to the right sellers in the program to make the market and we saw that it was going to take it have time to get to that scale that we needed to actually take.
Take over Atsis footprint in what we were buying for P.L.A. and so this is a much. Its almost instance, we continue our P.L.A. program. We we also are able to.
Cooperatively with our sellers they make money when there's a successful sale and it achieves the same result, where it we are in some of his successor subsidized and that we can divert more of our dollars at the upper funnel brand marketing as we had always intended to.
No. That's helpful. Thanks, that's all.
Thank you.
Your last question comes from Michael every man of Wedbush Securities. Please go ahead. Your line is open.
Hey, guys. Thanks for squeezing me in so.
Just on Offsite ads.
Give a little bit more color on it.
As you expand this in your you'll you'll be spending more marketing and where are you right now in terms of social.
How does that fit into your overall performance budgets. So that's what I really mean by that as you know you've been think exclusively are mostly spending on Google pathways, and I'm going to be stepping into Facebook and Instagram and in some of the other performance.
Form insights and moving mid funnel a little bit. So you know is their dollars is gonna be coming off of Google is that budget just gonna be expanding.
Google remains flat and can can all this lead to you've had 17% of Jim as being driven by by paid traffic can that can that expands.
Meaningfully as you as you expand your performance and social budgets.
Great Great questions right. So let's start let me try to the fact is one of the Tom So you're one of the questions. You asked is it's going to come at the expense of Google and no. We don't think so as long as the next dollar we spend on Google is a profitable dollar will keep spending so to and is not an or right. We're looking at how can we find more ways to put money to work that drive profitable growth.
At CN for our sellers and you know the more the better as long as are providing a good ROI. So on social. Your next question was how are we doing on social and on social I would say, it's still early days and I'm excited about that because that means that there is real upside potential for us to do more the tactic that weve unlocked over the course of the past couple.
Look quarters that does seem to really be working for us is re targeting so I'm finding people who came to etsy found something like that Didnt buy and then re targeting the Facebook is turning out to be an effective strategy that you know is helpful to drive incremental purchases in an ROI positive way.
We're working on other strategies and social that are you know sort of bottom of the funnel and would love to unlock more that would be part of the Offsite advertising program and again to be part of the Offsite advertising program, we have to be listing a specific listing of an individual sellers honest third party sites like Google or Facebook, So now let's move to mid.
Funnel this would not count as offsite advertising, but showing videos to people who have different life events talking about ATSI and what we have available for that more doesn't have to be video could be you know static content.
That's an area that we are just starting to learn more about and leverage and I'm excited about that lifecycle events make a big impact on etsy of you'd just moved home or how to baby or.
And engage these are important moments in your life and moments for which etsy is relevant and so starting to target more specific content. The people in those moments is something that we're very encouraged by but it's early days and we are just beginning to learn how to make that an effective part of our media mix using influencers more too.
Promote the brand is something that we're just learning to use more and then even in TV you know, we're getting more effective but we're newbies at this and so I think there's opportunity to continue to become more efficient and effective.
As we scale and grow and leverage things like DRTV more and more which.
The our TV is still a pretty like part of our budget most of our TV budget right now as cable so I I am.
Excited about the opportunity to continue to scale with Google in the Offsite adds program, but I'm equally excited about the opportunity to grow social and.
Mid funnel and upper funnel channels as well.
Thanks.
We're running late but this one where it really want to ask and so a little bit Decker picture, just going back to to the growth rates in gms during the quarter and so your 30% to 30% growth in cyber five and then your 20% growth for for the whole quarter. I'm. Just wondering was there's you know what drove that gap was is that normal seasonality.
He was at the things that you put into place during during that period that really drove the growth rate higher and are those things that you can implement over the course of a full quarter to drive.
You know to drive that graph that that gap kind of.
Closer between the 20 for the whole corridor, 30% for for the holiday [laughter].
Q4 was an exciting gorder [laughter] I think for Etsy like most fear the folks that we've heard talk about the quarter I think many of us about a very common experience, which is that the shift in Thanksgiving moving had a pretty big impact on consumer behavior writ large so November was.
As slow and December was strong.
And net net it seems like consumer spend about the same you know and we did great. We feel great about how we did in in the fourth quarter, but the pacing of it was very different this year than it was and it was last year.
Okay. Thank you.
Yeah. Thank you.
Thanks, everyone for your time, we really appreciate it.
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