Q1 2020 Earnings Call

[music].

Right with our director of Investor Relations, Jamie, we're trying something a little different given I work from home that our first ever video or any school.

I'd purposes prepared remarks had been pre recorded along with accompanying slides slide deck has been posada website era.

Once you finish with Josh and Rachel's presentations, you will transition. So I live video webcast Una session questions can be submitted by the Q1 eight shot windows late on your screen feel free to use at any time as it will remain open throughout the entire conference call I'll be reading your questions and be able to help me try to get as many as Uh huh.

Please keep in mind that our remarks today includes forward looking statements related to our financial guidance for the second quarter between 20 and key drivers there of the impact of investments on topline growth in certain impacts that the cobot 19 pandemic may have on our business strategy operating results he metric financial condition profitability and cash flows.

Changes in overall level, we're spending and volatility in the global economy, and the impact of ongoing settlement of intercompany balances on future foreign exchange rate volatility.

Actual results may differ materially.

Forward looking statements involve risks and uncertainties, which are described in our press release in our 10-K filed with the FCC on February 27.

Not reports that we filed with the FCC any forward looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update.

Also during the call will present, both GAAP and non-GAAP financial measures reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find our IR website, along with a replay of this fall with that I'll turn it over to Josh.

Thanks, Deb and Hello, everyone.

Let me start by saying that our hedge go out to everyone. That's been touched by the coffee crisis and it's in this crisis that we're reminded evermore the mission in the purpose of ATSI and how important we are in the lives of our sellers are buyers and our team and I hope you'll see of course of this call that we take that risk.

Antibody really seriously and we are acting with urgency and in this moment I think it's also demonstrating the resiliency in the agility of the Etsy model to rise to two this crisis, we stood up a called crisis Task Force in January we tested work from home in February so that we weren't prepared as we could.

The two to be continuing and productive in an entirely work from home environment and you know I'm pleased to say that.

So far we've seen productivity hold up really quite well and you'll see on this line in fact software releases are up 20% year over year.

In the first quarter in spite of all the changes and that's really a testament to the hard work that the team has undertaken and the seriousness the urgency that they take their work.

And it's not without real personal stress on them. So I do want to take a moment to thank him for for all of their hard work.

Let's let's dive.

So I know, we're all very anxious to discuss the trends, we're seeing in April and our thoughts for the future and I want to spend the bulk of my time talking about that but because this is our first quarter earnings call I'll, let said the headlines very quickly.

Delivered $1.4 billion in consolidated gross merchandise sales in the first quarter, 32% year over year growth ATSI Standalone delivered 16% year over year growth in Gms revenue was about $228 million and adjusted EBITDA was about 55 million.

In dollars and Rachel is going to go into more detail about the first quarter and take you through that in a disciplined way. So I'll just hit those headlines and now move on to April.

April was an extraordinary month and I mean, it in the sense of extraordinary very very big and extraordinary very unusual and there were two separate things happening in April.

First was the effect of the sale of fabric face masks and as he sold about $133 million worth the fabric face masks in the month of April separate and in addition to that the core Etsy marketplace grew very very robustly in April 79% year over year growth in.

Early April the CDC changed its guidelines to recommends that Americans, where fabric face masks and we saw a tremendous surge of demand for fabric face masks right away on our site. In fact, it was like waking up and discovering that it was cyber Monday, except that every one of the world wanted just one product.

In that one product was an extremely limited supply and so we needed to respond extremely quickly to that view.

The reality and there were a set of things that we had to do the first was really within hours to change our search results. So that when you searched for fabric face masks you actually saw masks previously when someone would search for masks. They would be thinking about Halloween masks are maybe cream for their face so the search engine.

The be retrained literally within hours to respond to that and you know thanks to our Google cloud implementation, we've been able to respond much more quickly and having very relevant results very early on was a big part of what earned US good rankings on Google STL, which has been incredibly important for the future but.

In meeting that.

A man. We then all of a sudden had a lack of supply and so we put out a call to our sellers and were able to get thousands of sellers to begin making masks within a matter of days in fact at this point, there's over 60000 sellers, making masks and selling masks on etsy, but not only do we need to recruit sellers to make man.

Next we needed to make sure that we could understand what there.

Delivery times worsens, we can manage customer expectations on delivery, we needed to distribute demand so that it wasn't too concentrated in just a few sellers and on and on this effort touched almost every single team ATSI. It was truly an all hands on deck, we sold over 12 million face masks.

The month of April alone in fact, if face masks were a standalone category. It would have been the second biggest category on etsy in the month of April.

So as we look forward.

Obviously, our opportunity is to really work on deepening our engagement with these buyers that they understand that you do a lot more for them than just sell them fabric face masks. So why am I going into so much detail about masks, it's not because unconvinced that masks are going to be an enduring category for months to calm they may.

Not be.

Nor are we convinced that this new cohort of buyers is going to be with us for months and years to come in a highly active way, we're going to work really hard to try to earn their loyalty and we'll have to learn and see what their behavior is overtime. The reason I wanted to tell the story is because I think it really highlights the dynamism of the.

She model and our Etsy sellers and how they're able to shift so rapidly to meet the demands but April was about so much more than just masks in fact non mask sales on the etsy core marketplace were up 79% year over year.

So the strength of Betsy sales came really from two factors. The first was a groundswell of demand across a set of categories, including home living craft supplies self care toys and games and gifting.

Combined with fewer alternatives in the marketplace with many retail stores closed and ecommerce players, having shipping delays or sometimes supply chain disruptions.

And I think that this combination of both macro factors and the dynamism of the marketplace Etsy sellers in the EFI team created an opportunity for ATSI to step in and fill the void in what we think could be a really meaningful and enduring way with our responsibility to step up and really communicate the way.

World, how we can fill those needs how we can be there for them at a time when they might not have often thought of ATSI and to the marketing team has been really hard at work to develop and then communicate that message to the market starting with our brand strategy. We ask the team to come up with some brand pillars that would really speak.

Directly to this moment, but have you enduring value and I think they did a great job with a brand campaign centered around three core messages to the buyer first etsy sellers are open for business second Etsy is there with everyday essential that you need and third.

In shopping on Etsy, Youre supporting small businesses.

And when shopping on Etsy are supporting small businesses, that's a message that might be familiar that's been a core pillar of our messaging strategy for some time, but the idea that etsy is reliable and the idea that every that's he can meet every day needs. Those are messages that I think our maybe newer to many of our buyers and we know that we can.

Live up to those.

Commitments and this is a moment of truth. When we think gets you really do a great job of that and maybe disruption people's understanding of at sea in a really positive way.

Our message to our sellers has been singular which is we have your back and we've now more than ever it's important that we're communicating to them and taking actions that demonstrate that we have their back.

We look at our merchandising strategy, we're able to take search query data and almost in real time within hours entering the kinds of merchandise that we're showing on our site to reflect what's currently happening in consumer demand, which as we all know has been exceptionally dynamic at this time and the ability to team to be Super.

Responsive, we think is a real strength of Betsy all of this is underpinned by some core evergreen messaging like we have many items that are ready to ship.

The fact that when shopping NFC are supporting small businesses and many of our sellers are running sales right now in promotions that really speak to the economic realities that we're facing at this moment.

We then asked the team to develop a TV campaign to communicate that and you'll remember that in the April 2nd call. We talked about how we've pushed back our TV buys into may so within days again, the TV the marketing team had to both create all new creative by the way without getting too.

Bring any new actors into the studio into a new footage they had to find a way to take existing footage and cut that into entirely new TV campaigns and get on the phone with.

With that TV stations, and others and negotiate new AD buys and by mid April we were alive with all new creative reflecting the brand strategy in a pretty loud and proud.

Prominent weigh on TV, we're proud of this TV creative we think it's not just the same is every other TV campaign. That's running right. Now we think it is unique in stands out in a way that really does ATSI. So they can take a second to tissue the TV creative now.

There are millions of people, making incredible thing from home.

From their garage.

I am their imagination.

It's not how far away city.

Right next door.

People with this can be an affirmation.

And the ability to create joy.

Currently the world.

There are.

Following so.

Tell me again.

There.

[music] shop.

Fine Chile.

So we have millions of people shopping on Etsy, now that might not have shopped with us before or might not have shopped with us in this way before obviously the task ahead is to deepen our engagement and earn their loyalty overtime and that's the test for our CRM and loyalty team and Fortunately, we have an entirely new set of tools that launched just.

In April that are going to make us much more capable of doing that and these are tools that allow us to create segments in a very rapid way and then push messages specifically to each of those segments across any touch point, we have via E mail out onsite or any other channel even off.

Ads and paid advertising, we can start to target the same segments with these messages.

But I don't want anyone to think that we've only been doing covered related work, we laid out the strategy that we've been executing on quarter after quarter that centered around the four key pillars of our right to win and that has been a true and enduring strategy that mattered before it matters every bit as much now.

And our team is hard at work continuing to deliver against each of these four pillars search and discovery human connections a trusted brand all built on the foundation of our sellers collection of unique items and just to give a very quick highlight in each of these four.

Starting with search in Q1, we launched a deep learning model to close the semantic gap.

And that can for example, determined that the word for us and aboard gown are actually identical in meaning and use gowns search results for dresses and dress search results for gallons and that's another meaningful step forward in the quality and relevance of our search results and it's just one of many examples.

The great work that the search team is doing to continue to push the frontiers and make our experienced more relevant.

We've talked a lot about trust and the trust team has been working very hard to gain more reviews and get buyers to leave more and richer reviews speaking of our sellers collection of unique items are sellers are so agile and responding to the demands of consumers and.

This current environment highlights that now more than ever we're seeing so many great. Examples are sellers innovating to meet needs that didn't exist even among the go.

Favorite example of mine is a pocket hug. This is a little trinket that you send to a loved one to give them a virtual hug and let them know that you're thinking about them.

And last but not least I certainly want to mention the successful launch of off site adds it launched in the first quarter and we feel great about how its going so far and of course Etsy ads, which is formerly known as promoted listings is also continuing to perform very very well and I also want to take a quick minute.

To talk about lever reverb is benefiting from many of the same trends that at CCM, they're seeing a groundswell of first time buyers coming to reverb, many of whom might not have played an instrument before and are coming to tick up their first instrument and as a time when many retail operations are not open or even ecommerce.

Critical instrument.

Companies are having harder time shipping reverb is there and so it's doing a great job rising to the challenge and meeting the needs of both its existing buyers and many new buyers with a lot of innovative strategies in particular, they did a great job I think of innovating how to communicate that things are available.

Well Im ready to ship right now and also bringing some brands.

The manufacturers directly on the site and having this brand sell directly to consumers in a way that's been very successful as a result re burbs gms in the month of April was up over 50% year over year.

So let me close by acknowledging that these are very challenging times, the challenging times for many of our sellers the challenging times for many of our buyers and these are challenging times personally for many people on the NCT.

And yet we're really proud of the fact that our model allows us to be really helpful to many of our sellers at a time when they need the income.

Really proud of the fact that we're able to be really helpful to many buyers at a time when they have maybe fewer alternatives and a lot of really important needs.

And really I'm personally im really proud of the Etsy team, who in spite of many personal stressors.

Listen to the challenge they take the responsibility of serving this community really seriously and are working really hard every single day to live up to that responsibility and with that I'll turn it over to ritual.

Josh and Hello, everyone. I Hope you are all going well thing, Dave and comfortable answering this uncertain.

My commentary today will cover consolidated results as well as key driver drivers that performance. This include as he standalone results where appropriate.

You can find select details I leave her contributions in our press release thinking fountain Q.

And that I'm going to be reading my prepared remarks, if there are quite a few numbers and want to make sure I get that all right.

Well that a lot to tell you that keeps you financial performance before I go there Q1, we're going very strong quarter I want to walk you through those results first.

Despite the headwinds that growth caused by coming 19, primarily during the month of March we delivered a solid quarter.

I consolidated basis, as he first quarter geographically, 32% to $1.4 billion.

Revenue grew 35% gets you hundred $28 million, we delivered adjusted EBITDA of nearly $55 million a margin of 24%.

As mentioned on our update call in early April.

Consolidated Gms growth during January February with very strong training at 41% for the quarter.

He standalone gain that's less than the first corner with 16%, reflecting strong January and February with a significant deceleration in March for care to last year and last quarter.

Q1 revenue was driven by growth both marketplace and services revenue as our consolidated take rate expanded 60 basis points sequentially at 16.9%.

We reported strong growth in revenue related to advertising, which was up approximately 70% year over year.

It'll shopping contributed about $11 million to advertising revenue for the quarter.

As a reminder, first quarter after accounting for our old at the AD model, which recorded that Google shopping cart as revenue with year on margin and the carried an equal our cost of revenue.

Unplanned during the quarter, we transition the at the ads product separating offsite ads with Standalone product in international transaction fee on every product listing ads that resulted in a successful sale for ourselves.

This new product was ramps during the second half of March and into early April.

Sellers have now had the chance TV advertising their product listing ads in action.

We began delinquent its patrick on the fourth.

Having away with the first month at the first Alister and it certainly the cold in 19 environment.

Waiting the first let's see if part of a basket of initiatives, we implemented to provide some relief threat armor community.

I'll touch on the financial impact of that whole basket imminent.

Reminder, going forward at the AD is now accounting for promoted listing.

The advertising on it.

In Q1, we tested our appeal eight channel, which had been excluded from the Incrementality testing we get in 2018.

The effective reducing our performance marketing spend in the quarter.

Q1, marketing expenses $49 million or 21% of revenue was flat compared to Q1 2018.

Oh that performance marketing for the marketplace, the $26 million and delivered 16% of over on CMS.

Despite the deceleration MGM assay described in March and the consolidation of reverb into our financials.

Our Q1, adjusted EBITDA margins expanded 400 basis points sequentially.

Our cost structure, it's highly variable to revenue and we've continued to take measures to optimize and scale our business.

I'll talk more about operating expenses and the variability ever CACI in more detail shortly.

Net income in the first quarter were $12.5 million with diluted earnings per share or 10 cents.

Net income was primarily impacted by noncash foreign exchange losses of $9.3 million or eight eight cents loss per share.

Foreign exchange fluctuations on our PML are primarily related to intercompany activity between our you asked for an entity.

The ongoing settlement of these down in which we did in Q1 reduces future foreign exchange volatility on our PNM.

Key operating metrics for the marketplace were relatively stable during the first quarter.

We maintained our momentum in driving frequency on the platform as he amounts for active buyer and the trailing 12 month basis grew 4% year over year in and a two year stack basis increased 6%.

We are to last quarter.

On a consolidated basis in Q1 active buyers grew 16% to 48 million.

An active sellers grew 26% over 2.8 million.

Percent International Gms was approximately 36% a total gms.

27% year over year on a constant currency basis.

Now turning to April. It's just then April has been an extraordinary months.

With that Dimensionalize that well yes.

During the month, we dial Mark increased in the demand for face masks and other self care product and it's had a significant impact on gms growth and our Q2 financial.

Ill handle on Gms for the month of April with over 100%, resulting in $780 million and CMS.

That mass were 17% Standalone gms that much.

We're also seeing demand for math drive engagement with new buyers and buyers that have not purchased for a year or more.

During the month of April we acquired nearly 4 million, new buyers, which was up 160% year over year.

22% Emasculated Gms was funny buyers.

Year over year growth in overall Gms from new buyers accelerated for 5% in Q1 to over 130% in April.

We've also reengage, two and a half million buyers that have not purchased for a year or more an increase of 186% year over year.

For all 32% of buyers who participate in that return within 14 days to make in addition, our purchase.

And the majority came through acute direct channel it's free.

As shown on slide 29, our new an older cohorts sign inflection higher in April.

We show you our cohort C. Historically, they've been stable and predictable, but we're now experiencing at these disruptive change to the positive.

This is a brand new cohort acquired during an extraordinary time and we don't have any basis to believe they will perform similarly to our existing cohort.

With that said they could provide a tailwind to teach her growth.

This is an unprecedented time for US now we are unsure when these trends they lighten the teacher.

In addition to Max we're also seeing additional momentum in other categories, excluding face mask related item as he standalone Gms growth was 79% during two ends in April.

Now of course these results are likely magnified by broader industry Tailwinds, specifically a shift from offline to online.

According to external industry data online retail sales for major market places have risen dramatically in April.

On the supply side, new sellers that joined the platform platform in April accounted for 13% of Masonite Ghana.

Over the past three years, we've shifted one of the largest fixed expenditures to variable with our migration to Google cloud.

Both at the end reverse perhaps highly variable cost structures, so and in an environment, where top line growth contract a large portion of our expenses can dynamically adjust with growth.

In response to the rapidly changing macro environment, we took a thorough look at operating expenses and implemented actions to reduce cost where it makes sense.

Simultaneously continuing to invest for long term growth and playing offense, let me any opportunity.

We're currently seeing times, an exceptional volatility and we hope for the basket, we plan for the worst.

We recognize that this is a moment for at the where we are uniquely meeting and eat millions of buyers and sellers want embraced that moment that potential inflection point for consumer behavior and habit and invest into it.

We're being very careful about our fixed costs, while walking into variable investment that we think can change the flip of the curve and engage these new York cohort.

So how are we doing that.

First we leaned into marketing more than we planned in Q2 television marketing is supporting great placement at Tpms that our 20% to 30% lower than normal.

But so many people at home and more screening I'm thinking the same than ever before we believe increased investment in brand marketing make sense and we are able to engage millions of new buyers and buyers who have not purchase for a year or more for who at the top of mind right now.

Performance marketing annealing higher ROI is with a lower cost per click.

As we've mentioned before performance marketing naturally flexes with and when demand is high we spend more.

In addition, our Offsite adds program will enable us to lean heavily into this channel. So if you take them altogether, we are talking to buyers at the top of the funnel and that we're catching them at the bottom.

Second we also undertook a product prioritization exercise the double down in areas, where we see the highest potential.

Some of these areas are more experimental in nature and have longer term hot time horizons to deliver expected returns. So they may not yield in period returns.

We expect work in this area will enable us to drive progress in areas, such as search and frequency that will be important to drive growth over the longer term.

It also made significant one time investment to help our stellar community during this difficult time.

These total approximately $11 million to $13 million, the majority of which will be incurred in Q2.

These include waiting Offsite Abbvie until early May differing seller bill payments from our increasing members the port operations and providing lifting credit for Mac sellers as well as listing in AD credits affirm our hardest hit salaries in categories like wedding party supplies.

We donated thousands of face masks the hospital and have supported many of our small contracted vendors by keeping them employed despite our own office closures.

Overall, we have conviction any investments, we're making and believe they will enable us to support our community and sustain growth over time.

At the 331, we had almost $900 million of cash cash equivalents and short and long term investments. In addition to you at 200 million dollar revolver. That's currently undrawn.

In the first week that Q1 is we repurchased 543000 shares at an average price of $46, a 25 million dollar investment.

Now caused share repurchases in light at the current macro environment.

With minimal Capex and margin on working capital needs. We believe we can continue to convert a very high percentage of our adjusted EBITDA into free cash flow.

Before I discuss guidance.

Provide some background about how we forecast our business no recast given all the uncertainty right now.

We've built up our own internal models and look at cohort data to establish baseline trends and layer and the impact of our investment in marketing and product will strive incremental growth.

In addition, we evaluate a lot of external economic data closely monitoring headwinds and Tailwinds and from there we develop a range of scenarios that could play out.

It's been an incredibly dynamic couple of months, you'll recall that we told you that on a consolidated basis, Gms and down more than 2% in the third week of March and then up over 100% in April.

To give you a bit more color on our recent performance the marketplace delivered our highest ever month of Gms the public company in April.

And that's you highest days a gms of all time, where Thursday, and Friday of last week.

And so far May performance remains consistent with what we saw in April.

There are a number of tailwinds that we believe contributed to our strong April including but of course not limited to.

Increased sales and categories unique to this current environment such as face masks.

Leveraging millions of new buyers and buyers who have not purchase for a year and more.

The benefits of attractive cpms, and many channels, enabling us to spend deeper.

Widespread shifts from offline to online commerce, so many fewer places to shop.

Yes locations in the competitive landscape look which may be only temporary.

And government relief packages, including stimulus checks.

So there's things that we know and there's things that we don't now for instance, we continue to monitor the possibility of very real headwinds, which we haven't experienced yet.

Such as potentially deep and broad economic downturn.

Mounting job losses.

Business closures fragile consumer confidence and many other macro factors.

Our best you today is that the recent surge in demand is likely to ease the gms strength in April will support strong top line growth for the quarter.

Because of the uncertainty we're going to provide guidance for Q2, but we're not able to provide guidance for the full year.

We currently estimate consolidated Gms for Q2 in a range of $2 billion to $2.2 billion, which is up 80% to 100% compared to Q2 of last year.

Revenue of 310 million dollar to $340 million up 70% to 90%.

And adjusted EBITDA of $75 million to $90 million a margin in the range of 23% to 27%.

Yes, so quite a deceleration in growth rates for each of May and June but its strong quarter overall.

Our own internal model a city was that retail begins to reopen creating more choice for consumers and then economic hardship announced during this time.

The combination of that you could potentially lead to meaningfully celleration both in this quarter and as we go through the year.

A couple of thoughts for your model.

We would encourage you to think about the headwinds and Tailwinds, we just got and their implications on growth in the back half of the year.

All right as revenue will reflect the partial quarter beginning in early may given the free trial period as we transition from our prior model you can expect gross margin to benefit from the marketing offset shifting from cost of revenue to marketing expense.

Our Q2 could take rate will contract temporarily a bit given the delayed fee charges for offsite ads and the impact of the large increase in gms without a corresponding increase in certain seller services.

As we mentioned last quarter Q2, marketing spend will increase significantly on sequential basis due to our transition to Offsite ads and now also with our incremental investment in TV.

Of the $11 million to $13 million in costs at the port our seller community approximately $1 million were incurred in Q1 and the balance in Q2.

These costs are nonrecurring and after the midpoint of guidance represent approximately 300 basis points of adjusted EBITDA margin for the second quarter.

Also keep in mind that will be lapping the reverb acquisition in Q3, 2020, reflecting arsenal quarter.

Based on our Q1 performance and Q2 guidance. We believed that we are extremely well situated to execute on our strategy in this environment with the marketplace model that allows us to scale, our investment and respond to changing conditions very rapidly.

We have a disciplined investment approach and an agile team are writing to the challenge of our current environment and executing superbly.

Debit is going to now moderate our lives acuity session. Thank you.

Hi, everyone Hope you are all doing well.

I'll start with a question we received from canal.

Occur at Deutsche Bank as you think about marketing spend in Q2, what is your strategy with regard to brand versus performance.

Search versus social versus TV, and then Offsite AD supported versus owned spend that when I think for you Josh.

Great. Okay. So as with all of our investments we try to have a very disciplined framework around how we make those investments and so let me start with performance marketing because performance marketing is really a.

A natural shock absorber that rises and falls with consumer demand. So we've talked a lot about our ROI thresholds and we're very disciplined of looking at the next dollar spend and whether we see the next dollar spent is going to deliver a good return and for all of our performance marketing budgets that continues now just as it did you know of before the crisis.

And that would include both our Google performance marketing spend as well as performance marketing spends that we have on Facebook and a couple of other places.

In terms of the question about Offsite advertising, what gets build back to the seller versus the part that is FC funded.

Overall, there is still a subsidy of performance marketing. We're at sea is paying a portion of the performance marketing budget and that comes in a number of different ways if.

Someone goes to Google and they see a search result for ATSI and they click through they may not vide from that particular store. They may buy from a different store. So in that case neither of the sellers gets charged neither the seller job was shown on Google nor the place at the purchase was eventually made neither of those sellers gets build for all.

Side advertising, that's something that's the funds.

So there may be times, where the cost of advertising and Offsite from an offsite AD is higher than what the seller pays and again that will be something that etsy etsy subs lives, but again, we think that that's a great partnership with our sellers because.

The sellers selling a product and getting you to customer which is great for the seller, but and see it also gaining a new customer and that's that's great for frenzy. So the performance marketing spend will vary.

Naturally with demand and the portion that is seller funded versus etsy funded will vary a bit as well, but I would say we expected to be broadly consistent with the kinds of guidance. We gave before the crisis in terms of the Offsite add versus Etsy funded.

Portion of it I do think the performance marketing spend is elevated right now because demand is elevated now let's talk about the brand the mid and upper funnel advertising there the way we look at it as we look at reach and frequency. So we look at GRP points against the.

The audiences that we really want to target and we think what isn't.

GRP, a reach and frequency number that is high enough to really be above the noise and we're you know we think that this is a really great moment for etsy to be communicating above the wide millions of people may be trying etsy for the first time are trying at seats are things that they hadnt realize that they could turn to exit for and they're having a great.

It experience, but rather than just having them land on the site and buy something we want the opportunity to really tell our story to create an emotional connection to help them understand the connection that they have with the seller and the opportunity to do that on TV is really special and you saw the creative lead into that in a way that you haven't seen our Korea.

Do before really telling our story from our sellers, we don't view and so we are looking at reach and frequency that's meaningful intimate dimensionalize that for you similar to the kinds of reach and frequency that we'll be doing in the fourth quarter during peak holiday periods and again, given the kinds of traffic that we've been seeing we think the.

That kind of spend is appropriate the other place we're spending in what I would consider mid funnel is video on social channels and the opportunity. There again, we're going to think about that in terms of reach and frequency.

We have a better opportunity to HIV test that overtime, even than we do with TV and we can rapidly iterate, new creative and test new creative in front of these audiences, which is also really helpful. For us as we think about how our message is resonating and how to tell very targeted messages to two different audiences. So broad.

Speaking, that's how we're thinking about our investment framework and I'll just close that question by saying I think that this is a really fantastic times for ATSI to be leaning in to these investments, but these are variable spend. So you know if conditions should change significantly it's quite easy for us to pull back.

To pullback this investment level, if we think it's it's appropriate at that top.

Okay, great. Thanks, Josh.

Excellent it's from sweat ACA jury out from RBC.

I understand that you arent guiding to the full year, but can you. Please talk about the general philosophy strategy and how you plan to manage cost this year with respect to topline growth and what are some of the places you plan to continue to lean into it and where are you seeing cost saving.

Will it anymore areas. The pullback on caught you talked about the three scenarios during your inter quarter cobot update either scenario build Stan.

Thanks for the maybe I'll start and then Rachel can fill in.

Filling the gaps yes, I mean in the April 2nd call. We talked about how we took some pretty fast action to look at our operating costs and we're always I guess I'd start by saying that we've always been very disciplined about our cost structure and if you go back and you look at our earnings call from the prior quarter. You know we pointed out that we have some of the highest revenue.

Per head count of anyone in our peer group and so we entered this crisis with already quite a lot of fiscal discipline and we're continuously looking how we can get better and how we can make sure that.

Every dollar is going to its best and highest purpose minimizing waste is one of our core values as a company. We also said that we're not going to take arch.

Short term actions about our investment levels based just on short term trench and Oldboy am I glad that we did not overreact to the events in the third week of March because we were very very busy in April rising to the challenge on odd I think the team did a fantastic job doing.

The fact that we were continuing to invest appropriately meant that we had the resources and the capacity to take.

To step in when we were needed.

In the month of April So Rachel said in her prepared remarks, we're going to hope for the best the plan for the worst and what do we need by that we need that we're going to continue to have a lot of discipline around our fixed costs, we're going to be taking a very careful eye on our fixed cost because we just it's hard to predict what the future will halt but in terms of very.

Estimates, we are leaning into variable investments right now that we think are going to have a good payback because we think this could be an inflection point threats being in a really positive way, we want to make sure we really embraced that.

And take full advantage last thing I would say, it's just in our product roadmap.

You know if.

We put a lot of thought into our product roadmap coming into this year and we think we're working on a lot of really high value projects that align very clearly with those four pillars of our right to win.

If we got to May and said, we've thrown everything out the window and started over.

That that would be strange and in fact, that's not at all what we've done.

Vast majority of work that was underway as we entered Twentytwenty continues because we continue to think it's really important work.

At the same time, if we said that we haven't changed the thing as a result of the current crisis that would also be strange and in fact, there are things that we need to do in two directions. So we took a look at what are things that really speak to the moment now and then have a lot of urgency or both important and urgent and we have made some pivots in our product team to go.

No and respond to those things and I'm proud of the way that the team has responded we've also looked and said hey. This is a moment when we actually have the opportunity to do some investing in some fundamental platform pieces of our business that are going to make us much stronger for the future that might have slightly longer time horizons and one example.

I would give of that is within search the quality of all of our data pipelines are recapturing the right data are the data clean or the unusable formats. How can we give the teams the right tools to use those data and there's an opportunity for ATSI to get much stronger there, which is going to result in much better search and recommendations and we're taking that opportunity.

Right now we are investing deeper there and that's not something that I would expect to have a payback in the next three or four months, but I think it's going to make etsy much better for the medium term in the long term and we are embracing embracing that opportunity right now.

If I can.

If I cant I'll jump in with a few additional notes specifically around margin.

So I just want to I want people to remember that we've now consolidated reverb into our financials, which creates.

A lot more revenue on the top line with potentially.

We are on margin for how we have said assets expect them to be breakeven the Pos.

Sure.

In the first quarter, we accounted for at the AD.

With a cost of revenue.

Oh, sorry.

Revenue with zero margin.

Also dragging down Q1 margins now that will shift as we get into.

We also spent and pretty heavily in Q1 this year on television.

Brian marketing, which we didnt spend in Q1 prior year and were as John talked about we're moving into that in the second quarter. So we'll continue to spend on tell that television advertising in a lapping I would remind you as it relates to margin is that we're capitalizing less about product development labor.

This year than we were last year's a lot more of our part element Keith expense in our.

Through our PNM. So those are the I know your question is what it with it specifically about cost reduction and we and judicious where we can also keep in mind. The other puts and takes that in fact, our bottom line.

Great. Thanks Rachel.

The next one I'm going to.

Give you is from Darren Aftahi at Ross on that math would have been a number two category in April.

Good on category, so with number one.

Number one as has historically often in the case was home and living.

So everything are on nesting right now to get your homework comfortable was our top category and I think that again speaks to the enormous opportunity for let's see the Tam of Betsy home and living.

He is only one of our categories. It's a very large category in the world and it's a very large category on that teach our number one category right now and in a moment like this a lot of people are thinking about how can they make their homework cosy how can they get home office set up and Etsy is there for them and can do that in way that no one else can really do.

But it's still only one of many categories. Other categories that were really robust. This quarter included things like craft supplies toys and games gardening self care.

Yeah. So many different categories on etsy that are really relevant gifting is a really big deal in this moment. So many categories that are that are really relevant.

Right now and the challenge for US historically has been getting people to think of Etsy for those particular products and suddenly we have the opportunity to do that as a bigger way than we've we've had before and you know what I know as our sellers are doing a great job delivering and delighting those customers.

So that makes me optimistic for the future.

Okay, Great next one come come some liar, Laura Champine from loop.

In Q2 since services revenue grow faster or slower than gms and its and what are the drivers.

So I would expect services revenue to grow slightly slower in Q2 than Gms for what is a kind of a unique reason to this moment. So gms is obviously growing really really nicely at the marketplace and of course Gms is the fact is a function of three things visits.

Conversion rate any auvi and right now we're seeing visits grow really rapidly and we're seeing conversion rate improved over its historical averages. Obviously then ASV is the third factor ASV is slightly down from its historical averages, but we very rarely see visits grow very.

We rapidly and conversion rate through.

At the same time a significantly so that's that's very positive for frenzy.

What we now call Etsy adds what we used to call promoted listings is really.

Driven by views. So if visits are growing slightly slower than DMV than it means that.

We may see at sea adds grow slightly slower actually then then gms overall and I want to emphasize that we think it's the as is doing great. It's on a great trajectory, but but again if visits is growing a slightly slower than overall Gms. Then we may see etsy adds grow a little slower than gms in the second.

Quarter in particular.

In May I add one think of that.

Josh its response, which is also just to point out that in the first part of April one where you're seeing the surge in mask sales.

The at the ads, formerly known as promoted listings off of the math listing it's now back on but for a portion of the month of the.

There.

Okay, Great. We have a couple of questions that are guidance related to go with this one that from Jon Cohen, Johnny I hope that that right John from Jefferies.

Gms guidance implies a high level of growth in May and June can you talk about some of the key assumptions and your internal model that gets you to the full quarter forecast.

I'm happy to start.

And.

I would start by emphasizing ritual said before which is that.

It's really hard to forecast right now and we had a lot of conversations about whether to give guidance or not and we know there's been a broad range of people, giving guidance not giving guidance. We wanted to be as transparent with you as we can we always try to be as transparent as we can.

And it's helpful. As we can without all the promising and so what we gave you as a very broad range. If you think about the fact that there's only two months left in the quarter and we're giving you a 20 point range.

It's pretty broad range and I think that just speaks to speaks to the time and so there's a set of tailwinds and we are currently benefiting.

Materially from those Tailwinds things like a rise in demand and fewer alternatives.

Etsy sellers being able to rapidly pivot to produce in demand products not just masks lots of other things that are currently in demand. The fact that were not reliant on you know logistics central logistic.

Film and warehouses like others. There's also a set of headwinds that we anticipate.

So it's a very tough economic background and we are our hearts go out to everyone. Who's lost their job was filmed economic insecurity, and we think that that.

Could was much more real in the months to calm, but you know we haven't seen that headwind show up much yet we expect that.

You know retail will reopen you know we hope for everyone sake that you know the economy gets back on its feet sooner than that rather than later and so it's very hard to model. When we will start to feel those headwinds and at what pace, we will start to feel those headwinds and how the continued tailwinds might counteract them or not so we did the best.

Within our guidance range to anticipate.

Those those trends I don't original fish, where you'd want to say there.

Yeah, I would only get to point out a couple of things first of all we gave you. The first couple of days is may don't get too attached to that we're not planning to update you daily but the we've seen some trend holding and we told you that we expect me the number you could back into the numbers. It given you the multi celebrate it may be that we thought we tolerate may.

To follow that turn line.

Eric salary June.

They don't forget we're giving you consolidated guidance, though.

Reger performing strongly even you I.

I think some information there that will help you understand that she respective marketplaces that.

You heard that smaller percentage of our total.

It's always higher weight.

A quick.

Okay. Thanks. Thanks.

The next one is from Nick John's at Citi.

But it's still early days and this crisis what are you learning about your.

Individual buyers your active buyers and your occasional buyers facing early trends that entities that are growing.

Yes, I mean to break it down starting with our habitual buyers and we love our habitual buyers, we will see that the number of habitual buyers.

Grew again, but because they are already habitual they already know.

So much about what's he can offer and they're already coming to us frequently and so we have seen frequency in that group improved which is great, but they're kind of the folks that have figured out the secret sauce of Betsy the big opportunity. In this moment is there's a lot of people, who maybe have never shopping at sea before who shopped only very occasionally on it.

They might think of us only for one very specific product category and now they're thinking about us and now they're coming for other product categories and that's a moment.

And so we're excited about the opportunity that we are seeing frequency gains in the lapsed buyers and the occasional buyers.

We're also encouraged by you know, it's very early days, but this brand new cohort.

From April we gave you some data in our prepared remarks that the frequency of this brand new cohort looks very healthy.

As well so you know the task ahead now is to do a great job engaging them. So that we continue to earn their loyalty.

The future.

And you know, we're really excited about the new tools that we have that allow us to really be able to identify different segments and communicate those different segments in a very personalized way really dynamic way really quickly.

And we're we're really focused on that and investing in that.

Okay next one is from Ria Rip the Canaccord. When you think about your Q2 guidance can you talk about the relative contribution from new customers versus engagement from existing customers. It seems like with as much visibility must be thing a lot of active.

It is near existing customers, but can you just talk about a little bit more.

Yes, I guess I'd started and rich let me feel free to pile on of course, but first I'd say that we define new customer that's the as new ever.

And many other people use.

Don't use different definitions, but a lot of people have a definition of new that means they haven't been around in a while and when we say do we mean, we were not aware of having seen that buyer before at least using not I'd.

And so we are seeing you know very strong growth in brand new buyers and we're excited by that.

In 2020, we have to remind ourselves are still a lot of people that just don't shop online much.

And there's a lot of people that have never shop than anything and so.

Lets people show up now and shopping tenancy and it's really exciting so new buyer growth is very strong right now and I'm excited about the fact that I feel like we're really well prepared the hard work that we've done over the past few years to make search much better to make the shipping experience feel really good build trust. You know these are people are coming onto.

For the first time and they're finding a marketplace that we're proud of you know that we think as well organized and trusted marketplace, where sellers to such a great job delighting them.

But as we've talked about before Theres, a very large number of infrequent buyers they've bought on etsy before they had a great experience they think of us in fondly, but they just don't think of us very often they don't know when to think us and suddenly we're more front of mind and we're one of the you know one of a smaller said.

Of places that is open for business and shipping and and shipping a lot of different products. They might want so we're definitely seeing improvements with the occasional buyers or the lapsed buyers people, who just haven't been on the site for more than a year and then of course, we are also see frequency improvements with people who.

Already shop and shop frequently has just of the Delta with a community is not as high because they you know they started from from up from a higher point already.

An original if there's anything else you want to.

I think just having a problem is being redundant, but I just want to point out that.

I guess, but by definition most other companies for new buyers the buyers that have not into the site for 366 days are more you add those two groups together than the one reactivating it six and a half million new buyers in the month in April.

And really about half of our.

That's about half of the April wire, so that that cohort at Newman reactivated is a material portion of our growth and they're the ones that are.

The opportunity for us to capture and top of mind for asking into marketing.

Thanks.

Okay. Thank you next one is some NAV ICANN at Suntrust, what kind of uplift the thinking maybe seeing from the list and then consumer spend due to government support.

Yes.

Yeah, we've been lucky that as well and again, it's hard to parse out because it's all fairly recent but what I would say right now is that the growth and we you know we gave you pretty specific data on how April and early may have been trending. So you can kind of seek yourself that.

It's probably true the stimulus checks were helpful. We certainly think on behalf of the American people the American economy that they've they've been helpful.

But weve continued to see sustained growth.

So you know where we feel good about that now we anticipate that overtime that growth will decelerate.

You know that at the peak as we get passed those stimulus checks of People's savings get worn down a little bit.

But the economic hardships will get even more real for people, but it's just hard for us to know all the puts and takes that precisely.

Okay. Great next wanted some Jason Helfstein at ASCO.

I think better seller demand for your new ad products and or stellar reengagement with third products anyway to quantify that.

I'll start and then rich if you want to jump in but we are very happy with so we basically had to sell around products, we've got offsite ads gutsy ads.

So offset ads is off to a great start.

We're very pleased with the launch by the way we see the team did a really nice job getting that product launched and just to take a second on offsets to im really pleased with how that team had a real biased action I think they also we're ready to pivot when when that made sense and they came to a new model actually they launched of version one.

Then they can go version two that even better and I think is even more fit for these times, we couldn't have anticipated these times, but but we do think that this new version is even more appropriate for for the current environment that we're in.

And in addition to haven't right strategy and be willing to pivot they executed really nicely on both the technology, which is complicated and the messaging to sellers and so we're pleased with how launches gone. We are pleased with what we're hearing by and large from the community and you know the early metrics are very encouraging on on off site adds it's very.

Early days.

Very early days, but the the metrics are encouraging around things like up opt out rates and seller Ciaran. You know, we're very encouraged by what we see there and on Etsy adds what used to be called promoted listings. We continue to see that be a very popular product.

And so our sellers like it they're investing in it.

And you know television really good value for them. So we're also pleased with what we're saying on etsy outs.

And that it finance static a couple other now so because we were the product line for months before we started billing and one of the one of that would that were part of that.

Seller belief basket that I talked about that it was also design so that sellers could actually be and start to calculate how this product with performing for them economically. They actually start these sales that they had made and on their bill Let me say that fee and then wait to strike through so they were seeing what would I have paid.

What I have gotten off.

Thanks.

At the opportunity.

All right.

And so we've been collecting feedback for several weeks now whether they like to product.

Performing off we've been very pleased with what we read it doesn't mean that everybody loves that we certainly get our share out.

At issued in consideration being great rates that what we see now since we've had.

Yeah. We lived for several days is that everything performed exactly as we expected it.

Very very early days, but nothing is.

Lined with how you model product.

Yes.

Great. Okay. Thank you on that we went over time here, a little bit I'm going to squeeze in one more high level question and isn't anybody else's questions that second the key we'll make sure we get back to you.

For Josh.

From Tom Forte da Davidson.

As a onetime industry just event what are your thoughts on ecommerce next coming out and around the virus outbreak. For example, the home category online mix today is about 40% versus 20% last year, how much does increase nicks hold near term at physical stores Leo.

Yes, I mean, I think that home.

I think.

This is going to be an inflection point for E Commerce, and I think that that inflection point is going to be meaningful and lasting.

As much as many of US are really native to online and have been shopping online for years and shop online for many if not most of our purchases there's still a very large segment of the economy that shops offline.

And I think this is a moment when a lot of people are suddenly turning online and discovering that it's really convenient and works really well for them.

I think that that could create some very lasting behavior changes.

And I think that.

In that world people aren't going to want to remember 5000 per 10000 or 50000 brands.

And I don't think they only want to shop in one or two places so in a world where everyone's on Amazon everyday all the time, which is great because Amazon beats a lot of needs loved the time, they're going to wanted alternatives to Amazon and I think getsy is super well positioned to be one of the few meaningful alternatives that stands for something truly.

Different.

And what you get at Amazon, but can lead to a wide range of your needs and this is a moment when we're actually getting to demonstrate that the people and we're embracing that moment in we're investing into that moment and most importantly, I think our sellers are doing a fantastic job of rising their innovating on products that are really cool there.

Delivering delight the hindered notes the personal touch that you're never going to get from almost any of the place. So I.

I do think that this is a moment that is going to create lasting behavior change them I think begets the is going to be a winner.

In that over the over the medium term in the long term and I think that's incredibly exciting most of all for our sellers.

And for buyers.

And so it's a time when our team as I said in my permit prepared remarks has a lot of stress in their lives, but they understand how important this is for.

For all of our stakeholders and so again, I guess I'd like to close by saying how grateful to all the people them yet see team that are really pulling out all the stops to to try to.

Two over the weekend to support the community, we've lot and I'm I'm really grateful for it.

Great. Thanks, Josh. Thank you everyone for joining us we hope it stay safe and well talk to you can thank you so much.