Q3 2020 ETSY Inc Earnings Call
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Hi, everyone and welcome to <unk> third quarter's waste money earnings conference call and they want their bps.
Dr Relations and joining me today are jostling women CEO wages laser CFO and Jay Ratliff I've director of Investor Relations today's prepared remarks, and pre recorded the slide deck has also been posted to our web site for your reference once.
Once you're finished with Johnson rice and the presentation, we will transition to a live video webcast Q and a session questions can be submitted via the queue in a window chat laid on your screen feel free to use it at any time and it will remain open throughout the entire conference call I'll be meeting your question and gave will help me to try to get to as many as we can please.
Please keep in mind that our remarks today includes forward looking statements related to our financial guidance and key drivers there of the impact of COVID-19 or communities business and strategy the potential benefits of our marketing and product initiatives and the anticipated return on our investment and our ability to drive growth our actual results may differ materially.
Forward looking statements involve risks and uncertainties, which are described in today's earnings release, and our 10-Q filed with the FTC on August 2020, and subsequent reports that we file with the SEC any forward looking statements. We make on this call are based on our beliefs and assumptions today, and we don't have any obligation to update them.
Also during the call, we'll present GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in todays earnings release, which you can find on our IR website, along with the replay of this call with that I'll turn it over to Josh.
Thanks, a lot and loan welcome everyone.
The third quarter was another quarter of really sustained momentum for SC, which speaks to we think the strength and the dynamism of the business model and.
And as much as anything I'm incredibly proud of how the team showed up yet again this quarter. In fact, we took a recent employee engagement survey, which shows that employee engagement and as he is incredibly strong at a time when so many forces are trying to divide us etsy employees are coming together to support each other.
And really focus on the mission, serving our buyers and our sellers and being proud to work for Etsy is something that we don't take for granted at a time when there are so much division in our society. So we are very focused in this quarter on leveraging all of the strength and momentum we've had in the business to lay the foundation for.
Tenure strength far into the future.
Rachel is going to take you through the numbers in more detail, but it was a very strong quarter across the board and the headline is that the macro headwinds that we expected to see in the third quarter really didnt materialize as a result, Gms and revenue were ahead of our own expectations.
Which meant that EBITDA margins were also significantly ahead of our expectations.
But lets unpack, what's driving that growth turning to slide five we are very very focused on the activity of our existing cohorts and our new cohorts and I'm sure you all are as well so let's unpack those together.
First new and reactivated buyers grew at an astonishing rate in fact, we added 15 million new and reactivated buyers.
For the 12 months ending in the third quarter.
In addition to that active buyers grew by 56% year over year to 69 million active buyers for the 12 months ending in the third quarter and.
And that's sort of a total base of 138 million unique buyers who have ever bought on etsy. So one way to interpret that is that half of everyone who's ever bought on Etsy has bought in the last 12 months. That's both great in terms of Etsys ability to re awaken many lapsed buyers, but it also.
It means there's still a ton of opportunity to go and really can existing lapsed buyers and part of the reason why we think that we're seeing so much success. There is as we've said before people who bought on Etsy.
Generally had a very good experience and so when we reach out to them and say why have you not bought in the last 12 months. The most common answer we get is what do you mean Halo Betsy I thought I'd bought more often and we tell but no you actually haven't been in the last 12 months. So gosh I just didnt think of it. So now at this moment a lot.
More people are thinking of it and we're seeing that show up in terms of the reactivation of buyers as well as the addition of a very substantial number of new buyers.
Let's take a look in slide six and how those cohorts are performing.
First about 75% of the purchase activity in the third quarter was from people, who joined as CEO prior to Twentytwenty user cohorts from 2019, and prior and we're seeing a real step function increase in purchase activity from all of our prior cohorts.
Taking the 2018 cohort as one example, what we show you here is for people who made their first purchase in 2018.
They made about 60% more purchases are 60% more gms.
They purchased on Etsy in the third quarter of 2020 versus the third quarter of 29 team and obviously you see on slide six about 50% of that was purchases of non masks and about 10% was the purchase of masks.
Turning to new buyers on slide seven you will see that new buyers first accounted for about 25% of the Gms in the third quarter of 2020.
And similar to existing cohorts do buyers look to be more active and purchased more than new buyers did a year ago, but it's a bit of a tale of two cities. We've got new buyer Who's first purchase was not a face mask and those new buyers are more active than new buyers were a year ago even.
Putting aside a second or third purchase that was a phase.
For new buyers, who first purchase was a face mask.
As you often expect their second and third purchases were more often face masks. So what we take from that is that new buyers, who first purchase was not affect face mask likely will have a lifetime value as good or more good than.
In previous cohorts were watching new buyers, who first purchased was a face mask because it may be an indication that their lifetime value is lower than what our traditional cohorts of that.
So why are we seeing such strength, we believe this because as he stands for something different at a time when there are more and more places coming online to sell you exactly the same thing.
And see some place you can go to actually connect with other people and find things Express your sense of identity. It's a place you can go to support small businesses in your community. It's a place that you can go to bring people together and the way the marketplace works, it's incredibly dynamic and hi, Joel server.
Ooh the kinds of products that are relevant right now.
So we think that the fundamental strength of the business model has been very important and allowing essien etsy sellers through wise to this occasion.
And how have they been rising to the occasion well if we look at the second quarter of 2020, you'll see that overall E. Commerce grew at an astonishing 45% year over year that number would have been unthinkable a year ago, but ATSI grew more than twice as fast and again.
In the third quarter, you'll see at sees growth was sustained so we expect that as he gained significant market share yet again versus the overall ecommerce benchmark.
Turning to slide 10, I know there is always a lot of interest in what specific products and what specific categories are we seeing growth and you'll see that the story in the third quarter is substantially similar to the story of the second quarter of 2020.
The same top six categories growing at very very rapid rates and I would point out that these are each as standalone categories massive massive industries and etsy is already at scale and growing at extremely rapid rates. In fact, we believe etsy is growing as fast or faster than the mark.
Good leaders in many of these categories and to Peel back a little bit the categories may be similar but the items are that are that are selling are always dynamic and changing so for example in back to school.
This year looks different than last year, it's a lot of custom desks and whole learning supplies in jewelry and accessories were seeing a lot of both necklaces. So the categories, maybe similar but the items themselves are constantly responding to the times.
And of course mask continued to be a very substantial product in the third quarter $264 million in Gms, and 24 million masks, salt, but asthmatic become more and more ubiquitous available in every retail outlets everywhere in the United States and across Europe.
We are seeing sales declined sequentially and that sequential decline is continuing into October however.
However, given masks were their own category, they would still be a top six category in the third quarter moving on from our results.
We have more conviction in ever the Etsys mission the county Commerce human is incredibly powerful and that our strategy built around our right to win.
Is compelling and durable and so we are investing aggressively to deepen our strength in each of these four areas that collectively make up etsys right to win.
Starting with search and discovery, we have been investing for the past many years to make search dramatically better and to close what we call the semantic gap and you'll see here that just over the past 12 months. The data we consume in each search search query has doubled its just one way of giving.
Are you a sense for the sophistication of the algorithms that we are using and when we talk about closing the semantic gap. What we mean is translating what someone types to what they actually need for example, understanding that the word dress and down are substantially the same word and use gal results.
For someone's dressed search query or that the type the word emerald ring needs rings that contains stone Emerald Etsy has made significant improvements in closing that semantic gap, but there's still a long way to go with a great roadmap that we think continue to deliver.
Famed improvements to make the buyer experience better.
We hit a major milestone in the third quarter launching our first ever personalized search you've been hearing me say for some time that two people who type in the same keyword will get the same results and now in the third quarter that is no longer true we look at your clicks your favorites.
Add the cards and your purchases and we use those to inform the search results. So that two buyers will now get different results for the same search. This was an exciting first launch and its showing promising results not just in terms of conversion rate, but also in terms of repeat purchase rate.
So we're very encouraged but it's just the beginning and we will now have years of work to refine and improve these models plus we're incredibly excited to bring personalized search to see ads as well we've been laser focused on driving frequency launching both product and marketing initiatives to get people to.
Come back more often and buy more often just one example is a new buyer offer that we automated and launched in the third quarter, giving a five dollar off on your next purchase to a select set of new buyers that both with what they have high lifetime value and the lower propensity to come back in the first 30 days.
And it's an example of something that were able to launch now that we couldn't have done a year ago because of the investments we've made in our CRM systems and in machine learning and it's just one of many examples of the kind of thing, we're launching and driving to try to drive frequency.
Turning to the all important holiday season. This holiday season is going to feel different for so many people, but we think that as he can play an even larger role in making it feel special and helping you connect your loved ones even at a time when you need to be more distant we're doing things a little bit different pulling forward the season.
Because we know many people are looking to shop earlier, and we're building our campaign around the theme gift like you mean it.
We continue to be really excited about the performance of our television advertising campaigns in the United States, they're becoming a mature channel, where we're seeing really strong ROI and we're seeing strong improvements in terms of top of the funnel brand awareness. So we're doing something new investing even D.
Deeper in the fourth quarter launching a more brand focused television campaign at the same time as we have a more direct response campaign running concurrently starting with the branding campaign. That's a campaign that has a narrative that is designed to create an emotional connection speaking to the differentiation to Betsy.
Using storytelling as a mechanism.
A pause now so you can look at one example of those ads.
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And at the same time, we're going to be running an AD that speaks to all of the different kinds of products and purchase occasions, you can buy on etsy designed to more directly drive you to come and shop and Here's an example of one of the spots in that campaign.
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You'll be seeing these television ads start running this week they launch on October 28.
But of course, our marketing investments are about so much more than just television we've been making significant investments in our marketing tech capabilities and they've been yielding great results. Our performance marketing have been even more efficient in the third quarter than they've been in prior quarters. Despite a step function increase.
Investment, we've also been able to really up our game in terms of our performance marketing in our European core markets, which has driven very strong results and we're investing in some new areas for example, podcast, which we're really excited about it.
In addition to that as FC becomes an even more important part of the site Geist, many leading influencers wants to associate with Etsy, and we've created a some really exciting collaborations with leading influencers were they carry collections of items that they love on Etsy, and then coal market them together with Betsy.
And it's an example of the power of a great brand like Getsy, combining with great brands that in individual Influencers have should really go and spread the word and an even bigger way and of course, none of this tremendous growth would have been possible, if we weren't making meaningful investments in infrastructure required to serve our plot for example.
I show you just a few minutes ago, the tremendous increase in data, we're consuming to make our search algorithms much more relevant that's required meaningful investments in our data infrastructure in order to serve that growth we've been investing in site performance to make our page loads happened much faster because we know this faster page loads.
Really important to create sticky and habit, forming buyer experiences and we've been investing meaningfully in our developer platform. So that as we grow our engineering team each new engineer can continue to be very effective and efficient as just one fun facts, we push code on average every 30 minutes.
NFC, so investing to make our co based easy to work with and easy to deploy we believe has very compelling long term benefits and turning to revert River also had a great third quarter at a time when industry sources indicate that the musical instrument industry contract did in the third quarter.
Reverb actually grew at a very healthy rate.
We're pleased at how the take rate changes that were announced in the second quarter have been received by the market and in fact seller and dealer growth has been very stable, while we've seen sales grow and importantly, it's allowed lever to invest even more in marketing and in product development to grow the business for the.
Future of reverb team continues to launch great product enhancements and really innovative and exciting marketing programs and we're really excited about the continued growth potential of the reefer platform.
So to conclude the third quarter was a great quarter, where the etsy team really put their heart and soul into executed for the benefit of the whole community. We're incredibly proud of what the team has executed and launched in the quarter not just for this quarter, but because we believe.
So that as he has an incredibly compelling growth potential for months years and decades to come and we have a lot of conviction around making investments that are going to allow us to achieve that full potential.
And with that I'll turn it over to Rachel.
Thanks, Josh and thank you everyone for joining us for our Q3 earnings call.
My commentary today will cover our consolidated results keep driver.
And standalone results where appropriate.
Q3 was another strong quarter across the board as we delivered higher than expected kms revenue and adjusted EBITDA.
On a consolidated basis ft third quarter, Gms, 119% to $2.6 billion revenue grew 128% to $451 million and adjusted EBITDA of $151 million with margins of 34%.
On our last earnings call. We indicated that we expected Q3 came expert to decelerate from Q2, partly due to lapping the 29 keenly her acquisition and introduction of free shipping initiative in Q3 of last year.
Now our results came in better than our forecast, we did see deceleration as the quarter progressed. The month of July was that 152% August with that 114% in September was up 98% on a consolidate.
The sequential deceleration in Sq standalones on that stuff was primarily driven by city decrease in mat sales and the deceleration of new buyer growth.
Matt as a percentage of CMAP contracted sequentially from 14% of Gms in Q2 to 11% in Q3.
Thanks, Matt declined 34% month over month in September.
Well, Matt are still meaningful we expected deceleration to continue.
Buyers also decelerated sequentially from 159% growth in Q2 to 127% in Q3 with about half of that acceleration driven by Matt Meyers.
Despite the deceleration in overall Gms, we saw healthy underlying trends in non math Gms growth, which was 93% in Q3. The same growth rate is last quarter also notable the 4 million map only buyers in Q2, 38% returned in Q3 for a non purchase.
Consolidated Q3 revenue was driven by growth in both marketplace and services revenue.
Key drivers for the quarter Bridge CMS volume.
Payment expansion as he adds and off site.
Transaction revenue grew 121% year over year, driven by higher Gms for visit growth and expansion in conversion rate.
And that's a revenue driver for the quarter was our FC came its expansion. We now offer entertainment in 45 countries across 21 currencies promising 92% of our Gms in Q3 up from 88% year over year.
We continue to make strides in bolstering advertising products and initiatives to help sellers trying to lock that in the marketplace.
As he adds grew 106% year over year, and 19% sequentially versus Q2.
We've made significant improvements to the relevance of our AD units by incorporating algorithms that more accurately matched listings search queries in.
In addition, we're also optimizing our bidding strategy to drive stellar return these.
These changes have led to incremental improvements in click through rate and the conversion rate.
Simultaneously improving IR experience.
The revenue and seller return on Ad spend.
A true win win win.
As a result seller budgets are increasing as demand for onsite advertising continues to outpace current.
Offsite and had a strong Q3 at least on the benefit of a full quarter of revenue.
Overall opt out rates remain less than 2% and we focused our efforts during the quarter on optimizing return on channel mix for our sellers listing.
MCN off by then and our expanded at the payment platform all fuel further growth in secret.
Consolidated take rate expanded 120 basis point sequentially to 17.9%.
Gross margin was 73% of 820 basis points compared to last year and continue to benefit from our shift to oxide, which delivered incremental revenue without an equal offset the cost of that.
We continue to optimize our investments across our marketing channels.
Rapidly expanding marketing initiatives for about two years now leaning more heavily into upper funnel strategy to TV ads and social.
We're also hard at work, including our own channels to optimize the email and push notifications to the buyer journey, while building out an integrated buyer CRM strategy across many sectors.
Q3, consolidated marketing spend with $127 million up 153% year over year.
Upper funnel marketing spend for the Standalone marketplace, including television and digital video was 18% of our consolidated marketing spend in Q3 or approximately $23 million order.
This is important because as we shifted spend up the funnel warmed the return will be realized in future quarters.
Another factor impacting margin our increased investments in product and engineering as our hiring picked up momentum in Q3.
We ended Q3 with 1375 employees, an increase of 14% versus prior year, and 6.3% increase versus the second quarter in.
In addition, we're augmenting our workforce by leveraging near shore contractors, which allow us to rapidly scale up resources as needed.
The talent, we are adding to our product and engineering that will focus on fire frequency initiative, including search as well as our platform and foundation initiative that allow us to deliver products more quickly and efficiently.
We continually look at the metric revenue per head count, which is significantly higher than our peers as well in gms per dollar of product development, Stan a proxy for ROI.
As noted last quarter. It will take some time for hiring plans to fully impact RPM now.
Our revenue for head count today, and therefore higher than where we want it to be given our many opportunities to invest for growth.
Moving to our operating metrics and that's the word third quarter active buyers grew 56% to approximately 69 million Anthony Etsy marketplace.
Gms for active buyer on a trailing 12 month basis grew 8% year over year, driven in part by hand, visual buyers, which grew over 100% in Q3. This is up from 64% growth.
In the second quarter.
Great. Thank you good performance of our most loyal foreigners repeat buyers grew 17% to 27.
Excluding map Gms for active buyer was up 4% and 6% on a two year basis.
Digging in a bit more on frequency as you know, both new and reactivated buyers aren't written buyer segments for etsy.
New buyers are defined as buyers that are unique to SDN habit leaner purchase on platform, regardless of the time period and the reactivated buyer is someone who is not purchased in over 12 months.
In the third quarter, we acquired nearly 10 million buyers and reactivated 5 million existing minor spread total of 59.
We outlined last quarter that the 19 million, new and reactivated buyers in Q2, nearly 10% of the need for more purchases across your Mark category.
Since this metric with time bound it only partially reflected the purchase behavior of many new and reactivated buyers, especially those acquired near the end of the second quarter. So here, we have adjusted to a 90 day window for all new and reactivated buyers from Q2, and then metric increases to 12%.
Note that we would expect reactivated buyers to decelerate, who the buyer can only reactivate onetime in a 12 month period.
We would also expect new buyers to continue to decelerate as demand from decreased.
Active sellers grew 43% to 3.5 million so the etsy marketplace and we are focused on growing the pie for all our sellers trying.
Trailing 12 month Gms for active seller was up nearly 18% and listing in our marketplace grew to over 80 million item.
Recently, our teams and develop new initiatives, including improved shop shop recommendations to get dollars to their first they are more quickly.
Helping sellers to scale and investing members the port operations to optimize and streamline issue, but that was.
Another one of the factors fueling sustained growth in Q3 was robust performance internationally.
Asking standalone percent International gene Gms expanded 340 basis points sequentially that 37% of overall.
International Gms, excluding Mac sales, 106% on a constant currency basis and was driven in part by strong trends in the UK and Germany with the strongest rate being domestic sales between buyers and sellers in the same country.
Within the UK market, we've seen an acceleration in the share of online retail overall from which we believe we are disproportionately benefiting thereby taking market share.
Domestic growth in the UK was up approximately 250% in Q3 significant growth for this core international marketing investment.
According to Comscore SC is now a top 10 ecommerce site in the UK up from number 14, a year ago.
With all of this momentum we've made the decision to launch TV advertisement in the UK for holiday season, which you will also see reflected in our marketing spend.
Moving now to the balance sheet as.
As of 930, we had $1.5 billion in cash cash equivalents and short term debt.
In addition to a $200 million revolver is currently undrawn.
During the quarter, we issued $650 million of seven year convertible senior notes.
A portion of the proceeds were used to buy back $301 million of our 2018.
And the caps.
I'll now review our outlook for Q4.
This years than anything that predictable. So we caution you to remember that potential headwind, we called out in the past and that appear in our slide presentation on factors impacting the business.
We currently estimate consolidated Gms for Q4 in the range of 2.7 billion to $3.1 billion, which is up 65%, 85% to Q4 of last year revenue.
Revenue of 459 million to $513 million up 70% to 90% versus last year.
And adjusted EBITDA of 117 million to $131 million and margin in the range of 24 to 20.
This implies 30% adjusted EBITDA margins for the full year.
We continue to model a wide range of outcomes.
To account for significant uncertainty this.
This quarter, primarily focused on the us election in tax on the pandemic.
Continued uncertainty around the health of consumer spending and the holiday shopping period, which would be influenced by many factors.
In terms of our Gms guidance, a few things to keep in mind first so far October gms trends at both ATSI and meet there have been similar to what we experienced in September.
Second in Q3 Mat sales added an incremental $264 million in Gms about.
About a 23% decline versus the $346 million sold in Q2.
Looking lastly, we can see steady deceleration than we currently expect net sales to be substantially lower in Q4. They were in Q3.
We encourage you to factor the impact of math deceleration into your Q4 models and incorporate the large grow from we will have an update your 2021 model.
Third note that in the fourth quarter LIBOR is currently expected to continue to grow more slowly than the.
In the context of our margin guidance, the largest sequential and year over year impact to Q4 margins will come from incremental marketing.
Let me on tax some of the additional spend and how we are thinking about associated return on investment.
First as we showed you earlier in Q4, we are launching a new television campaign brand focused creative specifically designed to drive emotional connection to etsy.
This investment will be in addition to our existing and Kathy.
Her more prominent direct response design intended to drive media.
Although interiors return is likely to be lower we see this as a real opportunity to build brand affinity that will have positive return next year.
Second we are investing an upper funnel marketing channels in both the UK and Germany.
It sounded more experimental in nature and ROI for these markets, it's still to be proven out who we are we are forecasting return below levels that currently achieving.
Third.
It is with the new brand campaign, we will also be expensing the creative costs for the new adds in Q4.
The increase in new Afton, Eric TV media and together with the creative expense.
Account for about a few hundred basis points of the sequential margin contraction.
Fourth season.
Seasonality plays a role in fourth quarter margin contraction.
Expect higher Cpcs, and our performance marketing, while continuing to target growth in impressions.
It's still achieving our ROI thresholds, we expect lower in quarter ROI on our fourth quarter spend.
Which similarly may also drive a few hundred basis points of the margin contraction.
And last macro headwinds and our hiring ramp may also impact Q for March.
You've seen us the extremely disciplined in our investment approach in 2020 proved out the scalability and tremendous value of our marketplace model.
While these investments impact our margins on a short term basis, we have strong conviction and expected to drive growth over the long term as we lean into our enormous Tam.
One last comment about our outlook.
We see a significant amount of uncertainty and 2021, particularly in areas that we cannot control.
Have not yet had a view to what our business would look like when the economy fully reopened or if consumer spending worse.
We are therefore being cautious in our planning for next year.
We encourage you to do the same in your models and pay particular attention to the quarterly run rates.
Meanwhile, the huge election next week.
He has been very active in encouraging our employees to register to vote and to volunteer.
We are providing our team meeting free day on election day, we.
Donated to mission for math and organization that provides ppt to co workers and we have been using our social media channels to our mine our millions of followers to gap.
We hope you will all the steps.
I will now turn the call over to Deb. So we can take your questions.
Okay.
Yes.
Okay. Thank you everyone. Thanks, Rachel and thanks, everyone for joining I am going to kick it off we have quite a lot of questions in our Q already if you haven't already put one in please do.
Please do use the chat function I'm going to start with one from Kunal Madhukar from Deutsche Bank.
How has the gms growth trends in the quarter to date. So far has that gone I know, we cover that but let's just go over that again, how much of that could be pull forward a holiday spend as consumers anticipate shipping delays.
Josh I think that one's going free to kick off with.
Sure and can all thanks for the question Hi, everyone. Thanks for spending time with US as we said in our prepared remarks.
Cobra has been largely consistent with September which means we have seen a great deal of sustained momentum through October to date and the Fairpoint can all that some of that may well be a pull forward in holiday spending we have been tracking that so we look at key words, and we we are seeing that that.
Purchases related to holiday shopping keywords things like for example tree ornaments are in fact happening a little bit earlier.
This October than we were last October so we do see a holiday shift happening earlier in October than before but we don't know is that going to come at the expense of November and December or not I'd say, it's too early to tell but we certainly are encouraged by the momentum that weve seen sustained all the way through our.
Silver.
Okay, great. Thanks, Josh next one is from John Cantone from Jefferies.
You talk about recent improvements as he has made to search and discovery and help parse out what portion of the increase in conversion is coming from those improvements.
Versus a generally higher intent shopper, resulting from the pandemic.
Also can you detail any observations and purchase behavior that help you can give you confidence that surge in spending on it represents a permanent shift in consumption.
Thanks for the question. So we are seeing conversion rates elevated on etsy.
And that has been sustained for some time part.
Part of that is no doubt.
The fact that our customer experience continues to get better through things like improvements in search and discovery and part of that no doubt is that people are arriving on etsy with fewer options in the outside world and higher intent.
And it's hard for us to parse out exactly how much is one versus the other what I would say is that we have seen steady and sustained progress in search month after month and quarter. After quarter. We launch new models that are better than the last models. So we've launched neural network models that are substantially more sophisticated they're doing a better.
A job as we as we talked about in the prepared remarks in the third quarter, we actually launched for the first time, the personalization of search meaning that two different people will see two different search results for the same keyword based on their purchase history, and that's having some impact on conversion rate already even in the very first.
Much of that of that model so.
And by the way, we haven't even rolled that out yet to recommendations and browse. So we talk about search, but but more often we talk about search and discovery and I will point out that those two are similar but not the same with search where given the benefit of someone typing in a keyword, which gives us a lot of understanding of what their intent is recommend.
Foundations, we just need to infer what we think you might like so it's actually related but separate technology, we havent begun to apply personalization to discovery or browse yet, but we will soon we'll also be able to apply it to etsy ads, which we think will make etsy adds even more powerful.
So we continue and that's just search and discovery, we are doing things to make the trust in the marketplace better every month, we're doing other things every month to make the human interface between the buyer and the seller feel better every month, so no doubt that's having some impact on.
The customer experience and on conversion rate and then the impact of the pandemic certainly as well.
Okay.
Pick up on that last one in terms of a macro question. This one's from Novid Khan from trust and any thoughts on the impact from reopening of physical stores, where the exploration extended federal unemployment benefits.
You know we talked about in the second quarter, how the data are noisy and we showed you some states in some countries and how reopenings have been not necessarily correlated with the trends that we've seen.
On our site and I'd say that has continued to be true in the third quarter, So things like states reopening retail.
May have some impact undoubtedly have some impact on what we're seeing in ATSI, but its not like Theres, a one to one correlation and part of that may be that a city might technically reopened stores, but.
In terms of what does the culture of that city, how often are people you going into those stores and whats feel like to be in those stores and I think there's quite a lot of difference around the country.
And around the world in terms of of of how that impact did so what I'd say is that it's been pretty difficult for us to do things like type store reopenings directly to the traffic trends that we've we've seen on the site no doubt it would stand to reason that those things are correlated over the medium term, but if you look over the short term sort of.
Good day and week to week, it's a little harder to see consistent patterns right now.
I'd just add on some of the data that we gave what showed that.
Even though there are stores that are consistently reopening our core business grew 93% in Q3 and it grew 90. The core business also grew 93% in Q2. So it's remained stable. This is a business that is excluding masks, though it seems not smart store reopening habitat.
Impact on it.
Okay. Thank you. Most next one is from Heath Terry at Goldman Sachs. What are you seeing from your shipping partners in terms of their expectations for delivery times and costs. During the holiday season, how are your messaging efficiency of buyers and sellers and can you quantify the impact that that's had on your guide.
Since for the quarter.
I'll start and then maybe original one AD we are able to track daily what shipping times are like with different.
Shipping providers, and we can even track that down to the city level and so as we present to buyer as what the expected delivery date is we're able to update that expected delivery date in nearly real time based on what were actually seeing in terms of shipping times in their region or for that.
Particular from two pairing and by the way, we Didnt mention in our prepared results, but expected delivery date has been a very big focus of ours in the third quarter and we've made significant progress. So at the beginning of 2020 only in the low 30% of listing views would.
I have an expected delivery date and now.
In October about in the mid Fiftys percent of listing views haven't expected delivery date. So there has been a fairly dramatic increase in coverage for expected delivery date, we're doing a better job of telling buyers when they can expect the items to arrive and we do incorporate shipping times into that.
We are also tracking shipping pricing of course.
You know a very large percentage of of items on etsy shipped for flat rate mail in some of the lowest tier and cheapest parcel rates and so we think that increases in pricing there well.
On a percentage basis may be meaningful in terms of the total cost of the total item. We don't think are going to be as much of a headwind as maybe you're seeing in some other E. Commerce sites. So we are communicating very actively with buyers and sellers. We don't anticipate at this time, it being a particularly material headwind for etsy.
And I'll say that I think a lot of ecommerce sites are pretty nervous about cyber week big.
Because their ability to fulfill large quantities in a short amount of time is constrained and that's where I think the benefits of the Etsy model really shine through our sellers our businesses largely of one working from their home and they're not as constrained.
In terms of having a supply chain depend on a few factories or having everything shipped through one or two fulfillment centers.
So we're leading into cyber week.
And I think this is this is going to be a time that also highlights the strength of the model there.
Yes.
Only thing I would add to that is that seasonality or.
It takes a little longer to get the item because you are buying things that are customized and personalized just for you on spec and so.
Our customers are somewhat conditioned to order early and maybe our holiday season has recently ended earlier than traditional retailers. In this case is the shipping speed is slower for all it's sort of leveled the playing field for all so I think that.
Across the board and E. Commerce, we're all going to have the same sort of order by December 15th order by December 18, if you like and in time for holiday not not just that.
Okay. Thank you both so weve, we obviously give a lot of cohort data ominous as good multipart question here from sweater could Gerry from RBC.
What is driving greater spend level is it fair to say that basket sizes across most cohorts increased you pointed to 50% increase in your 2018 court spend in Q3 2020 versus Q3 19, and also a 50% increase in spend in the first 90 days among new buyers in Q2 versus Q.
Last year, what is driving greater spend levels is not selling across the categories is it. Your marketing initiative is the bundling of products are free shipping lots of questions, but I think.
I'm pretty sure Josh you can start and then Rachel may want to add something great.
Great I'll start and I'm sure original will catch but I missed so I'm going to try to take that question in order at the beginning of the first thing you said is Lv, that's driving an increase in cohort purchases and for the most part I would say no. Its not I O V has not moved appreciably in fact masks is a low lv items. So.
So the mask surge that we saw actually drove down these site.
Site widen as massive shrunk as a proportion of sales Lv has recovered somewhat but if you take out masks I think ASV has been relatively consistent throughout the pandemic period. The biggest factor that's driving this increase in cohort behavior is the reactivation of lapsed buyers.
Yes, so when we talked about that 2018 cohorts a higher percentage than normal of the people who joined in 2018 have come back and bought at least one thing in the third quarter of 2019 and that reawakening up the lapsed buyer base across all of our prior cohorts is the number one thing.
Driving that increase in Gms for each of the cohorts a second and still very substantial factor is frequency in period or 90 day repurchase rate, meaning that for people, who did come back and buy in the third quarter. It was more often that they bought a second or even a third or fourth item in that.
At quarter. So both of those factors are at play.
And we did a bit to quantify the relative impact of those you'll be able to see it when you look at how many active buyers and reactivated buyers there were and how much that accounted for in terms of of increased Gms.
And we get give.
We have a lot of data on this call. So I'd be other metrics going forward that would be some of the metrics that talk about frequency specifically, so our fastest growing and most valuable cohort are what we call our vitriol buyers or buyers that come to us six or more times in the year, we spent more than $200.
Ours and they that cohort grew 100% in the third quarter I think last quarter. We said think grew 64% and higher not that co brands are growing in the low 20% range that we really had a nice spike in the.
People that are coming.
The most frequently is less than the next category down is what we call repeat buyers, which are people that come two or more times, a year and that grew 70%. So we've got a nice uptick in the frequency and then the last metric that helps to sort of triangulate the frequency picture in that for our new.
New and reactivated buyers and that was 15 million buyers in the quarter, 12% of them came.
For our times across two or more categories and so they are they are they are come.
Coming more frequently and they're coming across multiple categories not just a single category and so I think a lot of money in marketing and product initiatives that we've laid down beginning of the year.
To encourage repeat frequency.
Okay. Thank you Rachel.
Into a question on off site and some of the gallant learning from Wedbush, how is the traction than on our side and how is that contributing to take rate how are sellers reacting to it. So far anything you can share on conversion and how it's driving sales.
Number one and then number two with the biggest top of the funnel with season with the biggest spend top of the funnel. What are you seeing there and anything you can share on your ROI on your top of the funnel spending understanding that it's currently.
I can start with just some of that specific numeric answers to those questions and then maybe just want to talk about top of funnel.
Now you and impacts.
On take rate, we Didnt break we just stated the largest movers to take rate in the quarter were and I think we did win a 120 basis points.
Were inclusive of off site and also at the assets performed very strongly in that and see payments expansion into new countries and.
I don't think we gave the numbers specifically on Offsite and that that was one of the country contributors to.
Take rate increase because we now have full quarter profits down and so that was.
And I think we enter metric we gave more often than Atms that we continue to see less than 2% opt out rate from the salaries than or equal to opt out of it. So again, it's a very strong product and performing with return on assets and that we think it's very attractive for our sellers.
Top of funnel, we said that we are 18% Mark consolidated marketing spend was in upper funnel initiatives, which is about $23 million in Q3.
We said marketing overall on a consolidated basis, 153%. So that we are spending significantly more on marketing and then big chunk of that is not upper funnel.
As always we have a very strict ROI methodology, not only for performance marketing, but for all of our online marketing as well, where we we analyze it pretty stringently to prove out that every marginal dollar of spend incrementally ROI positive as well.
A little trickier with others.
The other line marketing use I think over nine different statistical models that we get from our media buyers than from our internal models and then we use external I spot data that channel Dana.
That tells US how is this dollar spend performing and is it keeping internal ROI thresholds that we have and so we feel pretty comfortable that our marketing spend has.
A nice positive returns the one caveat that we talked about is that upper funnel marketing tends to have longer yield curves and particularly with the brand focused campaign that yield some of that yield is going to come out of the quarter.
A little bit more than mortgage market.
And you know I would only add that etsy has suddenly and so powerfully become in the Zeit guys trite now suddenly you're hearing FC mentioned in the same breath as Amazon ebay and target.
And that would have been something that would have been surprising to people you know, even two or three years ago and if you look at our relative size relative to those four companies.
It's pretty good company to be in a.
And so this is a moment to be really leading in we believe to marketing. If you look at the re awakening of the lapsed buyers again, they don't think of themselves as lapse. They love Betsy They think of themselves as loyal Etsy shoppers. They just didnt know when to think of US. There are so many great purchase occasions, you can use on its really just.
Didnt think of us and so the ability to be front of mind and use this time to really form habits, and deepen our differentiation and reinforce our differentiation. We think is really powerful and there's still a huge opportunity with.
70 million people out there are 80 million people out there who have shopped on I'd say in the past and Havent shopped on Etsy in the past 12 months, that's a lot of lapsed buyers to go in reawaken and in addition to that there are so many people who still have never shopped on Etsy people, who we might not have thought of as our core demographic.
A short time ago, who suddenly now.
Maybe you know Steve Bartman as one of my favorite comedians and if you go check is Twitter feed he just posted I just discovered FC Goodbye and that he falls into the you know the etsy.
Vortex and is throwing up all sorts of great things he's finding on etsy.
And so I think we're broadening our appeal to more and more types of people in more and more demographics and we love it.
Since the beginning of getting lost in the at the Gore Tex or rather at all.
This one comes from Rick Patel at Needham and company Gms per buyer up 50% year over year in Q3, which categories are getting the most gms boost and what's your confidence that this can continue on the other side of the pandemic.
That's for Josh I think.
Yes, I mean, so we shared some category data.
And I'd say, it's very consistent with Q2. So you know home furnishings continues to be up over 120% year over year, but we're seeing different kinds of items I gave a little bit of color in the prepared remarks, but what we're seeing even in October now is things that are good for outdoor gatherings blankets or fire pits fire.
If it sell out everywhere else you can go but theres going to be a steady supply of really cool made just for you fire pits on etsy.
And so.
Individual items in each of these categories.
Our changing real week to week, but the categories are pretty largely consistent crop supplies continues to explode jewelry and accessories is doing great.
When we go to the future.
I would say in the near term of 2021, it's very difficult to predict we're not even giving annual guidance. These days, we're only giving quarterly guidance 2020 has been any.
Certainly the most unusual year since World War two.
In the western economies.
And I think it's likely that 2021 is also going to be one of the most unusual years.
In modern history, so trying to predict from this time to that time is is very difficult and.
But I would say, though that every interaction we have with customers every additional purchase we have with them every additional because it gives us a chance to deepen our relationship with them gives us a chance to form habits gives us a chance to two to reinforce our points of difference and all of our signs and signals suggest that customer.
We're having a very good experience on Etsy right now and frankly, we have additional investment capacity and we are using that we are doing things like investing in TV right now, we're expanding that to Germany and the UK in the fourth quarter. So we can really lean into this moment and try to build as much sustainable momentum not just now but into.
The future as we possibly can.
Okay, Great and then go into some margin questions with.
From sweat actually Gerry O'hara with RBC, please enter probably be three Rachel could.
Could you. Please talk about your Q4 EBITDA margin guide and the puts and takes there.
He has a highly variable cost structure and Q2 and Q3 margins were healthy harsh partially due to upside in revenue what are some of the most important factors you have taken into account for your Q4 EBITDA margin guide could you talk about your expectations on marketing and product spend and also lastly, weaver impact on the margin.
Hi, Thanks for the question so why not.
So for.
For starters I want to start with masks that we've talked about it stayed deceleration in Maxim even gave the amount that masked decelerated in September versus.
August than that went down 34% month over month I believe the number that we gave and so we would expect masks to continue to decelerate in Q4 and in fact, we did some cautionary guidance did not thinking about your 2021 mile modeled as well.
Keep it seemed guns.
We gave a year to date masks number eight and that when you think about a full year something upwards of $700 million is pretty much going to need to be taken out in 2021, when you think about.
2020, and that will contemplate in Q4, so you know its a.
Not to four units.
In summary, the second thing I want to point out is that we did our best to give guidance for top and bottom line for Q3, and when we spend on marketing and.
We had better than expected.
Okay impacts from our marketing and product initiatives in Q3 and lower than expected impact from headwinds in Q3. So we.
We have a lot of unknowns in Q4, and there were were giving our best to give you topline guidance, if our marketing, it's a headwind or a again as the currency headwinds are lower and that and the impact of marketing is higher you would expect to see.
Additional flow through to the bottom line, but we're doing our best to manage through an unpredictable.
Environment, particularly with elections coming up and.
We couldnt be continued headwinds.
Just the last thing I think we broke that out very specifically.
We talked about Q4 margins the biggest thing impacting our Q4 margins is our increase in marketing spend and those things will hit margins.
We announced four different impacts for starters, we're spending on him.
Two.
The line campaigns, we're spending on the existing about underlying campaign that is very direct response oriented meaning we expect direct immediate sales from that campaign and another television campaign that new that is in addition to that campaign, which is more brand focused and we showed an example on the call and that.
More media spend and more media spend where we would expect some of the yield is going to be achieved outside in the quarter to quarter. Secondly, the creative costs from that on the new campaign. The brand campaign will all be expensed in Q4 so.
Thirdly, we're also spending more internationally, specifically in the UK and Germany, not only on above the line, but on music, putting our marketing technology to work really targeted.
Better targeted performance marketing teams social.
And then the last piece of this is we're spending more on performance marketing and it's a lot more competitive to buy new yet.
From his marketing in the fourth quarter, so cpcs will be higher but we want to get the same impression mine. So we will be spending deeper into the yield curve still hitting our ROI thresholds that.
Probably lower ROI achieved previous quarter, just because if you think it will be higher.
Okay, Great. We are at six so once I am going to squeeze in one more here I think it's one of the if they want to treat and risks Josh. This is from Tom Forte of da Davidson can.
Can you please discuss the structural competitive advantages your sellers survive you versus other E commerce platforms. When it comes to making products at times and large scale manufacturers are having a hard and keeping up with demand such as masks desks during back to school gifts for the upcoming holiday.
We lose Josh.
Got it can you sorry, a lot of question Tom appreciate it.
And.
That wed so first I'd say that there are more and more places coming online to sell you. The exact same thing.
And if it's the exact same product you can find in 10 or 100. Other places they can only compete on who can sell it to cheaper or ship it to faster and Etsy is the one place you can go where you're going to find things that are truly unique and different than what you're finding everywhere else and may just for you and by the way there are millions and millions and millions of them. So.
For each person there is some form of beautiful that's just for you.
And we're doing a better and better job of surfacing that in helping you to find that but some of the strengths that our sellers spring art that either able to personalize. It up for you. They are able to customize it for you. So if you need a desk, they're going to make it to the dimensions of your room, if you need.
Some clothing, they can actually change the color or the length or the fit to be designed just for you. If your gifting you can gift like you mean.
But our sellers have also demonstrated tremendous agility they respond to trends within days. It can literally look at what keywords are really getting a lot of traction, whereas in search volume happening and start making product within hours or days of the trends that they are seeing and last but certainly not least they're not reliant on one.
Supply chain concentrated around very few factories and fulfilled from a very few fulfillment centers and that allows for the dynamism of the marketplace to meet the buyers where they are and be able to do that in times. When other people are meeting constraints. So we think that the individualization personalization and frankly the humanity.
Of the Etsy marketplace at a time, one year being pulled apart from distant from people the opportunity to connect to create connections meaningful connections. We think is super important now, but we think it's an during two we think that that kind of thing is something people are going to discover in this time fall in love with.
And I believe continue to want for years and decades into the future.
All right well, thank you, Josh and Rachel and thank you all for your questions I know, we didn't get to everyone. So you know what if.
Find us we will talk to you during the quarter. Thank you all so much and Latin wrote take care.
Hi.