Q1 2021 ETSY Inc Earnings Call

[music].

Hi, everyone and welcome to Etsy first quarter 2021 earnings conference call on Deb Wasser, Vice President of Investor Relations and ESG engagements and joining me today.

Sure, Josh Silverman, CEO, Rachel Glaser, CFO, and Gabe Ratcliff, our director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference once we are finished with Joshua Rachel presentation, we will transition to a live video webcast Q&A session questions can be submitted by the Q&A window Chi.

Displayed on your screen feel free to use it at any time and it will remain open throughout the entire conference call I'll be reading your questions and Gabe will help me try to get to as many as we can please keep in mind that our remarks. Today include forward looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19, or its abatement may have on our communities.

Strategy, our operating results the potential benefits of our marketing and product initiatives and anticipate a return on our investments and their ability to drive growth. Our actual results may differ materially from.

Good looking statements involve risks and uncertainties, which are described in today's earnings release, and our 10-K filed with the SEC on February 26, 2021, and which will be updated in any future periodic reports filed with the SEC any forward looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.

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

Thanks, Deb and good evening, everyone Q.

Q1 was another really strong quarter for Etsy in terms of its financial results and also in terms of its corporate citizenship I'd like to start this evening by talking a little bit about some of those citizenship efforts.

Pepsi continues to speak out against racism and harassment for example in the first quarter, we donated $500000 to support the API community and we continue to invest and highlighting the wonderful work of many different underrepresented sellers within our fire community for example, our partnership with the G spend cultures.

From Alabama, I'm delighted to report that many of the Gs Bend shops sold out within the first 24 hours of the launch of that initiative Etsy also launched donate the change where buyers can round up to support the uplift fund, which provides a path to entrepreneurship for many different communities.

We had over 1 million buyers from wound up to support the uplift fund in just the last six weeks of the quarter.

Third Etsy continues to deepen its commitment to environmental sustainability announcing our goal to be net zero by 2030. This continues to pave our pathway is a trail breaker with one of the most ambitious targets of any of our peer group.

As I said, our Q1 results were excellent consolidated Gms was $3 $1 billion up 128% year over year and that's really the result of strength in the core and continued positive momentum in frequency.

You'll also notice that we came in above the top of guidance guidance that we gave in late February most of that overshoot relative to guidance was due to the impact of stimulus and Rachel is going to talk about that more in her section.

The core business did great in Q1.

Our customer cohorts continue to show that we're driving increased frequency and engagement from all of our different buyer segments Etsy added 16 million, new or reactivated buyers from the quarter for a total of 90 million active buyers up 91% year over year, and I'm, particularly pleased that our faster.

First growing segment, yet again was habitual buyers are most loyal and engaged buyers. We now have 8 million habitual buyers and that was up 200% year over year.

Building on this expanded base, we are laser focused on driving frequency and of course frequency can be driven in part by your marketing initiatives things to make you more front of mind for customers, but it's also critical that we have a customer experience that in and of itself is engaging and drives activity and so we've.

Launching efforts across the spectrum and to pick just a few.

Quizzes or something we launched recently and that allows the buyer to come and tell us more about their particular tastes and their particular interests and a light and fun way that not only makes that visit more engaging insertion, but it gives us important information to help bring that buyer back more often to have more sat.

Misfiring experiences in the future.

We've been working a lot on buyer triggers as well things to notify people through app pushes through E mails and other things that theres something new or interesting. That's happening for example that an item you favor that in the past has gone on sale.

And when they come back to the site, we've been investing in and updates tab in the App think of that as your daily feed for what's changed since you've last been here maybe an item you have left in your cart has gone on sale or here's some new favorites that you might be interested in to add share left it's very encouraging to see that now 13% of <unk>.

GAAP visits include a visit to the updates tab and 27% of those visits have buyers clicking on one or more of the listings that we include in updates.

And the fourth pillar is strategic discounting, where we've launched a tool that allows our team to rapidly test and then automate and scale different types of discounts to very finely tuned customer segments. So five $5 off for example on your your next purchase.

I've never been more excited about our product roadmap. We continue to make investments that we believe are driving long term volume, making the customer experience better I know we show you. This slide a lot, but it really is how we drive focus and prioritization within our product organization focused on each of these four pillars.

Start with in each pillar by saying what customer experiences to we want to focus on the truly uplift. We then ask what are the fewest initiatives that could have the most impact in those customer experiences and then we assigned very specific goals. So it's clear what success looks like and here's what your constraints are to squads, who are owned who.

On the success of those different initiatives. So let me take a second now to show you the priorities within each of these four pillars for 2021 within search we have four focus areas personalization is about making etsy feel more like it's made just for you.

Fire pathways is about making it easier to find the things you want whether or not you actually put a search query into the search engine and making sure that we have few and our hope hopefully no dead ends closing the semantic gap is about taking what you happened to enter into a search engine and interpreting that from what you.

Actually meant he wanted and of course all of this relies upon an infrastructure that is fast and reliable and scalable.

Double clicking on personalization just to show you an example of that pillar.

We launched the opportunity the ability to personalize their search results recently, and we're seeing really encouraging gains from that but we're still very much in the early innings consuming more data to understand more about what that customer wants and then delivering through more sophisticated models ever more personalized search results, but it.

Doesn't end with just the search results themselves, we actually believe that overtime, we can customize the entire experience. So here you see an example of how the layout itself might be different for two different customer segments and our ambition over time is to create ever more finely tuned customer segments that are <unk>.

<unk> Q multivariate models powered by machine learning, so that etsy truly feels made just for you.

I'd also highlight on this slide a couple of the infrastructure improvements that have led to material gains in the in the past quarter. For example, the search infra team made the search results faster, which resulted in increases in clicks and conversion rate and we're able to expand the search results from long tail queries, leading to more satisfy.

On buying experiences there as well, but makes the etsy marketplace truly special is that every item and every seller has a story in a store you would actually be interested to hear.

And there's nothing more powerful than video to help to tell that story. We also encourage conversations directly between the buyer and seller something youll see and few if any other marketplaces, because those combos help the buyer and seller to co create personalized or customized or even just a form community. That's one of the things <unk>.

Different and special about Etsy, and we think investing in this pillar is critically important.

One example of where we're.

Leading in is in video itself sellers have now uploaded about 5 million videos to the Etsy site, that's up 36% quarter over quarter, and we're seeing very encouraging progress. When a listing includes a video that buyers engage with it more click and even convert more but the listing pages only the <unk>.

Beginning of where we can be using video to tell the story of Etsy tell the story of the items and to help people to engage even more often throughout the site. So expect to see more video in more places, making the etsy experience even more dynamic.

The third pillar is trust and we have four focus areas within trust first is speed expectation, that's making it very clear when you can expect the items to arrive second is delivery predictability where is this item in the fulfillment process being made or currently being shipped to you third is issue resolution, making it even.

Easy or to access support and know that we have your back on the rare instance that something goes wrong and fourth is stellar reputation. This is around giving sellers, even more visibility into how they're performing versus key customer satisfaction metrics as well as setting the bar for what good looks like so that we create more of a sense of aegis.

See among the sellers for how they can drive success in their business and create a race to the top where the buyer experience improves as a result for all of our buyers taking sell a reputation as an example, and showing how we can apply that to fulfillment on the left you see a new dashboard, we've launched within the seller dashboard and.

Here it shows the seller very clearly, which items are expected to ship today, which one ship tomorrow, which one ship next week. So they know exactly where they should be focusing their time and energy. We've also been focusing on dashboards that show, how they're doing versus fulfillment expectations relative to our expectations of.

What good looks like so that again, they focus their energy and we've set the standard together on how we can deliver a consistently great customer experience to our buyers that feels predictable for all of our sellers.

The foundation of Etsy is right to win is our sellers' collection of unique items.

I know have told you in the past that 90% of buyers report that they come to etsy for items that they cant find anywhere else and in fact, one of the most special parts of Etsy is that most things on etsy can be personalized and customized and in fact, we find that buyers are 20% more likely to make a purchase when theyre looking for customized or.

Personalized items. So a focus for this year is going to be even more.

Specifically, highlighting and showcasing items that can be personalized and customized as well as streamlining that process of co creation between the buyer and the seller but of course what is this what good is this great collection of unique items. If we don't tell the world about it in fact, we launched a brand new campaign called Bye Bye bye.

Barring and I'd like to pause now to show you one of the spots in that new campaign.

Oh.

[music].

Uniquely hain granted is healthy.

[music] why buy boring.

Given the performance that we've seen in the U S from our TV campaigns.

We're interested to see whether investments in television can actually accelerate our flywheel in some international markets and get us to scale, even faster. So we're going to be experimenting leaning in more in the U K and in Germany to see how above the line marketing can drive brand awareness and more visitation.

<unk> and get a spinning faster.

I'd like to show you know an example of a campaign, we're going to run in Germany, Germany is a market that's different than the U S and the U K and then awareness there is substantially lower although we are seeing very positive momentum. So there's more work that needs to be done to introduce etsy to the German market.

The campaign is called Etsy, Hotseat, which translates to Etsy has it by.

By Etsy heaters May one day.

<unk>.

It is under the Dana on sabotage and consistent.

Let's see how states.

Let's see how safe Etsy, they kind of April 11 extended.

Etsy also has the advantage of being beloved by many influencers. So we've created a scalable experience, where influencers can curate or co create their own set of items and then market those items to their own communities that reinforces the desirability the quality the diversity and the scarcity of.

Items on Etsy, and allows etsy to reach out to diverse communities and ways that feel highly personal curated and praiseworthy all in all I couldn't be more excited about what's ahead for the etsy marketplace, but.

But speaking of couldn't be more excited I'd like to take a moment also to give you an update on how things are going with reverb reverb also had an outstanding Q1, Gms grew about 50% or about five times faster than the musical instrument industry and reverb continues to deepen its moat serving as the primary market.

Place for many musicians reversed four key focus areas for 2021 are going to be around personalization around partnerships with brands like Fender to market new gear.

Deepening its investments and growth in international and continuing to improve the customer experience.

It's now been about 18 months since Etsy acquired reverb and we couldnt be happier with how that partnership has evolved as youll see on the left at CS helped reverb to expanded gross margins from 33% to about 53% and the purchasing power and scale of Etsy has played in <unk>.

Portal role on that we've taken many of those gains and we've reinvested in marketing and net investment in marketing has also helped to accelerate the growth of river, but we're not just investing more we're investing more efficiently. So you'll see on the way that each dollar of marketing is driving more gms through the incorporation of Etsy ads.

From techniques to help make the marketing funnel within reverb, even more efficient.

In closing Q1 was another great quarter for Etsy, I couldnt be prouder of the team are more grateful to the whole community and with that I'll turn it over to Rachel.

Thanks, Kash and thank you everyone for joining us for our call. My commentary today will cover consolidated results key drivers of performance and Etsy Standalone results where appropriate.

We saw continued momentum in Q1, we delivered another strong quarter across the board delivering higher than expected Gms and revenue and healthy adjusted EBITDA on.

On a consolidated basis Etsy, Inc. First quarter Gms grew 132% to $3 1 billion revenue grew 141% to $551 million and adjusted EBITDA was $184 million with margins of about 33%.

On a consolidated basis International <unk> expanded 200 basis point sequentially to 42% of overall game that international Gms grew faster than our overall growth ex.

Salaries from 169%.

Our fastest growing trade area in Q1 and was once again, our domestic sales between buyers and sellers within the same non U S country.

International domestic delivered its highest ever growth in Q1 and grew more than two times faster than our overall growth rate.

While we continue to benefit from significant macro tailwind in several core international markets success can also be attributed to our focused strategy to build local marketplaces by supplementing global product launches with locally relevant optimizations that expand domestic vibrancy.

In addition, we've been careful and measured in our marketing approach by efficiently anything performance marketing dollars and now adding brand spend in the U K and Germany.

When we provided our outlook for Q1 in late February we mentioned that unpredictable macro events beyond our control could create volatility and performance.

And as you can see from them on the cadence January was up 130%.

February was up 107% impacted by weather events as we have previously noted in March with 161% as we lapped the onset of the pandemic and the positive impact from government stimulus checks.

U S government stimulus with only a very small part of our guidance for the quarter, but the timing and impact turned out to be much larger than we had anticipated and we believe made up the majority of our guidance.

In estimating the impact of stimulus checks, we bifurcate and gms growth trends between ZIP codes with household income higher and lower than $50000.

As you can see from this line after the distribution of stimulus checks gms growth from ZIP codes with income lower than $50 outpaced those at more than $50000.

On an etsy stand alone basis, our category mix remained fairly stable with our top six categories, representing over 80% of arts and math and growing 115% year over year.

Wedding shopping occasion that was a headwind to our overall growth in 2020 with that 43% in Q1 and remains an opportunity S geographies reopen.

As mobility restrictions ease and consumers shift their purchasing habits reflected more social lifestyle Etsy category.

Category mix could reflect that dynamic.

For example, just recently in March Gms growth was driven in part by gifting related to Easter and UK mothers day, which were celebrated with more in person standard alloy family and outdoor events than in the prior year.

A great thing to all of the health of our core base as can be seen on this chart non math CMS growth accelerated 20 percentage points quarter over quarter to 138%.

Second consecutive quarter of sequential acceleration.

As anticipated mask sales continued you can track as a percentage of overall GM assets, two 5% down from 4% in Q4 <unk>.

Consolidated Q1 revenue was again driven by growth in both marketplace and services revenue with key drivers being Tms volume Etsy payments.

He and Offsite ads revenue.

Transaction revenue grew 144% year over year, driven by higher Gms from visit growth and an expansion and conversion rate.

Payments revenue was up 156% and we processed 92% of our Etsy Standalone DNS do etsy payments in Q1 up from 89% in Q1 of 2020.

Consolidated advertising revenue was up 93% year over year.

You'll recall that in the first quarter of 2020, our Etsy ads revenue model included a portion related to Google shopping of about $11 million.

Excluding this Google shopping revenue from Q1, 2020 consolidated onsite advertising growth was up 138% in Q1 2021.

For Offsite ads Q1, with our final fully incremental quarter of revenue for this survey is moving and to Dell sellers in early may of 2020.

We recently expanded our distribution channel channel for Offsite ads, so that Google display network, which provides access to over 1 million affiliate sites.

While spend on this channel it's relatively small today sellers can now reach buyers on major publishing site tissue Biopsied, Martha Stewart and better homes and gardens.

As a reminder of how the model works Etsy places ads on behalf of our sellers, leveraging our marketing expertise and that budget, while only charging sellers if admittedly directly to sales within a 30 day attribution window.

We continue to make strides in bolstering our advertising products and initiatives to help sellers drive velocity in the marketplace and take control of their success.

Etsy payments Etsy ads, and offset and all were drivers of it take rate expanding to 17, 5%.

Up 60 basis points compared to Q1 of last year, and 40 basis points sequentially.

Gross margin was 74% expanding 10 percentage points compared to last year and continuing to benefit from our shift to offsite ads, which delivers incremental revenue without an equal offset in the cost of revenue.

Gross margins were also positively impacted by the leverage gain of the highly variable nature of our revenue base and reverb is higher transaction fee versus prior year.

We continue to leverage the marketing and product investments to drive incremental growth on the platform.

Prior to making the investment are launching a new initiative.

Rigorously test and iterate to ensure we're delivering a positive ROI.

In Q1, we launched a new TV campaign expanded our performance marketing channel and continue to drive efficiencies.

Q1, consolidated marketing bandwidth $151 million up 212% year over year.

There's never been a better time for us to lean into advertising and gain share.

There are three factors that help explain how marketing is generating momentum and driving profitable growth.

First we continue to benefit from fire frequency as our cohorts are engaging with us more often leading to material gains in lifetime value for.

For example, Gms per buyer is up 20% year over year and as we achieved growth in LTV and enables us to spend more marketing dollars at a healthy ROI.

Second as part of our Offsite ads initiative, we generated an additional seller fee. When we successfully placed an AD that leads to a sale.

This incremental revenue recouped, approximately 30% of our performance marketing spend and increases lifetime value and consequently allows us to reinvest to drive more growth for our sellers are beautiful virtuous flywheel.

And third because we have continued to heightened awareness of the significant breadth of merchandise on the Etsy platform. There is higher demand for our long tail of keywords, creating more AD inventory for us to bid on it that meets our ROI hurdles.

Brand marketing spend which includes TV and digital video with 13% of our consolidated marketing spend in Q1.

We intend to increase brand marketing as a percentage of total spend which will continue to shift the LTV curve a bit further out and late in the payback period, if the marketing portfolio overall.

Our product development investments continue to deliver strong returns driving higher conversion rates and frequency.

This investment is reflected in our pace of hiring and has led to gms growth we.

The weighted hiring in Q1, adding nearly 100 employees. We ended Q1 with 1508 employees, an increase of 18% compared to Q1 of last year.

And at an accelerated pace versus the 14% increase we had in all of 2020.

In addition to growth investments, we allocated a meaningful portion of our portfolio two foundational spend our infrastructure to serve the platform. For example, we are investing in areas such as data infrastructure member services and our developer experience to make our platform faster more efficient and reliable.

Moving to our operating metrics for the Etsy Standalone marketplace, we delivered the highest growth rate since we became a public company for active buyers repeat buyers and habitual buyers in the first quarter.

In Q1 active buyers grew 91% year over year to approximately $90 million and growth in new buyers grew 114%.

Habitual buyers are most loyal buyers grew over 205% for the quarter to $7 9 million the fourth quarter of sequential acceleration.

Despite only accounting for 9% of active buyers. This segment contributes on average about 40% of Gms.

So as we develop the product and marketing strategies that Josh discussed we pay a lot of attention to these buyers as well as those that could eventually become habitual on the future. In addition to our habitual buyers repeat buyers those who made purchases on two or more days in a 12 month period through 114% to $36 million.

Gms per active buyer on a trailing 12 month basis grew 20% year over year, driven by repeat purchases and frequency.

Our cohorts continue to show stable underlying trends as we invest to drive further stickiness and habit forming behavior.

Active sellers grew 70% year on year to $4 5 million for the Etsy marketplace.

And we are focused on growing the pie for all of our sellers.

Trailing 12 month Gms per active seller was up 34% and listings on our marketplace grew to over 90 million items moving to the balance sheet as of 331, we had $1 7 billion in cash and cash equivalents and short term investments. In addition to a $200 million revolver that is currently undrawn.

Our business model is capital light and our cost structure is highly variable to revenue and we've continued to take measures to optimize and scale our marketplace.

Okay.

Turning to our outlook.

Given volatile global macroeconomic conditions that impact consumer spending broadly and external ecommerce forecasts, which continue to be an influx where.

We're only providing guidance for Q2 at this time.

We currently estimate Q2 consolidated gms to be approximately $2 8 billion to $3 1 billion of about 5% to 15% compared to Q2 of last year.

Revenue of 48, 493 million to 536 million up 15% to 25% versus last year.

And adjusted EBITDA of $129 million to $144 million with a margin in the range of 25% to 28%.

Here are a few reminders as you update your models and think about the cadence of growth.

In Q2 of 2020, we saw the beginning of significant growth and Facemasks, which delivered $346 million of Gms in the corner and 14% of Etsy Standalone Tms.

As we showed you in Q1 of 2021 face masks have declined to less than 3% of Etsy, Standalone Tms and have been declining sequentially each quarter since Q2 of last year.

We are forecasting continued sequential decline and the remainder of 2021.

Leading macroeconomic indicators, such as TSA flight information mall traffic and Google mobility data suggest that as states and countries reopen activity and consumption and non retail category is picking up and this could imply increasing headwinds in the balance of the year.

For example, we are starting to see what we believe are some reopening headwinds and select core market. We monitor third party forecasts as LTE ill and data suggests that 2021 ecommerce growth will have been the highest in Q1.

Our estimated that government stimulus drove approximately eight percentage points of Gms growth in Q1, 2021 we've already seen it benefit Wayne in April and early May and do not expect government stimulus to similar they impact our business in the second half of this year.

Coupled with the continued decline in mask sales. We also currently expect new buyers to decelerate in 2021, given the record number of new buyers we acquired in 2020.

That said, we're encouraged by the progress on frequency and are hyper focused on delivering a better user experience for all of our buyers.

We expanded gms substantially through 2020 with the highest Gms in Q4 2020. This means that year over year comps in 2021 are expected to get deeper as we go through the year.

That fact combined with the other factors I just outlined possible deceleration on e-commerce growth absence of stimulus tailwind and potential future impact from business reopening implies that year over year growth rates may decelerate as we progress from here.

Wrapping up guidance. He may also want to think about Q2 performance by modeling a two year stack looking at 2021 versus 2019, which implies 170% growth for Q2 at the midpoint of the guidance range a mile deceleration compared to 207% in Q1.

To put a finer point at it on it that is $3 billion of Gms in Q2, 2021, compared with $1 billion two years ago, that's an incremental $2 billion.

Even if your forecast more deceleration in the second half they'll still seeing very strong full year results on a two year stack basis.

We believe this is a better representation of the stability and sustained momentum that we have seen in our growth trends.

We remain very excited about the opportunity ahead and believe that now is the right time for us to invest for growth. These investments primarily are in the form of people and marketing dollars.

Our growth has vastly outpaced our hiring and we're leaving far too many great ideas on the cutting room floor.

We've already added 100 employees in Q1 and intend to keep hiring throughout the year. So we have ample resources and time to impact the holiday season and beyond.

We're establishing a new product development center in Mexico City, a great location for tech talent and you'll see us begin to hire there and in addition to our existing locations.

In addition, we continue to make important investments in infrastructure marketplace safety compliance and customer support critical functions that support our gross.

And finally, we see great opportunities in marketing, especially internationally, where we are less penetrated in key channels relative to the U S and we're testing with our brand investments can further accelerate growth.

In Q2, we intend to invest an incremental $15 million in brand marketing versus Q1, including more spend in Germany, and the UK contract our margins in the short term. We believe these investments will be ROI positive and expect they will deliver a return over many quarters in the future.

In closing I want to reiterate that as we navigate unprecedented times, we remain highly confident and encouraged about our long term opportunities.

We also believe that our brand is more relevant than ever before as we build top of mind awareness in the hearts and minds of consumers.

Thank you all for your time of day I'll now turn the call over to them. So we can take your questions.

Okay, Hi, everyone that we're going to dive right in and we have quite a lot of questions in the queue. If we don't get to your question in the next half an hour or so.

Please feel free to email us at are addressed.

So I'll start with the question from Darren <unk> from Roth.

On your search and discovery goals, specifically on semantic gap what are you working on that will improve this GAAP between 'twenty, one and longer term how good can you search results mirror shoppers and chance.

Start with Josh for that one.

Great I love it and thank you for that question I can kick out on this stuff all day so.

Okay.

Gross debt to geek out on with me so just to be clear demand to GAAP is about translating what you meant with what you actually wrote so for example.

Cocktail attire for men.

A good search results, so that might be a blue blazer and yet the word cocktail nor a tire might appear in the title of acute glaser.

No.

There's a lot of work we've been doing to improve our models on that we've been making great progress three things I would talk about that are underway that we think are exciting one is using neural or deep learning models to expand the number of candidates of 100 million items picking the right small set or actually appropriate from which you can there.

Then rank from one to 500 is actually a big part of that task that first pass through the 100 million listings to find the volt candidates and we're starting now to leverage deep learning models.

To do that a second thing I would say is what do you do for listings that are relatively new that havent been exposed to very many buyers where you have very few data points. So we're starting now to interpolate with new listings, where we think they might be relevant and a third thing we're doing and semantic bridges language agnosticism. So you might've done your search in French but.

We're going to show you German.

From German search results as well those are three examples but I also don't want to imply that when we launch a neural model that we are done and we move on we might spend years optimizing that model and so we are in the very early days of of launching these models and experimenting.

Improving our results with these so to the question of how good can we get.

You know I don't know, we'll find out I think.

We will never be perfect, but we could get a lot better than we are and we are already a lot better than we were even one year ago. The only thing I would say in this area is that we.

We won't always speak with words.

And so one of the things we're focused on now is how can we use pictures, let US show you. Some things you might on even though the words to express what you want but we might be able to show you some ideas and as you interact with those ideas that tells US what you want and we get better and better.

Okay, great. Thanks, Josh next one is from Maria <unk> from Canaccord.

With cruise is habitual buyers accelerating so strongly can you talk about the key drivers. There. In addition to multiple search on platform improvements. Since we just discussed is there anything else you would highlight from the category engagement standpoint, that's driving the strong buyer engagement.

Josh you might start there.

On my prerecorded remarks.

We are very focused on building more hooks into the experience to engage you in have you come back wanting more and importantly, having the site b very rewarding in terms of what's next for those of you and hope hopefully all of you use use etsy regularly.

You know the Etsy homepage has been the rear view mirror for for many years, you show up on Etsy and its things you've recently viewed or things you've recently favorite Ed or it's a bunch of things you've already done we're moving much more now to show you more recommendations more leaning forward things you might like things you Havent seen shops your favorite it here's three new items from that.

Shops, and so we're both figuring out how to learn more about your tastes and preferences. So we can provide better recommendations and then entice you with things that debt that we think are going to be interesting to make you want to come back more and more and part of that is of course, the listing experience and recommendations.

But part of that is things like video and when we talk about videos by the way, it's not just shooting that item from multiple angles. Some of the videos that we're finding are most mesmerizing are the making of videos customers seem very interested in how did you actually make this product and they can watch those for hours from Todd It's fun.

And inspiring and that's uniquely etsy youre not going to find that on other platforms and so.

Finding ways to really engage customers.

In the platform is something we're very focused on as well as all of the marketing efforts and the TV investment we're doing on the performance marketing investment. We're doing also helped to keep etsy top of mind and really make us.

Really make us a place that people want to come back to and I'm, particularly proud that when we ask customers now in both the U S and the U K very generic question, which is just what are your favorite places to shop online.

Etsy is now top 10 in both of those two markets.

That's the kind of thing were going for that we're top of mind and we're not like what's your favorite handmade side or what's your favorite place to go for niche just what's your favorite place to shop online Etsy is now a top homesite by our internal survey work.

In both the U S and the U K and I think that's that's really encouraging the second part of your question was about category mix and.

I can I can guess like you can guess, what's going to happen with home furnishings, what's going to happen with events like weddings.

What I would say is.

One of the parts of the Etsy model that I like the most is that we can speculate a lot, but we don't actually do anything differently at Etsy, we of 100 million items for sale on Etsy today. So whatever is hot tomorrow, there's an enormously high probability that we have it and if we don't have it it will be on the site within hours and so.

Our marketplace responds very dynamically to trends and our performance marketing system picks that up and largely real time and boy did we ever see that through COVID-19 right. We have an incredibly agile and dynamic marketplace. So unlike so many others, we're not sitting around guessing what's going to happen in <unk>.

June and buying inventory against that and putting marketing spend against that only to maybe be proven right and maybe be proven wrong. We have a marketplace that naturally adapt and we tend to work much more horizontally on making sure that the seller experience is really good making sure that the buyer experience is really good and whatever they want.

To buy and sell them that particular moment is great by us.

Okay, great. Thanks, Josh on an excellent on I think is from Rachel last quarter and this is from on Shanken Morgan Stanley Excuse me last quarter, you mentioned Q on take rate would likely be the high watermark for the year is that still the case what are the puts and takes to thinking about regarding the cheek rate through the rest.

Of the year.

Hi, Laurent. Thank you for the question. So we can say that Q1 would likely be the high watermark in that guidance. We just gave at the midpoint implies that we are.

Stable to the Q1 take rate if not just a little bit higher.

Some of the things that are driving take rate improvement, our offsite ads program, our etsy payments and our Etsy ads, which are all stable and growing and so we didn't give guidance for the full year I can remind you, though that usually in the fourth.

We see that take rates might hit their lowest point just because.

Revenue relative to the very very high conversion rate, we get on transactions Gms will increase significantly and our and the non the elements of revenue that are not variable with Jim at like listing fees and Etsy ads will be relatively lower so Q4 relatively low point in the year Q on Q2.

Our stable and strong as we've guided.

Great. Thanks, Rachel Perfect next one is from Yigal Iranian from Wedbush, It's actually very multi part questions some of which we've done already so I'm going to stick with the first part of it now.

Now that we're through the COVID-19 here and we think about the opportunity to keep the significant surge of new buyers each on.

Potentially increasing their frequency what are the main products that allow you to keep the new and reactivated buyers coming back to etsy.

I think by product I think we need chronic experiences but.

I can interpret that in multiple ways.

Yeah, I mean, obviously with 100 million items for sale or more on now.

Wow.

Likely we got it with the exception of a few categories.

Separately on appropriate.

So you know the main thing is keeping the main thing the main thing people need to have a great experience on etsy.

You know when they come when they browse when they shop and I've talked a bit about some of the things we're doing to drive more engagement and keep you coming back personalization recommendations videos, let me talk a little bit about stellar performance I'm really quite excited about that as well. In addition, our sellers want agency. They want to know what they can do that will make.

Them more successful.

And we have the ability to do a better job telling from that so the more we can provide them with for example, a customer satisfaction scorecard here on the five metrics that matter most to your buyers and here's how you rank relative to other sellers you relative to what good looks like.

That will be very helpful for sellers and it will let them know where to invest their precious time and energy.

And in doing so I have no doubt that the clearer we can be about what good looks like and where they are relative to that the more they will rise to that opportunity and do a great job and that creates a race to the top of it makes the experience better for all of our buyers and so some of the things we've already launched in that area are around.

So film on time.

You as a as a buyer wanted know Wendy items going to come and then you wanted to needs to arrive on time and so you've seen us now on the seller dashboard launch very clear two seller here is what needs to ship today here is what needs to ship Tomorrow, and we've started to experiment with.

What's the easiest way to explain to sellers, how they're doing on fulfillment and what good looks like there you should see us do more and more of that.

And I think that's going to be very helpful. In terms of lifting all boats and making the buyer experience at etsy, better and better and better combined with the marketing efforts that we're doing that are keeping etsy top of mind. So that as we have a fantastic experience that delivers so often we're there and we're planting the seed and we're building the habit and us leading into brand marketing right now.

As part of that I think that this is a fantastic time for us to be reinforcing what is unique and special and different about etsy and how often we're relevant for for buyers.

On the next one comes from John <unk> from Jefferies, even after experiencing pretty impressive growth and frequency and retention over the past year average spend per buyer on etsy, It's still left from the third of other E Commerce players.

Not a perfect comparison, but can you talk about what initiatives you have been implementing key driving spend higher even from todays levels and then assuming higher spending flows through to higher lifetime value over time, how should we think about the margin implications of spending to drive a more valuable buyer, particularly on a portion of those buyers are coming from the Offsite ads program.

Rachel do you want to maybe take that one.

I can start and I'd love Josh Yes.

So I think one of the things that is really rare.

<unk> with people to our marketing is why they come to etsy and when to come to Etsy. Instead, we've talked before in the past about thinking about etsy not just for the quick cushions, but for the couch and as we see more in the increase of habitual buyers and a significant increase in frequency. That's an example of people.

Really understanding the breadth of product that etsy.

The upper Austin Medical net average order values are higher and rebar for instance, so as reverb also grows we get increased and higher spending items there well.

Yeah.

Higher.

Average order values at May imply that we have higher some higher margin to invest there, but our marketing and so on.

That the hole that works the whole ecosystem will work positively in that regard.

To date, though the primary growth we've gotten this from.

And CMS has been more visits and higher conversion rates and that's where our efforts have really focused and that's where we're getting a lot of the value creation from the from the marketing investment.

I'll only add that I agree with your thesis if you look at something like similar web it says that etsy and wait there are pretty comparable in terms of visits per unique visitor per month or per quarter, but ebay is three times, our level and wafers only home furnishings etsy is across many many categories.

So it stands to reason that we would look more like an ebay than we would like like a wafer. So I agree that there is a lot of opportunity for us to do better and that's about really helping our buyers understand the breadth of offering that's available on etsy and all of the different times that we can actually serve them and we're doing more so for example in.

Right now for brand new buyers, who are using video to have a brief like a welcome to etsy moment, where we start to explain to them all the different things that we have on offer we're doing some quizzes tell us the kinds of things you like and you tend to buy which by the way also plans to see for all the different things you can buy on Etsy and then what.

About consumer sentiment I think that over the next coming years and we're already starting to have this there's going to be some introspection around shopping your values and where you want to buy and who you want on support.

And I think etsy is going to do very well as people think more and more about do I want to spend all of my E. Commerce dollars with one place or do I want to support small businesses.

I think people are going to want to support small businesses, a little more particularly when those small businesses deliver a great experience at a fair price.

I think we can do that I think are sellers can do it.

Chain rates, Inc.

Ill go to one from Nick Jones at Seabee.

In the press release, you noted that off line and has expanded to include more affiliate channel can you touch on the puts and takes them optimize on your current channel for instance, adding more affiliate channel.

Shall I jump in on that line.

Yeah.

Yeah Okay.

So the first thing I'll say is that.

The vast majority of off site ads and all available AD inventory is on Tuesday.

And that Google and Facebook with their P. L a programs in that square.

And we're already there on those things, it's great that we've been able to add.

Digital display network and its affiliates.

Into the into the mix, but I would consider those to be much smaller.

A portion of where we see the growth coming from future growth will really come from continued increases in conversion rate on the site.

And so that's why we're we're really focused on.

Well I'll put in one more day of a data point on this call also that I think it's just worthy of mentioning that our Offsite ads program.

It gives us about a 30% offset in the quarter. It gave us about a 30% off site to offset to our entire performance marketing spend.

And so when you think about Etsy is profitability on marketing spend it is important to look at that piece of revenue that is offsetting what you see on our marketing line. So we're really getting good weekend and we have a lot of spending power. We can spend deeper as we make these LTV increases from things like Offsite ads.

Product improvements.

Okay. The next one from Jason's Haustein at Oppenheimer can you talk about the quarter over quarter acceleration in seller services and how you see that playing out for the rest of the year.

Rachel Stern with that do you mind repeating the question sure can you talk about the quarter over quarter acceleration on seller services and how you see that playing out from the rest of the year.

So look we had about a L. A on 90% increase in our Etsy ads product and we.

Again that benefits from.

Increased conversion rates and increased traffic to etsy site.

Didn't give full year guidance beyond Q2, and we didn't give specifically services guidance to the services revenue, but we believe there's a lot of strength and.

On that product and increased demand for the site and increase conversion rates should support those.

Should support our services revenue there on the other the other services that we have of course, our shipping and.

A few other ancillary line items and so the majority of our services growth is going to come from our Etsy ads product.

Great perfect and free channel on the next one is from Nick Jones of Citi and because it would be great on for Josh to take and that you'd lap tough comps over last year and you take stock on Etsy brand recognition pre COVID-19 versus today.

How would you quantify on qualifying the improvement in brand recognition insurance at terms of Etsy being top of mind for shoppers.

I would say it's better.

Not first we have a lot we have a lot of opportunities still to go by our internal survey work, we have made meaningful improvements throughout the funnel so unaided awareness awareness.

Visit intention and preference.

And in fact, we continue to see a slightly concave curve in net more people say that they are passionate evangelists of us than say, a an immediate intent to come back and shop in the near term. So that continues to be a GAAP around.

What are your needs and does etsy have things for your needs. So reminding them that many things they want to buy you could actually find on etsy, but we've seen that entire brand awareness funnel go up and we're very pleased by that I'm sure. It's a combination of plenty of people actually visiting the site over the course of the prior.

Months and quarters and being happy with what they've seen it might've been there first time on etsy or they might not have been on etsy in a while and.

I think it's a better uptake than it was.

A few years ago, and I think people are seeing that and feeling that an experienced from that and I think our marketing efforts are having a meaningful impact on that.

On a bubble on marketing efforts, our global on marketing efforts and Influencers talking about us and our friends over over zoom calls talking about that Greg purchase they just need and all of that is is helping to push brand awareness ultimately what matters is if you tell someone.

You have the following purchase Michigan, you need to buy a gift for your mother for mother's day.

You have two seconds, where do you go.

It's what is on the tip of your tongue.

What we're going for it and so that's where the survey research just asking people what are your 10 favorite places to shop online. That's our ambition, we don't want to be the best handmade place, we don't want to be the best home furnishing place when we ask people, what's your favorite place to shop online I want them to say etsy.

And I think that that ambition is the right ambition for us and we are now a top 10 site. According to our internal research for many customers in the United States in the U K, but we can certainly move up that ranking it'd be great to be top five and by the way there's a lot more markets in the world than just the U S and the UK.

Yes, Josh I thought you might want to add in there a little bit about Germany in case people didn't hear what you have on say on the net.

On slide that in there yeah.

We are making progress on Germany, and Germany saw really nice growth in 2020, and we've got more vibrancy now on the buyer and the seller side than we did before but brand awareness in Germany is still actually quite low you ask the average German.

Where do you go to shop online not a ton of them are going to put etsy in their top 10.

Or even necessarily going to have etsy in the tip of the tongue. So in the past what we've done is we've really leaned on performance marketing until awareness in the market is very high and then we go with with television in Germany, We're experimenting with Golar with TV earlier can we drive brand awareness, which is in fact going to turn the funnel faster and make our performance.

Marketing was issued on.

So that's an experiment that we're running starting in the second quarter, we will run it for a little while you don't learn this is just one quarter, but we're spending an incremental $15 million in TV ads in the second quarter almost all of that is going to be in the UK and Germany to see what TV can do over time and I would expect that to be an investment that will spend through 2021.

But over over at least the course of this year, what can that to operating metrics.

Okay, great. Thanks, Josh.

Next one is from Laura Champine at loop.

It's on for reach out can you update us on your long term margin expectation given that 2020 likely created several changes relative relative to your thoughts at the most recent analyst day, which was in 2019.

Hi, Laura.

Yeah.

We did give guidance for margins in Q2, and you from that guidance you can see that they can attract a little bit from what we delivered over 30% margins in Q1, and we've been talking for most of 2020 and we've talked about it again last quarter that we would expect some margin contraction because we think now is.

As the time to be investing back the words, we use on this call are we're leaving far too many things on the cutting room floor.

The thing that takes a bit of time to ramp is hiring people and so on and we are accelerating the hiring we talked about hiring 100 people in Q1.

Year over year, Q1 was 100 and.

With 18% growth in all of its alright, with 18% growth not one not 180% gross in terms of head.

Head count adds versus Q1 of last year.

But that's up from 14% in all of 2020. So you can see the uptick in hiring and as we get more people on board that Arctic contract.

And it's a bit.

We would expect those to yield future topside gains in future quarters, and then you would just her Josh talk about investment and on brand marketing, we're going to continue to lean into brand marketing and in fact, we're spending $15 million more in Q2 in brand marketing most of which is in.

U K and Germany, and so those things also will yield but with brand marketing that.

The payback curve is a little bit longer and so those things taken together without giving you specific guidance on margins.

We believe we have a wonderful healthy business model with low fixed costs and not capital intensive but these are the years that we might be investing for that long term growth to get future margin expansion.

Perfect. Thanks, Rachel and then I'm going to find one more last one in here before we finish from Schwent acreage area of Evercore, ISI, which of the product and marketing initiatives were most impactful in driving gms growth and importantly, buyer frequency and habitual buyer growth.

Josh and I will start with that and then Rachel can add anything she wants to hear their there hasnt been one.

Launch that's been the big thing and we do think that these tend to work collectively so it is getting easier to find what you want on the site meaningfully easier to find what you want on site. When you find it it's feeling more human and you're gaining more trust in the fact that it's going to arrive on time. It is going to be what you want will have your vacuum.

He goes wrong.

And we're making it easier for our sellers to do their job servicing customers and taking away some of the administrative work and other things for our sellers and those things in combination are leading to a really good experience, which is what matters in terms of having people come back more and more and we're also projecting that.

Turn to the market through marketing right.

So.

I really can't point to one thing that was like the big thing.

I'm happy about that because I hate to bet.

Our business on on.

One big swing for the fences, we think that working collectively and having this virtuous cycle spin our flywheel faster is is a really healthy way to go.

Okay, I think that's a great way to end. It we are out of time for anybody who didn't get their questions answered. Please email us we're happy to chat and we will.

Talk to you all very soon take care.

Pete.