Q2 2022 ETSY Inc Earnings Call
Executive Officer, Rachel Glaser, Chief Financial Officer, and Jessica Schmidt Senior 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 Josh and Rachel's presentations, we will transition to a live video webcast Q&A sessions questions can be submitted via the Q&A window chat.
Displayed on your screen feel free to use it at any time as it will remain open throughout the entire conference call I'll be reading our questions and Jessica will help me try to get as many as we can please.
Please keep in mind that our remarks today include forward looking statements related to our financial guidance and key drivers thereof, the global macroeconomic uncertainty, including the impact of general market political economic and business conditions may have on our business strategy and operating results our opportunity our levers for Gms growth and our plans for investments in our marketplaces.
And in our member support programs, the potential impact of our strategic marketing and product initiatives and the anticipated return on our investments and their 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 in our Form 10-Q filed with the SEC on May five 2022, and which will be updated in any future periodic reports, we file 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, both 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 IR website, along with the replay of this call as a reminder, our 2021 financial results and Kpis for the second quarter did not include <unk>, which were acquired in the third quarter of 2021.
I'll turn it over to Josh.
Thanks, Deb and good evening, everyone. We continue to experience striking changes in the global economy and consumer behavior. This year and as a result, our forward visibility is not substantially clearer than it was a quarter ago.
Tumors have more choices for where to spend their time and money and disposable income is under more pressure than it's been in a very long time and.
In spite of these headwinds we are encouraged by the tens of millions of shoppers that returned to etsy spending only slightly less with us in the second quarter of 2022 than they did a year ago when choices were far fewer and economic conditions were a lot different.
While markets naturally go through cycles I'm energized by the agility of the Etsy team the adaptability of our business model and our ability to deliver solid profitability in a quarter, where achieving top line growth was challenging.
We have a lot of conviction that not only is ecommerce poised for meaningful growth over the medium term, but that each of the four etsy marketplaces as a unique reason to succeed and scale offering something truly important in different against the sea of sameness, that's why even through a challenging time, we've continued to invest in our people.
And our businesses, making bold moves that we very much believe will set us up for continued future growth and we've been able to do this while delivering strong profitability. Thanks to the benefit of our disciplined scale and business model.
The headline for our second quarter results is that despite really meaningful headwinds we continued to hold the vast majority of our topline pandemic gains while delivering strong profitability in other words controlling the things we can control our consolidated Gms was $3 billion basically flat year over year and up two 6%.
On a currency neutral basis also when adjusting for the currency impact Gms for the Etsy marketplace was down only a few percentage points. Our consolidated revenue grew 10, 6% and adjusted EBITDA margin was 28%.
Before moving into our operating highlights for the quarter I wanted to review, our recently announced leadership changes with our Chief product Officer Officer, <unk> Patel Goyal moving to become CEO of Deepak.
Mcdaniel VP of product promoted to fill crude these former role.
And her 11 years at Etsy Koozie as led almost every function, including strategy corporate development International Trust and safety and seller services.
Four years ago, I asked her to run our product organization and she's done a stellar job.
She together with Mike Fisher, our Chief Technology Officer, spearheaded Etsy product development culture building focus customer obsession agility and accountability into the fabric of our operating rhythms. She's also built an incredibly talented bench of leaders. She is ready to be CEO of a great marketplace brand.
And in my opinion, there is no one better positioned to take deep up to the next level.
<unk> will move to London next month to joined deep hops very talented leadership team I'd also like to express my gratitude to deep hubs CEO Maria Rago under.
Under her leadership D pump has taken the world by storm and defined itself is a beloved culturally relevant brand we wish her the best in her future endeavors.
Nick Danielle joined US the eight years ago and over the course of his tenure has led many of the most complex and value driving product initiatives in our portfolio. For example, the development and growth of Etsy ads and our off site advertising program scaling etsy marketing technology capabilities and launching our major push into personalization.
Nick has the strategy chops to set a vision the technical chops to ensure good execution and the leadership chops to attract and develop world class talent.
I couldnt be more excited about these changes and I'm immensely proud of the depth of leadership talent, we have in etsy, we've been intentional about building and strengthening that bench over the years, putting us in a position to make moves like this it also highlights the career adventure, we're able to offer our team and even more now with the addition of reverb deep hub and.
<unk> seven I believe Thats one of the reasons why our engagement remained strong and nutrition low even in these more challenging times nickel.
Nick will now partner with Mike Fisher to lead the teams driving Etsy has a right to win product development roadmap as we've explained on prior calls this year, we're organized around making etsy feel more made for you more efficient.
Okay.
Okay.
Etsy more reliable and continuing to support our sellers growth by offering them more agency and scalability we.
We've directed more product teams towards active buyer growth accelerated efforts to deepen personalization and the buyer experience and re sequenced roadmaps to pull forward higher confidence retention and frequency drivers.
Let's start with search we currently have about 100 million items for sale, an unimaginable selection and none of it maps to a catalog.
Most queries have more than 1000 relevant search results, we need to get you to the good stuff fast, but each person has their own idea of what the good stuff is.
That's why it's so critical that we not only have a world class search technology, but that we marry it with world class personalization and this way we can make etsy feel truly made for you.
And along the way build a competitively differentiated value proposition.
We used to have only one search engine, which was great at finding search results using text from the listing title, but was limited since it needed to find an exact or near exact text match in order to retrieve results what we've talked about as the semantic gap over.
Over the past six months, we've gotten significantly better at leveraging multiple search engine simultaneously each with different strengths.
For example, some are better at headquarter is curtailed queries or understanding the true meaning of phrases.
We then intelligently blend to the results personalizing them with insights from what you've done in the past and has a very recently real time data from the bread crumbs you've left during this particular.
Okay.
The engine is getting considerably better, but we can take.
Adding add to cart.
Yes.
Add to cart in search results made it easier and faster for buyers to find what they love, thereby creating a faster path to purchase with less distractions.
This change drove improvements in conversion rate and average order value a testament to the fact that we've improved the quality of search and the information provided on the search result page enough that some people are ready to buy without even needing to visit the seller's listing page.
Last quarter, we mentioned that we have a portfolio of early stage visual discovery ideas. We're testing to learn how we can engage buyers when they don't know what they're looking for and to make etsy more visual dynamic and inspirational again more made for you in June we held a live etsy market shopping event on our App.
In the days, leading up to the event buyers could watch trailer videos for each stream and set in App reminders. The event featured 20 seller streaming live from their studios sharing their stories process and styling tips. It's a great example of ideas, we're testing and iterating on to help sellers reach buyers in new and authentic ways.
Another visual discovery App experienced during the quarter focused on helping buyers gained confidence and a purchase decision by highlighting the experience of other buyers by enabling buyers to lead video reviews. We've just started to collect video reviews and make it easier for buyers to access and engage with this content and we continue to iterate on the.
Explore feed to make it even better we know that reliability has been an important friction point for buyers. If they can trust that the item will arrive on time on damaged and as described we believe we can unlock significantly more purchases from each buyer.
Fortunately, our sellers generally do a great job delivering quality items at a fair price.
And we've made major progress improving metrics like on time arrival over the past two years.
That's why we couldnt be more excited that our new Etsy purchase protection program goes into effect next week, it's going to help make shopping and selling on etsy far clearer easier and more reliable. This program will protect sellers and buyers for qualifying orders up to $250. When the item doesn't match the description arrives.
Damaged or never arrives and she expects to invest approximately $25 million annually to cover refunds at no additional cost to sellers and the refund process will become clearer faster and easier for many buyers youll.
You'll see us get louder on these new policies as we go through the rest of the year building up to the all important holiday season in Q4, and we've been doing more than ever to help our sellers grow we've created an entirely new simple and we believe very lovable sell on Etsy mobile app more maintainable and extensible with improved usability versus ours.
Legacy seller at.
Key new features include the ability to purchase shipping labels and to receive a heads up when a repeat buyer is messaging you.
We've incorporated new technology to enable the release of more functionality at a faster rate than ever before.
Also during the quarter, we incorporated seller feedback into our star seller badge, making it more achievable for sellers that provide excellent customer support we continue to invest to help sellers, who have the skill and the well to succeed on Etsy and we're proud of the results. While we're on the subject of helping our sellers to grow this quarter I also want to shine.
Spotlight on Etsy ads.
Over the years, we've made meaningful improvements to the availability of ads on our marketplace. The relevancy of ads, we showed of buyers and the tools, we offer sellers to manage their spend and how we bid on their behalf.
This product has been a win win win for our sellers buyers and Etsy Etsy ads revenue has grown 516% over the last five years, even faster than Etsy marketplaces, 253% Gms growth. We've continued to close the semantic gap by leveraging new machine learning techniques to capture in <unk>.
Princess styles and properties, thereby providing more relevant AD inventory for buyers without compromising conversion rate.
We also recently expanded etsy ads inventory to the homepage, while maintaining listing relevance consistent with organic search results seller.
Seller budgets are up 80% year to date, and we're maintaining strong ROE us for them as well.
We've ramped our investments meaningfully in Etsy ads as it's an area, where we see a long runway for continued growth.
As you know we've been hyper focused this year on driving engagement and frequency and one area I'd like to highlight is how we've been working to engage low frequency buyers.
More engaged our habitual users are generally more adept at coming up with ideas and are finding what they're looking for which is generally not how a low frequency buyer experiences that seat.
By making etsy, more accessible and hence, giving novice buyers and experienced closer to that of habitual power users. We believe we can unlock significant frequency gains over time, and we've been making encouraging progress. Recent examples of wins include a revamped more diverse presentation of items above the fold on the homepage to.
Generate interest and engagement and a revamped user interface, prompting signed out buyers to download the app.
Once again app downloads had impressive growth up 53% versus last years second quarter.
Our research and experimentation are giving us creative ideas for layouts that work to encourage scrolling by incorporating trending shops searches and categories all of which of course get far more powerful when combined with the personalization investments discussed earlier.
This work is just in its infancy and will continue to tell you more about it as we make additional progress another important vector for our engagement and frequency work is our international efforts getting the flywheel, turning and additional international markets. We believe can unlock significant growth recall from the last call the insight that penetration rates in the <unk>.
15 markets beyond the U S and the U K are about 80% lower than those top two etsy markets a great data point to support our belief in just how early our growth journey really is some recent international wins include the launch of the first version of localized ex work in all our non U S markets. We're in.
Now applying this powerful search engine technology to optimize results to find the perfect listing for our non U S buyers.
Our fulfillment team has been hard at work moving the needle unexpected delivery date postal code coverage for non U S orders and other transparency and confidence building initiatives and we recently added another eight countries to the list of places buyers can buy now and pay later.
So making etsy more made for you and reliable no matter, where you are our research shows that one of the top reasons buyers don't shop more often on etsy is because we aren't top of mind for enough purchase occasions of moments. That's what gives US continued conviction in our marketing efforts and I'm proud of the agility of our team continuously adapting our.
Strategies and creative to the market environment with macro headwinds continuing to be strong in 2022. Our team has modified our very successful meant for you and why buy boring campaigns to remind people of the many purchase occasions for which etsy is relevant that all important shoulder tap while leaning into value.
You and affordability, so the what and the why to shop Etsy. During these times the.
The message in a nutshell is etsy has home decor fashion jewelry and gift, it's affordable and better on Etsy.
We've also incorporated the messaging about extraordinary and affordable into our earned media engagements, our social channels and the marketplace itself.
Our team has been really creative during this time utilizing our CRM tools app notifications emails and other on and offline techniques to drive buyer engagement and frequency and we also had some great brand building earned media during the quarter from tried and true features such as the Etsy design Awards.
Turning to our subsidiary brands 2022 has been a challenging year for all three each of whom phase III opening and other headwinds similar to those faced by our core marketplace.
Current business conditions, notwithstanding we have a lot of conviction that we're in the extremely early days of realizing value from our house of brands.
He will hit the ground running a deep hop in September where she will be focused on incorporating our product development culture to increase product velocity with goals that will sound a lot like what she's accomplished for the etsy marketplace, highlighting sellers' unique inventory improving search and discovery elevating the human connections on the marketplace and making deep up more.
<unk> to more of its target audience and building trust in the brand and of course, driving ROI focused marketing investments that deliver results.
We believe the pop has fostered one of the most passionate communities in ecommerce and it has only scratched the surface when it comes to reaching its full potential.
Reverb and Elo seven each have responded to macro challenges with creative approaches designed to set themselves up for future growth.
Reverb helped buyers find their perfect instrument with updates to onsite search algorithms localization enhancements and improved domestic this discovery in the U K.
To meet buyer expectations on free shipping and returns they helped buyers connect with sellers offering customer services like free two day shipping and 30 day return policies. In addition, reverb built SCO optimized landing pages and drove adoption of my collection a feature that helps buyers track the value of their music gear overtime.
Yellow seven improved the buyer experience by introducing signals nudges into the purchasing journey, while expanding delivery carrier options for sellers to materially reduce shipping costs increased speed and improve transparency for buyers.
Performance marketing remains an important focus is allo seven continues to leverage the etsy playbook for improving spend efficiency.
Rachel will talk a bit about our business model, which we want to highlight today is one of the key factors that gives us comfort in uncertain times, we've seen multiple scenarios possible for the remainder of 2022, but even in downside scenarios. We believe we are well positioned to deliver healthy profitability will keep focusing on the things we can control.
Driving great customer experiences investing with discipline and care and helping our team to minimize distractions and focus on getting the job done.
It's not an easy time for the world, but we take heart in the fact that our work has purpose delivering value and economic opportunity for millions of sellers and giving tens of millions of buyers experiences they can't find anywhere else and most of all the chance to keep commerce human thank.
Thank you for your time and with that I'll turn it over to Rachel.
Thanks, Josh and thank you everyone for joining us for our second quarter earnings call.
My commentary today I will cover our consolidated results key drivers of performance and Etsy marketplace Standalone results where appropriate.
As a reminder, reverb hip hop and <unk> seven are all reflected in our consolidated financial results and Kpis for the second quarter of 2022 deep hop any of those seven are not included in our second quarter 2021 results.
On a consolidated basis, our second quarter Gms was basically flat year over year at $3 billion, while revenue increased 10, 6% year over year to $585 million and adjusted EBITDA was $163 million with a 28% margin.
The etsy marketplace transaction fee increase and growth in Etsy ads drove strong revenue performance and we delivered adjusted EBITDA margins ahead of our expectations due to disciplined marketing spend and solid profit flow through.
On a currency neutral basis, Gms increased two 6% year over year and FX was a 300 basis point headwind.
The second quarter featured challenging comparisons as our consolidated Gms increased 13% year over year in the second quarter of 2021 on top of a 146% expansion in the second quarter of 2020 fueled by the initial broad based pandemic lockdown and.
In contrast today, we are seeing mobility nearing 2019 levels, a challenging global macro macroeconomic environment and ongoing geopolitical uncertainties.
I'll dive into these factors shortly.
Marketplace revenue increased 11% year over year and services revenue expanded 9% the growth in our marketplace revenue was largely driven by the etsy marketplace transaction fee increase from 5% to six 5% effective April 11th as well as the benefit from the inclusion of our acquisitions of <unk> seven.
Within services revenue consolidated ads revenue increased 12, 1% year over year, primarily due to ongoing enhancements to etsy ads relevance and click through rate as well as more AD inventory throughout the buyer experience.
Better than expected growth of Etsy ads also drove consolidated take rate to 19, 3% ahead of the take rate implied by our guidance.
Our second quarter consolidated adjusted EBITDA margin was 28% above our expectations and above the 26% reported last year.
The primary driver of the adjusted EBITA margin improvement with disciplined marketing spend and the continued growth of Etsy ads.
Consolidated EBITDA margins are also impacted by headwinds related to our two new lower margin of subsidiaries that were not included in year ago financials.
Our three subsidiaries were more than a 400 basis point headwind to our consolidated adjusted EBITDA margin with deep hop representing the primary drag.
We have a lot of conviction that the strategic rationale for acquiring keep popping in yellow seven is sound, providing us access to the large retail apparel market and opening up an untapped market opportunity in Brazil.
It's also fair to say that given current significant macroeconomic headwinds both companies have to date performs below the financial expectations that we had a year ago.
That said, we remain confident in our long term growth models for each of these businesses and believe it is early days and unlocking that value.
Other factors contributing to our bottom line results include investments in head count growth and increased compensation, including stock based compensation with the largest portion in product development, where the majority of our engineers sit.
I will dig deeper into head count growth in a moment in the second quarter, our stock based compensation increased sequentially due to the annual refresh grants that were priced in March and therefore had a full quarter of impact.
Finally, we had higher cloud computing costs related to greater development activity on a year over year basis.
As you know our marketplace operates with minimal capital requirements and there are relatively few expense items, we designate as fixed. These would include our leases the minimum obligations associated with our cloud computing costs certain portions of our compensation and our public company costs.
The vast majority of our consolidated expenses are variable or semi variable.
Variable expenses, such as performance marketing move dynamically with revenue.
Semi variable costs are less dynamic, but are those we can moderate by tapering up or down as business demands rise and fall. So for example, we significantly slowed new hiring this past quarter in order to better align with our pace with topline trends.
That decision enabled us to invest invest appropriately in our existing team and stay the course on marketing and other investments while maintaining healthy profit margins.
Moving to product development, and our second quarter consolidated product development spend with $102 million up 65% year over year, largely driven by head count growth, including the deep hop in emo seven acquisitions.
Our product development expenses as a percentage of revenue moved sharply lower when revenue rose dramatically in 2020 in 2021. Meanwhile, during this time, we hired at a steady pace in order to scale in a more sustainable way.
Product development as a percentage of revenue is now at a healthier level of spend similar to our pre pandemic percentage, which we believe is appropriate to enable future growth.
On a trailing 12 month basis revenue per average full time head count for Etsy marketplace was in excess of $1 $1 million, which we estimate to be our peer group average.
Our product development resources, including stock based compensation and cloud computing costs are factored into our measurement of ROI for product investment.
So when we add incremental people, we also increased our gms and revenue targets and maintain our expectation that product investment is ROI positive and a portfolio within about two years.
We continue to make strategic investments that do not directly generate incremental gms, but help us to scale, our business optimize development capabilities and keep the marketplace safe.
During the second quarter consolidated and marketing spend declined 2% from the prior year to $164 million and as a percentage of revenue quarterly marketing spend has been relatively consistent overall for a couple of years.
Our performance marketing spend declined year over year, driven by our improving model and data feed efficiencies combined with softer consumer demand and weaker Google search trends for our related terms.
This was partially offset by a higher LTV related to our transaction fee increase which allowed us to spend more.
Our brand marketing spend increased 4% year over year in the second quarter as Etsy was an error in our top three core markets with spending somewhat elevated versus the same time last year.
So to summarize while we modestly pulled back our performance marketing spend during the quarter the ongoing improvements to our marketing models allowed us to deliver greater profitability with minimal impact to our gms moving to our etsy marketplace performance metrics. We have maintained the vast majority of our pandemic gains with Gms increasing 141.
A percent on a year over three year basis.
For context, we delivered $2 $6 billion in Gms this quarter compared to $1 1 billion in the second quarter of 2019.
It's a nice reminder, to also look at how well we are doing today compared with the second quarter of 2020, when we had such a large impact from sales of face masks.
From a geographic perspective, 44% of Etsy marketplace Gms in the second quarter of 2022 with from transactions, where either the buyer or the seller or both were outside the United States.
Non U S. Gms was up 3% year over year on a currency neutral basis, which was driven in part by strength in Germany, where we've intentionally built our brand over the past few years offsetting weakness in the UK, which continues to face difficult comparisons primarily due to strict lockdowns in that country a year ago.
It's also worth noting that we continue to see that our mobile app share of Gms, which crossed desktop to become the highest gms contributor in the first quarter of this year climb as a percentage of Gms in the second quarter.
Let me take a moment to unpack the various macro factors impacting the etsy marketplace.
<unk> at the top the Etsy marketplace declined about 6% in this quarter versus prior year, meaning we kept 94% of our gms in the same quarter a year ago.
As a reminder, in the second quarter of 2021, we continue to experience elevated gms levels related to economic stimulus payments in the U S High Covid case counts and low vaccination rates.
In contrast today, we are seeing in mobility indices approach 2019 level as people continue to spend more time out of their home, leaving less time and money for at home shopping.
This slide shows a walk for Etsy marketplace Gms on a year over three or three year view from mid January through June .
Based on third party data and our own estimates. We believe there has been a very high inverse correlation between Etsy U S Gms trends and U S retail and recreation and mobility trends, particularly given our exposure to pandemic winning categories, such as home and living and craft supplies.
On this chart, we've estimated that about 75% of our year to date declines can be attributed to these factors.
We attribute the remainder of the decline to FX pressures macroeconomic factors impacting consumer discretionary spending including inflation.
As well as the ongoing crisis in Ukraine, which was a supply side factor for us throughout the second quarter.
Overall consumers have many more places to spend their money and less disposable income, which is driven week to week volatility in our business.
Similar to our commentary last quarter, we have only seen a modest impact from inflation on the price of goods on Etsy Dot com as it appears our sellers remain largely hesitant to increase prices and they often offset pricing increases with discounting.
Diving a bit deeper into categories reopening headwinds have specifically pressured the home and living and craft supply categories, which collectively collectively represented over 40% of our second quarter Gms and were meaningful beneficiaries of stay at home related consumer purchasing trends during the pandemic.
Trends remained positive in paper and party and apparel categories as consumers continue to shift to in person events and activities.
Demand was also strong for travel related needs, including luggage tags travel wallets and Fanny packs.
Weddings and parties remain bright spots, especially wedding favors as larger in person weddings resumed.
Gms per active buyer on a trailing 12 month basis for the Etsy marketplace was $136 in the second quarter down slightly on a sequential basis.
On a cohort basis spend levels for all of our cohorts remain ahead of pre pandemic levels as all of our buyer cohorts remained more valuable today than before the pandemic.
As an example, we looked at our 2020 cohort, which was first acquired during the pandemic compared to our 2017 cohort, which is an example of a typical cohort short term performance pre pandemic slide.
Slide 26 shows that our 2020 cohort materially outperformed that earlier cohort in terms of value.
We also monitor the spending trends are by buyer demographic, specifically income level. So far this year, we are seeing fairly consistent gms distribution across income levels. Although it has shifted slightly away from lower income buyers as we continue to lap last year's stimulus check benefits similar to trends that you're seeing reported across retail.
Encouragingly, our buyer metrics remained largely stable across active repeat and habitual we ended the quarter with nearly 8 million habitual buyers down 2% sequentially and 1% versus last year.
These loyal buyers accounted for 46% of our Gms in the second quarter.
Habitual buyer growth in core non U S markets was a bright spot, particularly in Germany, and Australia. We continue to have a high conviction that moving the needle further on frequency will unlock significantly more value.
We added $6 4 million new buyers in the quarter, nearly 50% higher than in pre pandemic periods still it was down 20% from the prior year and as expected creates a material headwind to our growth.
We again reactivate it about 5 million lapsed buyers in the second quarter. The composition of our lapsed buyer segment is increasingly compelling recently lapsed buyers those that made their last purchase between 13 and 24 months ago now represent about 40% of the lapsed buyer total.
We believe these buyers are ripe for reactivation with strategic product and marketing investments, particularly given our improved CRM tools.
Moving to the balance sheet as of June 30th we had $1 1 billion in cash cash equivalents and short and long term investments and a $200 million revolver that is currently undrawn.
During the second quarter, we repurchased $62 $2 million in stock under our $250 million December 2020 Board authorized repurchase program, which we completed in early July .
As noted in our 10-Q in May 2022, the board authorized a new 600 million dollar repurchase program.
Operating cash flow for the quarter was a healthy $125 $8 million.
Now turning to the outlook first I want to highlight that our guidance assumes currency exchange rates remain unchanged at current levels.
As a reminder, in the third quarter of 2021 as he reported consolidated Gms growth of 18% on a year over year basis, and Gms increased 159% from the third quarter in 2019.
We currently estimate our third quarter 2022, consolidated Gms to be approximately $2 8 billion to $3 billion down about 7% to 8% at the midpoint compared to the third quarter of last year and up about 140% compared to the third quarter of 2019.
For the Etsy marketplace. This implies a decline of mid to high single digits.
Said another way at the midpoint of our guidance, we expect to deliver gms of around $2 $9 billion compared to $1 $2 billion in the third quarter of 2019, nearly two and a half times larger than before the pandemic.
We are forecasting revenue of $540 million to $575 million up about 5% at the midpoint compared to the third quarter of last year and up about 180% compared to the third quarter of 2019.
Our two new subsidiaries also contributed to growth in the third quarter of last year, and we passed the anniversary that these acquisitions a few weeks ago.
We currently expect an adjusted EBITDA margin of approximately 26% with investment in Etsy purchase protection and higher compensation costs related to a full quarter of our now larger employee base being the primary factors in the sequential decline. We are encouraged to see that the year over three year deceleration we have experienced in the past too.
Quarters has shown signs of slowing significantly over the past eight to 10 weeks as you can see on this chart.
In our view it appears the curve has started to flatten.
However, we have not yet seen a return to growth on a year over year basis, nor are we certain that year over year growth rates have bottomed given the present macro uncertainty and would therefore recommend you consider these trend lines. When you are modeling fourth quarter Gms.
Recall that in the fourth quarter of 2021, Etsy reported consolidated Gms growth of 17% on a year over year basis, and Gms increased 154% from the fourth quarter of 2019 very high comp hurdles to be sure.
It's also fair to say that we are now more cautious than we were on our last earnings call given continued macro pressures, particularly on consumer discretionary spending the strong correlation between our business and mobility and the inflation factors described earlier.
And less macroeconomic factors become significantly more volatile we believe the fourth quarter will track historical holiday seasonality as our largest <unk> quarter for the year.
Lastly for your models, we substantially adjusted our hiring plans during the second quarter, which will result in a slower pace of hiring in the second half. However, our second half P&L will reflect the additional head count we have already added.
In terms of marketing spend we generally spend more in marketing in the second half of the year versus the first.
Particular leaning into brand marketing during the holiday season.
Our performance marketing investment is largely variable with demand and we continue to set ROI thresholds for our spend that keep the last marginal dollar of spend at or above those thresholds.
We currently expect consolidated take rate for the second half of the year to be largely in line with the second quarter.
Thank you all for your time today and I'll now turn the call back to them to take your questions.
Hi, everyone. Good evening first I want to start by saying I know there were a couple of issues during the recording of being played back. So if you go to our site later this evening.
Should be able to find a fully loaded video with all the audio clear.
And with that I will start into the Q&A. Thank you all for submitting the question, we'll get to as many as we can so I'll start with in your room from Piper Sandler has there been a change in the seller base. Since you increased fees I'll start with that one for Josh.
Yes. Thanks for the question, we haven't seen any noticeable change in the seller base that we can track to the change in fees in fact, I'm happy to report that seller sentiment has rebounded pretty significantly since the fee change went into effect and I think that's a testament to the fact that we're doing exactly as we said in reinvesting back.
In the community. So we've got some great television campaigns going I think that purchased protection.
Protection program is a great Testament to the kinds of things, we're doing to invest that the sellers really care about so they know we have their back and buyers care about to bring more buyers back.
Refresh seller app that we've launched.
The refresh of the star seller badge.
And lots of other good things. So we're encouraged by that and we'll keep building.
Great. Thanks, Josh next one came in from Kunal <unk> from UBS, given search is such a challenge how easy or tough it is to scale into different languages and countries.
Great question. Thank you the techniques that we use are generally language agnostic. These are quite advanced machine learning and neural network techniques that work.
Regardless of the language of course, it does take work to make the models adapt we need data and then the size of the training such matter.
But we have recently expanded many of the techniques into many of our international markets and we do definitely see gains. One example, we talked about last time was translation engines I don't mean literal translation from Spanish to English for example, as I said, but understanding the context of a word. So for example, just go in.
Mostly people are referring to the D. J D J Tesco if youre in Spain. The word just go actually means flowerpots.
And so we're using models that are that are sophisticated enough to understand what you meant not just what you said and that can be particularly powerful when we're talking about going from from one market to another.
Okay, great. Thanks, Josh.
Well my all Gonna give can all another one.
While it may be early for the buyers you have added in the past two quarters in 2022 is their behavior different from the new buyers you added during COVID-19.
And how has behavior change new buyers.
Pre COVID-19 kitchen to today I think we had that one two to one for Josh and then Rachel if Matt if you'd like.
Sure. So Rachel showed in her prepared remarks that the.
The cohorts, we've acquired since the pandemic actually are more valuable or spending more than the cohort than what pre pandemic cohorts were doing before the pandemic and that's continued to be true over the past six months or so since we've really felt the reopening come on.
Much more strongly so we're really encouraged by that.
And we continue to acquire a lot of new users who are great new buyers, we are acquiring new buyers not as fast as we were during the peak of the pandemic that's for sure, but we're still acquiring them faster than we were before we entered the pandemic. We're also reactivating lapsed buyers and we think there continues to be.
A big opportunity there.
Okay, Great I'm, Rachel we're okay with that one I think.
Excellent okay.
Next one is from <unk>.
Uh huh.
From Piper Sandler can you talk about the dynamics driving the reduction in GMI Gms per active buyer is this a function of mix or are you seeing signs of a trade down that one and I'll get you Rachel.
Sure Hi, Ed Thanks to have you back in the <unk>.
Empty team here.
We.
What we've said on the call was that.
Gms.
Trailing 12 month buyer in the quarter with uptick year over year down slightly sequentially, but it was really down just a bit.
Gms per active buyer in the corner.
The actual number of active buyers in the quarter was basically flat year over year. So there's a slight decline in the total number of active buyers on a trailing 12 month basis, you were active in Q2, which basically explains that.
Rental decline on the trailing 12 months number.
I can just jump in on that so if you look at the total number of people who bought in the second quarter and divide the gms from them by the number of buyers that were active year over year, it's about flat.
And we think that's actually really encouraging in spite of reopening and in spite of inflation and all of the other economic headwinds the buyers that are buying with us we're spending about as much.
Year over year.
And that's roughly flat we are seeing a very slight decline in.
The the number of active buyers in Q2 relative to trailing 12 months and again no surprise that when people have a lot more options for where to shop in their pocket books are tighter we might see some contraction.
The number of active buyers, but actually all things considered we're pretty encouraged by how those trends are holding up as well.
Okay, great. Thanks, Josh when Rachel next one is from Rick Patel at Raymond James also back in the Saddle can you talk about inflation have your sellers begin to pass along higher prices in response to their input costs being up if not do you see an opportunity to educate the community on driving higher Gms like you did with the.
America offering free shipping in the past.
Josh you want to start with that one.
Sure the <unk>.
Short answer is no we are not seeing sellers take up their net prices to account for the higher input prices because they have and so providing them more education and tools might well be.
Strategy and it's certainly something we're taking a hard look at.
Right now we are also seeing a lot of discounting in the market you know Walmart reported yesterday that they've got oversupply and so they're having to do a lot of discounting.
Moments like that when I continue to be grateful that our model does not require us to spend billions of dollars buying inventory in advance on the hopes that there will be demand for it when it finally arrives weeks or months later.
But nonetheless, there is a lot of discounting in the market. So here's what we've seen we've seen over the past five years.
Sellers take their headline list price up by about 9% now 9% a year in total over five years.
Item prices have gone up by about 9%. We've also launched a lot of sales and promotion tools that our sellers can use to put things on sale.
And our sellers are using those tools and they are using them with increasing frequency. The result of that is actually that it completely offsets the increase in the item prices, meaning that the net item price has been basically flat for five straight years now our sellers. It also means our sellers are armed with the kinds of tools that they might need.
In a time like now where there's a lot of heavy discounting and promotion where they can compete for that and so we're happy that we're giving them tools to be able to compete win but it does mean that while many other retailers might be promoting might be reporting revenue and gms numbers that that are benefiting from price inflation.
Our sellers do not appear to be doing that at this time.
Okay. Thanks.
Thanks, Josh Your next one comes from Tom Forte at D. A Davidson how should investors think about your staffing levels given comments by your e-commerce peers, such as Amazon Shopify, suggesting that they are currently overstaffed for today's level of ecommerce demand with shopify going so far as to implement a 10% reduction in force Josh.
Yeah. Thanks for the question I think that our staffing levels, just about right worried about where the right size and shape right now we feel pretty good about it and just to give some context.
When our revenues more than doubled overnight in the second quarter of 2020, and then stayed at those elevated levels and grew we did not throw caution to the wind and suddenly go on a massive hiring spree and.
Higher Super quickly there is a certain cadence at which you can interview people well make sure you're getting high quality people make sure that they have a job that's a clue.
<unk> lead a fine job that their managers ready for them that they are well trained there is a certain cadence at which we think you can responsibly higher and so.
We let revenues lead and what we said quarter after quarter as margins are higher than we like and we are more leveraged than we like it is just that we can only hire at a certain pace. We also said traffic has also doubled so every new product release that our that our team does has twice the impact because we're driving convert.
Vision right on twice the traffic.
And so.
Revenues have led head count, but head count has caught up and Rachel showed a slide showing that now.
Product development expense as a percent of revenue is roughly back to where it was before the pandemic I do want to point out that those numbers include the acquisitions of.
<unk> seven and <unk> both of those are earlier stage companies earlier in their lifecycle, so they're not as leveraged as etsy.
But I think that when we benchmark us to our peers, we look good.
And.
I think especially if you look at the Etsy stand alone.
Business.
We think that we benchmark quite well relative to the peer set so we're happy that we have been.
Thoughtful and careful as we've gone we've never been a growth at all cost company, we've always been disciplined about investments but.
But we think we're about the right size and shape right. Now so we have slowed hiring as business conditions have slowed we started to significantly slow hiring in the third quarter.
We don't have a hiring freeze we are still hiring.
But not at the same pace that we were in the first half of this year and we think that's we think that's appropriate.
Okay great.
Next one I think these two I'll get back to back for Rachel first one is related to performance marketing from Lee Horowitz.
On the performance marketing spend declined in the quarter with much of those declines being driven by internal initiatives across your marketing team. How should we think about how performance marketing should evolve for the second half sphere.
So thank you for the question performance marketing as we said many times for us very dynamically with demand.
We the when we when we did our transaction fee increase we were able to increase lifetime value and so our model dynamically adjusted at higher lifetime value, we can spend more and spend deeper into the ROI curve and on the other side and on the other hand when demand is softer it will dynamically.
Pull back so we had we saw both of those things happening in the second quarter, where we had some decreased spending because of lower demand.
And on the other hand, and being able to spend a bit more because of higher LTV said another way. We would have spent less had we not had the higher LTV. So flash forward going going forward, but we have continued new and we have this continued higher lifetime value. We can continue to lean into that ROI curve and we will expect to what we said.
On the call with me that we would expect to be spending.
More than this we typically spend more in the second half of the year than we do in the first a lot of that driven by the seasonality of higher demand as we get towards the second half of the third quarter and the.
And into the holiday season in the fourth quarter and.
We also said that in addition to performance marketing, we would typically they spend more on brand marketing in the fourth quarter also because demand is higher at that time.
Thanks, Rachel and then a follow up.
Asthma from Amit drew that need them, how should we think about etsy brand marketing spend in the second half as you start going against the pull back in marketing in Q3 of 'twenty. One in Q4 of 'twenty. One can you also talk about the Offsite ads and how that's been trending in line or ahead of expectations. Thank you Anna Let me take the Offsite ads question first basically offsite ads.
Is trending in line it's.
Been about one.
A percentage point of take rate improvement more give or take a little bit here and there, but we're trending roughly in that same neighborhood.
On brand marketing like I said, we typically do spend more on brand marketing in the fourth quarter, so relative sequentially relative to the first half of the year in the second half, we would expect to spend a little bit more on brand marketing year over year.
I don't think we've given a guide on that specific number, but we arent necessarily.
Doubling down because we try to make brand marketing as dynamic as we do with performance marketing, meaning where demand when demand is there we will spend more.
We did expand from the U S into the UK and Germany as well in the last year will continue with that because we've seen very high.
And.
High ROI on that spend as well as very positive.
Our brand marketing results with how.
While we resonate top of mind in those markets. So.
We attribute a lot of that to the success of the brand campaign.
Great. Thanks, Rachel next one of Q2.
Hi, Josh.
No is that Ken <unk> keybanc.
Are there any actions you are taking in the near term to improve performance at deep <unk>.
<unk> seven mm.
How are you thinking about the long term opportunity for your house in France.
Thanks for the question we continue to think it's early days in that.
Deepak is a great brand with a great community in a great space. So we think that re commerce is going to continue to be a big and important space and we think Gen. Z is the place to be in deep up as the choice of GNC.
So we continue to be excited and it's early days.
For for deep hub and <unk> as well.
We think Brazil is a really exciting economy, a really exciting market and having a foothold. There. We think is is really important we made these investments with an eye to long term not not the short term and we are absolutely investing to to have an impact there. So I think QC.
Coming over to Deepak brings tremendous know how I talked on the call about her 11 years of tenure and almost every role.
And actually we've also.
Taken at Sea alumni now run the <unk>.
<unk> technology team and the product teams.
And very talented leaders I think it really speaks to the bench of talent that we have at etsy.
That we're able to do this kind of knowledge transfer and talent transfer, but theyre hard at work right now on <unk>.
Accelerating the velocity and the measure ability of the product work that we're doing one of the core.
Cadences of Etsy Thats been so effective is really being able to look at what's truly driving impact in gms and focus our work on things that are truly a market gains we're building a lot of that.
Into into deep hub.
Really working on building performance marketing systems have deepak that can accelerate growth.
We can be more measurable and attribute.
ROI there.
And so we're encouraged by the work in there and then more in search and discovery.
That we can do and Yolo seven also there's been a really terrific partnerships. So for example, they are making a lot of gains right now getting shipping costs down through negotiations with carriers.
We're also seeing real gains with performance marketing and our ability to help them be more thoughtful about how and where to do their performance marketing and so we're very encouraged by our opportunity to add value. We think it's early days and we're excited for the future.
Okay great.
Yes.
To ask Rachel this one for Rick Patel at Raymond James How should we think about lower EBITDA margins in Q3, given the upside you've had in Q2.
Is there something specific about Q or the timing of investments that have caused the downward pressure sequentially.
Hum.
Happy to answer that question so.
There's one main reason I can cite that is.
Suggests the sequential decline in Q3 margins.
From the guidance that we gave and that that's because as as I said on the call and as Josh reiterated here, even though we have slowed hiring for the rest of the year, we have been hiring steady as she goes for the last four to six quarters and so we have sequentially more head count for a full quarter of <unk>.
More head count in the third quarter than we did in the second quarter.
Including the head count we acquired with the acquisitions of <unk> and <unk>. Seven. In addition, we try to stay very competitive on our compensation, we do annual market assessment, and we adjust compensation relative to.
What we learned from that market assessment, and so we stay competitive and higher compensation costs and more people in Q3 versus Q2 drives the primary primary reason for the.
Deceleration that's offset by.
The higher flow through of revenue from higher transaction fee, we get a full quarter of that in Q3 as well.
Also the purchase protection.
That's good and I think we have another question coming up where I was going to ask that one.
We've talked a lot about this purchase by purchase protection that we've recently just launched we've talked about that being about a $25 million investment off our P&L on an annualized basis. So we'll be getting a partial quarter of that in Q3 that we did not have in Q2 that is something that has.
Not.
To date, we haven't done a large marketing or promotional push so that buyers better understand that where we're operating as purchase protection. So right now that's a full expense on our P&L and not necessarily being offset in the near term with Gms is something over the long term that as we build trust in our brand that we would expect to see.
See some benefit that's the reason that we're doing as higher trust in the marketplace will remove one of the big friction points, we have in repeat frequency and new buyers coming to the site.
That's great Rachel. Thank you I was actually going to follow up with Josh on a question from <unk> Khan on I'm curious about just in general about purchase protection on how we see that as a long term growth driver I don't know if you want to add anything to that Josh, but only that I don't think it's a silver bullet that all of a sudden changes things, but brands that are known to have you back.
Engender loyalty and frequency and we know that nagging voice in your head of what if it doesn't arrive or what if I don't like it.
Can be a real friction point on etsy, particularly when youre buying the nature of Etsy as you are buying an unbranded product from an unbranded seller. So we think that by backing it with the full faith and trust of Etsy, We can give you the confidence and we think.
<unk> more frequency.
If you think about the brands that are really famous for this didn't happen overnight. It's something you earn and people have an experience in to have their back and maybe tell their friends and it grows.
But.
Fortunately this is affordable for us because our sellers generally do a great job and people.
As a percentage of our total volume don't have a lot of really bad experiences, which is which is what makes it feasible for us to step into this cap.
Great and we're going to go a couple of minutes over.
Our prepared remarks, we're a little bit long. So one is for you at Rachel on guidance.
From John Cantone from Jefferies, and I'm going to I'm going to shorten the question a little bit can you just sort of talk about the midpoint of the Q3 Gms guidance and what's implied on a sequential basis I think that would be sort of the core of the question, yes. So.
Well there is two of my favorite charts in the in the slide deck I'm not sure if you've been able to see them, but on one side. We did outline the walk for Q2, what we thought the primary drivers of the Gms decline was by far the largest.
Diesel was coming from what we call mobility, we were almost at all the way back to the mobility level. According to Google Mobility Index that we were in Q2 of 2019.
Well before the pandemic. So people are out there dining out there they're shopping online theyre. There. They are traveling and that was the biggest decline in what we saw in Q2 and we would expect we have no reason to believe at this point that there would be a big difference in that.
On our Q3 numbers now the second favorite chart with the Q3.
The month lease that we gave implying where we are that we're seeing this flattening between may and June between June and July and so at the at the high end of our guidance, we're basically flat year over year on an <unk>.
Over three year, rather on Gms and at the low end of the guide where we're going to see a continued slight deceleration, but at a slow on a softer slope.
Great. Thanks, Rachel and I'm going to just take one more firm Shep Dunlap at Morningstar and that's all I'll ask Josh to talk about are we fully penetrated in terms of AD load now that we've added adds to the homepage one of the future growth opportunities and threats yet great question. One thing I'll, just say on top of Rachel's question.
Of course everything she said FX is also something of a headwind it's several percentage points in fact.
Of a headwind to Gms, so just something to think about it if you can light of that even more encouraged by how well we are holding up.
Part of this is just FX.
So the ad load.
We're really excited about the continued opportunity for etsy ads over time that team has just done a great job and when we think about head count and hiring by the way we have a tiny group of people one squad on that for the longest time and now there's a few squads but.
For a business that generates the kind of benefits that it does for the community the kinds of revenue and profit it's still a very small team.
And so the question of AD load have we covered every surface, we could on etsy actually it's more complicated than it sounds because the answer is it depends on the quality of ads right. If the quality of ads are as good as organic.
Search results than you could imagine.
Load being very high right if the quality of the AD product is much worse than organic than anywhere you put ads comes at the expense of organic listings, which would be better.
So the relevance of the ads that we serve has gotten dramatically better over time and as a result.
Theres less variance in fact, there is often no variance between the Gms produced by AD or the Gms produced by inorganic listening.
And as the relevance of ads gets better.
Sellers more sellers take up their budget.
That allows us to actually expand AD coverage or AD load, even more that they actually go go hand in hand, there was a question asked about seller budgets seller budgets are up 80% year over year on aggregate.
So that I take as a.
A nice testament that sellers are getting good Roe us.
Relative to their expectations, what they want and need from the program Thats in aggregate, but in fact, some sellers still achieved their full daily budget in the first hours of the morning, right and so there's still room to go on getting more sellers to increase their budget.
We still think there's a lot more we can do to make the search engine, even more relevant and as we do those things, we can expand coverage or AD load even more.
Okay, Great Alright went over by a few minutes so I'd like to thank everybody for your time and we will talk to you. All soon thanks, Josh Thanks, Rachel Thank you.