Q2 2023 Etsy Inc Earnings Call
Once we're finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session.
<unk> 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 your question and Jessica will help me to try to get to as many as we can.
Forward looking statements involve risks and uncertainties some of which are described in today's earnings release and our most recent Form 10-Q, and which will be updated in future periodic reports that 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 will present.
GAAP measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to todays slide deck posted on our website along with the replay of this call with that I'll turn it over to Josh.
Thanks, Deb and good afternoon, everyone and cheese results landed in line with our expectations consolidated Gms was $3 billion about flat to last year revenue grew seven 5% to $629 million and our adjusted EBITDA margin was again strong at 26, 4%.
<unk> for the Etsy marketplace was about $2.6 billion this past quarter about flat with the prior year digging.
Digging deeper we have seen many of our key metrics trending positively again are negative year over year growth rate improved sequentially and even more important gms grew year over year in May and June and in July as well quarterly.
Quarterly active buyers reached 91 million, an all time high and when adding new and reactivated reactivated buyers together, we saw healthy growth in buyer additions on a year over year basis.
Additional green shoots included Gms growth outside of the U S improvement in trends in important categories and early signs of stabilization in our gms per buyer and habitual buyer metrics. Overall. This performance is quite encouraging, especially given the tremendous gains we've maintained from our pandemic growth and the stiff headwinds.
We've continued to face in consumer discretionary spending.
Economic cycles are just that cyclical the etsy brand stands for something different in a sea of sameness and I believe we've proven our resiliency I'm confident that we're well set up for future growth as we continue to move through this cycle.
On our last call. We explained that Etsy is 2023 product roadmap is focused on welcoming new buyers to the joy of Etsy elevating the best of Etsy to keep buyers coming back instilling trust when transacting with us and being the platform sellers love to sell on as we progress through the year, we continue to prioritize our investments.
To ensure that we're funding the biggest boldest and most impactful initiatives on our roadmap to make our marketplace, even more organized curated and reliable.
Regardless of whether you're new to the etsy experience or habitual buyer. We know we have so much more opportunity to gain your mind and wallet share.
We've made so much progress improving the relevance of our search results our ability to find what you meant compared to what you searched for we've explained some examples of these search technologies in prior calls which are featured in this slide.
The next frontier is to better identify the quality of each listing so that from this relevant results set we bring the very best of Etsy to the top of our data shows that high quality listings attract a higher value buyer than our average listings attract more repeat than habitual buyers and most importantly, they offer.
Can convert over two times better than other listings, we have a lot of opportunity here and I couldn't be more excited about some of the progress we're already making starting with our work and organization and curation.
With over 115 million items for sale on Etsy, and our average search result, yielding well over a thousand listings. This incredible abundance continues to not only be one of etsy is greatest strengths, but also one of our greatest challenges and where we have so much potential our product teams are helping buyers more.
Easily navigate the breadth and depth of our sellers' inventory leveraging the latest <unk> advances to improve our discovery and inspiration experiences while surfacing the very best of Etsy. These latest technologies combined with training and guidance from our own talented team is making the superhuman pop.
<unk> in terms of organizing and Curating at scale, which I believe can unlock an enormous amount of growth in the years to come.
One Great example, over the past quarter, we've more than doubled the size of our best of Etsy Library, which is curated by expert merchandisers based on the visual appeal uniqueness and apparent craftsmanship of an item. We're now using this library to train our ml models to better predict the quality of items as person.
<unk> by humans were seeing encouraging results from our first iterations on these models and I'm optimistic that this work will have a material impact helping us to surface. The best of Etsy in every search.
Finding the good stuff also comes to light and to other second quarter product launches as does our focus on highlighting home and living style and gifting purchase occasions first we launched a curated shop the look in home and living on our homepage, which drove higher conversion rate second buyer participation in our new.
Etsy wedding registry showed strong and steady growth from the May launch through the end of June not only is this initiative driven buzz for Etsy through earned and social media about 14% of registry Gms has come from new buyers and we're seeing higher than average order value from items purchased since the success of that launch.
We fast tracked our expansion to more categories, including our baby registry, which will be live this month.
In addition to solving for a buyer's tastes and preferences. We're also working on several compelling initiatives to better highlight specific etsy seller merchandise, which fits in individual buyer's budget.
We're starting to elevate great deals on etsy, such as through prominent onsite promotional merchandising on our homepage and we're developing a new feature on the Etsy, App, which will help buyers find deals for items in which they've already shown an interest. There is no question. This is a very promotional environment. So our team is pulling out.
All the stops to help etsy sellers compete and win.
And she's been on a journey to make shopping and selling in our marketplace more joyful and more reliable than ever before we're doing this by focusing on quality doubling down on enforcement and up leveling customer support.
Specific to our trust and safety work advances in ml capabilities have enabled our enforcement models to detect an increasing number of policy violations, which combined with human Knowhow is starting to have a meaningful impact on the buyer and seller experience.
Since Etsy purchase protection was launched about a year ago, we've reduced the issue resolution time for cases by approximately 85% dramatically streamlining the service experience on the rare occasion that something goes wrong.
Demonstrating to buyers and sellers that we have their backs in these key moments.
The opportunity now is to ensure that more of our customers know about this which is why you'll see us embed even more purchased protection messaging and customer touch points. We've got a lot of conviction that we can increase both frequency and lv as we build consumer confidence in etsy.
We're always focused on helping our sellers grow and thrive towards this and we're investing in our seller growth suite a group of programs designed to give sellers personalized insights and the tools they need to grow their business in a sustainable way.
One area I'm really excited about we're running tests of a new price discovery functionality utilizing buyer demand data to help sellers think about how to price their items and when or how they might best use promotions as part of their mix.
Our recently launched make an offer program currently focused on U S. Vintage sellers is another example of our investments to help sellers price their items appropriately and especially challenging task in a world where items don't have MSR piece and as we improve the seller experience. This in turn enhances the buyer experience.
As items on Etsy are priced appropriately, we facilitate better matches between our buyers and our sellers.
During the second quarter, we held our annual engineering week designed for our engineers to connect share ideas learn new skills and technologies of course much of the focus was on the myriad ways. We can continue to harness AI and ml technologies in almost every customer touch point with the potential to further transform buyer facing.
Experiences like enhancing search and recommendations seller tools like streamlining the listing process and assistant with answer entering customer queries, improving fraud detection and trust and safety models, etc. The opportunities are nearly endless.
But all of this innovation also takes time and effort and relies on a relatively small but mighty team of ml experts talent that is obviously in high demand.
Historically, all new ml models have been created by this team of highly specialized data scientists and the full process of creating a new model from cleaning and organizing the data to training and testing. The model then putting it into production could take as long as four months. That's why we kicked off a major initiative over a year ago. We.
Call Democratizing ml with the goal to streamline and automate much of this work so that virtually any etsy engineer can deploy their own ml models in a matter of days instead of months and I'm thrilled to report that we're starting to see the first prototypes from this effort come live now for example, if youre on the Etsy.
Team working on by our recommendations you can now use a dragon dropped modeling tool to create a brand new recommendations module without needing our ml team to build that model for you. It's a great example of the kind of longer term infrastructure investments, we've been making that we believe will pay very significant dividends over the medium term.
As we work to get even faster and more efficient as we scale.
Turning to marketing, we've released a new creator collab with the award winning artist entrepreneur, John Legend, featuring handcrafted home decor and wardrobe Staples produced in partnership with female sellers from the Etsy uplift initiative and other underrepresent in communities to date, we've seen this collection deliver.
Our above average order value and strong awareness engagement and frequency.
The fifth annual Etsy Design Awards has once again created wonderful buzz for Etsy. This year with the winners handpicked by Sarah Jessica Parker and Etsy is Dayna Isom Johnson.
And early indications are that our etsy hasn't campaigns in the U S U K and Germany that emphasize home and living style and gifting are performing well and driving brand Association for these purchase occasions.
While gms per buyer has shown early signs of stabilization, taking this metric to new heights is a top priority for us with over a quarter of our Gms coming from buyers, who purchased again within 14 days of their prior purchase one way. We can influence. This metric is to bring buyers back to the platform faster for their next purchase.
We're leaning into this work in the second half of 2023, including leveraging post purchase touch points, better outreach and promotional campaigns and improvements to seller funded offers.
Given all Etsy has to offer we're highly confident that we can make etsy, a place where buyers want to shop with us much more than our average of three purchase days and spend significantly more than $128 per year.
Moving to our house of brands two weeks ago, we announced an agreement to sell our Brazil based handmade goods marketplace Elo seven to enjoy a Brazilian company, which operates an online marketplace for clothes and furniture.
Our house of brands philosophy has been to operate Standalone marketplaces that together accelerate value creation for each brand and Etsy, Inc. We evaluate each company's performance on a case by case basis and given the low sevens performance over the past two years due in part to the unique macroeconomic conditions in Brazil as well.
L as they're small scale it became clear that we needed a different approach for that business, we considered various alternatives and determined that the best opportunity to sustain the marketplace and its thousands of sellers would be for Elo seven to join forces with a local likeminded marketplace. The transaction is expected to close shortly and Rachel will.
Review its financial implications in a moment.
We remain committed to doing what is best for our remaining marketplaces and will invest with discipline and compelling long term growth plans that further our global scale and shared mission.
The deep hop team is starting to see very encouraging signs of success transforming the business by narrowing their focus and improving operations to reignite growth in the second quarter Deepak delivered both Gms and revenue growth on a year over year basis U S. Gms growth accelerated by over 25.
<unk> points since the end of 2022, where we believe the pop is taking share. We believe this performance is a direct result of improvements in the customer experience and marketing efficiency powered to a significant degree by Deepak CEO crudely Patel goyal more streamlined focus organizational structure and processes.
Product development velocity has remained strong and the Deepak team has been leveraging deep expertise from the etsy core marketplace to great effect.
Some examples are shown on the slide, including new personalized buyer recommendations greater search relevance and new make an offer capabilities.
Deepak also expanded its performance marketing data feeds to additional listings driving a strong increase in paid marketing contribution deepa.
<unk> is building a playbook for community driven marketing such as branded events pop up shops and Influencer marketing.
We're seeing really encouraging signs the business's recapturing its mojo with significant opportunity to scale and drive improved profitability over time.
Although macroeconomic factors are pressuring consumer discretionary spend reverb has continued to outperform the musical instruments sector overall similar to Deepak reverb has increased its product experiment velocity to more quickly deliver better buyer and seller experiences with its best quarter ever in terms of the number of product wins.
Reverb is focus on affordability and helping musicians find good deals has continued for example, we launched new offer and negotiation tools, making it easier for buyers to save money on a wide range of gear.
Over the last few years Etsy has gone from a period, where we grew tremendously with so many tail winds at our back to a period of stiff headwinds and uncertain macroeconomic conditions, while we're cautiously optimistic for the near term the macroeconomic climate remains challenging at least for the moment.
Consumers continue to make very tough choices on where and how to spend their money and we're fighting hard to help our sellers get their share we're up for the challenge we have an energized world class team, who are all in on helping our sellers and etsy grow we couldnt be more proud that our already high employee engagement score.
Increased 3% from last year and is now 6% above the industry benchmark were acting with focus speed and boldness in our work to reignite Gms growth in the second half of 2023 and beyond in fact, Youll see us, making some big moves so that etsy is even more special in a better place to shop for the holidays.
This year.
Building on our Etsy hasn't theme this year, we're working to better connect our brand and onsite experiences to become your gifting accomplished in other words, helping our buyers to be gifting heroes buyers will see some new AI assisted ways to find crafted quality gifts for the loved ones at great value with each.
Even more confidence that these gifts will arrive on time.
Our goal will be to help buyers gift better in 2023, we continue to believe that we're doing something truly important and different and are in the very early days of unpacking Etsy has enormous potential.
Thank you for your time and I'll now turn the call over to Rachel.
Thanks, Josh and thank you everyone for joining our second quarter earnings call.
My commentary today will cover consolidated results for our house of brands key drivers of performance and Etsy marketplace Standalone results where appropriate.
Last quarter I commented that one of the things I'm. Most proud of is etsy is ability to navigate through choppy waters and our second quarter performance further demonstrating the resiliency of our business the benefit of our capital light highly profitable business model and our team's strong execution.
We delivered strong second quarter consolidated Gms, a $3 billion roughly flat year over year.
Revenue increased seven 5% year over year to $829 million and adjusted EBITDA was $166 million with a healthy 26, 4% adjusted EBITDA margin.
We are pleased to have delivered strong profitability through this challenging business cycle, while also investing in future growth, it's worth noting that our adjusted EBITDA has grown at a 43% CAGR since the second quarter of 2019.
Well year over year consolidated Gms growth remained negative in April trends turned positive in May and June driven primarily by strong etsy marketplace growth in several of our international markets and continued growth in active buyers.
FX headwinds soften to 20 basis points down from 200 basis points in the first quarter.
Jan that's for our three subsidiaries is largely flat in the second quarter driven by a return to year over year Gms growth that deep op, which was offset by some softness at reverb annulus Evan.
Our solid revenue growth can be attributed to continued growth in our marketplace revenue, which increased 3% year over year.
In addition to the impact of the Etsy marketplace transaction fee change that we fully lapped during the quarter marketplace revenue also benefited from a mix shift to more international transactions that often yield higher payment speeds and some positive contribution from our subsidiary.
A smaller percentage of revenue overall services revenue with our standout growth driver in the quarter with a 21% year over year increase the highest growth rate in this component since Q4 of 'twenty one.
The ads is the key driver here due to continued product optimization. For example, we utilized multiple retrieval systems to increase the relevance of pay that including integrating X walk our real time retrieval engine.
These enhancements that allowed us to show more ads in our search results without negatively impacting conversion rate.
These contributions drove consolidated take rate to 29% modestly ahead of the take rate implied at the midpoint of our quarterly guidance.
We are pleased with the strength of our profitability and the returns they are getting on our investments in both product development and marketing.
Q2 was another excellent quarter for returns in both areas and you'll see that even as we have gained further leverage in marketing. We have we are leaning a little bit more enterprise development, where we see very strong value creation productivity and velocity as we have scaled.
We believe the investments they are making will continue to be drivers of long term growth and differentiation as we unpack the significant opportunity ahead.
And as I, just alluded to a consolidated product development spend increased 19% year over year to $122 million in the second quarter.
Meanwhile, for the Etsy marketplace product launches increased over 50% year over year, a great sign that we are getting bolder and faster despite getting bigger.
We continuously realign resources to focus our talent on the areas. We believe will have the highest yield which is why we have some of the highest revenue per head count amongst our peer set.
We have strong conviction that our teams are working on the true vital few to enable 2023 and 2020 for growth.
Our consolidated marketing spend increased 1% year over year to $166 million driven by a 1% year over year increase in consolidated brand spend.
We leaned into our Etsy has it campaigns in our top three markets, highlighting home and living style and gifting purchase occasions.
Our performance marketing spend was largely flat to last year as he ran incrementals any tests on our ROI models and selectively pulled back on performance marketing spend in several key channels.
Overall, we gained leverage on our marketing spend in the second quarter with marketing as a percentage of revenue decreasing 160 basis points year over year to 26%.
While we primarily use utilize our ROI model to drive our marketing spend we understand investors focus on LTV to CAC.
And thought we could use this opportunity to provide our view of how you should think about this metric specifically for the etsy marketplace.
Start with CAC. Many of you have concluded that the rate of growth of our total etsy marketplace marketing spend has outpaced our new buyer growth that is correct. In fact from 2019 to 2022 blended at new by your customer acquisition cost increased about 50% after accounting for Offsite ads revenue.
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Effectively off site ads revenue offset a portion of our performance marketing spend it and as such OSA revenue is important when considering your CAC calculations and we've seen that on meeting this factor it leads to incur.
Incorrect conclusions.
And then moving to LTV, the etsy marketplace as customer lifetime value also increased about 50% over the same period, which allowed us to spend deeper while maintaining very strong efficiencies.
It's very impressive increase in LTV was driven by a higher gms per active buyer transaction fee increases.
See ads growth and etsy payments expansion.
The stability in our CAC to LTV reflects our long stated philosophy of investing to a marginal ROI threshold that we establish for all of our marketing spend worldwide.
So what do we mean when we say that we have maintained very strong efficiencies. We think this slide should help clarify our view.
While our blended LTV to CAC has held steady our performance marketing ROI has increased over 40% since 2019 due to the following.
Successful expansion of our paid marketing to new channels and more countries, which drove an increase in paid Gms and which we believe has contributed to significant non U S Gms growth.
And as our buyer mix evolved we increase the amount of performance marketing spend that goes to retaining and reactivating buyers and encouraging purchase frequency.
We have worked hard to maintain the gains we achieved during the pandemic period as well as through reopening and challenging macro conditions.
Given our healthy buyer retention rate as well as the significant retention of our Gms and scale of Etsy. We believe this investment has been well made.
And as a reminder, our LTV models assume that the majority of the payback comes within the first 30 days after acquisition, but there is a tail on the investment which drives future retention and frequency, which is the L and lifetime value.
In connection with that we also have significantly expanded our brand investments during this period, which as we have reported loved brand awareness up materially in our core markets contributing to Etsy now being more of a household name than we were several years ago. In summary, we feel great about the returns on marketing spend has.
And we will continue to invest with discipline and focus as the marketplace scales in the future.
Moving now to a review of Etsy marketplace, Gms and buyer metrics during the second quarter Etsy marketplace. MFS is nearly flat year over year declining just <unk>, 7% to $2 6 billion.
While we continue to experience week to week volatility year over year growth trends turned positive during the quarter. These.
These results can be attributed to several factors, including including easier year ago comparisons positive order growth moderating FX headwinds and healthy growth in select international markets.
We also saw our average order values remain largely unchanged on a year over year basis.
Data suggests the etsy marketplace Gms remained pressured by consumer wallet share shifts from goods to services and headwinds to consumer discretionary spending, particularly for lower household incomes when using U. S census average household income data by ZIP code, we have seen a clear delineation of gms trends between.
Buyers with income above 100000, where we experienced meaningful gms growth and those below that level, where we continue to see declines.
This slide shows a monthly view of Etsy marketplace performance or have you seen an encouraging trajectory towards positive gms growth since the beginning of the year. Despite the stiff macro headwinds in fact, the etsy marketplaces Gms is marginally positive year over year in July , making our third consecutive months of growth.
From a geographic perspective, 47% of Etsy marketplace Gms in the second quarter with some transactions, where either the buyer or the seller or both or outside of the U S.
Gms, excluding U S domestic returned to positive year over year trends, increasing 5% in the second quarter.
While we had a modest year over year decline in the U K, we reported year over year growth in some of our core markets, including Germany and France.
We also saw strength in select noncore Western European countries, and encouraging Testament to our growing awareness in these markets, particularly as we have carefully expand our performance marketing with limited very targeted spend and improve our overall search and discovery capabilities in those markets.
We are pleased to report that year over year Gms trends improved sequentially in three of our top categories home and living apparel and craft supplies as shown on the left side of this slide.
We also had year over year growth in horizontal categories, such as gifts and personalized items with etsy being a great mother's and father's day destination.
We remain extremely excited about our long term ability to gain market share in our top categories as well as improve awareness of etsy for specific purchase occasions, where we have so much great and unique merchandise to offer.
The Etsy marketplace ended the second quarter with a new all time high of $90 6 million active buyers and our positive year over year growth rate accelerated sequentially to 3% from 1% in the first quarter.
Growth in our non U S. Active buyers continued to outpace trends in the U S. As the majority of our active buyers are still in the U S.
We also continued to see strength in active buyers, who identify as men, which increased 8% year over year.
While our gms per active buyer on a trailing 12 month basis for the Etsy marketplace declined 6% year over year to $128 in the second quarter. We are seeing early signs of stabilization on a sequential basis as you can see from the chart.
Overall, our Gms per buyer has held up fairly well up 28% since the second quarter of 2019, and we continue to maintain nearly all of our pandemic gains we remain optimistic in our ability to once again inflict gms per buyer over the long term both in the U S and internationally.
We added 6 million new buyers in the second quarter, which is over 40% higher than the average number of new buyers be acquired on a quarterly basis and pre pandemic periods.
We also saw a negative year over year, new buyer trend moderate to 3% in the second quarter compared to a 6% year over year decline in the first quarter.
We reactivated nearly 6 million lapsed buyers up 21% year over year.
Overall, we've done a really good job of keeping our active buyers engaged.
In fact, our active buyers retention rate on a trailing 12 month basis remained above pre COVID-19 levels.
On a quarterly basis retention trends improved from both the prior year and prior quarter.
We ended the quarter with 7 million habitual buyers up 218% from the second quarter of 2019, but down 9% year over year Encouragingly, our habitual buyers were largely flat on a sequential basis as the strong pandemic related curious sure. It's fully rolled out of the trailing 12 month figure.
Germany, France, and several noncore western European markets experienced strong habitual buyer growth.
We also saw a year over year increase in the number of habitual buyers who identify as men.
Continuing the trend we previously reported the vast majority of the year over year decline in habitual buyers can be attributed to buyers moving into the repeat purchase category with very few of these buyers lapsing entirely.
Strong performance in Western Europe also contributed to a 2% year over year increase in repeat buyers.
Before moving to the balance sheet, we recorded a noncash impairment charge of $68 million to the long lived tangible and intangible assets related to <unk>. Seven this impairment charge was fully offset by tax benefits related to <unk>, seven which netted to a neutral impact to our quarterly net income and earnings per share.
There.
As of June 30th we had $1 $2 billion in cash cash equivalents and short and long term investments.
The second quarter, we repurchased $39 million in stock under our $600 million May 2022 board authorized repurchase program of which approximately $114 million remained available as of June 30th.
On June 14th the board authorized a new $1 billion share repurchase program.
Our free cash flow this quarter was a healthy $128 million, we continued to convert nearly 90% of our adjusted EBITDA to free cash flow on a trailing 12 month basis as our marketplace operates with minimal cash requirements.
Now turning to our outlook, we expect to complete the <unk> divestiture. Shortly so that business is only included in our guidance for half of the quarter. As a reminder, <unk> 70 reported $70 million in Gms for all of 2022, so 0.5% of our consolidated total Gms.
<unk> seven represented less than a 50 basis point headwind to our consolidated adjusted EBITDA margin last year.
We currently estimate our third quarter 2023, consolidated Gms to be approximately $2 95 billion to $3 1 billion about 3.03 billion at the midpoint up slightly compared to last year.
External factors, we're keeping an eye on for the third quarter include those that could influence consumer discretionary spending including wind down of previously high levels of consumer savings potential negative impact from the resumption of student loan payments this fall and discontinuation of child tax credits.
On the plus side, we are reading all the same data you are about the potential for a soft landing for the U S economy.
So given the continued uncertainty we're forecasting the midpoint of our guidance to land with a slightly positive year over year performance similar to what we delivered in July .
We are forecasting revenue of $610 million to $645 million up nearly 6% at the midpoint compared to the third quarter of last year the.
The implied take rate for the third quarter is down slightly sequentially and please keep in mind that we sometimes see seasonal pressure on our fourth quarter take rate.
We currently expect another very strong margin quarter for Q3, with adjusted EBIT EBITDA margin of 27% to 28%.
It's quite encouraging to be guiding to a slightly positive gms at the mid point of our guidance with another sequential improvement in our Gms trend line currently anticipated for the third quarter, we arent economist so it's hard to predict how the macro environment. There is from here, but as Josh highlighted we have an impressive pipeline of product and marketing initiatives.
<unk>, where we continue to see strong value creation and return on investment and strongly believe we are on the right path to reaccelerate growth.
Thank you all for your time today, and I will now turn the call back to them to take your questions.
Hi, everyone. Good evening, Thank you for joining us I'm going to dive right into Q&A.
First one I'm going to give to them to Josh from Mike Morton at Moffett Nathan Nathan.
Looking beyond domestic buyer growth can you discuss expectations for the biggest contributors to Gms growth in 2023 and 2024. For example, do you see this from improved curation international expansion or a recovery in the software category and the softer categories, such as home and living.
Thanks for the question happy to take it first of all I don't want to look beyond domestic buyer growth without talking about domestic Barbara for a second.
I do think it's important we're happy about the fact that we have the highest ever level of active buyers of this quarter and we think it's early days and we think we have a lot of opportunity both domestically and international as we've said many times before most people who identify as women in the United States have still have not shopped on etsy and lost.
<unk> months only about one in 10 people, who identify as men have shopped on etsy in the last 12 months in the United States.
And so we think there continues to be a big opportunity to continue to grow active buyers in the United States, both new buyers and reactivating that pool of 100 million lapsed buyers when we saw great evidence of that.
In this quarter and as you say there is a very big opportunity for etsy to grow internationally and we're seeing very promising signs of that again this quarter.
So etsy.
<unk> began to buy Google P L as in markets outside of the U S outside of the U K, Germany, and our core markets.
Recently, and we're seeing that we're able to do that in an ROI positive way immediately.
The Etsy site has translated into many languages and it turns out theres demand for Etsy products in many parts of Western Europe for example, and so we're able to grow in a pretty cost efficient way in those markets and those markets collectively can be very big can have the GDP of the United States. For example, the 15 markets beyond our.
Core.
Have a population that's even larger than that in the U S and GDP equal to the U S. So we're very encouraged by that in addition to that I think there's a very meaningful opportunity for us to do even more with the traffic that we have to drive gms per active buyer to drive conversion rate up and I see lots of opportunities.
To do that I talked on the call about quality and the recorded part of the call about quality and I'm really excited about this next chapter for Etsy, we've done so much over the past six years to do a better job with relevancy to understand what you meant not just what you said in your keyword and to give you search results that are relevant it is still there.
Case that most of the time, we have thousands of search results to choose from and finding the ones that are the most visually appealing that you're most likely to like the ones that feel are priced appropriately and the ones that deliver really great service quality and of course doing ever better at making sure that we can infer.
First all of our policies and a really scalable way all of that means we're serving only the highest quality things to you which is going to.
Think do a lot to make them more delightful experience to drive conversion rate up to drive frequency up to even further enhance the appeal of the Etsy brand I talked into recorded part about pricing and the tools that we have to do to help our sellers come up with the right price I think that's another example of where we can.
Where we can really help.
To improve the conversion rate of the site and make our sellers be more successful and then things like promotions.
We're investing even more in tooling to help sellers run the right promotions at the right time in the right way.
It's more important now than ever we want to make sure that our sellers can compete and win if you go look at the homepage of Etsy right now youre going to see some big bold banners.
The items that are.
Running promotions right now.
That's new we haven't done something that bolt in the past I think it's appropriate and fitting with the times I think theres a lot of levers we can pull.
That will continue to drive.
Drive conversion rate drives the quality of the experience of one more that I would want to talk about is our curation. When you look at the Etsy search results page right now you'll often see many variance of of the same thing. Many similar versions of the same thing we can do a better job of organizing those and collapsing those into.
A set of things that are that are different.
And showing you just the very best of each of a set of very different items and I think that can also do a lot to drive conversion rate perception of quality and a better customer experience and time. So I'm really excited about our roadmap and we've got a lot underway right now that I think can.
Can really help to even further improve and differentiate etsy.
Okay, great. Thanks, Josh next one is from Laura Champine at loop.
It gives us onto Rachel what do you expect to be the ceiling on total take rate now that seven is being divested and the rate seems to be naturally climbing on an organic basis.
Hi, Laura Thank you for the question.
You know, we've we've never said anything about a ceiling on take rate you're right. We have actually been able to improve take rate almost every single year since.
This management team has been in place and we've done that in part from a transaction fee increases and in part from offering.
And in services that naturally bring that take rate up.
Etsy ads for instance was not even a new service in the past couple of years or a transaction fee increase it was just a continuation of optimization of that particular product, where we keep making these search results better on.
Our sponsored AD, which increases click through rate and therefore increases our ability to drive.
Incremental revenue.
So.
We haven't fixed price on <unk>.
Ceiling on.
Our take rate and I'm not going to do so here I will say, we are neither the highest take rate for marketplaces, nor at the lowest take rate for marketplaces, and we really always stick to our credo, a fair exchange of value, So where we see there our products our needs or services that will benefit our sellers.
And we can provide a service that will or a product that will benefit them, we will charge a fair fee for that and we feel that all boats rise in that scenario and we see lots of opportunities to do so.
Thank you Rachel and then move to the next one from Tom Forte at D. A Davidson and this is gonna be for Josh can you provide an update on your M&A strategy and why it wasn't the right time to divest seven we've had quite a few questions about that and also related to our house of brands.
Our strategy going forward.
I'll just I'll end the question there and if you can just address those kind of two factors of it would be great. Thanks, Joshua So we look at each of our acquisitions on a standalone basis, and we have a thesis and so we bought <unk> seven with a thesis which is that when coming out of the pandemic, we would see real tailwind to ULA Seven's growth you low sevens merchandise centers.
A lot around events and activities that happen offline things like birthday parties can scenarios weddings, etcetera, and it's now been two years since we've come through the pandemic and we've not seen the growth rates that we've expected.
From the <unk> seven business I think it's a good team doing good work.
But they've faced quite a lot of headwinds and so the thesis hasn't played out we haven't seen what we've expected and we thought that this is the time to call. It.
And I think that's part of taking risks we're prepared to take calculated risks thought for us as a business, but we also want to be clear on and call. It when we see it acknowledged when it didn't work out.
And move on.
Really excited about the opportunities in our core we're seeing great progress Deepak is doing fantastic things reverb.
<unk> continues to gain share in its industry and we want to keep our focus.
And so that's we're going to do.
Okay, great. Thank you.
This next one to them.
Josh hold on a second one second okay actually for Rachel Uncoupled guidance questions. The.
Hi, This is Emily Horowitz Deutsche Bank at the high end of guidance suggest a quarter over quarter growth.
A 40 basis points in the past back to school demand has supported growth in the low to mid single digit range why is it that you're no longer replicating past seasonality is it the continued pressure from the macro environment.
So thank you for the question Lee.
Let's talk about what's implied in the guidance that we gave.
Midpoint of the guidance is about <unk>, 7% growth, 5% growth, rather and that implies that the conditions that we have seen.
Uh huh.
As far as macro headwinds remain roughly the same they don't get better they know at worse at the high end of the guidance would assume that macro pet.
<unk>.
Improve so that we.
We're able to hit the high end of the range and the low end of the range, we would say that they would slightly worsening.
Still very volatile market, we don't actually.
Have our crystal ball to say, we'll get more or less volatile. So we do the guidance does imply that August and September .
Timber or sequentially, a little bit worse than in July .
We do think we stand to get our fair share of the back to school and Labor day market, we've been as Josh talked about leaning much more promotional.
Promotional opportunities similar to all e-commerce retailers and more so than etsy has really ever done before and we're very excited to be able to talk about.
Our back to school is occasion for which you can find many many special things that people would be shopping for it at this point.
There was a thank you Rachel there was actually another question related to guidance that was from.
Curtis Nagel at Bofa and it was really about we already answered the part about the midpoint than where it was hitting in terms of macro factors, but there was another one about whether our product categories had any impact how we were thinking about product categories. In the guidance that you want to answer that one as well.
Well what are the things that we said we did talk about is that some of our horizontal categories. So specifically gifting and.
Occasions are actually growing quite nicely and so.
While we do see headwinds from some of our larger.
Our larger categories like home and home and living and those have continued to be a little bit under pressure. Some of the other categories are actually starting to see sequential improvement and.
Category like gifting.
Heading into holiday, we feel pretty pretty.
Strong.
Strong opportunity for growth.
Thanks, Rachel Alright, Josh I'm going to give you. The next one for Maria reps at Canaccord recently, there have been reports of some sellers taking issue with the Companys reserve system and its processor withholding and distributing funds can you first refresh us on what that policy is around payment reserves and why it's important to the overall health of the marketplace and maybe comment on how you are addressing this.
Are sellers, who are unhappy with the current policy.
Yeah. Thanks for the question so.
So etsy has an unusually generous payment policy relative to most marketplaces and that historically when a buyer buys in item, 100% of that money is transferred to the seller right away, we take it on faith that the sellers going to ship the item to the buyer and the good news is the vast majority of the time that happens, but things do go wrong and sometimes for example.
<unk> sales really ramp faster than they can deliver on and things go wrong and Etsy of course steps in to the gap in those times to make sure that the buyers held holes of the Etsy brand is a great brand and other sellers reputations are not hurt by that so it's really important for the overall health of the marketplace.
That we can always stand behind every single sale and buyers have a lot of confidence that etsy will always have their back as part of that then in 2021.
We introduced a payment reserve, we're a very small number of sellers that are high risk perceived to be high risk predicted to be high risk, we would hold some of the payment from from those sellers.
And we.
We continue to iterate, we continue to learn on that program, how do we make the models more precise how do we withhold the smallest amount that we need to and how do we communicate better with sellers about what the thresholds are why they are in that program or not and so we just announced yesterday some improvements in.
Being even clearer with sellers about why they are in the program, we announced actually we're going to be.
Reducing the amount we're holding off from from the vast majority of sellers.
So we continue to listen we continue to learn we continue to work together with sellers and buyers to make sure that the marketplace stays safe and just to put some dimension around this it's in the low single digits with sellers that are in reserve right now 70% of those sellers have less than $50 in payment.
<unk> and I don't want to.
We're recognized for every seller being in payment reserves.
Is can be a hardship so we want to do it only only when necessary only the Mt. One necessary and we want to be communicating as well as we come with the sellers and get them out of reserve as quickly as possible and so we're working hard to make sure all of those improvements happen.
Okay, great. Thank you Josh.
One from Ed rumour at Piper.
Piper Sandler can you talk about inflation, if any observed on the marketplace the pricing tool to help sellers understand when they have pricing power and could this help drive Jana I'll give that one Josh.
Sure. Thanks for the question, Yeah, we see a lot of opportunity and I think we've talked for a few years about how helping sellers that better pricing is a big opportunity and it's one that we hadn't yet lead into but we want to know we really are so we've kicked off a couple of squads focused on what we call sustainable pricing and Theres really two set.
But areas that we're focused on the first part is how do we help sellers.
Get the right data so they can set the right price for their lifting at the start.
And so we can share with them for example data about items that appear to be similar to theirs and what has been the final selling price for those items and we showed a screenshot of an example of a test of that that we're going to be launching.
We'll see we'll iterate and learn exactly how to how to do that how to give sellers the right context.
But you know probably there are some sellers that are really under pricing and some sellers that are really over pricing and some that are getting it just right, but in our market.
There are no msrp's right every item is unique and made by the seller and so it's I think particularly helpful to be able to give sellers context. The second piece is having set your initial price appropriately when how and if should you use promotions.
And I think a lot of sellers are just winging it and so we're doing a lot of research to see.
When do promotions pay off and when do they not for example is a 10% promotion worth it maybe a 10% promotion isn't enough to get a seller to buy so you're just kind of wasting.
Wasting that sale if you will.
So giving them more insight about about when it makes sense and what doesn't make sense to use promotion and how much promotion may make sense. I think that's also an opportunity for us to gather a lot of insights that we get through the marketplace and then share those insights back so sellers, it's always sellers, what they want to do but we give them the insights so they can make better.
Informed decisions and build their business better.
Great. Thank you.
Rachel I wanted to give you one from sweat acreage area from Evercore just to clarify the guidance comment that you made does the guidance assume August worse than July and September worse. In August . She was just following up on that and I think that's an important let me I want to clarify yes. So first of all I D.
The midpoint of our guidance is actually 0.7, not quite five so I wanted to clarify that first and foremost second of all we do.
Each of the months. So we don't guide to August or September individually.
My comment was meant to stay at the low point of our guidance it would imply some T cell.
July was positive as we said several times on our calls in place on T cell in August and September .
Rachel and that's perfect.
And then I'm going to give another one from shred it since I have her right here.
What I'm gonna give to Rachel also.
He adds once again drove revenue growth in take rate expansion, where do you see the clear growth opportunity isn't driving relevance ad load.
More sellers something else and maybe Josh wants to comment on that one too it's an exciting one so basically the first step.
Thanks for the question, but yes.
We've continued to be able to grow etsy ads.
I want to say organically, but it's not without a lot of hard work from a lot of relief.
Smart machine learning engineers, making the algorithm better and better and better better retrieval engines, and because we are able to make the AD results so relevant to what our buyers wary, we're able to.
It increased.
Increase the CPC, which increases our revenue and also at the same time, maintaining the ROE as for our sellers and as you know we get a.
Lot of budget from our sellers and we don't spend it if we can't give them a certain amount of a minimum amount of ROE as so the more that we can match our buyers query to add to our sellers product, but more of that budget. We can utilize that we see.
Some continued growth and opportunity for Etsy ads I will remind you that we do see at the at our take rate actually Bowl.
It's softer in the fourth quarter, we called that out on the call and that's because etsy ads, even though it's the gift that keeps on giving relative to the growth we usually see a gms in the fourth quarter is lower so that's the one thing to think about is the seasonality of that product.
Okay, Great did you want anything gotcha, Okay Fabulous.
And I'll go to the one for both of you on from your Gallerani and from city and I'll start with Rachel are you able to quantify the AI and ml investments what they are and how they are impacting margins and then perhaps and then connected to that can have Josh talk a little bit about the benefits, we're seeing from gen II and whether it's helping develop better product.
Development velocity and do you have any proof points, yet, but they are tools are driving gms growth and sort of how both of your question and say you want to start and then okay.
Okay. Thanks again.
We've been doing machine learning at Etsy for a very long time, so we have a lot of.
Talent at the company that is in machine learning and that's already embedded into our cost base.
One of the things that we are focused on is doing Josh described is democratizing ml. So that many people throughout the company can leverage.
The suite of tools for machine learning and AI and do their own.
<unk> that capability and that technology themselves without having to sort of.
Ask for that service from us from a separate group so that means that our entire installed base of.
Of engineers, and maybe even others like people in my finance organization will be able to really leverage the capabilities there without having to hire armies of people to go do machine learning for US. We've also been leveraging the investments that other companies.
Any of them are existing partners have invested already in machine learning.
And so we're doing a lot of beta testing and experimentation with other companies and at the moment that is coming at a very low cost to us.
We would imagine that at some point there will be some kind of license fee arrangement.
Typically we do not invest in anything unless we see a high ROI for that investment. So if we decide to.
License different tools that are out there or is it.
Invest in our own.
Workforce to be able to lean more heavily into machine learning and large language model that would be because we see significant gms opportunities from doing so and as you know we measure everything pretty carefully we expect about an 18 month return on those investments and that things vaccine or.
Or any kind of AI.
New product development as well.
And then.
On how <unk> might affect the customer I would talk about internal and external customers.
For that so there's a set of productivity potential benefits that come from from Gen II.
For example for our software developers.
And I'm really pleased by the data we shared in this earnings call about just how much velocity.
<unk> to improve in spite of getting better velocity per squad.
<unk> continues to get better and we're really excited about the value creation per squad were seeing.
Right now so we continue to focus on making etsy more efficient and more nimble even as we get bigger.
Hi.
Things like copilot are going to be another tool to help with that I would caution I don't think we were testing and we're leaning in and we're excited about it and I think it's going to be helpful.
But it's not the only thing its not a silver bullet we're actually constantly looking at how can we streamline our processes. How can we be more agile and how can we get more productivity and more value creation out of every squad.
I do think that the.
The way that we measure value creation per squad in this company as part of our secret sauce.
Always been obsessed with that.
I think it can be a tool that can really help our sellers sell for example answer inquiries from buyers can it help to auto generate some suggested responses, but the seller is still going to want to look at that put us on that before they send it so it'll it'll be helpful for them and we want to help sellers everywhere that we can.
Help them auto generate listings over time things like that yeah, maybe.
So it could be good again, if its helps sellers save time, that's great. We wouldn't want to do anything that makes the site look homogenous are boring, though so we're going to be very careful about that and more listings doesn't necessarily translate into more sales for etsy. So if it's useful for sellers will lead them.
For buyers the idea that the search experience can become more conversational I think can be a very big deal for etsy, and maybe more for etsy than for most people I talk to two earnings calls ago now about how you don't walk into a store and shout dress blue.
No.
Linden to a sales agent.
You actually have a conversation with them as more context, and I think that's especially important in a place like Etsy, where we've got 115 million listings to choose from and no catalog. So the idea that it can be conversational I think can give a lot of context and really help.
And I think a lot of the technology behind that is becoming a self problem, what's going to be longer as the consumer adoption curve.
What our customers expect when they enter something into a search bar, how do they get used to interacting with chat bots and whats the UI look like and that's something that I think we're going to need to.
We're going to we're testing a lot right now what do people expect how do they like to interact with things in my experience now having a few decades of consumer technology.
Leadership.
The consumer.
Adoption curve is often the long pole in the tent.
But I think overtime can yield really big gains for us.
Great. Thanks, Josh.
One from Alexander Stagger from Goldman Sachs.
And I think I'll give this one to Josh in terms of Gms per buyer, how should we think about declines in that metric and can you talk about what you were seeing at the cohort level that gives you confidence that you can actually return to positive gms per buyer growth once macro conditions normalized yeah, great. Thanks for the question so.
Let me talk about Gms per buyer in the U S and in international.
In the United States, well around the world when the pandemic happened.
Most of the places you can shop shut down or were out of stock and Etsy had enormous tailwind during that time.
In the U S. We saw gms per active buyer grow by over 30%.
Since that time, there's been an onslaught of competition theres been.
Inflation and all the other things everyone knows about and yet gms per active buyer in the U S has stayed almost exactly the same we felt almost all of those games.
The declines were seeing in gms per active buyer or that were growing faster in international than we are in the U S and we've seen a little bit of pullback in gms per active buyer and international I'm not mad about us growing faster than international there's a lot of opportunity in international there's a lot of buyers to be added in international and the fact that we've done such a good job maintaining.
Gms per active buyer in the U S. In spite of these headwinds in spite of all the new competition.
Says Wow people came to etsy and they loved it and it was something really different and now with a lot fewer dollars to spend and a lot more places to spend it they are continuing to come back and spend and roughly the same amounts today as they were back then as a platform from which to drive further growth it'd take a lot of.
Optimism excitement confidence.
That I talked to I think the first question about all the things. We think we can do to grow and drive even more off from there, but I take that as very encouraging.
Rachel talked to in the call in her part of the call about the difference we're seeing between households over 100000 and households under 100000, and we see this not just in etsy results, but all around but it does seem like for households, under 100000 or just under enormous pressure right now and having to make very very difficult tradeoffs and life and if its not something thats.
Currently essential.
Then people are having a hard time.
Prioritizing that and we may be feeling some of that.
We're still getting a pretty good amount of gms per active buyer from people under 100000, considering the times, we're in but I would say cycles are cycles and now being over 50, having lived through a few cycles myself cycles or that they come and they go.
And we're in a tougher part of the cycle and at the time, we're in a tougher part of the cycle and we are still maintaining the gms gains at the pandemic and putting up EBITA margins in the core of 30%.
You know.
Feels like a pretty good business. If this is what bad times look like and I'm very optimistic that there is much better times to come.
Great. Thanks, Josh I'm going to just slip in one more for Rachael from Nick Jones of JMP Securities. The press release indicated there will be more investments in noncore markets and performance marketing in particular, how are you thinking about the pace at which we can capture share in Europe , Canada. Its success in North America, and UK helped accelerate the pace at which you can win active buyers in the air.
Rest of Europe .
It really we're super excited about what's going on internationally and what we said on the call was that we've seen growth.
Non U S markets up.
5% and we've been able to invest profitably and.
Our core markets with performance marketing and in the U K and Germany with brand marketing as well.
<unk> been investing with performance marketing in our noncore markets and we're seeing this lovely.
Yield from that spend where we're we're getting lots of visits and gms coming from some of these noncore, especially western European.
Markets.
So well stay tuned for that we'll talk we'll talk more about it.
And non non human intervention kind of thing so we're able to spend they're with us fairly light lift and with good ROI.
Our investment.
Okay, great. Thank you Rachel I think we went over about a few minutes. So we're going to end. It there. Thank you all for your time and attention and we'll talk to you very soon.