Q2 2019 Earnings Call

Welcome to the Q2 2019, Etsy Inc. earnings Conference call.

At this time all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and instructions will be given at that time.

If during the conference you require operator assistance press Star Zero, and an operator will be happy to assist you.

As a reminder, this conference call is being recorded for replay purposes.

It is now my pleasure to hand, the conference over to Deb Wasser, Vice President of Investor Relations you may begin.

Thank you good afternoon and welcome to Etsys.

Q2 conference call joining me today are Josh Silverman.

[noise] CEO and Rachel Glaser, Chief Financial Officer before we get started just a reminder, that our remarks today include forward looking statements relating to our financial guidance and key drivers Perez anticipated marketing spend and other current and planned investments and their anticipated impact on our future financial results anticipated product launches and impacts of experiments, including on conversion rates and the anticipated impact on our future financial results for actual results may differ materially forward looking statements involve risks and uncertainties, which are described in our press release, our 10-Q filed with the FCC on May nine 2019, and subsequent reports that we filed with the FCC any forward looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them also during the call. We present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in todays earnings press release, which you can find on our Investor Relations website.

A link to the replay of this call will also be available there and if you'd prefer to access the replay by phone you can find that information in the press release as well we have created a slide presentation to accompany today's opening remarks I'd recommend you follow along with that I'll turn the call over to Josh.

Thanks, Deb and good afternoon, everyone.

It's been another encouraging quarter across the board with continued growth in Gms, driven by our portfolio of marketing and product investments Gms drove increases in revenue and EBITDA and services revenue was solid resulting in an overall study take rate of 16.5%.

We're making great progress, improving our product experience and our marketing capabilities and it's paying off.

In addition, we have a number of bold new initiatives. We're excited to walk you through detailing how we expect them to fuel our growth even further.

First lets dive into highlights of our second quarter progress starting with marketing.

We have a full funnel marketing approach and in 2019 Weve been optimizing our investment in every part of the funnel.

In the first quarter, we paused our spend in certain channels in order to test their incrementality and to refine our attribution model.

As a result of these tests, we entered the second quarter with an optimized portfolio and conviction around some of the new channels we tested.

First we ramped our spend on Google performance marketing, while maintaining and even increasing ROI.

Through efficiency and infrastructure improvements.

Second, we're making progress on locking potential in social channels, we found strategies such as dynamic re targeting where we are seeing positive returns and are encouraged by our progress.

Over time, we believe social channels can become a powerful lever to drive incremental growth.

Third we launched a new TV campaign called belongings, which focuses on buying things that matter to you.

It aired for seven weeks on National cable and select digital channels from late April through mid June .

We're very pleased with the results our market research indicates that visits and purchase intent are significantly higher for customers, who were exposed to the ads versus those who were not.

In fact, Irish who visited the site after viewing our ads were 20% more likely to convert to a purchase.

As expected we saw correlated uplift in other channels such as our Google ads during the time the TV campaign was running.

It's exciting to see this early evidence that TV spend can make our other channels work harder.

We'll also produce shorter versions of our ads focused on specific categories, such as home furnishings weddings.

In short, it's been a great quarter for our marketing initiatives and these results further validate our belief in the potential for marketing to drive significant profitable growth as we strengthen our capabilities.

And speaking of strengthening our capabilities towards the end of the quarter at these new Chief Marketing Officer, Brian Scott joined the company, Brian brings two decades of marketing and ecommerce experience to ATSI. He's a true master of the craft and with just over a month under his belt why and is already adding a ton of value and shares my enthusiasm that we are in the very early days of unlocking the power of marketing to turbocharge Etsys growth.

Now, let's turn to our product initiatives, which have continued to move the needle.

Our product teams also delivered strong results in Q2.

As you know our product development strategy is tightly aligned with our rights to win which focuses on highlighting our unique inventory improved search and discovery strengthening human connections and building a trusted brand.

Product experiment velocity expanded to an all time high surpassing the record set in Q1.

We made progress on multiple fronts, improving the customer experience, resulting in significant incremental gms.

For example in the second quarter, we made meaningful strides in search and discovery by making the homepage more personalized and dynamic, allowing buyers to more easily pick up where they left off on their most recent ship shopping mission.

We also made progress improving our mobile App is part of what we expect will be a multi year effort that will have significant positive impact on metrics such as frequency.

And as I'll discuss in a moment all of our focus on shipping is a core workstream connected to building an even more trusted brand.

I'm encouraged to see that we are rapidly that we are able to rapidly scale, our product and engineering teams, while maintaining and even accelerating productivity.

It's a testament to the strength of our product pipeline the discipline of our development methodology and the caliber of our team.

We're encouraged by the progress we made in both marketing and product development in the first half of 2019.

The second half of this year also includes a trio of bold new initiatives that we expect will catalyze additional future growth.

First is that sees new free shipping program.

Second we are launching a new unified AD platform called at Sea ads and third we are acquiring reverb, a two sided marketplace very similar to etsy, and a new category, but the strong strategic fit and robust growth potential.

First lets discuss our recent news on shipping.

When buyers find an item that they like and don't buy.

Additional cost of shipping is one of the top three most commonly cited reasons. Moreover in these instances fires tell us they are far less likely to come back to etsy or to promote their friends.

Buyer expectations have changed regarding shipping and it's important that etsy keep up.

Last year fewer than 30% of listings on Etsy offered free domestic shipping and a significant number of items had additional shipping prices that buyers perceived to be unreasonably high.

So on July nine we out we rolled out a new program to give sellers the tools education and support they need to offer free shipping to U.S. fires on orders of $35 or more.

Our central message to sellers is that buyers now expect free shipping.

We know from our research that buyers are significantly more likely to buy an item that has free shipping as compared to the same item with shipping fees broken out separately.

To help our sellers manage this transition we created a smart pricing tool, which allows them to easily set up a free shipping guarantee.

The tool also gives individual sellers the up turn to incorporate all or a portion of their shipping cost into their item prices to recover costs and to bulk edit their listings accordingly.

The products with the free shipping guarantee will be prioritized in U.S. search a key factor, we know sellers valued deeply.

Internal data suggests that free shipping for U.S. buyers often leads to higher order values.

We also believe that there is a potential for higher conversion and improved frequency related to better meeting buyer expectations regarding chipping.

We're excited about the opportunity to make free shipping a core part of the etsy shopping experience and to enable our sellers to better compete in todays ecommerce landscape.

Seller adoption has been promising to date and our plan is to begin actively marketing free shipping to buyers starting in September .

Our initial launch is focused on the U.S., our largest market and the one that has the most established expectation for free shipping.

What we explained we plan to explore making this available to other core markets in the future.

We also plan to address other friction points related to fulfillment such as establishing a consistent approach to returns and ensuring that delivery date expectations are met.

I'm also excited to announce that later this month, we will be launching at sea adds a new unified AD platform, which is designed to give our sellers more opportunities to gain prominence and drive visits and sales.

Today at Sea offers two separate paid advertising products, which help sellers to drive traffic to their shop.

Promoted listings, our onsite advertising product and Google shopping, which advertises their products on Google.

Let me take a moment to explain these two products.

Starting with promoted listings. This service has grown approximately 30% or more for each of the past eight quarters.

Robust revenue growth for what is now our largest seller service.

Prolific growth has been primarily driven by the expansion of inventory, meaning promoted listings show up in more places on the site.

And through improved algorithms, which delivered right AD to the right shopper, resulting in more sales.

Promoted listings is designed to be extremely easy to use sellers simply give us a daily budget and we optimize that budget on their behalf.

Working to ensure that on average they receive a strong return on ad spend.

Since we know that our sellers are relatively indifferent as to whether the visits they are buying come from on or off etsy as long as they are high quality visits.

In 2016, we launched the second AD product Google shopping.

This product allows sellers to give us a budget, which we used to buy plays on their behalf driving traffic from Google directly to their listings.

We also believe that on average our sellers gross margin is much higher than our 5% transaction fee in other words, they're able to spend more on a visit from Google then we would and still achieve a strong return on ad spend.

Our research indicates that there are many potential visits we are leaving on the table and our sellers would have happily purchased.

However, today, Google shopping as a completely separate AD buy meaning that we do not invest any of the unused pro list budget on Google shopping.

Our sellers have found that confusing and a bit intimidating to try to manage two separate add programs and as a result seller adoption of Google shopping has been limited.

We believe that sellers want a single simple solution with a single budget.

Where they tell us how much to spend.

And we invest that on their behalf on and off Etsy.

As Weve illustrated on slide 14.

Today, we use less than 50% of our sellers aggregated budget.

In other words, they have more appetite to invest than we have inventory to offer.

By creating one streamlined AD offering we can optimize our sellers budgets across both pro list and Google plays as you can see on the right hand side of this slide.

Let's see ads will launch later this month.

We aim to utilize more of our sellers budgets over time.

But expect that a portion will remain unutilized as we continue to optimize seller spend with the strong robust hurdle has the guide post.

Over time, our goal is for this product to be a growth driver for our sellers and for Etsy.

We expect to reduce at Ses and on performance marketing channels and reallocate those investments upper and mid funnel marketing.

We believe this will improve brand awareness and consideration.

Drive more direct traffic to our home page and our mobile app as well as increased frequency reminding consumers why ATSI and when and see a message no individual seller can do on their own but every seller will benefit from.

A smarter way for us to be investing.

We believe that that she adds will be another popular optional seller service and as its uptake and budget grows so will at Ses take rate.

It's a great example of how optional seller services can help us to deliver excellent value to our sellers and the fair take rate for etsy, while minimizing mandatory fees.

Our third growth catalyst is our recently announced agreement to acquire river a privately held marketplace for new used and vintage music year.

As you've heard me say many times vibrant two sided marketplace is our lightning in a bottle there are only a few a handful of them at scale and reverb is one.

This transaction is a great strategic fit that firmly aligned with our mission of keeping commerce human.

Reverb is the etsy of musical instruments with significant competitive differentiation and we see tremendous value and potential in the business.

But re verbs founder David called and his team have created and only six years is incredible.

Essentially a new and special place to buy and sell musical instruments and I'll bet. Some of you out there are musicians who are familiar with the platform.

They've been a disruptive force in this space where used musical instrument sales are now outpacing new.

Reverb has redefined the sector and grown it online.

Why am I, so Josh sorry about this deal.

It's a great strategic fit and similar business model to Etsy.

And the company is in the infancy of its growth.

We see a number of similarities between the lever of growth for Etsy and river, such as improving search and discovery, making selling and buying easier and building a global brand and user community.

We've successfully implementing these types of initiatives at ATSI and are confident that we can similarly impact refurbs business.

We'll have more to share with you about this business once the transaction is completed.

But since it's still pending regulatory approval and other customary closing conditions, we are keeping our commentary to a minimum today.

I've never been more excited about what lies ahead for etsy.

We have a core business that stand for something different than meaningful which has never been more relevant and continues to have tremendous potential to unlock further growth with disciplined investments in marketing and product development.

Overall, we feel good about the ROI and progress on our key marketing channels, including TV.

And as we scale our product teams, we continue to see incremental returns there as well.

And we continue to make bold bets that set us up for an even brighter future and that we believe will have a positive impact on our financials in the near term and long.

And with that I'll turn the call over to Rachel.

Thanks, Josh.

In the second quarter, Gms grew 23% on a constant currency basis, and 21% on an as reported basis.

An acceleration versus prior quarter and last year fueled by both increased product development velocity and optimized investment in mature and new marketing channels.

Revenue grew 37% year over year to $181 million with growth in both marketplace and services.

And adjusted EBITDA was $40 million with EBITDA margin, expanding 100 basis points to 22% in Q2 as he continues to benefit from robust revenue growth.

Let me provide a little color on our revenue and adjusted EBITDA result.

First marketplace revenue benefited from 21% Gms growth and the related transaction revenue also benefiting from last year's price increase.

As a reminder, in the beginning of Q3, we anniversary the increase in our marketplace take rate, which has been a significant driver of marketplace revenue growth over the past year.

Next promoted listings revenue was the largest factor contributing to growth in services revenue growing 32% in Q2.

As discussed on our last call in the second quarter of last year, we had a one time benefit of $2.8 million related to Etsy shipping label revenue that did not recur in 2019.

In addition, some of our development squads shifted focus to work on Ftn somewhat delayed new product launches that may have had a positive impact on promoted listing revenue.

And a last note on revenue 24% of active sellers have adopted our shipping label service in the four markets, where we offered this product for approximately 430000 sellers.

This is an increase of approximately $40000 compared to prior year.

Despite this growth.

We saw a headwind from shipping label revenue as the U.S.P.S. eliminated one of their rate classes, causing sellers to shift to a lower margin class.

This was effective at the beginning of the year and continue to cause a small year over year increase in Q2.

Overall, our take rate remained at 16.5% consistent with prior quarters.

We were pleased to see incremental efficiency in our marketing spend as we leveraged data and insights from recent test.

Both our robust revenue and marketing efficiency helped to drive 100 basis points of improvement to our EBITDA margins to 22%.

Q2, EBITDA growth is partially offset by incremental expenses running through cost of revenue and DNA.

Cost of revenue increased 29% year over year gross margin increased by 190 basis points.

In terms of our migration to Google Cloud, we have migrated a majority of our systems to Google cloud and usage costs related to the cloud our expense and recorded in cost of revenue.

Cloud expenses were the primary driver of our year over year increase and we expect to leverage the benefit of this spend for product initiatives with a positive impact on gms growth.

DNA DNA increases this quarter versus prior year were driven in large part by the impact of the new lease standard adopted at the beginning of the year, resulting in incremental depreciation primarily non cash.

This will now be included in our DNA expense line in the TNL going forward that is backed out of EBITDA.

Also backed out of EBITDA is $1.2 million of professional expenses primary primarily related to our pending acquisition of reimbursement.

Our flywheel has continued to get stronger as demonstrated by the improvements in our key operating metrics.

Active buyers accelerated for the seventh consecutive quarter, increasing 19% in Q2 to 43 million.

Gms per active buyer on a trailing 12 month basis grew to over $100 for the first time ever and delivered five consecutive quarters of positive growth evidenced that we are continuing to make progress improving frequency.

It is important to keep in mind that we expect this metric to be positively impacted by our marketing investment such as TV, which had about longer term payback period and can deliver returns in future quarters.

Our buyer categories continue just to show signs of improvement habitual buyers customers, who have made six or more purchases as spent over $200 and a 12 month period, where again the fastest growing segment of buyers.

An active sellers increased 18% driven in large part by growth in international sellers.

International Gms was 38% of overall gms in the quarter and on a constant currency basis Gms growth was 30, 37% another strong quarter for international growth driven by our U.S. fire, the international seller and international domestic trade rate.

Hey, GM assets as a percentage of total Gms was 15% in the corridor contracting from 16% in Q2 2018.

We define paid gms the CMS attributable to our performance marketing efforts, excluding most of our upper funnel investments like TV and digital video.

We believe that more organic traffic is coming directly to etsy as a result of our TV campaign, having a positive impact on Etsy brand awareness.

So those are the highlights of the second quarter financial and operating metrics.

Let me take a few minutes to walk you through the financial impact of our free shipping initiative and as he adds.

There are a number of living cart and I will do my best to explain the accounting impact of each one.

Let's start with our free shipping initiative.

Our first Mike our smart pricing tool allows sellers to set up a free shipping guarantee.

They can then individually choose to incorporate all or a portion of their shipping cost into their item prices to recover costs I presented the buyers as one clear price.

Slide 22 illustrates how we believe this initiative will drive higher Gms and revenue.

First in our test so we saw that conversion rate increases for items that are presented with free shipping.

Second we observed that average order value increased as buyers buy more from the same shop to reach the 35 dollar minimum required to earn free shipping.

Well, we believe that in the future. These two factors will drive positive impact the Gms and revenue.

A third factor to consider is whether sellers will move their shipping price into their item price to recover the cost of shipping.

Wes.

And the seller transfers left and 100% of the shipping cost into the item price.

This could have a neutral to negative impact on revenue and take rate.

Sellers were already paying 5% transaction fee on shipping any amount less than a 100% transfer from shifting to item price will result in a modest contraction to revenue.

In our tests, we saw that approximately 84% of shipping price was transferred into item price for cost recovery purposes.

Net net when taken together, we expect to benefit from increased conversion and ASV will significantly outweigh this small contraction.

In September we will begin marketing the availability of free shipping to buyers and we believe the strength of this free shipping message will have a positive impact on frequency importantly, gms and revenue growth.

Next let me walk you through the financial impact of at Ti ads.

Currently sellers could elect to purchase promoted listings and or Google shopping.

Promoted listing is recorded as revenue and Google shopping is recorded net with sellers spend.

Beginning in Q3 under the new Etsy adds platform. The gross amount spent on Google shopping will instead be recorded as revenue with a dollar for dollar offset of expense in cost of revenue.

And the short term this results in a slight contraction in gross margin, even though gross profit dollars are not impacted.

The budget allocated to each of these products were dedicated to the individual channels and if the budget was not utilized these funds were returned to the seller.

With that he adds we will now take a seller single budget election, and optimize it across two products promoted listings and Google shopping.

He controls the allocation of their marketing dollars and this therefore becomes one gross revenue stream for etsy.

So how does this impact our financials.

Starting with Gms the initial impact is neutral.

But over time, we expect the positive impact of Gms as our sellers increase their AD budgets and we improve utilization.

Revenue is also expected to increase with larger budget utilization.

Since the Google shopping portion of our assets. He adds revenue will be a straight pass through to cost of revenue there will be zero impact to gross profit.

Gradually we expect that our sellers marketing spend it will replace at these performance marketing spend to a great extent.

This enabled us to re purpose that spend the upper funnel marketing channels, where as he can invest to build brand awareness something our individual sellers cannot do on their own but we believe they will greatly benefit from.

Overtime, we expect etsy adds to create a fundamental improvement to our margins, while also enabling sellers to more easily make investments in their own growth.

And lastly on our pending acquisition reverb, we plan to discuss any specific updates to 2019 financial guidance. Following the completion of the transaction.

Turning to how our overall business trends and these new initiatives impact our 2019 guidance.

We are raising Dms guidance to 2020, 2% growth.

Raising ever in the revenue guidance to 32% to 34% growth.

And taking our outlook for adjusted EBITDA down by one point to a range of 20% to 24%.

The increase in our Gms guidance is driven by better than expected product development efforts, which have been delivering incremental gms wins.

Efficiency in our portfolio of marketing initiatives, including TV.

And the Gms benefit of our free shifting guarantee which we expect will primarily impact to the fourth quarter.

One headwind we are managing its been new state sales tax laws, which are coming online, which among other things in the macro environment could offset some of the growth we expect in 2019.

Our increased revenue guidance reflects both continued growth in our core business and the revenue benefit of Etsy ads, which in the near term is primarily related to the additional revenue for our four former Google shopping service.

Our guidance implies that in the second half of the year revenue will grow 28% to 31%.

A substantial increase to our run rate as we enter 2020.

Please note that the fourth quarter is generally the high watermark for the year for our AD platform revenue.

Turning to adjusted EBITDA, we have a disciplined approach to making investments and are comfortable investing for long term growth. While we have confidence if there was a positive return on investment.

We have a great deal of confidence in our current slate of marketing and product initiatives some of them have longer term payback periods.

As the mix of our marketing spend shift to include increased investment in upper funnel marketing channels, we expect our payback period to length and as we go forward we have confidence in the positive return this investment will drive overtime.

Secondly, the majority of incremental revenue associated with Etsy ads will have no impact to adjusted EBITDA in 2019.

As a result, our take rate will increase and adjusted EBITDA margins will contract in the short term.

Overtime, we expect the efficiency of this platform and the greater utilization of available AD budgets will be margin accretive.

Last.

Now that Weve migrated the majority of our systems operations to the cloud, including our machine learning efforts, we expect a lower percentage of our product development labor will be capitalized and more the expense going forward.

As a reminder, our long term target for adjusted EBITDA margins is 30% or higher.

We're building on our momentum following another great quarter, we expect to continue to capitalize on our large market opportunity and leverage our strong financial position to transform that business by delivering sustained growth and expanding margins.

Thank you all for your time today, we will now take your questions.

Thank you.

Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. You May press the pound key.

And due to time constraints, we ask that you. Please limit yourself to one question and one follow up.

Our first question comes from the line of Heath, Terry with Goldman Sachs. Your line is now open.

Great. Thank you very much.

Just on on at the ads can you give us a sense you know as as.

You're obviously dealing with a lot of sellers that.

That have.

A budget plan around that should we should we expect that this has the potential for net AD spend at sea to be down in some part or.

Is there enough demand.

Across the platform to be able to reinvest.

All of the offset from sellers and then on the guidance for.

GFS.

Given the outperformance this quarter relative to expectations as well as the.

Free shipping on the horizon any reason that we shouldn't expect sort of further upside to the to the gms growth over the second half relative to what you guys have guided to or is there potentially something we're missing in that.

So I'll take the second question first and then Josh I will take the one on the on the AD spend.

So first of all thank you for your questions and.

I would say we've given our you know we've given our best estimate for Gms for that for the year and so we're comfortable with that number baked into there is some conservatism around what we might or might not see from our sales tax so that could be we're doing our best estimate of that based on what we've seen thus far.

We pointed out that that could be a headwind or other macro factors could be a headwind. So we're we're doing our best there and then we are also just launching we have not yet launched at the ads that we're giving you kind of a debut of that product that is yet to come. So we're that's a lot as a fairly big unknown for us and we're just launching our shipping guarantee the marketing for that doesn't even start until September so.

You know I think there's I you know we're doing our best based on extensive testing and I'm speaking with sellers and.

To give the guidance that we understand we pretty confident that we've given you the numbers.

Yes, there's a few unknowns as we pointed out.

And on Etsy adds it's a great question Heath and you know I think.

It's complicated this new program. So I'll start with we're really excited about it if you ask sellers what they want from Etsy one of the top things are going to say is the opportunity to invest more to drive my own growth.

And so this is we think over time going to really make the pie bigger because it's going to really give sellers the opportunity to invest more to drive their own growth have more agency, which which we think is great and I think they are going to think as great as well in the near term. It's really important that we were able to put that money to work in a way that drives incremental growth for them and good return on AD spend and they're going to test and learn their way into the program and so we're going to be testing and building out our capabilities and they're going to be testing and getting more sellers to come into the program and more sellers to pick their budget up is something that we want to do overtime and were optimistic is going to happen.

In the near term.

We're going to have to see.

How how it works.

So we're very optimistic about the program in the medium term, it's complicated and we're going to be navigating it and in the months to come all that said I think that the guidance that we've given you for this year as appropriate.

A number of puts and takes and.

And I think it's appropriate.

Great. Thank you both.

Thanks, Thank you.

Thank you.

And our next question comes from the line of Edward Yruma with Keybanc. Your line is now open.

Hey, good afternoon, and thanks for taking the question I guess, just a follow up at ATSI ads.

When do you think you'll hit the crossover point, where the decline in ATSI funded performance marketing will allow you to basically hold or leverage AD spend and then I guess as a follow up you've you've got you've asked a lot of your sellers. This 12 months between the higher take rate now free shipping and now potentially asset to increase advertising threats, yet whats your sense of the vibrancy your supplier base.

Maybe their margins and kind of how happy they are with a lot of these changes that are in place. Thank you.

I'm, just hi, Hi, Ed and thanks for your question. This is Rachel I'm first of all the vibrancy is.

Robust, we had 18% active seller growth this quarter at 2.3 million now and.

You know Josh can speak more about some of the ways, we rolled road shipping guarantee out to our.

Sellers, but.

In rolling it out we did you know as we did with pricing we did it very carefully through lots of.

Marketing to them and gauging feedback pre testing on all of that and that went as as we expected it to and we would expect the same thing.

With the ads, we think that the ads is going to be something that they're very excited about gives them.

We know from the budgets that they give us and the amount that we're able to utilize they have appetite to spend a whole lot more than we are able to spend on their behalf.

And this this will put more control in them being able to create growth to their own shops and listings. So we think this is something that will be very pleased about yes, just to build on that this is a pioneering new program and I think.

That's pretty exciting I do expect that the reception from sellers will be on the whole very positive because it gives them more agency.

And you know at sea is very committed to marketing.

Our sellers this gives us a chance to to move up the funnel in a way that each individual seller can't so we can do things like even more TV advertising driving people to home page brand awareness events. He drives frequency getting people to download the app and that result in more organic sales for our sellers.

Which is great for all of our sellers, if some of them want to opt in to further fuel their growth they can through an optional for them to do that.

But it allows them to even further fuel their growth and you know as I talked about in the script. There's a lot of reasons why they might have more appetite to do that than we do you know their gross margins for the 5% Commission when you run the math on how much we can afford to for example by a Google PPSA.

Yeah, there's there's many circumstances, where I think the seller would be ready willing and able to spend more on that click than weekend.

So this really is an opportunity for the sellers to invest in an area that that they are best suited to invest that allows us to reallocate to where we can best use our.

Income statement to their to their best interest.

To your question about when and how we would be moving and reallocating that timing you know, we're heading into the fourth quarter and will continue to be.

Investing ourselves and having our sellers invest the most important thing is that they get a really good return on ad spend.

And we're going to make sure that we stay very close to this that our sellers get a good return that's what's going to have them liking the program and continuing to invest so we're going to be continuing to invest with them.

At least for a period of time to make sure that the returns are really strong.

Great. Thanks, so much guys.

Thank you.

Thank you and our next question comes from the line of NOL car with Deutsche Bank. Your line is now open.

Hi, Thanks.

Quick one on the long term growth outlook that you have on one of the slides.

Didn't remains at least 16, 20% given given free shipping and given that you know not to me.

With that it is 84% of the shipping charges that moves into Gms unlocked.

I was hoping that that could have been.

The 16 to Quinn do you might have inched up.

More than that.

And then the propensity to buy.

That side of the equation and.

Please do.

Intent to buy.

How much would that impact the 16% to 20% target as we kind of think about it.

Yeah. Thanks for the question and thanks for your optimism and there is enthusiasm about the long term growth we share that.

So we gave those long term targets just in March.

And we're not in the habit of updating those you know on a on a very very frequent basis. So so we gave those just in March were confident we were confident than those targets. When we gave them. We are very confident in those targets continued to be very confident those targets today and we're not we're not updating them at this time.

Thank you.

Thanks.

Thank you and our next question comes from the line of Nick Jonas with Citi. Your line is now open.

Hi, Thanks for taking the question.

Reverted to talk a little bit about.

Educating sellers overtime, and then we've kind of seen some movies that maybe for sellers and other kind of.

You know adopt the kind of behavior you are looking for are there or kind of other opportunity to.

Push sellers in the right direction seeking maybe bypass some of the.

More.

It is education and then a quick follow up.

Whether they be prime that it had an outsized impact this year compared to previous years.

Yeah. Thanks for the question I really appreciate it you know, it's our job running a platform to look after the go to the comments and we just have more data and and you know that gives us an opportunity to gather more data and sometimes have more insight than any individual seller would have the chance to have on their own I do want to say, we do not consider education to be tedious at all we considered to be absolutely. Our day job, it's really important that we take the time.

And you know have empathy for the fact that sellers you know they really count on us, it's a really big part of their life and and we really get that and this is a partnership and so we worked really hard to communicate with them. So I think the way we've handled shipping I hope is indicative of how we think about this we've been talking to sellers about free shipping for two years and we have been providing a lot of educational information, we print for giving them a lot of data and we've been.

Taking stronger and stronger strides to encourage our marketplace in the direction that it's gone. So that's what we just made is the strongest and you know again, what it's designed to allow ourselves to compete on a level playing field with all of the other ecommerce players out there when you look around you see free shipping almost everywhere you go.

And so we're just trying to make sure that our sellers get to a level playing field, we do have some courage and conviction because of our role as a marketplace. We get more data than in any individual seller has and that means as a leadership team, sometimes we need to lead.

And well educate and communicate to our sellers and then we'll do some things to help make sure that the whole marketplace gets to where where what what serves our sellers best well keep doing that.

And with Amazon.

Oh, so that again I'm sorry. Your second question was on Amazon Prime day correct.

Yes, just if it had an outsize impact this year compared to previous years.

I don't think we're commenting on individual days, but the guidance we've given for the rest of the year, we think appropriately incorporates how we how we see the rest of the year.

Got it thank you.

Yes. Thank you.

Thank you.

And our next question comes from the line of Sweat could urea with RBC capital markets. Your line is now open.

Thank you two questions. Please one on the impact on revenue from shipping at the AD. So can you quantify little bit to the full year guide increased by $12 million at the midpoint.

How should we think about where it's coming from of that 12 million between the two.

And then the second on seller adoption for.

The shipping service ratio I think you mentioned, 24% I may have gone that wrong as what percentage of sellers have a you think have adopted right now and how how do you think that grows in.

In the back half wanted to fully launched do you think it would be 50% of sellers, 70% exiting the year that would be using the free shipping. Thank you.

Right. So I'll take the first and rich will take the second.

On the first your questions really can we break down the revenue increase I think when we're increasing our guidance.

How do we break down the components and we're not going to give you specifics, but let me try to give you directional and Dimensionalize first we're taking up our gms guidance and as we pick up our Gms guidance. There's some revenue flow through that just naturally comes from that so that's a component of why we're taking up revenue we talk about Gms for just a second.

We entered the year, giving guidance and when we entered the year, we had a sense that we were going to make progress on free shipping in fact, I said and every opportunity that this year, we will make really material progress on free shipping we feel really good about the progress that we've made in the first half of the year on product and marketing we think that those.

Those teams have done really well.

And we've had a chance to test.

Some of our free shipping ideas and do simulations and things like that and the combination of all of those make us even more confidence in the second half of the year and thus the increase in guide to Gms.

Which has some revenue impact, but the larger piece of.

Increasing our guidance on revenue is etsy ads.

And there are two components to Etsy adds one is simply a reclassification. So Google shopping did not used to count as revenue and now it does so the simple reclassification of Google shopping from not revenue to revenue has an impact on.

Obviously on our revenue.

But all of that is a straight flow through with no gross margin.

The second thing is we expect increased seller adoption and increased budget.

Which will in fact grow revenue and that is more true revenue growth that has.

You know.

That has real implications for revenue overtime.

To the extent that that's on the Google shopping side, that's still a pass through but again over time, we think gets he adds has real margin accretive.

Value too.

The etsy.

So on this.

Before I jump into the second question, but I just want to.

Punctuate the point that the revenue guide that we gave.

At the midpoint.

Is it.

Implies a 17.1% take rate.

From the 16.5% take rate that we've seen in the first half of the year. So I wanted to make that point. They rightly capturing the fact that revenue guide was a significant increase in our run rate.

On the shipping I, just want to make sure I'm clear I did say that shipping adoption grew to 24%.

For sellers in the four markets that we offer it.

So its only offered in 44 markets, what we're talking about shipping labels the products that we offer them as a seller service that is not 24% adopt adoption of the free shipping guarantee that we've just rolled out we did not give a metric on how much that has been adopted but we're really pleased that progress is exceeding what we expect is where we expect it to be at this point.

Okay. Thank you very much Josh and Rachel got it.

Thank you.

Thank you and our next question comes from the line of Rick Patel with Needham and company. Your line is now open.

Hey, guys. Thanks for taking the question and congrats on the strong execution.

I'm, hoping for some color on Gms per active buyer. So good progress. There can you provide some granularity on what's driving that growth I think Rachel called out frequency, but I'm. Just curious are your search results optimizing product pricing as well.

And just curious where the opportunities are and how sustainable.

Continued increases are.

Yes.

The number one driver is.

Well, we're seeing visits per visitor does well and I think you know TV as helpful to remind people of wed come back.

To etsy sort of more moment in which were irrelevant.

So that's helpful and conversion rate continues to see progress.

So it turns out that many of the people who shop tenants he come back to Etsy not infrequently, we've just got to.

Got them off in line to buy and so we continue to see some progress and conversion rate as well and it's really the combination of those two that are driving the gms per buyer what I.

What I didn't mention is A.O. VSOE, we've seen less progress to date on average order value. So the increase in Gms per buyer really is a function of people buying more often.

So far it's not so much that they are buying.

More expensive products, although I think that there is a real opportunity for us to move HIV as well over time and you know we're excited about the potential there.

I just add that you know we had so much to talk about in this call that we didnt give as much color around which products. We were working on that drove that the conversion rate increases or the visit increases. There is a tremendous we did talk about a tremendous number of product wins and an increase in velocity of products that we're putting into market and as we.

A follow up after this call at various conferences and one on one calls will can get or we can share a little bit more color on progress that we're making on search and other.

For rights to win that the dosh laid out.

And can you contextualize marketing from a us versus international perspective, I'm just curious how these core cohorts of behave differently to various marketing initiatives, you've tested and how we should think about the opportunity going forward.

Yeah, Great question.

So.

First let me break it out into performance marketing and then above the line in performance marketing, we apply pretty much the same standard all around the world.

So we we talked about our sort of ROI threshold of buy to the marginal.

Until the next dollar has a marginal return less than our cost of capital that we do everywhere above the line marketing, we really only been testing in the U.S.

And so we arent really able to talk about the impact of above the line marketing outside the U.S., yet we do expect that to change but at this time, we began with above one marketing.

In the us.

Does that answer your question.

Yes, it does thanks very much.

Thank you.

Thank you and our next question comes from the line of Maria Ripps with Canaccord. Your line is now open.

Great. Thank you for taking my questions.

Just a follow up on frequency any incremental color you could share with us on your progress with improving frequency and then in terms of habitual buyers can you talk about how long they've been would that be on average what are the most responsive to and what are some things that you see in the behavior. Then maybe you can leverage across your broader user base.

So on the metrics that we gave in the call where that are habitual buyers were again, the fastest growing consumer segment.

And so those are the buyers that spend $200 or more and visit us six times or more or make some more purchases rather in a 12 month period. So we're we're pleased that we're influencing that category through our marketing and product initiatives. The other thing we see is that Dms on a trailing 12 month basis per active buyer continues to grow it grew to over $100 in the.

In the quarter for the first time ever and that was if consecutive quarter of growth and when you look at that number on a two year stack. It again, an acceleration. So we're that that's a proxy for us saying on average over a 12 month period. So it smooths out seasonality as we have more active buyers or buyers that have only come back to us in a 12 month period that number is growing and so that to US is one of the metrics to give that that.

Shows that frequency is actually having an impact in terms of describing the sort of average tenure of habitual buyers or some other characteristics.

First they tend to not show up as habitual buyers on day one.

They tend to have been with us for more than a year. So what you see as people steadily use us more and more.

And what what seems to differentiate habitual buyer versus or not is that they kind of understand the treasure chest of etsy. They figure out how to find the best stuff on at sea, which as we've talked about at length, we want to make that easier.

And these are the folks who figured out kind of how to navigate that and they have their own tips and tricks. So spending time with them thinking figuring out what those tips and tricks are and how to kind of build those into the core experience. So everyone can have that experience is part of what we do.

But I'd take heart in those other than that describing habitual buyers a little tough it's not that they're all wedding people are all baby people are all home furnishing people are you know it turns out that they're pretty diverse.

In almost every other way and what I like about that is it suggests that it's not a small niche where it's only one or two use cases that lead to this behavior. There are many different use cases that can lead to this behavior. We've just got to make it easier for the sort of mass audience to to to find the treasure chest. The visual buyers have had that.

Temerity to to do.

And I think we can we get a lot of value there.

Great. Thank you both.

Thank you.

Thank you and our next question comes from the line of Brian Moore with Morgan Stanley . Your line is now open.

Thanks for taking my question just to go back to the last question a little bit on new buyer growth ritual I I might have already bicycle is in and out you mentioned that you're changing the.

ROI payback kind of extending the payback that you're applying to the marketing spend going forward.

And then if that is happening just talk to us about what's causing that strategic change and how you think about incremental cost of buyers going forward. Thanks.

Yeah. So we talked about that because we have shifted the mix of our overall spend to include upper funnel marketing, which is television and digital video those tend to have longer term payback periods because we're.

Relying on the frequency of the impression.

Causing people to understand why equity and one at sea and went out into that takes longer for that to have an it has more legs to it also but we haven't reduced our ROI hurdle and we have the same expectation of ROI is just the payback period shifts out a little bit.

Got it and then you go to the other half of the equation. So the conversion point, Dave about the Q.

A couple of specific examples we've had kind of conversion when I guess I just wanted to ask if you could sort or male down the one or two key points of friction you still see on the platform to really drive higher conversion from always repeat visits and one of the things that you're really watching to drive faster overall gms per per buyer from better conversion.

So.

At the risk of.

Being boring, but I don't mind being boring because we keep going back to the same things.

Can we really have a great search and discovery experience how people can find a good.

Good stuff easily.

We built the trust in the brand so that buying from someone you've never met.

Feel safe.

You know, it's really those core can you find it and do you have the confidence to buy it elements. What I hope you see is us, making really steady progress sometimes incremental sometimes more bold.

In those journeys I think the free shipping launched over the past few weeks as an example of us doing something more bold in that direction.

Great. Thanks.

Thanks, Brian .

Thank you.

Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.

They want to dig in a bit more I guess around marketing and how you magnifies everything that you've effectively come on put in place over the past.

About five quarters.

You know.

There was a license.

Moving around all of these new initiatives.

Labels shipping.

But when he first and then big days right.

Into the cloud and leveraging all that when you start to see the confidence to our lack of deploying more marketing and kind of bring it all together.

When you say competence around the marketing do you mean, the return on our marketing spend to the shipping I'm sorry can you can you.

Hello Hello.

In the market.

Increasing marketing and we kind of dropped off so I think you got it exactly why when trying to understand when your comments are going to step on the marketing to drive the top line.

Great got it so look we spend what we think we can get a really good return on them. We have a lot of discipline around that and we're proud of that discipline. So what you're seeing us do right. Now is take our margins down just a tiny bit which I think is really good news because it means we've got a lot of confidence in the marketing initiatives and the product initiatives. We got we have right now.

So much so that we're going to spend a little more into them and we feel really good about that.

So let me let me give you a little more color maybe you'd be interested in that so for example in performance marketing, we think that we can have better data feeds and.

And having better data feeds we're going to be able to be more effective with folks like Google and some of the social channels, we think that our bidding strategies can become more nuanced and segmented and we think that's going to have an impact and we think our landing pages can get better.

And Ryan our new CMO is a real expert in really technical in these areas and by the way our marketing team has been doing a fantastic job without a CMO for the few months past few months and I want to call a shout out to that team that's really done a great job.

In spite of not having a CMO, but with ryanair, they're even more equipped to go attack those kinds of opportunities that are going to make our marketing and the performance channels more effective and then in TV, we're pretty new.

To TV you know we've been doing this for less than a year and so the size of budget, we're putting the TV relative to folks that have been doing this for a year or less is actually I've done a lot of benchmarking of their companies and were not being that Dimmit I don't think for a foot for folks that have only been doing it.

For one year that said, we're optimistic that if it continues to work like its seems to be working so far you might see us take our TV budget up further in in time to come and we're excited and I will say that the launch events. He adds makes the pie bigger this gives us the chance for to bring the sellers into the equation, even more and let them help to fund some of the performance marketing channel, which they're uniquely well positioned to do so we can invest even more above the funnel and make the pie bigger for everyone.

Jason This is Rachel I'll just add that.

Josh mentioned it in his prepared remarks, but we will we pulse TV on and off and TV will pull back on as we enter the late.

Third quarter into the fourth quarter. So I think we're spending a healthy amount on.

Upper funnel marketing and then on our performance marketing, we don't even give the team a budget, we give them an ROI hurdle and they spend as much as they can add up to that to where that hurdle and so we feel like we've we continue to optimize their so that they can spend more we continue to test less mature channels. So that we can give them that kind of sort of link you open to buy to go out and spend up to the ROI hurdle when we have confidence in the channel. So I think we're I consider us to be on the more aggressive side of using marketing as a lever for growth.

Profitable growth right, just we're super focused on profitable growth.

All right. Thank you and our next question comes from the line of Marvin phone with BTG. Your line is now open.

Great. Thank you for taking my question, just just drill a little bit more into that the ad.

So I understand what you're saying about the you know sellers you know have better economics for that and.

Spend more than they might otherwise be <unk>. So is it conceivable that they'll actually be spending more in aggregate and then at the current paid search budget it sounds like in the long run.

You know they can probably be spending multiples that you guys are spending right now and just mechanically how would that work in that.

You know you guys will check to see if that seller has and the AD budget and if not you will serve up your purchase that paid out youre still still or how how mechanically is that going to work.

Yeah, Great question. So let me start with the second and then go to the first so mechanically yes, a seller gives us a budget and then we look at their listings in their shop.

And we work with Google to figure out what would be a reason.

Responsible bid.

The buy visit on their behalf.

And we look at what a good what we what we estimate the conversion rate of that visit would look like and therefore, what would the return on AD spend and what we're really trying to do is back into what do we think there are robust we will be.

And spend as much as we can reasonably spend on their behalf.

With well maintaining a good Ross and we obviously have much more sophisticated tools than any individual seller would be able to have on their own and our landing on the FC domain, which as you know a lot of confidence and performed better on average than landing on an individual sellers domain, there's real value in that as well.

So that's how the program works and could it be bigger than that sees it you know existing performance marketing spend over time I'd say, it's too early to tell you know we're going to come into this in the.

The second half of the year in test and learn our way in.

But we think it can drive a lot of value for sellers and we're really excited about that and so we're optimistic about the future of this program.

Great and just as a follow up it sounded like you were saying that social Retargeting is now ROI positive.

If that's the case are you guys are you planning on.

Expanding your marketing spend in that channel and.

Could you just give us an idea of how big that channel is maybe relative to TV or some of the other mass mass channel yes.

Yes, so we did call out that we're finding some tactics within social that we've now figured out how to get ROI positive with dynamic retargeting being one and so you should expect us to use the same methodology, which is the next dollar should still be ROI positive and when the next dollar isn't ROI positive we don't spend that dollar.

So as we on Earth tactics.

We use them you know dynamic retargeting means that someone.

Who's been on ATSI and has found a particular product NFC, we might have the opportunity if they're also on Facebook to so there's there's it's only a certain community of people that you can reach so the size of that is smaller than being able to target for example, everyone on.

Social channel.

But you know we're you know I think it is early days for Atsis marketing capabilities, and I think that as we invest more and better martech.

I think we can continue to unlock more opportunities to invest and grow.

Great. Thanks, Josh Thanks, Rachel.

Thank you.

Thank you.

And our next question comes from line of.

Elliott Alper with da Davidson. Your line is now open.

Great. Thank you and now that you've locked your price increases last year, how should we if at all I think about your strategy regarding future price increases.

And secondly, you touched on this a little bit before but.

Ebay on its earnings call indicated gms growth negatively impacted.

By 100 basis points due to online sales taxes are you if at all or quantifying the impact for you. Thank you.

Sure I'll start and secondly on the first we're not quantifying it but we think we've appropriately baked into guidance.

It is affecting we do see that when when we when when we begin to collect state sales taxes. It does affect.

Conversion rate and Gms to some extent than you know.

And there is real price elasticity. So the states that have higher sales tax it affects more than states that have lower sales tax.

So we're seeing that California is coming online soon that's big state.

So.

While we're not quantifying it we are seeing some impact than we believe although time will tell we believe that weve appropriately baked into the guidance that we've given you.

With regard to price increases and take rate.

I think that Etsy ads is a really great example of an optional service we can offer to sellers that delivers a lot of value for them and it makes the pie bigger for everyone. So this is an opportunity for us to keep our mandatory fees low while offering great value added services that they may or may not choose to opt into but as they choose to opt into them. The effect is that at these take rate goes up and so we're we're quite excited about etsy ads in the future of Etsy ads and if you look at just taking the midpoint of guidance.

For the second half of this year. It implies is Rachel says that our take rate goes from 16.5% today to 17.1% in the second half of the year and does that in a way that we think sellers are going to really like.

They don't have to use adds he adds if they don't want to they are going to get a ton of value from the platform. If they don't use it but they can get even more value by adopting at sea ads and we like that strategy.

Thank you ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.

Everyone have a wonderful day.