Hi everyone, and welcome to Etsy's Second Quarter 2021 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. And joining me today are Josh Silverman, Chief Executive Officer, Rachel Glaser, Chief Financial Officer; and Gabe Ratcliff, our Director of Investor Relations. Today's prepared remarks have been pre-recorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&A window chat, displayed on your screen. Feel free to use it at any time as it will remain open throughout the entire conference call. I will be reading your questions and Gabe will help me to try to get to as many as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 or its abatement may have on our communities, business, strategy, or operating results; the potential impact of our strategic, marketing, and product initiatives; the potential impact of our acquisition of Depop and Elo7 on our market opportunity and on our future consolidated financial results; and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties which are described in today's earnings release and our 10-Q filed with the SEC on May 6th, 2021, and which will be updated in any future periodic reports we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we disclaim any obligation to update that. Also, during the call, we'll present both GAAP and non-GAAP financial measures. Reconciliation of GAAP -- non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb. And good evening, everyone. Etsy delivered a strong second quarter. I'm pleased to share highlights with you on our progress and our results. Consolidated GMS was $3 billion, up 10% year-over-year on a currency-neutral basis. In fact, non-mask GMS on an Etsy standalone basis grew 31% year-over-year, which frankly, I find remarkable given the extraordinary comps from last year. And on a two-year basis, this is 153% growth, also excluding face masks. Revenue grew 23% and our adjusted EBITDA margin was 26%. We feel great about these returns we're seeing as our investments ramp. We also announced the acquisitions of Depop and Elo7 during the quarter, which I'll talk about in just a few minutes. Our Q2 '21 performance is particularly impressive when put in the context of the year-ago period that we're comping. Remembering back to Q2 of 2020, brick-and-mortar stores were largely shut down with the exception of essential services. And even at those essential stores, lines were long and shelves were often empty. Even e-tailers faced similar challenges with many products out of stock and long shipping delays for the rest. And in the midst of this crisis, Etsy mobilized the cottage industry to the rescue. Etsy sellers had so much of what you needed and were ready to ship quickly, at a fair price, and without significant supply chain challenges. In fact, Etsy was one of the few places where you could shop with confidence and convenience in Q2 of 2020. As a result, we delivered the highest growth rate of any Company that we track in our sector. Flash forward to Q2 of 2021, and thankfully, things began to look dramatically different. While the situation is still evolving, people are moving about much more freely and beginning to travel and dine out again.…

Thanks, Josh. And thank you, everyone, for joining us for our call. My commentary today will cover consolidated results, key drivers of performance, and etsy.com standalone results, where appropriate. As a reminder, Depop and Elo7 results are not reflected in our consolidated financial results or KPIs for the second quarter. We had a strong quarter across the board despite macro headwinds and challenging year-over-year comps, delivering GMS revenue and adjusted EBITDA, squarely within our expectations. Before diving in, I want to point out that we're now growing off a meaningfully larger base. Just taking GMS, for example, we've added $2 billion incrementally to the 2019 base. And we're just beginning to benefit from the power of what this larger scale can do for Etsy over time. Moving to the financials. On a consolidated basis, Etsy's second-quarter GMS grew 13% year-over-year to $3 billion, revenue grew 23% year-over-year to $529 million, and adjusted EBITDA was $139 million with a margin of about 26%. On an etsy.com standalone basis, we see non-masked GMS growth as an important barometer of underlying trends in the core business. In Q2, face masks declined to 1.4% of etsy.com standalone GMS, declining sequentially each quarter since Q2 of last year. And as you can see on Slide 23, non-mask GMS grew 31% year-over-year, particularly notable considering last year's unprecedented spike in new buyers with the onset of the pandemic. Non-mask GMS growth on a 2-year basis remained fairly stable relative to last quarter in the historical trend line. These are encouraging data points that highlight strong underlying trends in our business. While we don't anticipate showing the monthly cadence of growth in the future, we thought it was important to show the stability of our trends in light of the expected headwinds in the coming quarters. Here…

Hi, everyone. Good to see you today, and we're going to dive right into questions. Okay. I'm going to start with Alexia Tsimikas from D.A. Davidson. We've had a lot of investors ask us about the impact of the economy reopening on Etsy. How should we think about the impact overall? And additionally, what categories are benefiting from the reopening, such as weddings, and what categories would you say are being negatively impacted? I think, Josh, we can at least start with that one?

Sure. First, we feel really good about our Q3 guide. We're talking about Etsy Standalone growing in the mid-teens Q-over-Q in a world where we anticipate that in Q3, the world will be largely reopened and people are going about their lives much like they were not entirely like they were before COVID, of course, but much like they were before COVID. So, some of the things that are powering that, we are seeing a resurgence of growth from some categories like weddings. So, weddings, for example, was up over 100% year-over-year in Q2. And it was the second sequential quarter of growth for weddings, so that's certainly helpful. We're also seeing building momentum in some categories like back-to-school. So last year was all about homeschooling and people were buying desks for their kids at home. Now they're buying backpacks and they're buying all sorts of things to get ready to send their kids back-to-school, and we're already seeing that. We're really pleased to see sustained momentum in many categories. For example, Home Furnishings is seeing nice sustained growth and, as you know, that's our largest category. And some of the things that are really hot in-Home Furnishings right now are kids' furniture, gardening activities, and things like that. And then, as always, we're seeing the viral trends; whatever is hot and new right now is showing up on Etsy. Things that are hot on TikTok, for example, show up on Etsy within moments and actually can drive millions of dollars of GMS. So, those are really the 4 buckets. And Deb did I -- I think I got the beginning well.

No, you got it. You got it. That's great. Thanks, Josh. The next one I'm going to take from Ana Andreeva from Needham. This one is for Rachel. A question on taking rate came in flat sequentially. What's driving the upside, excluding the new businesses to the second half and how do you think about the take rate opportunity, longer-term for Etsy?

First of all, I think we gave a lot of color on taking rate because we gave you what take rate would be with and without the new businesses. So, you can see that without the new businesses, our take rate would have been 17.7% and the new businesses, though much smaller than Etsy, have lower take rates and make some contraction to that overall number. Etsy's gotten take rate gains from the expansion of Etsy Payments to 9 new markets globally, and Reverb actually took a price increase last year as well, which helps keep the former consolidated Etsy take rate high. We look at taking rate improvements as a value exchange. So, where we can offer more services that are -- that benefit the seller in exchange for some fee increase, we are open to doing those things. So, for instance, last year, we added Offsite Ads and that was a win-win for sellers and for Etsy. So, there are lots of opportunities to continue to add services, and where we see a fair exchange of value, we'd consider taking fees for that. But right now, we have no plans for that and there's nothing in our guidance that would suggest that we have any plans for that.

Great. Thanks, Rachel. The next one is from Eddie Yruma at KeyBanc. Josh, I'll toss this one to you. "You moved very quickly to bring selection inventory from DaWanda onto the core Etsy marketplace. Do you see the same opportunity existing with Elo7?"

Great question. Thanks, Edd. With the DaWanda arrangement, we had an Etsy business in Germany, and we did a referral agreement with a basically Etsy look-alike Company called DaWanda in Germany. And we just combined the 2, you're right, very, very quickly. Brazil is different. Etsy doesn't really have a presence in Brazil. And in fact, cross-border trade between Brazil and other markets outside of Mercosur is really tough for a bunch of reasons. And so, we expect that Elo7 will remain a standalone brand and a standalone business, giving us a presence in Brazil for the first time. And when we look at who has succeeded in Brazil, it tends to be the native companies. Mercado Libre is very successful there, and eBay didn't manage to penetrate. So, we think having a native indigenous brand in Brazil, built for Brazil, that is focused primarily on domestic trade, is the right way to go. And we're really excited about the Elo7 team and brand as our way to do that.

Great. Since we're talking international, we'll go next to a question from John Colantuoni from Jefferies. Last quarter, Josh characterized the advertising strategy in Germany as being different than in the U.S., because Etsy is leaning into brand marketing early on. After having success with your brand marketing campaigns in the UK and Germany, is the next step, to begin layering in more performance marketing spend, to take advantage of the improved awareness that you were achieving. Josh?

Yes. Is that for me or Rachel?

I think for you. Yeah.

Okay. Got it. Sorry. So, I think the short answer is yes. We are seeing that the brand marketing spends we're doing in Germany and the UK is making our performance marketing more effective and, therefore, we are spending more. The performance marketing spend is quite mechanical. We have very clear ROI thresholds and we have quite clear ways to measure impact in nearly real-time. So, as the performance of our performance marketing gets better, we just automatically increase spend, and if things happen to depress it, we automatically take spend down. But you're right that because the TV advertising is making brand awareness higher, it means the propensity to click on our ads is higher and the lifetime value of the customers is higher, and that allows us to spend incrementally -- incrementally more in those markets.

Okay. Great. The next one I will take is from Laura Champine, from Loop. This one is for Rachel. what drove the decline in a mix of GMS from paid channels in the quarter?

Good question. We said the percentage that was paid was 19%, which is down from the previous quarter. Remember that one of the things that we do is invest in top-of-funnel marketing, which we don't count in our paid spend because the traffic from the top of funnel marketing comes in through the direct channel. We spend a lot of money incrementally marketing in the second quarter. The dominant portion of that incremental spend was on top of funnel marketing in the UK and Germany drove a lot of toplines that we count as direct. That's one of the answers to your question. The second answer is that we actually spent a relatively flat amount of money on performance marketing, and we got the same or better ROI. And also recall that our performance marketing is now subsidized by our Offsite Ads product. We don't actually see that subsidy in the marketing line, that shows up in revenue. All of those factors together drove a really high return on our performance marketing spend and a relatively lower percentage of total traffic coming from paying.

Okay. Great. Thanks, Rachel. Next from Nick Jones at Citi. Josh, we'll throw this one to you to start. Can you talk about the effectiveness Etsy has had in managing Reverb and the implications for its ability to manage Elo7 and Depop? And how many other opportunities might there be out there that could look similar to these, in terms of focusing on products or demographics or geography? I assume that means in terms of potential future acquisitions.

Yeah. We feel great about the progress to date with Reverb. And, really, job 1 was to partner with the Reverb team to think about where can their product efforts be most focused to improve conversion rate. That makes the value of a visit go up, and the lifetime value of a visitor and a customer go up. And, at the same time, how can we optimize their marketing spend? And those 2 are actually a virtuous cycle because if the conversion rate goes up, the value of the visit goes up. That allows you to actually invest more in marketing. And if your marketing is more efficient, you can really get the flywheel to turn. And so, we're excited about how that has worked at Reverb and we hope to execute similar ideas, not the exact same, but similar kinds of playbooks at both Depop and Elo7. They're both very different marketplaces and they have different dynamics and they face different trends. And so, step one is to get in and partner with their teams and understand where they are and see where we can add value and what their current roadmaps are. The teams are doing that very actively. I think we've owned those two businesses for 2 or 3 weeks in total. And the teams are already there and working, and we're excited about what the future can hold. I will say that this takes work, and it takes time, and it takes effort. And we are very conscious of the fact that the big prize here is the core Etsy marketplace, which we are incredibly excited about the massive opportunity ahead of us at Etsy. And so, we want to be thoughtful and disciplined as we always are. Integrating Depop and Elo7 I think is meaningful, and we want to take the time to integrate those 2 and make sure that they're successful and really set up for success. That's very much our focus right now. To the question of, are there other two-sided marketplaces out there? Maybe. As I've said, it's lightning in a bottle. It's not every day you come across a truly authentic, organic, two-sided marketplace that really has mojo. In a place, it's additive to Etsy where Etsy is really positioned to help, where we can acquire it at a fair price, and where we have the bandwidth available to do it. So, we've got a high bar and, I would say, we are going to be patient and picky. And right now, we're very much focused on the core Etsy marketplace and integrating Depop and Elo7.

Okay. Great. Thanks, Josh. I'm going to give a couple to Rachel that also have to do with Depop and Elo7, more on the financial side. So, from Shweta Khajuria from Evercore ISI; Rachel, could you quantify the impact from Depop and Elo7 included in the Q3 guide?

Hi, Shweta. Thanks for the question. First of all, I'll start by saying that our 3 subsidiaries in our new House of Brands together represent less than 15% of our total GMS. So, they're still important. We see a huge opportunity for them, but they're a relatively minor impact on our total guide. And at Etsy, we try to think about focus and we're very focused on continuing to grow the Etsy marketplace. What we've disclosed for Depop and when we announced the acquisition was that Depop did about $650 million of GMS in 2020 and about 70 million in revenue, and it was growing about 100% at the -- in 2020. You would expect that Depop is experiencing the same macro headwinds from the economy reopening, that all of the e-commerce is experiencing. So, we -- while we're not giving specific guidance for Depop now, you can consider that that's factored into our guidance. Elo7 is much smaller. Also, they had -- they did not have a tailwind from the pandemic in 2020 as Depop and Etsy did. A lot because they're -- they've had significant impact from COVID in that region, and also their business is much more concentrated in the event space, which has been more hampered by shutdowns. We did, however, say in our guidance that the addition of those 2 new businesses to our former consolidated numbers, a former consolidated meeting Etsy plus Reverb, creates about a 300-basis point contraction to the bottom line. These are very new businesses. We've owned them for 2 weeks. Reverb's a perfect example of how we've been able to grow and optimize that business. We're super excited about it while we invest in them for growth.

Rachel, while I have you. Similar question -- similar topic from Jason Helfstein in Oppenheimer. "If we assume a 10% take rate for the acquisitions of Depop and Elo7, can that get us close enough to the revenue impact for the acquisitions as well in Q3?"

So, I think we gave pretty clear and transparent information on the impact of taking the rate from our subsidiary businesses. Because we said our total take rate for Etsy would have been 7 -- for our former consolidated businesses would have been 17.7% without them. And I believe we gave take rate specifically for Depop when we acquired them in about that 10% range, so that's a good number. And Elo7 today is very, very small, so it's not going to move the needle. So, I think you're safe in that assumption.

Okay. Great. The next one is from Ygal Arounian from Wedbush. You added 8 million new buyers this quarter, after a big last 12 months of new and reactivated buyer ads. What is driving the continued uptick in new buyers strategically? And how is this behavior from this cohort similar or different? Maybe Josh, wants to talk about overarching new buyer behavior?

Sure. We feel great about that. And so, adding 8 million new buyers is a sequential decline from what we were adding in the pandemic. But it's 8 million new buyers. In fact, it's almost twice the level of new buyers we were adding before the pandemic. I think that's, again, quite remarkable. And they're coming from a number of sectors. One, international has been great and we are growing in international markets a little faster as a percentage of the total than we are in the U.S. and in places like in the UK and Germany, for example, our core focus areas, the investments we've been making over a period of years to make those markets more robust. We're seeing some of the fruits of that. But even in the United States, there is still a lot of people who don't shop online, don't regularly shop online, or haven't really heard of Etsy. Etsy is coming into the common vocabulary now and people are starting to say, "Oh, yeah. My neighbor told me about that," and, "Oh, yeah. I hear that's really hip and cool." There's a lot of people who still haven't yet experienced Etsy. And then there's new demographics that we're starting to really lean into. For example, men, that's about 50% of the population, and it's very underrepresented at Etsy, as we've said. And we think that leaning in more there, we can do a lot to open up to new segments and new categories even within the United States.

The only thing I'd pile on to that with is that our new buyer growth on a trailing 12-month basis we said was 40 million, so it's a really huge number. And we've talked about on this call and internally about the pull-forward effect of -- we acquired so many new buyers in a short amount of time that we were actually pulling forward new buyers that at our old rate, we would have acquired in future years. And just to remind you that you can only be a new buyer once. What we're seeing with new-buyer deceleration is 100% in line with what we expected, and we take -- we get excited and take great comfort from the fact that all of these buyers are coming to Etsy more often and shopping more frequently. The GMS per active buyer number up 22% in the quarter is super exciting to see.

Great. Okay. We've gotten several versions of this question, but I'll ask the one that came in from Ana Andreeva from Needham. We have heard from several online companies talking about the intra-quarter slowdown as the economy reopens. Can you talk about what you are seeing quarter-to-date in Q3 2021, and if there are any call-outs from a category standpoint?

Do you want me to grab it?

:

Okay. So, we're not giving any -- unfortunately, giving any guidance about what we're seeing in Q3 now. But, maybe, a simple way to answer your question is our guidance assumes that there are no further locked downs. So, of course, as we see what happens in the world, that may or may not change the forecast in the guidance that we've given.

That's great. Thanks, Rachel. The next one is from Nick Jones, and I'll give this one to Josh. "Can you talk more about the Star Seller program? Is this an icon on the seller profiles? And can you give us any data that you can share about how this might help sellers to sell more?"

Yeah, great question. Thank you for that. Yeah, the Star Seller program is really designed -- Yes, it will be an icon on people's shops. That will show up in a few months. We might do featured marketing around our Star Sellers. It might influence your prominence in search. We're going to experiment with a lot of things. But at minimum, it will be a badge on your shop to highlight to buyers that you're one of the very best sellers. I think one of the most important things it does though, is it provides agency to sellers to tell them very transparently, "Here are the customer service metrics that buyers care about the most, and here is what good looks like." And that sets a bar, an aspiration for our sellers of where they want to go and where we want them to go. And one of the things we hear from sellers over and over again is, "What can I do to be more prominent?" And if you look online, the tips and tricks they hear from a lot of others are like keyword stuffing, put more keywords in your title. That doesn't necessarily make the buying experience better. Do you ship on time? Do you answer bio convo -- buyer convos in a really timely fashion? Do you get 5-star reviews on your products? Those are things that buyers really care about and we want to focus sellers on those things. And so, the Star Seller program is a great example. And by the way, it's not the only way we can do this. But it is a powerful example of how we can really tell sellers exactly what they can do to be more prominent, and give them agency in their own success, in a way that creates a race to the top and lift itself up. And I'm really excited about this track-up work in the coming years.

Okay. Great. Thank you. And from Marvin Fong at BTIG. Here's another one on Q3 guidance. Would you say you are contemplating mainly a slowdown in traffic or are you also seeing changes in conversion rate, items per basket, or purchase frequency? Rachel, did you want to take that on?

Sure. So, no, we are not contemplating a decrease in conversion rate in frequency. We're really excited about the product and marketing initiatives that we have that are actually driving growth in those metrics. And you can -- as we've talked about and answered a few other questions, there's a deceleration in new buyers, largely associated with masks. Remember that in Q3 of last year, 11% of GMS came from mask sales, and new buyers were a lot of the mask buyers. So, those things go together. And that we have these really, really big numbers to comp. We said that non-mask sales in Q3 last year grew 119%, and we've roughly added $2 billion of GMS on a 2-year basis. So, these are really big -- big numbers to comp, and so it's mathematical gymnastics that we're doing, but with lots of underlying growth opportunities in the core business.

Okay. Great. And then I will squeeze one more in under the wire here from Navi Khan at -- Naved Khan, excuse me, at Trust. What -- how are you thinking about the opportunity to migrate payments on Depop to Etsy 's Payments and how should we think about the timeline for that? It's for you. Rachel, you want to do that one or -- Josh?

I'll take that one. Depop has a great payment structure today. And so right now, each business has its own CEO, they have their own operations. We want them to run and fully optimize their businesses. We are thinking about, loosely, where we can find optimizations maybe in 3 categories. First are things that are back-office like G&A, where we don't necessarily need to replicate certain functions in every single business and we can handle those things from a corporate perspective. Things like legal and finance and treasury and things like that. The second tier is things that we can operate as services across all of our brands. So, payments might be an example of that and we'll certainly explore that. There might be other things like member support, and trust, and safety. There might be other services like our ad network. And then there are things that we think need to be operated directly, and with innovation and creativity in those management teams, like product and engineering. And so, we're just -- again, we've only owned them for 2 weeks. We will look -- we continually will look for opportunities to optimize and scale as we grow. Payments might be one of those areas and we'll be happy to talk to you more about it as we dig into it.

Okay. Great. Josh, did you want to add anything on that one or are we good?

Thanks very much for your interest. I think -- when I think back to a year ago, the question we kept getting was like, is this just a flash in the pan? All these people are coming to Etsy just because they have to. And are they all going to go away when the world reopens? And I'm not saying we fully post-pandemic or the world has completely reopened, but people have a lot of choices right now. And I couldn't be more excited about the fact that in a world of a lot of choices, Etsy is growing. And it's growing materially and people are coming back. They're choosing to come back more and more often to Etsy even when they have vastly more choices than they did before. And I think that's super encouraging for the future.

Great. All right. Thanks, everyone for your questions, your attention. And we will talk to you, I'm sure, very soon. Take care.

Thank you.