Hi, everyone, and welcome to Etsy's First Quarter 2022 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG engagement. Joining me today are Josh Silverman, Chief Executive Officer; Rachel Glaser, our Chief Financial Officer; and Jessica Schmidt, who joined us in March as our Senior Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. [Operator Instructions]. I'll be reading your questions, and Jessica will help me to try to get to as many of them 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 global macroeconomic uncertainty, including additional or unforeseen impacts of the COVID-19 pandemic and general market political, economic and business conditions may have on our communities, business strategy or operating results, our opportunity, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic marketing and product initiatives and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in today's earnings release and our 10-K filed with the SEC on February 25, 2022, and which will be updated in any future periodic reports we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which we'll find on our Investor Relations website, along with a replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. In recent years, it seems one of the only real certainties has been uncertainty. You could say it's the new normal. We believe that over the past 5 years, our team has demonstrated its agility and adaptability, and our business model has shown resiliency through many types of macro conditions. In Q1, we rose to the occasion once again to deliver solid results in a challenging quarter, maintaining almost all of the gains reported during the extremely strong year ago period. Our consolidated GMS was $3.3 billion, up 3.5% year-over-year or approximately 5% on a constant currency basis, with the Etsy marketplace GMS down about 2% as we lapped the exceptionally strong growth of the prior year. Consolidated revenue grew 5.2%, and our adjusted EBITDA margin was 27.5%. Rachel will cover the results in more detail shortly. Etsy experienced a tidal wave of growth over the past 2 years. As so much of the world shut down, we went from serving 2.6 million to 5.5 million active sellers and from 47 million to nearly 90 million active buyers, and etsy.com GMS grew from about $1.2 billion in the first quarter of 2020 to $2.8 billion this past quarter. We have provided a pathway to economic opportunity for millions and a meaningful alternative for buyers looking to not be just another cog in the complex and increasingly commoditized global supply chain. As we move from the COVID pandemic to what appears to be an endemic, people have regained their mobility. And with that, come so many more choices for where to spend their hard-earned dollars. This is a great thing for humanity, and I personally couldn't be more relieved to see it. It also means that in the near term, we'll have to fight harder…

We are emerging from an unprecedented time. And within that, Etsy had unprecedented growth. We expect that this year is going to be unpredictable for us. There are certainly many moving parts both tailwinds and headwinds, which are difficult to forecast. People continue to be nervous about global events and the economy, and we'll have to fight harder for consumers' time and money. Yet we have ample reason to remain optimistic. We've got a world-class team with the creativity and conviction to invest with purpose on behalf of our seller community. We truly believe we offer something different across every brand in our house and that the size of the prize for Etsy is enormous. It's why I get so excited to come to work every day. I'll turn it over to Rachel now to take you through the results and provide our outlook.

Thanks, Josh. And thank you for joining us on our call. My commentary will cover consolidated results, key drivers of performance and Etsy Marketplace stand-alone results where appropriate. As a reminder, Reverb, Depop and Elo7 are all reflected in our consolidated financial results and KPIs for the first quarter. On a consolidated basis, our first quarter GMS grew 3.5% year-over-year to $3.3 billion. Revenue grew 5.2% year-over-year to $579 million, and adjusted EBITDA was $159 million with a 27.5% margin. On a currency-neutral basis, GMS increased 4.8% year-over-year. As we explained on our last call, the first quarter of 2021 was an anomaly, with 132% year-over-year GMS growth fueled by pandemic lockdowns and tailwinds from stimulus checks. Flash forward to the first quarter of this year, which was marked by a rebound in global mobility and headwinds from the highest inflation the U.S. has seen in over 40 years. Further, geopolitical events appear to be causing additional headwinds, particularly in Europe. We estimate that the direct impact of the crisis in Ukraine, including lost GMS from both Russian and Ukrainian sellers, was about 40 basis points versus the forecast when we set guidance for the quarter. In short, disposable income is lower and competition for share of wallet is higher across our markets. In that context, we're pleased with our consolidated GMS growth of over 200% on a 3-year basis. Moreover, we delivered better-than-anticipated adjusted EBITDA margins, demonstrating the strength of our marketplace model. So let me double click on our performance, starting with revenue. Marketplace revenue grew 3.4%, in line with GMS, while services revenue increased 11%. Within services revenue, consolidated ads revenue increased 14% year-over-year, primarily the result of continued improvements to ad relevance and expansion of ads in the buyer experience. Etsy Ads strength was a factor…

I'm going to dive right into questions. Good to talk to everybody. So the first one is from Maria Ripps, and this is -- she's from Canaccord. Josh, this one is for you. Can you talk about how the near-term uncertainty embedded in your Q2 outlook, impacts your investment planning and considerations as you look towards the second half of the year?

Absolutely. Thanks, Maria, for the question. If the pandemic has taught us anything, it has really strengthened our conviction even more in the enormous size of the prize that we believe we have at Etsy. And just to dimensionalize for a second, in the second quarter, pre-pandemic, Etsy sellers sold $1.1 billion worth of product on the core Etsy marketplace. And at the low end of guidance, we're projecting for Etsy consolidated $2.9 billion worth of sales. Etsy has been transformed, and maybe that is a glimpse towards that future we keep talking about, where we say in the future, we don't think there's going to be an unlimited number of places to buy things online. Amazon is going to likely continue to succeed. And it's not likely that there's thousands of places selling the exact same thing as Amazon, trying to compete head-to-head with them. Etsy offers something truly different, something really meaningful across many categories and many purchase occasions relevant to many people as we talked about in this call. We think the size of that prize is absolutely enormous. And so we have our eye on that prize, and we're investing for that future time. The next couple of quarters, absolutely are turbulent. We're facing reopening headwinds, we've got a war in Europe, we've got inflation. It's turbulent times for everyone, but the strongest companies invest with conviction and discipline through turbulent times with their eye on the medium term. And we think the opportunity for Etsy is enormous, and we are absolutely investing for that. And this is, by the way, the time when our sellers need us most to be investing, and that's absolutely what we're doing.

Okay. Great. Thanks, Josh. Next one was also from Maria, but I will add it from several other people, including Naved Khan, and we want to talk about the sellers reaction to our recent fee increase. How do sellers view all the incremental investments that we're making? And has there been any impact from the boy cut that we saw in the middle of the month on our GMS growth? And we'll start with Josh on that one.

Sure. So we announced a fee increase in mid-February, and the reaction from sellers was actually more muted than in prior fee increases. No one likes it when prices go up. But actually, the seller reaction was less negative than it's been in the past. And what we said before the pandemic was we have an enormous number of sellers with a huge amount of things for sale. And what they need is to bring us more buyers to bring them more buyers. That's more true now than ever. Etsy now has 5.5 million sellers. And they're counting on Etsy to grow the pie at the very moment when buyers have a ton more choice than they had even 3 and 6 months ago. They are feeling a lot more pressure in terms of their wallet, and they have the opportunity to travel, to dine out and to shop offline, it's even more important that we are investing to bring buyers to those sellers and have a really compelling offerings that our sellers can grow. It's the only way that our sellers can grow. And so what we've been hearing from thousands of sellers is we need you, Etsy to be investing to grow. And when our sellers sell in other places, and by the way, many -- most of the big ones do, they sell on eBay, they sell on Amazon, they have their own sites on Shopify or Wix, they sell on craft fairs. As we've said in all of our seller sentences, our sellers have a lot of choices in terms of where they can sell. And what they find and what we know is that the value on Etsy is greater. We provide more value than the other alternatives. That was true before the fee increase,…

Okay. Next one is for you, Rachel. This is from Naved Khan at Truist. Why are margins lower in Q2 '22 despite the higher take rates?

Hello, everyone. Thanks for the question, Naved. So the lower margins reflect what we talked about as playing through. We're going to continue making our investments, even though we're seeing constraints on the top line. And first and foremost is really investing in our own people. So we are adding heads. We added heads throughout 2021. We've continued to grow headcount in 2022. And as a reminder, we've also added the headcount in from our recently-acquired new subsidiaries, Elo7 and Depop. And a lot of those people are pointed at product development. So product and engineering are a lot of the headcount adds. And they are really the growth engine of the company because they are creating all the products that is going to do exactly what Josh talked a lot about, which is increasing more active buyers and increasing frequency to get more GMS per buyer. That's the first bucket. We're also going to continue to invest in marketing. We showed you a clip of one of our new ad campaigns, but we're also running campaigns in the U.K. and Germany. We tested some above-the-line marketing for Depop in the first quarter, and we'll be looking to scale and optimize that program as well. And we spend on performance marketing dynamically. So we'll continue to lean into marketing where we see that the ROI is there. And then the third bucket is it's less visible to GMS in the short term, but we are spending a lot on our trust and safety and member support organization. We talked about really having our customers' back in a way that they can see it and feel it more so than ever. We'll talk more about that as we announce it externally, but we're excited about that, and that is an investment that hits the P&L in the short term. And so we believe that's a long-term payback. Another place we invest is in our -- as we have more product engineers, we're developing more. So we use more cloud computing and hosting costs. So some of those things, you don't see the direct relationship between those investments and GMS in the quarter, but we believe in the long-term benefit of making those bets.

Okay. Great. Thanks, Rachel. The next one I'll give to you, Josh. It's from Shweta Khajuria from ISI Evercore. Could you please provide more color on the most impactful initiatives that have driven buyer frequency growth so far? And of the upcoming product improvements, which ones do you think could be meaningful purchase frequency drivers?

Yes, absolutely. Thanks for the question. So let me start with just awareness, because one of the top things we hear about why did you not buy on Etsy more frequently is I just didn't think of it. So we continue -- we said that before the pandemic, we continue to see that as I just didn't think of it, should have had a VA. And so the television campaigns that we showed in the investment and above the line as well as the performance marketing investments that we're making are more important than ever to just remind people of all of the different purchase occasions for which we're relevant. And we shared, for example, 30% of buyers who identify as women in the U.S. and the U.K. shop in Etsy at least once and 58% of them shop more than one time. So we know we're relevant to a lot of people a lot of the time. If we take a second on those 8 million habitual buyers, they bought an average of 13x over the course of the last 12 months. So we know that we can be relevant to them very, very often more than once a month, and I know we shop on Etsy more than once a week. And I know plenty of people who do. So we know we can be a lot more relevant. What is it that differentiates those habitual buyers that are shopping once a month or more. They figured out the magic of Etsy. Not only do they think of us more often or we're front of mind, but they know how to speak Etsy. They know how to put the right words in our search engine in order to get the right results. And we got to continue to…

Okay. Great. Thanks, Josh. The next one I want to give to Rachel is a couple of questions have come in on the Q2 guide. So I'll read the one from Marvin Fong of BTIG. Could you discuss how April GMS performed? And what are the assumptions driving both the high and the low end of your Q2 GMS guidance?

Thanks for the question, Marvin. So first of all, one thing I want to point out right at this -- at the start is to think about at the low end of our guidance, it's $2.9 billion. And in 3 years ago, so Q2 of 2019, we had $1.1 billion. So even at the low end of the guidance we gave, we have -- we are 3x -- nearly 3x bigger than where we were 3 years ago, and we were super proud of being able to have retained all of that growth. We did say on the call, I think maybe your question was written before I said it, and I know everyone's multitasking because there's so many people reporting today, but that we saw successive deceleration in GMS starting in about February. And we have seen that even in April. So it's been a pretty volatile and unpredictable quarter, pretty bumpy for a lot of people. It's part of the reason we gave -- we stayed with a wide range of our guidance and a reason why we're not still not giving full year guidance because there's just a lot we don't know and can't control. With that said, there's a lot of positive in the numbers that we gave. We talked about adding millions of new buyers in the last quarter, which was up 60% from the same quarter 3 years ago, and we have so much opportunity for growth as Josh laid out. So we're really pleased with the numbers that we're hitting, and we expect the other number that we gave in the guidance that we gave was that we would expect as we get to the second half of the year, generally, the second half is a bigger half than the first half, and we still expect that. And also the other fact pattern is that we're going to start to have lower comps in the second half of the year than we did in the first. So those things remain true, and we're just playing through with our investments and pleased with the results that we're delivering.

Great. Next one, I think, is also for you. Talk about how performance -- sorry, this is from John Colantuoni from Jefferies. Talk about how performance marketing ROI has trended for Etsy over the course of 2022? And whether there was any notable change in ROI that coincided with the pandemic reopening? How are trends in ROI guiding your approach to deploying incremental marketing from the revenue generated by the recent take rate increase versus letting it drop to the bottom line or spending those dollars into product initiatives?

Great question. We love talking about marketing at Etsy. So first of all, this is a reminder for everybody, we don't really give our marketing teams a marketing dollar budget. We give them an ROI threshold on performance marketing. And so our spend will dynamically increase or decrease based on demand. And because as we talked about, had a bumpy first quarter with some deceleration in demand through the quarter, the spend dynamically pulls back on performance marketing. So we did see that happen. Offsetting that is we spent more on brand marketing. And I think we said it was about 16% of total spend in the quarter as opposed to 13% in the period a year ago. So that trend is happening. When we announced the price increase, the price increase takes up our take rate, so it takes up our ability to continue to spend deeper into the ROI curve without compromising our ROI thresholds. And we started to spend ahead of that. So we knew that the take rate was going to go up and we started to spend ahead of that even before the price increase went into effect. So in March, we started to spend at a higher level. And now that the price increase has been effectuated, we are spending -- we're able to spend more on the performance marketing. We haven't seen necessarily any increases in CPC. So it's not necessarily more expensive to spend to buy that to buy that traffic. But as we've said many times, we don't -- we won't spend beyond our marginal ROI. Lastly, I want to remind everybody that we have our off-site ad program, and that subsidizes about 40% of everything that we spend. That's just another way of saying we can spend even deeper into the ROI curve, it was effectively when we launched that program, wasn't a take rate increase, but it's a success-based model, so the sellers only pay that additional fee if they've had a successful sale. That subsidy we get is not seen in the marketing expense line, it's seen obviously in the revenue line. So that is another factor that sort of offsets our marketing spend allows us robustly where we go. And lastly, we are spending more on -- you saw the brand campaigns, and we'll continue to lean into our above-the-line marketing as we go through the year more heavily in the third and fourth quarters, as we typically do.

Great. Thanks, Rachel. Next one is for you, Josh, from Victoria James at D.A. Davidson. How is inflation affecting your business? To what extent are you in relatively favorable position versus your e-commerce peers because your sellers allow consumers to save money when they buy things like apparel or home goods? To what extent are you relatively favorable versus your e-commerce peers? Yes, that's basically the question.

Thanks for the question. I appreciate it. And I appreciate the context behind the question because I think for the past maybe roughly 100 years, the world has been well schooled in the benefits of mass production. And there's been a lot of focus on mass production, making things cheaper. But it's also true that when something is produced in mass production overseas to get on a boat, to end up at a port, to get on a train, to get on a truck, to finally make it to your house, and there's maybe 3 markups along the way, the opportunity to buy directly from the person who made it without all those markups along the way, can offer that seller the chance, that maker the chance to earn a fair price and a fair living, while also offering great value to the buyer. So that's a story that we want to tell, and we want to make sure that the world understands. To be clear, Etsy sellers set their own prices. That's not something that Etsy is directly involved in. We have said in the past and it continues to be true that our sellers have so far on average, if you look at a basket of goods analysis, not chosen to take their prices up by much at all and far, far less than what you're reading in terms of consumer inflation. And as a result, the relative value proposition of things on Etsy is getting cheaper relative to the market, which can increase appeal for those products. Some sellers may also choose to raise their prices as their inputs go up, and that's perfectly fair and appropriate. It's a big market with 5.5 million sellers, each making their own decisions on that. But if they choose not to raise their prices, the value proposition of their items can get more compelling. Also, it can be very fair as the competition on and off Etsy, if their prices go up, that our sellers can take price and maintain margins, and that's appropriate as well. Either way, we think that our sellers have a tremendous amount to offer the market, and our job is to make the market aware of that great value available on Etsy, and we're investing with discipline and with conviction to make sure that the market is aware of that.

Great. I'm going to ask the next one from Lauren Schenk from Morgan Stanley. This is for Rachel. Can you clarify the 2H marketing commentary -- margin commentary that you don't expect margins to expand materially? Is that a second half comment or a full year comment and fourth quarter margins are likely to be up year-over-year?

Lauren, thanks for the question. So it's a second half comment, and we -- the caveat there is that to whatever extent seasonality comes into play, that could expand margin slightly. Sometimes we see that happen in the fourth quarter. But I also want to take the opportunity to point out, we put up 27.5% margins in the first quarter this year. And harkened back to Q1 of 2021, our margins were in the 33% range. And I think at some point during 2021, we also delivered 37% margins. We really have full control because our costs are so variable with GMS [indiscernible] control over sort of how much margin -- how much we want to flow through to the margin line. And what we've said and we want to reemphasize is that we see so much opportunity for growth, that we are staying the course on our investment plan regardless of headwinds that might factor into the rest of the year. And those investments are really all around our people, which are the lifeblood of the company. They're incredibly important to us to actually unlock that growth in marketing, which we think really will unlock more awareness and frequency and in the marketplace to really support our customers and our sellers and their journey all the way through to the end of the purchase -- the point of purchase. And so that, our margin guidance that we gave reflects our intent to keep investing in those areas.

Great. Thanks, Rachel. I know we're out of time [indiscernible] from Deutsche Bank. I think [indiscernible] moving buyers [indiscernible] habitual purchasing amongst buyers on the platform?

We're really [indiscernible] offline stores. Many states were in lockdown. And if you could go to offline stores, it wasn't very pleasant. And even online shops often had big supply chain challenges and it really highlighted the benefit of the Etsy model that we were not facing those headwinds. We had ample supply the entire time. Our sellers were doing a great job making great product, responding to the need and being ready to ship. And so Etsy was one of the few places that you could shop reliably for much of the past 2 years. And I'm delighted by the fact that the vast majority of our buyers are choosing to come back now at a time when they have so much more choice. When there is pent-up demand to travel and dine out and go to all of those stores that they weren't able to go to before. At the low end of our guidance, we say that we'll keep 90% of those purchases in spite of having tremendously more options in a time of inflation when you've also got more pressure on your wallet. So we're really pleased by the fact that people want to come back to Etsy. And I think they really see that we offer something really compelling and really different in a time that matters and in a way that matters. And we think that opportunity is huge, and we're going to keep investing to keep growing it.

Okay. Great. Thank you all for staying on with us a few extra minutes and we will talk to you during the quarter. Thank you very much.

Thank you.