Hi, everyone. And welcome to Etsy’s Second Quarter 2022 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 Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast, Q&A sessions. Questions can be submitted via this Q&A window chat displayed on your screen. Feel free to use it at any time as it will remain open throughout the entire conference call. I'll be reading your questions and Jessica will help me try to get 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 global macroeconomic uncertainty, including the impacts of general market, political, economic and business conditions may have on our business strategy and operating results. Our opportunity, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs. The potential impact of our strategic marketing and product initiatives in the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in today's earnings release and in our Form 10-Q filed with the SEC on May 5, 2022 in 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 will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR website, along with the replay of this call. As a reminder, our 2021 financial results and KPIs for the second quarter did not include Depop and Elo7, which were acquired in the third quarter of 2021. With that, I'll turn it over to Josh.

Thanks, Deb, and good evening, everyone. We continue to experience striking changes in the global economy and consumer behavior this year. And as a result, our forward visibility is not substantially clearer than it was a quarter ago. Consumers have more choices for where to spend their time and money and disposable income is under more pressure than it's been in a very long time. In spite of these headwinds, we're encouraged by the tens of millions of shoppers that return to Etsy spending only slightly less with us in the second quarter of 2022 than they did a year ago, when choices were far fewer and economic conditions were a lot different. While markets naturally go through cycles, I'm energized by the agility of the Etsy team, the adaptability of our business model and our ability to deliver solid profitability in a quarter we're achieving top line growth was challenging. We have a lot of conviction that not only is e-commerce poised for meaningful growth over the medium term, but that each of the four Etsy marketplaces has a unique reason to succeed and scale, offering something truly important and different against a sea of sameness. That's why even through a challenging time, we've continued to invest in our people and our businesses. Making bold moves that we very much believe will set us up for continued future growth. And we've been able to do this while delivering strong profitability, thanks to the benefit of our discipline, scale and business model. The headline for our second quarter results is that despite really meaningful headwinds, we continued to hold the vast majority of our top line pandemic gains, while delivering strong profitability. In other words, controlling the things we can control. Our consolidated GMS was $3 billion, basically flat year-over-year…

Thanks Josh. And thank you everyone for joining us for our second quarter earnings call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace standalone results were appropriate. As a reminder, Reverb, Depop and Elo7 are all reflected in our consolidated financial results and KPIs for the second quarter of 2022, but Depop and Elo7 are not included in our second quarter 2021 results. On a consolidated basis our second quarter GMS was basically flat year-over-year at $3 billion, while revenue increased 10.6% year-over-year to $585 million and adjusted EBITDA was $163 million with a 28% margin. The Etsy marketplace transaction fee increase and growth in Etsy ads drove strong revenue performance, and we delivered adjusted EBITDA margins ahead of our expectations due to disciplined marketing spend and solid profit flow through. On a currency neutral basis, GMS increased 2.6% year-over-year as FX was a 300 basis point headwind. The second quarter featured challenging comparisons as our consolidated GMS increased 13% year-over-year in the second quarter of 2021 on top of a 146% expansion in the second quarter of 2020, fueled by the initial broad-based pandemic lockdowns. In contrast today, we are seeing mobility nearing 2019 levels, a challenging global macroeconomic environment and ongoing geopolitical uncertainties. I will dive into these factors shortly. Marketplace revenue increased 11% year-over-year and services revenue expanded 9%. The growth in our marketplace revenue was largely driven by the Etsy marketplace transaction fee increase from 5% to 6.5% effective April 11, as well as the benefit from the inclusion of our acquisitions of Depop and Elo7. Within services revenue, consolidated ads revenue increased 12.1% year-over-year, primarily due to ongoing enhancements to Etsy ads relevance and click through rate, as well as more ad inventory throughout the buyer experience. Better than…

Hi everyone. Good evening. First I want to start by saying, I know there were a couple of issues during the recording being played back. So if you go to our site later this evening, you should be able to find a fully loaded video with all the audio clear. And with that, I will start into the Q&A. Thank you all for submitting the questions. We’ll get to as many as we can. So I’ll start with Ed Yruma from Piper Sandler. Has there been a change in the seller base since you increased fees? I’ll start with that one for Josh.

Yes, thanks for the question. We haven’t seen any noticeable change in the seller base that we can track to the change in fees. In fact, I’m happy to report that seller sentiment has rebounded pretty significantly since the fee change went into effect. And I think that’s testament to the fact that we’re doing exactly as we said and reinvesting back in the community. So we’ve got some great TV campaigns going. I think that the purchase protection program is a great testament to the kinds of things we’re doing to invest that sellers really care about. So they know we have their back and buyers care about to bring more buyers back. The refreshed seller app that we’ve launched and the refresh of the Star Seller badge and lots of other good things. So we’re encouraged by that and we’ll keep building.

Great. Thanks, Josh. Next one came in from Kunal Madhukar from UBS. Given such a challenge, how easy or tough it is to scale into different languages and countries?

Great question. Thank you. The techniques that we use are generally language agnostic. These are quite advanced machine learning and neural network techniques that work regardless of the language. Of course, it does take work to make the models adapt. We need data and then the size of the training sets matter. But we have recently expanded many of the techniques into many of our international markets and we do definitely see gains. One example we talked about last time was translation engines. I don’t mean literal translation from Spanish to English, for example, as I said, but understanding the context of a word. So for example, tiesto in English, mostly people are referring to the DJ. DJ Tiesto. If you’re in Spain, the word tiesto actually means flower pots. And so we’re using models that are sophisticated enough to understand what you meant, not just what you said, and that can be particularly powerful when we’re talking about going from one market to another.

Okay, great. Thanks, Josh. I’m going to give Kunal another one. The wallet may be early for the buyers you have added in the past two quarters in 2022. Is there behavior different from the new buyers you added during COVID? And how has behavior changed new buyers pre COVID to today? I think we had that one’s a good one for Josh. And then Rachel can add if you’d like.

Sure. So Rachel showed in her prepared remarks that the cohorts we’ve acquired since the pandemic actually are more valuable or spending more than the cohort than what pre pandemic cohorts were doing before the pandemic. And that’s continued to be true over the past six months or so since we’ve really felt the reopening come on much more strongly. So we’re really encouraged by that. And we continue to acquire a lot of new users who are great new buyers. We are acquiring new buyers, not as fast as we were during the peak of the pandemic. That’s for sure, but we’re still acquiring them faster than we were before we entered the pandemic. We’re also reactivating lapsed buyers, and we think there continues to be a big opportunity there.

Okay, great. Rachel, well, you’re okay with that one, I think. Yes, we’ll go to the next one, okay. The next one is from Ed Yruma from Piper Sandler. Can you talk about the dynamics driving the reduction in GMS per active buyer? Is this a function of mix or are you seeing signs of a trade down? That one, I'll give to Rachel.

Sure. Hi Ed. Nice to have you back in the Etsy team here. We – what we’ve said on the call was that GMS for trailing 12 month buyer in the quarter was up year-over-year, down slightly sequentially, but it was really down just a bit. GMS for active buyer in the quarter, meaning the actual number of active buyers in the quarter was basically flat year-over-year. So there's a slight decline in the total number of active buyers on a trailing 12 month basis who were active in Q2, which basically explains that sequential decline on the trailing 12 month number.

If I can just jump in on that. So if you look at the total number of people who bought in the second quarter and divide the GMS from them by the number of buyers that were active. Year-over-year, it's about flat. And we think that's actually really encouraging in spite of reopening and in spite of inflation and all of the other economic headwinds, the buyers that are buying with us are spending about as much year-over-year. And that's roughly flat. We are seeing a very slight decline in the number of active buyers in Q2 relative to trailing 12 month. And again, no surprise that when people have a lot more options for where to shop and their pocket books are tighter, we might see some contraction in the number of active buyers, but actually all things considered were pretty encouraged by how those trends are holding up as well.

Okay, great. Thanks, Josh and Rachel. Next one is from Rick Patel at Raymond James. Also, back in the saddle. Can you talk about inflation, have your sellers begun to pass along higher prices in response to their input costs being up, if not, do you see an opportunity to educate the seller community on driving higher GMS like you did with the merits of offering free shipping in the past? Josh, do you want to start with that one?

Sure. The short answer is no, we are not seeing sellers take up their net prices to account for the higher input prices that they have. And so providing them more education and tools might well be a strategy. And it's certainly something we're taking a hard look at right now. We are also seeing a lot of discounting in the market, Walmart reported yesterday that they've got oversupply. And so they're having to do a lot of discounting it, it's moments like that when I continue to be grateful that our model does not require us to spend billions of dollars buying inventory in advance on the hopes that there will be demand for it when it finally arrives weeks or months later. But nonetheless, there is a lot of discounting in the market. So here's what we've seen. We've seen over the past five years, sellers take their headline list price up by about 9%. Now 9% a year in total, over five years, item prices have gone up by about 9%. We've also launched a lot of sales and promotion tools that our sellers can use to put things on sale and our sellers are using those tools and they're using them with increasing frequency. The result of that is actually that it completely offsets the increase in item prices, meaning that the net item price has been basically flat for five straight years. Now, our sellers, it also means our sellers are armed with the kinds of tools that they might need in a time like now, where there's a lot of heavy discounting and promotion where they can compete for that. And so we're happy that we're giving them tools to be able to compete and win, but it does mean that while many other retailers might be promoting, might be reporting revenue in GMS numbers that are benefiting from price inflation. Our sellers do not appear to be doing that at this time.

Okay. Thanks Josh. The next one comes from Tom Fort, D.A. Davidson. How should investors think about your staffing levels, given comments by your e-commerce peers, such as Amazon and Shopify suggesting that they are currently overstaffed for today's level of e-commerce demand with Shopify going so far as to implement a 10% reduction in force, Josh?

Yes. Thanks for the question. I think that our staffing level is just about right. We're at about the right size and shape right now. We feel pretty good about it. And just to give some context, when our revenues more than doubled overnight in the second quarter of 2020, and then stayed at those elevated levels and grew. We did not throw caution to the wind and suddenly go on a massive hiring spree and hire super quickly. There's a certain cadence at which you can interview people well, make sure you're getting high quality people, make sure that they have a job. That's a clear, redefined job that their manager's ready for them. That they're well trained. There's a certain cadence at which we think you can responsibly hire. And so we let revenues lead. And what we said quarter-after-quarter is margins are higher than we like and we are more leveraged than we like. It's just that we can only hire at a certain pace. We also said, traffic is also doubled so every new product release that our team does has twice the impact because we're driving conversion rate on twice the traffic. And so revenues have led headcount, but headcount is caught up and Rachel showed a slide showing that now product development expense as a percent of revenue is roughly back to where it was before the pandemic. I do want to point out that those numbers include the acquisitions of Elo7 and Depop, both of those are earlier staged companies earlier in their life cycles. So they're not as leveraged as Etsy. But I think that when we benchmark us to our peers, we look good. And I think especially if you look at the Etsy standalone business, we think that we benchmark quite well relative to the peer set. So we're happy that we have been thoughtful and careful as we've gone. We've never been a growth at all cost company. We've always been disciplined about investments. But we think we're about the right size and shape right now. So we have slowed hiring as business conditions have slowed. We started to significantly slow hiring in the third quarter. We don't have a hiring freeze. We are still hiring but not at the same pace that we were in the first half of this year. And we think that's appropriate.

Okay, great. Next one, I think these two I'll give back to back for Rachel. First one is related to performance marketing from Lee Horowitz, Deutsche Bank. On the performance marketing spend declines in the quarter with much of those declines being driven by internal initiatives across your marketing team. How should we think about how performance marketing should evolve for the second half of the year?

So thank you for the question. Performance marketing, as we’ve said, many times for us varies dynamically with demand. When we did our transaction fee increase, we were able to increase lifetime value. And so our models dynamically adjusted at higher lifetime value, we can spend more and spend deeper into the ROI curve. And on the other side – on the other hand, when demand is softer, it will dynamically pull back. So we saw both of those things happening in the second quarter where we had some decreased spending because of lower demand and on the other hand, being able to spend a bit more because of higher LTV. Said another way we would’ve spent less had we not had the higher LTV. So flash forward going forward, we have continued – we have this continued higher lifetime value. We can continue to lean into that ROI curve. And we will expect to – what we said on the call, we would expect to be spending more – we typically spend more in the second half of the year than we do in the first, a lot of that driven by the seasonality of higher demand as we get toward the second half of the third quarter and into the holiday season in the fourth quarter. And we also said that in addition to performance marketing, we would typically spend more on brand marketing in the fourth quarter also because demand is higher at that time.

Thanks, Rachel. And the follow up I’ll ask one from Anna Andreeva at Needham. How should we think about Etsy brand marketing spend in the second half as you start going against the pullback and marketing in Q3 of 2021 and Q4 of 2021? Can you also talk about the offsite ads and how’s that’s been trending in line or ahead of expectations?

Thank you, Anna. Let me take the offsite ads question first. Basically offsite ads is trending in line, it’s been about 1 percentage point of take rate improvement, give or take a little bit here and there, but we’re trending roughly in that same neighbourhood. On brand marketing, like I said, we typically do spend more on brand marketing in the fourth quarter, so relative – sequentially relative to the first half of the year. In the second half, we would expect to spend a little bit more on brand marketing year-over-year. I don’t think we’ve given a guide on that specific number, but we aren’t necessarily doubling down because we try to make brand marketing as dynamic as we do with performance marketing, meaning where demand – when demand is there, we’ll spend more. We did expand from the U.S. into the UK and Germany as well in the last year. We’ll continue with that because we’ve seen very high ROI on that spend as well as very positive brand marketing results with how well we resonate top of mind in those markets. So we attribute a lot of that to the success of the brand campaigns.

Great. Thanks Rachel. Next one I’ll give to Josh from Noah Zatzkin at KeyBanc. Are there any actions you’re taking in the near-term to improve performance at Depop and/or Elo7? How are you thinking about the long-term opportunity for your house of brands?

Thanks to the question. We continue to think it’s early days and that Depop is a great brand with a great community and a great space. So we think that e-commerce is going to continue to be a big and important space, and we think Gen-Z is the place to be, and Depop is the choice of Gen -Z. So we continue to be excited and its early days for Depop and Elo7 as well. We think Brazil is a really exciting economy, a really exciting market. And having a foothold there we think is really important. We made these investments with an eye to the long-term, not the short-term and we are absolutely investing to have an impact there. So I think Kruti coming over to Depop brings tremendous knowhow. I talked in the call about her 11 years of tenure and almost every role at Etsy. We’ve also taken Etsy Alumni now run the technology team and the product teams and very talented leaders. I think it really speaks to the bench of talent that we have at Etsy that we’re able to do this kind of knowledge transfer and talent transfer. But they’re hard at work right now on accelerating the velocity and the measurability of the product work that we’re doing. One of the core cadences of Etsy that’s been so effective is really being able to look at what’s truly driving impact in GMS and focus our work on things that are truly unlocking gains. We’re building a lot of that into Depop really working on building performance marketing systems at Depop that can accelerate growth where we can be more measurable and attribute to ROI there. And so we’re encouraged by the work there and then more in search and discovery that we can do. And Elo7 also, there’s been a really terrific partnership. So for example, they’re making a lot of gains right now, getting shipping costs down through negotiations with carriers. They’re also seeing real gains with performance marketing and our ability to help them be more thoughtful about how and where to do their performance marketing. And so we’re very encouraged by our opportunity to add value. We think it’s early days and we’re excited for the future.

Great. I wanted to ask Rachel this one from Rick Patel at Raymond James. How should we think about lower EBITDA margins in Q3 given the upside you had in Q2? Is there something specific about Q3 or the timing of investments that would cause the downward pressure sequentially?

Happy to answer that question. So there’s one main reason I can cite that is suggests the sequential decline in Q3 margins from the guidance that we gave. And that’s because as I said on the call and as Josh reiterated here, even though we have slowed hiring for the rest of the year, we have been hiring steady as she goes for the last four to six quarters. And so we have sequentially more headcount, full quarter of more headcount in the third quarter than we did in the second quarter, including the headcount we acquired with the acquisitions of Depop and Elo7. In addition, we try to stay very competitive on our compensation. We do annual market assessment and we adjust compensation relative to what we learn from that market assessment and so we've stayed competitive in higher compensation costs and more people in Q3 versus Q2 drives the primary reason for the deceleration that's offset by a higher flow through of revenue from a higher transaction fee. We get a full quarter of that in Q3 as well.

Rachel, also the purchase protection?

That's good. And I think we have another question coming up with, yeah,

I was going to ask that one next, but go ahead.

So we've talked a lot about this purchase – buyer purchase protection that we've recently just, just launched. We've talked about that being about a $25 million investment off our P&L on an annualized basis. So we'll be getting a partial quarter of that in Q3 that we did not have in Q2. That is something that has not to-date we haven't done a large marketing or promotional push, so that buyers better understand that we're offering as purchase protection. So right now that's a full expense on our P&L, and not necessarily being offset in the near-term with GMS. It is something over the long term that as we build trust in our brand, that we would expect to see some benefit that's the reason that we're doing is higher trust in the marketplace will remove one of the big friction points we have in repeat frequency and new buyers coming to the site.

Yeah, that's great Rachel, thank you. I was actually going to follow up with Josh on the question from the [indiscernible] from trust about just in general about purchase protection and how we see that as a long term growth driver. I don't know if you want to add anything to that Josh?

Only that I don't think it's a silver bullet that all of a sudden changes things, but brands that are known to have your back in gender loyalty and frequency. And we know that nagging voice in your head off what if it doesn't arrive or what if I don't like it, can be a real friction point on Etsy, particularly when you're buying, the nature of Etsy as you're buying an unbranded product from an unbranded seller. So we think that by backing it with the full faith and trust of Etsy we can give you the confidence and we think earn more frequency. If you think about the brands that are really famous for this didn't happen overnight. It's something you earn and people have an experience and you have their back and they tell their friends and it grows. But fortunately this is affordable for us, because our sellers generally do a great job and people as a percentage of our total volume, don't have a lot of really bad experiences, which is what makes it feasible for us to step into this gap.

Great. We're going to go a couple minutes over, because, you know, our remarks were a little bit long. So one is for you Rachel on guidance from John Clatoni from Jefferies and I'm going to shorten the question a little bit. Can you just sort of talk about the midpoint of the Q3 GMS guidance and what's implied on a sequential basis? I think that would be sort of the core of the question?

Yes. So there, it hits two of my favorite charts in the slide deck. I'm not sure if you've been able to see them, but on one slide we did outline the walk for Q2, what we thought the primary drivers of the GMS decline was. And by far the largest decel was coming from what we call mobility. We're almost at all the way back to the mobility level, according to Google's mobility index that we were in Q2 of 2019 or well before the pandemic. So people are out, they're dining out, they're shopping online, they're traveling and that was the biggest decline in what we saw in Q2. And we would expect – we have no reason to believe at this point that there would be a big difference in that on our Q3 numbers. Now, the second favorite chart was the Q3 the monthlies that we gave implying where we are, that we're seeing this flattening between May and June, between June and July. And so at the high-end of our guidance, we're basically flat year-over-year on year-over-three year rather on GMS and at the low end of the guide, we see a continued slight deceleration, but at a slow on a softer slope.

Great. Thanks, Rachel. And I'm going to just take one more from Sean Dunlop at Morningstar and this one I'll ask Josh talk about, are we fully penetrated in terms of ad load, now that we've added ads to the homepage, what are the future growth opportunities for Etsy ads?

Great question. One thing I'll just say on top of Rachel's question, of course everything she said. FX is also something of a headwind, it's several percentage points in fact of a headwind to GMS. So just something to think about, I think in light of that even more encouraged by how well we're holding up. Considering part of this is just FX. So the ad load, we're really excited about the continued opportunity for Etsy ads over time. That team has just done a great job. And when we think about head count and hiring, by the way, we had a tiny group of people, one squad on that for the longest time, and now there's a few squads, but for a business that generates the kind of benefits that it does for the community, the kinds of revenue and profit, it's still a very small team. And so the question of ad load, have we covered every surface we could on Etsy, actually it's more complicated than it sounds because the answer is it depends on the quality of ads, right? If the quality of ads are as good as organic search results then you could imagine ad load being very high. If the quality of the ad product is much worse than organic, then anywhere you put ads comes at the expense of organic listings which would be better. So the relevance of the ads that we serve has gotten dramatically better over time. And as a result, there's less variance. In fact, there's often no variance between the GMS produced by an ad or the GMS produced by an organic listing. And as the relevance of ads gets better, as sellers – more sellers take up their budget that allows us to actually expand, ad coverage or ad load even more. They actually go hand-in-hand. There was a question asked about seller budgets, seller budgets are up 80% year-over-year on aggregate. So that I take is a nice testament that sellers are getting good ROAs relative to their expectations and what they want need from the program. That's an aggregate. But in fact, some sellers still achieve their full daily budget in the first hours of the morning. And so there's still room to go on getting more sellers to increase their budget. We still think there's a lot more we can do to make the search engine even more relevant. And as we do those things, we can expand ad coverage or add load even more.

Okay, great. We went over by a few minutes. So I'd like to thank everybody for your time and we will talk to you all soon. Thanks, Josh. Thanks Rachel.

Thank you.