Hi, everyone, and welcome to Etsy's Third 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 session. Questions can be submitted via the Q&A window chat displayed on your screen. Feel free 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 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, key drivers thereof, and underlining assumptions, the global macroeconomic uncertainty and volatility, including the impacts, general market, political, economic and business conditions may have on our business strategy or operating results, uncertainty regarding overall levels of consumer spending and e-commerce generally, the impact and duration of reopening headwinds and stabilization of COVID-19-driven economic trends, 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 in our Form 10-Q filed with the SEC on July 28, 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 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. We're pleased to once again be reporting strong results. Etsy's consolidated third quarter 2022 GMS was $3 billion. Revenue grew to $594 million and our adjusted EBITDA margin was again very strong. Etsy marketplace GMS was $2.6 billion this past quarter, compared with about $1 billion in the same quarter three years ago. And when adjusting for rather formidable currency headwinds, GMS for our core marketplace was up a bit on a year-over-year basis. We believe this performance is the direct result of the actions we've taken to put our larger size and scale to work, investing in our sellers and aiming to drive long-term growth in our active buyer base, with strategies designed to fuel awareness with new audiences, retention, reactivation and frequency. And these investments have really paid off. Not only is the Etsy marketplace over two times bigger than we were three years ago, but overall, we've held most of our gains. This speaks volumes to the work done by teams across Etsy, particularly within the context of a fully reopened world and ongoing macro challenges. In my opinion, this is a great setup for future growth. Another reason that we believe our business has held up so well in this post-pandemic environment is because in a world of mass commodities supplied by companies obsessed with speed and scale, Etsy is the antidote. Etsy offers something different, and we've continued to invest to bring even more joy to the very human experiences of selling and buying on Etsy. During the pandemic, tens of millions of buyers tried Etsy for the first time or for the first time in a long time. And our customer research indicates that most buyers were delighted with the experience. I've spoken with so many buyers who…

Thanks, Josh, and thank you, everyone, for joining us for our third quarter earnings call. My commentary today 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 third quarter of 2022, with Elo7 and Depop included as of July 2 and July 12, 2021, respectively. On a consolidated basis, our third quarter GMS was down 3% year-over-year to $3 billion. Our revenue increased 11.7% year-over-year to $594 million, and adjusted EBITDA was $168 million with a strong 28% margin. Our adjusted EBITDA margin was driven by both revenue strength and disciplined operational expense management. On a currency-neutral basis, GMS increased 0.7% year-over-year, as FX headwinds accelerated 100 basis points to a 400 basis point headwind in the quarter. We continue to face challenging comparisons as our consolidated GMS increased 18% year-over-year in the third quarter of 2021 on top of a 119% increase in the third quarter of 2020 due to pandemic lockdowns, stimulus benefits and other factors. Our business has continued to stabilize, similar to the trends we discussed on our last earnings call. And our investment discipline is evident in the strong adjusted EBITDA margin. On a consolidated basis, marketplace revenue increased 12% year-over-year, and services revenue expanded 10% year-over-year. The growth of our marketplace revenue was primarily driven by a full quarter benefit of the Etsy marketplace transaction fee increase from 5% to 6.5%. Within services revenue, consolidated ads revenue increased 14% year-over-year due to ongoing growth in Etsy ads, impacted by prior period improvements such as ads on our homepage, as well as a new capability that utilizes computer vision to help determine buyer intent and serve a more personalized ad…

Hi, everyone. Good evening. I'm going to dive right into questions. I know our prepared remarks went a little bit long, so thank you for bearing with us. First one, I'm going to give this one to Josh from Marvin Fong at BTIG. Last quarter, you lost about 1 million buyers -- Etsy buyers. But this quarter, you added 200,000 on a similar number of gross adds. Is it fair to say that churn improved this quarter? And if so, which of your key initiatives do you think is most responsible for that improvement in buyer retention?

Yes. The short -- first, thanks for the question. I appreciate it. And the short answer is yes, that is a fair assumption. Churn decreased even further. Also, gross adds held up pretty well and we continue to reactivate lapsed buyers. If you think about our trends, the reopening headwinds we felt, really, most severely between January and May, and so active buyers is a trailing 12-month metric. And as that gets further into our rearview mirror, things should stabilize even further, we think or we believe. But when I really pull the lens back, we went from maybe 40 million active buyers to close to 90 million active buyers during the pandemic. And at the time, millions and millions of those were people who came from masks. Millions and millions of those came in 2020, when you couldn't shop offline in very many places. And even online, most places we're having shipping delays or supply chain issues or other things. And we were all asking ourselves how many of these people will come back. And we're really delighted that here we are in Q3 of 2022, where you've got a multitude of options and the vast majority of people are coming back, the vast majority. And so we feel really great about that. To your question about what is keeping them coming back, what specific tactics? Honestly, I think the most important thing is they really love the experience they're having. They find that it's easier to find products than they thought, that the products come within a reasonable amount of time, that they're fair priced and that they're delightful when they arrive. So it's kind of the best of all reasons, in my opinion, in that people just like the experience and it's different than what they find anywhere else. In addition to that, we are pulling smart marketing levers, I think, to really remind people to think of Etsy at the right time. And I think that matters a lot. And then we're building more into the product. We talked a lot this call about all the personalization effort we're doing. And I do think that makes a really big difference that we're finding things that are right for you more and more, and able to present you with both e-mails and push notifications, but also recommendations on site that makes sense to you in different times. I think that has a big opportunity. I think it's helping. And I think there's a lot more for us to do with a lot more opportunity in the future.

Great. Thanks, Josh. Okay. So the next, I have two questions on take rate, and I want to combine them. One is from Laura Champine at Loop Capital, and the other one is from Anna Andreeva at Needham & Co., and I'll give this one to you, Rachel. The guide seems to imply a negative take rate trend sequentially. Is that right? And what would account for that? First part of question. And the second part is how should we model the take rate going forward into 2023?

Thank you for the question and thanks for joining the call. I think you've done your math right. So our guide did imply that there's a slight decel in take rate, though we don't guide to take rate. And we've talked about this on a lot of other calls that seasonally in the fourth quarter, Etsy Ads relative to our GMS is a lower percentage, and that's because it takes fewer page views per purchase, because conversion rate goes up so high, and that drives Etsy Ads to be lower relative. Said another way, Etsy Ads will be great, but GMS is going to be greater, and that's what drives the take rate down. Now we didn't guide take rate for 2023. So there's -- I think you could follow seasonally what we've done with take rates sequentially quarter-by-quarter to try and estimate what take rate might look like by next year. But we're not implying that take rate -- that this is indicative -- that take rate dip in Q4 is indicative of the full year 2023 at all.

Okay, great. Thanks, Rachel. Next one is also from Anna at Needham. Can you talk about the customer -- this is for Josh, can you talk about the customer reception of the Purchase Protection Program? And then I'll circle back with Rachel about a financial question related to purchase protection. But Josh, if you want to just talk about the overall reception that would be great.

Sure. I'm delighted to talk about it. We're really happy with how it's going. So most importantly, on the rare occasion that a customer does have an issue and creates what we call a case, internally, those cases are getting resolved much faster. In fact, the time to resolve has been cut roughly in half, because the policies are just super clear. Etsy steps in and covers those costs in many cases when we might not have in the past. And that saves time, hassle and stress for everyone. So we're really happy to see that the customer experience is getting a lot better. It's also true that as we're promoting purchase protection in places like checkout, we're actually seeing some conversion rate lifts. So it's yielding some incremental GMS, so that feels great. And, I guess, we'll let Rachel talk about costs.

Yes. So they’re weakened, but the costs come in line for the third quarter was a specific question. How is it feeling versus the $25 million annualized run rate that we gave?

Yes, all of our metrics are tracking pretty close to how we originally forecasted them or better in terms of cost, the costs are in line. In terms of other metrics like issue resolution rate and things like that, those are tracking right where we want them to be.

Okay, perfect. Thank you. The next one is from Tom Forte at D.A. Davidson. Does in -- and I'll give this one to Rachel, I think. Does in-country buying and selling insulate you from changes in FX rates, for example, when there is a transaction between a UK buyer and seller? If so, does that lessen the impact on your performance from the strong dollar compared to e-commerce peers such as Amazon?

No, it doesn't, because what we do is, the sale does happen between a buyer in that country and a seller in that country, but we do convert it back to USD for the purposes of our financials. We do get some benefit, which is that we have a natural hedge from OpEx in some of those markets, not all of them, but where we do performance marketing and where we have offices, we get some upside from the exchange rate helping us in the other direction. And then the other thing is that, the metrics we've given you about the two-sided equilibrium in those markets is showing us that the FX is insulating buyer spending habits from. It's not -- the FX is not hurting them if they're buying and selling within their same currency. So the demand and the supply are not hindered by FX changes going to USD.

Great. Thanks, Rachel. Next one is for Josh from Corbin Weyer at R.W. Baird. You had $1 billion write-down after only a year from these acquisitions. What are your learnings from this experience? And how should we get comfortable that this doesn't happen again?

Thanks for the question. Fair question, I appreciate it. So, first, I'd say, acquisitions don’t happen overnight. And as we said at the time, we spent about two years courting these companies. They came to fruition, both of those acquisitions, coincidentally around the same time. And we felt great about the acquisitions. And in fact, the market felt overall, quite enthusiastic. I got a lot of really positive reactions from shareholders, and the general market reaction that we received at the time was positive. And then, reopening headwinds hit, they hit quite hard for Etsy, for Depop and Elo7 and for many, many other e-commerce companies. And then inflation happened and interest rates rose and then a war broke out, Russia invaded Ukraine, and a lot of things happened and the whole market went down across many, many e-commerce names. And you're seeing us acknowledge that. And so I own that, that's on me, the timing was wrong. We continue to feel great about the companies. We feel good about the strategy. And the timing didn't work out, so we will continue to do our best to make the best decisions we possibly can with the information we have. I think if you look back over the 5.5 years that this management team has been here, I think, on average and over time, we have been very good stewards of shareholder capital. We're very thoughtful. We are -- we've never been a growth-at-all-cost company. We've always cared about profitable growth and making smart investments, and we're going to keep doing the best we can to be good stewards of shareholder capital.

Thank you, Josh. Okay, Rachel, I'm going to combine a couple of questions on -- I'll start with one from Alexandra Steiger at Goldman Sachs on guidance. What key factors could create an upside or a downside surprise? The GMS trajectory in Q4 relative to your guidance, can you unpack the various building blocks that went into our guidance for the fourth quarter?

Thanks for the question, Alexandra. So first, let me start with what we said about Q3. We said that Q3 was showing stabilization. As we had talked about on our last call, we had seen some deceleration from the start of the year. And as we went through Q3, we saw a pretty stable runway. And in fact, October actually improved from Q3. So the guidance that we gave at the bottom end of our range would imply that we see some continued pressure that would push that stabilization down lower than what we're seeing in October. But at the top end of the range, it would say that we have a pretty good holiday, a holiday that's similar to 2019. And so that's the -- that's sort of the elements of the guide that we gave. What would push the numbers down are things that we think are somewhat out of our control, so macroeconomic factors that impact consumer discretionary spending, and we don't have a good line of sight right now to predict exactly how November and December are going to pan out. And the top end of our guide would show continued dynamics and trend line that we've been seeing so far in September and October.

And Rachel, I just want to jump in to clarify, when you say stabilization on a three-year stack, meaning relative to pre-pandemic, right?

Yes.

Yes.

Okay. Great. All right. So we've got quite a few questions in about promotional activity, merchandising strategy. So I'm going to combine questions from David Malinowski from Bank of America, Lauren Schenk from Morgan Stanley and Lee Horowitz from Deutsche Bank. I'll do the sort of the first one first. How should we think about your promotional cadence in the fourth quarter? Will the company be -- will the company be co-funded by more seller promotions or discounts, given that it's expected to be a very aggressive competitive holiday season. I'll start with that and then there's sort of a second part question I want to ask related to that.

Yes. So our seller -- we have given our sellers a lot more tools for them to behave more promotionally, particularly in times like a holiday season like Halloween, like back-to-school. And those tools have enabled them to take modest discounts. And they're in the forms of you shop from my shop, here's a 10% off on your next purchase kind of thing. I'd say modest. They're not very deep discounts. At the same time, Etsy has significantly increased its CRM capabilities. And we've been able to give some -- to put our own P&L to work modestly to also offer discounts. We use that kind of when -- we're putting our own P&L to work, we're using that same ROI lens that we do with all of our performance marketing in that we are also measuring if we give -- if we enable some kind of a discount, what is the impact on that and how much return visitation do we get or how much -- how do we influence the conversion rate from our sellers? So I would consider that that part of our marketing spend de minimis relative to the bigger pie that we're spending on performance marketing.

Yes. And maybe, Josh, the other part of the question came in from Lee Horowitz, which was more just about how we're thinking about our marketing strategy in general for this holiday season, given where we are in such a tough macro environment. Did you want to add a couple of thoughts on that, too?

Sure. And just to build on Rachel's point, we are seeing a lot more promotional activity from our sellers. The vast majority of that is funded by the sellers. The sellers are choosing to give very targeted discounts. A tiny piece of that is funded by Etsy. But the vast majority of the promotional activity you're seeing is sellers choosing to put certain items on sale for certain buyers. In terms of our marketing spend for Q4, Q4 is an important time to remind people that Etsy is really relevant for them. And so, we lean in, in the holiday season. We plan to lean in, in this fourth quarter like we have in other fourth quarters. So we're going to be running brand TV spots, which really tell the story of Etsy and why Etsy matters and why it's different, as well as more direct response TV ads, which really highlight the kinds of items you can buy on Etsy and the shoulder tap of very specific kinds of categories where we're relevant. And then, we typically see on the performance marketing side, things like search queries for gifts go up on Google. And so that naturally drives more performance marketing for us. But again, with all of this, we take a strong ROI lens. We look very much at what kinds of returns we're getting. So the performance marketing side, there's quite a lot of science. It's very dynamic and it tends to adapt, our models adapt within hours or days to what we're seeing in the market. The brand side is the piece where we've got to make some bets. And so, we think that this is the right time for us to be telling our story. We expect to be telling that story in the fourth quarter. We love the creative that the team has developed, and that's reflected in the margins and the guidance that Rachel gave.

Great. Thanks, Josh. That's perfect. And then I have two questions from Steven Forbes at Guggenheim. The first one I'm going to give to -- first one, I'm going to give to Josh. As we look out to 2023, what categories represent the greatest opportunity for Etsy to drive market share?

So, one of the great things about Etsy is, we just -- we have such breadth. So we have seven categories that have 15 million buyers or more, and we have 15 categories that have 1 million buyers or more. And what we take from that is, there are so many different occasions for which -- in categories for which Etsy is relevant. 15 million people are finding something to shop in that category. It's a pretty good chance that many, many people could find something relevant in that category. That's why I love that product that we highlighted a little bit in the earnings call, the new release we just did where you can take a photo of virtually anything and you'll see items on Etsy that are similar. I'd encourage you to give that a shot. I think you'll be quite surprised at how often we have a really great version of whatever it is here in the market for. I do think there's an opportunity for us to improve the shopping experience in many of those categories. So when you survey buyers and you ask them, name great places to shop online, more and more of them will come up with Etsy. And Etsy will be one of the first three places people name more often. But if you ask people, where do you go to shop for home furnishings, very, very few people will say Etsy. When in fact, we're not even a top 10 name there. And the number 10 name, 6% of people would name was Hobby Lobby and our research came up as the 10th and we weren't even 10th. We're somewhere less than that. And yet, it's our biggest category. We sold billions of dollars of home furnishings. And so it's about building those associations with very specific categories, jewelry, home furnishings, fashion, craft supplies, art and on and on, paper and party goods. We've sold pets, so many babies, weddings, so many great categories on Etsy, and it's about building those associations more broadly. We are leaning more into starting to verticalize those experiences more so that things like the taxonomy, so you have a better browse experience. And if you come to home furnishings, for example, and you browse, it doesn't feel like a lot of other sites you browse, where you're looking for a kitchen or a living room is typically what you get in a browser experience. Etsy takes you often very deep into very niche category. So we do think there's a real opportunity to up-level and you'll see us focus on that more in 2023.

That's great, Josh. And the other part of the question from Steve was for Rachel about, do you have any high level thoughts about the potential to reduce the weight of the recent acquisitions on the consolidated margin structure? And what time line should people be thinking about for that?

Hi, Steve. Thanks for the question. And before I answer, I just have to give a second to Josh's point about how cool that Etsy Lens product is. Open your app, there's a little camera icon in the search bar and click on it and take a picture of anything in your household and you'll be able to find it on, see what Etsy has. That's like it's very cool. On the lessening the weight of our recent acquisitions, one thing I want to remind you, we've said a few times that collectively, our three subsidiaries are less than 15% of our total GMS. And they collectively there are almost immaterial to our bottom line. We do say that it's 400 basis points of drag on our margins. But you have to remember that even if they were breakeven, they are lower-margin businesses and they would still be dilutive to margins. So you can't do the math on that 400 basis points as a percentage of our revenue and come up with how much the investment is that we're making there. We really think that these investments we're making in the businesses are appropriate to enable them to grow, that's -- they shouldn't be spending less on investing for growth, because we own them that we should be a benefit to their growth, not the other way around. And they all operate now very similar to how Etsy operates, with a prioritization of focusing on the vital few, an experimentation culture, where they test their way into the things that are going to have the biggest impact. And they are always and probably forever will be optimizing how to make their -- how to be efficient in making the biggest bets and putting the investments in the view of things that are going to drive the highest growth.

Great. Thanks, Rachel. Next one is from Maria Ripps at Canaccord. I'm going to give this one to Josh. Recognizing that you aren't guiding for 2023, how are you thinking about investment priorities for next year?

Thanks for the question. One thing we shared in the call is that we've scaled our team fairly significantly over the past two years. We have not been a growth at all cost company. And when revenue doubled almost overnight, we didn't double headcount overnight, because I don't think that would have been manageable growth. We couldn't have made sure that we were bringing in really high caliber people and that we were making sure that they had clear roles and responsibilities and all the things that -- scaling responsibly means doing at a certain cadence. And -- so we have taken a little bit of time to scale our team to catch up with revenue. I'm really proud of the fact that when we look at our productivity metrics, things like GMS per squad, that is as high as it's been for years. And so, what that suggests is that, where we are in the marginal return curve, we've significantly increased the team over the course of the past two years and yet they continue to add at least as much value, if not more, than we were seeing before the pandemic even on a per squad basis. We've got a ton of great ideas and the teams are doing a great job of executing those in a way that improves the customer experience and build shareholder value. If we look at the number of things we talked about in this earnings call, I'm really proud of Etsy Purchase Protection, all of the progress we made on personalization, the progress we made on CRM, the new marketing initiatives that we've launched, the new TV spots we've launched. And by the way, we had to cut four or five things on the cutting room floor, because the call was just too long. So this team is getting a lot done that is making a better customer experience and building shareholder value. We're doing it with urgency, and we're doing with what is still a pretty small team and we feel great about that. So we're not managing to a margin target, so much as we're looking at, as we scale, are we continuing to drive meaningful growth and measurable growth with the team that we have? We feel pretty good about the team right now, the size and shape of the team. And we'll keep an eye on as we go through next year. If we invest a little more, are we getting a little more? And make sure that we're always looking at profitable growth and finding the right balance there.

I think this is a connected question, so I'm going to just ask it right away for you, Josh, from Kunal Madhukar at UBS. And you seem, at least somewhat optimistic for 2023, assuming the macro doesn't get worse is the way we've said that. But do we think that's more from sort of buyers, more buyers or more spend per buyer?

Over time, I think we're going to continue to get both. I mean, I'm pleased with the fact that, while new buyer growth has slowed from the pandemic, very unsurprisingly, it's 50% higher than it was before the pandemic. And I think that's pretty exciting. And so there still are a lot of people out there in the US, in the UK and especially in the rest of the world who have not yet shopped on Etsy. And so, we think there's a real opportunity to add new buyers. And then reengaging lapsed buyers, 100 million lapsed buyers who've shopped on Etsy before, generally had a very good experience and just need to be reminded to come back or come back more often. So reengaging more lapsed buyers and adding more buyers, I do think there continues to be a runway there, but we think there's a big opportunity in frequency. And over time, I do think we have a big opportunity to get people to have more purchase days per shopper in more occasions. Again, seven categories have 15 million shoppers and yet very few people shop across all seven categories. And again, that -- take a photo of virtually anything and Etsy's got a great version of it. I don't think people realize how often we can serve them, and so I'm excited about that. And the last opportunity, the one we -- again, we've talked about in the past that we haven't put our shoulder against it and I'd say we're still not putting our shoulder against it. But average order value. As we get more trustworthy, as people get more familiar with Etsy, having them take larger purchases on Etsy, buying bigger stakes items, I do think is -- continues to be an opportunity for us as well.

Great. And Rachel, I'm going to -- it's 6:04, but I'm going to try to squeeze one in because it's a pretty hot topic we get a lot from Noah Zatzkin at KeyBanc. I'm hoping you could provide a bit of color around inflation, particularly as it relates to seller pricing. Have you seen them begin to take up their prices? We haven't really seen that in Q2, so has anything changed there?

Yes. I knew we -- I thought we were going to get out of this call with no inflation question. But just under the wire, we really haven't seen sellers. We do a basket of goods analysis and we haven't seen sellers take their pricing up in any material way. And we do try to help them think about pricing strategically and other things, but there's probably more we can do there. I will say that does make Etsy, relatively speaking, a value play relative to other places where we see prices going up significantly. And some of our creative ads kind of lean into that a bit, talking about you can really find something special, something that only Etsy has, or it's made especially for you and it doesn't break the bank at the same time. So it kind of is another differentiating factor for our marketplace.

Okay. Great. I'm going to call it there. Josh, do you have any closing remarks or good?

No, we feel really good about the progress. And again, if you'd asked us a year ago or two years ago in the midst of the pandemic, what would we hope for in terms of retaining buyers, retaining buyer spend, I'd say, I'm just delighted with how well our retention has been in light of people having so many more choices. And I do think it really comes down to the fact that they really like the experience and it's different, and being different in a way that's better matters. So we're grateful for it and we'll keep doing the best we can.

Great. Well, thank you all for your time tonight and we'll talk to you over the next weeks.

Thanks, everyone.

Thank you.