Hi, everyone, and welcome to Etsy's Second Quarter 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. And joining me today are Josh Silverman, Chief Executive Officer, Rachel Blazer, our Chief Financial Officer, and Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been prerecorded. This 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'll be reading your questions, and Jessica will help me try to get to as many as we can. Forward-looking statements involve risks and uncertainties and some of which are described in today's earnings release and our most recent Form 10-Q, and which will be updated in future periodic reports that 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 measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted on our IR website, along with a replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good afternoon, everyone. Etsy's results landed in line with our expectations. Consolidated GMS was $3 billion about flat to last year, revenue grew 7.5% to $629 million and our adjusted EBITDA margin was again strong and 26.4%. GMS for the Etsy marketplace was about $2.6 billion this past quarter, about flat with the prior year. Digging deeper, we've seen many of our key metrics trending positively again. Our negative year-over-year growth rate improved sequentially, and even more important GMS grew year-over-year in May June and in July as well. Quarterly active buyers reached 91 million an all-time high and when adding new and reactivated buyers together, we saw healthy growth in buyer additions on a year-over-year basis. Additional green shoots included GMS growth outside of the U.S., improvement in trends in important category and early signs of stabilization in our GMS per buyer and habitual buyer metrics. Overall, this performance is quite encouraging especially given the tremendous gains we've maintained from our pandemic growth and the stiff headwinds we've continued to face in consumer discretionary spending. Economic cycles are just that cyclical. The Etsy brand stands for something different in a sea of sameness and I believe we've proven our resiliency. I'm confident that we're well set up for future growth as we continue to move through this cycle. On our last call, we explained that Etsy's 2023 product roadmap is focused on welcoming new buyers to the joy of Etsy, elevating the best of Etsy to keep buyers coming back, instilling trust when transacting with us and being the platform sellers love to sell on. As we progress through the year, we continue to prioritize our investments to ensure that we're funding the biggest, boldest, and most impactful initiatives on our roadmap to make our marketplace…

Thanks, Josh, and thank you, everyone, for joining our second quarter earnings call. My commentary today will cover consolidated results for our House of Brands, key drivers of performance and Etsy marketplace stand-alone results were appropriate. Last quarter, I commented that one of the things I'm most proud of is Etsy's ability to navigate through choppy waters, and our second quarter performance further demonstrated the resiliency of our business, the benefit of our capital light, highly profitable business model, and our team's strong execution. We delivered strong second quarter consolidated GMS of $3 billion roughly flat year-over-year. Revenue increased 7.5% year-over-year to $629 million and adjusted EBITDA was $166 million with a healthy 26.4% adjusted EBITDA margin. We are pleased to have delivered strong profitability through this challenging business cycle, while also investing in future growth. It's worth noting that our adjusted EBITDA has grown at a 43% CAGR since the second quarter of 2019. While year-over-year consolidated GMS growth were made negative in April, trends turned positive in May and June, driven primarily by strong Etsy marketplace growth in several of our international markets and continued growth in active buyers. FX headwind softened to 20 basis points, down from 200 basis points in the first quarter. GMS for our three subsidiaries was largely flat in the second quarter, driven by a return to year-over-year GMS growth at Depop, which was offset by some softness at Reverb and Elo7. Our solid revenue growth can be attributed to continued growth in our marketplace revenue, which increased 3% year-over-year. In addition to the impact of the Etsy marketplace transaction fee change that we fully lapped during the quarter, marketplace revenue also benefited from a mix shift to more international transactions that often yield higher payments fees and some positive contribution from our…

Hey, everyone. Good evening. Thank you for joining us. I'm going to dive right into Q&A. First one, I'm going to give to Josh from Mike Morton at Moffett Nathanson. Looking beyond domestic buyer growth, can you discuss Etsy's expectations for the biggest contributors to GMS growth in 2023 and 2024, for example, do you see this from improved curation, international expansion or recovery in the software category -- in the softer categories such as home and living?

Thanks for the question. Happy to take it. First, I don't want to look beyond domestic buyer growth without talking about domestic buyer growth for a second, because I do think it's important. We're happy about the fact that we have the highest-ever level of active buyers of this quarter and we think it's early days. We think we have a lot of opportunity both domestically and international. As we've said, many times before, most people who identify as women in the United States have still have not shopped on Etsy in the last 12 months. Only about one and 10 people, who identify as men have shopped on Etsy in the last 12 months in the United States. And so we think there continues to be a big opportunity to continue to grow active buyers in the United States, both new buyers and reactivating that, you know, pool of a 100 million lapsed buyers, and we saw great evidence of that, in this quarter. And as you say, there is a very big opportunity for Etsy to grow, Internationally. And we're seeing very promising signs of that again this quarter. So, Etsy, just began to buy Google PLAs in markets, outside of the U.S., outside of the U.K., Germany, and our core markets, you know, recently, and we're seeing that we're able to do that in an ROI positive way immediately. You know, the Etsy site is translated into many languages, and it turns out there's demand for Etsy products in many parts of Western Europe, for example. And so we're able to grow in a pretty cost efficient way in those markets. And those markets collectively, can be very big. You know, can have the GDP of the United States, for example, the 15 markets beyond our core,…

Okay. Great, Josh. next one is from Laura Champine at Loop. I'm going to give this one to Rachel. What do you expect to be the ceiling on total take rate now that Elo7 is being divested and the rate seems to be naturally climbing on an organic basis?

Hi, Laura. Thank you for the question. You know, we've never said anything about a ceiling on take rate that you're right. We have actually been able to improve take rate almost every single year since, this management team has been in place. And we've done that in part from transaction fee increases and in part from offering, expanded services that naturally bring the take rate up. At the ads, for instance, was not even a new service in the past couple of years or a transaction fee increase. It was just continuation of optimization of that particular product, where we keep making the search results better on a sponsored ad, which increases click through rate, and therefore increases our ability to drive incremental revenue. So, we haven't fixed a price on, you know, a ceiling on take rate in, I'm not going to do so here. I will say we are neither the highest take rate for marketplaces nor the lowest take rate for marketplaces, and we really always stick to our credo of a fair exchange of value. So where we see there are products or needs or services that will benefit our sellers and we can provide a service that will or a product that will benefit them. We will charge a fair fee for that, and we feel that all boats arise in that scenario, and we see lots of opportunities to do so.

Thank you, Rachel. Alright, I'm going to move to the next one from Tom Forte at D.A. Davidson and this is going to be for Josh. Can you provide an update, on your M&A strategy and why was it the right time to divest Elo7? We've had quite a few questions about that and also related to our House of Brands, strategy going forward? I think we'll just -- I'll end the question there. And if you can just address those kind of two factors of it, it would be great. Thanks, Josh.

Sure. So we look at each of our acquisitions on a stand-alone basis, and we have a thesis. And so we bought Elo7 with a thesis, which is that when coming out of the pandemic, we would see real tailwinds to Elo7's growth. Elo7's merchandise centers a lot around events and activities that happen offline, things like birthday parties, Kinzinetas, weddings, et cetera. And it's now been two years since we've come through the pandemic, and we've not seen the growth rates that we've expected from the Elo7 business. I think it's a good team doing good work, but they've faced quite a lot of headwinds. And so the thesis hasn't played out. We haven't seen what we've expected, and we thought that this is the time to call it. And I think that's part of taking risks. We're prepared to take calculated risks, thoughtful risk as a business, but we also want to be clear on and call it when we see it, acknowledge when it didn't work out and move on. We're really excited about the opportunities in our core. We're seeing great progress. Depop is doing fantastic things. Reverb, we think, continues to gain share in its industry. And we want to keep our focus, and so that's what we're going to do.

Okay. Great. Thank you. I'm going to give this next one to Josh. Hold on a second. Give me one second. Okay, actually, for Rachel on a couple of guidance questions. The high -- it's from Lee Horowitz at Deutsche Bank. The high end of guidance suggests quarter-over-quarter growth of 40 basis points. In the past, back to school demand has supported growth in the low to mid-single-digit range. Why is it that you are no longer replicating past seasonality? Is it the continued pressure from the macro environment?

So thank you for the question. We -- let's talk about what's implied in the guidance that we gave. The midpoint of the guidance is about 0.7% growth -- 0.5% growth, rather. And that implies that the conditions that we have seen today, as far as macro headwinds, remain roughly the same. They don't get better, they don't get worse. At the high end of the guidance, we would assume that macro headwinds improve so that we are able to hit the high-end of the range. And the low end of the range, we would say that they would slightly worsen. It's still a very volatile market. We don't actually have our crystal ball to say they'll get more or less volatile. So we do -- the guidance does imply that August and September are sequentially a little bit worse than July. We do think we stand to get a fair share of the back-to-school and Labor Day market. We've been, as Josh talked about, leaning much more into promotional opportunities, similar to all e-commerce retailers and more so than Etsy has really ever done before. And we're very excited to be able to talk about back-to-school as an occasion for which you can find many, many special things that people will be shopping for at this point.

There was a -- thank you, Rachel. There was actually another question related to guidance that was from Curtis Nagle at BofA. And it was really about -- we already answered the part about the midpoint and where it was hitting in terms of macro factors. But there was another one about whether our product categories had any impact, how we were thinking about product categories in the guidance. Did you want to answer that one as well?

Well, what are the things that we've said -- we did talk about is that some of our horizontal categories, so specifically gifting and occasions are actually growing quite nicely. And so while we do see headwinds from some of our larger categories like Home & Living, and those have continued to be a little bit under pressure, some of the other categories are actually starting to see sequential improvement. And a category like gifting when we're heading into holiday, we feel pretty strong opportunity for growth.

Thanks, Rachel. All right. Josh, I want to give you the next one from Maria Ripps at Canaccord. Recently, there have been reports of some sellers taking issue with the company's reserve system and its process for withholding and distributing funds. Can you first refresh us on what that policy is around payment reserves and why it's important to the overall health of the marketplace? And maybe comment on how you are addressing this cohort of sellers who are unhappy with the current policy.

Yes. Thanks for the question. So Etsy has an unusually generous payment policy relative to most marketplaces. And that historically, when a buyer buys an item, 100% of that money is transferred to the seller right away. We take it on faith that the seller is going to ship the item to the buyer. And the good news is the vast majority of the time, that happens. But things do go wrong, and sometimes, for example, seller sales really ramp faster than they can deliver on, and things go wrong. And Etsy, of course, steps in to the gap in those times to make sure that the buyer has held whole so that the Etsy brand is a great brand and other sellers' reputations are not hurt by that. So it's really important for the overall health of the marketplace that we can always stand behind every single sale and buyers have a lot of confidence that Etsy will always have their back. As part of that then in 2021 we introduced a payment reserve, where a very small number of sellers that are high risk, perceived to be high risk, predicted to be high risk, we withhold some of the payment from those sellers. And we continue to iterate. We continue to learn on that program, how do we make the models more precise, how do we withhold the smallest amount that we need to and how do we communicate better with sellers about what the thresholds are, why they're in that program and not. And so we just announced yesterday some improvements in being even clearer with sellers about why they're in the program. We announced actually we're going to be reducing the amount we're holding from the vast majority of sellers. So we continue to listen. We continue to learn. We continue to work together with sellers and buyers to make sure that the marketplace stays safe. And just to put some dimension around this, it's in the low single digits of sellers that are in reserve right now. 70% of those sellers have less than $50 in payment reserve. And I don't want to -- we recognize for every seller being in payment reserve is -- can be a hardship. So we want to do it only when necessary, only the mount one necessary, and we want to be communicating as well as we can with the sellers and get them out of reserve as quickly as possible. And so we're working hard to make sure all those improvements happen.

Okay. Great. Thank you, Josh. One from Ed Yruma at Piper Sandler. Can you talk about inflation, if any, observed on the marketplace? Does the pricing tool help sellers understand when they have pricing power? And could this help drive GMS? I'll give that one to Josh.

Sure. Thanks for the question. Yes, we see a lot of opportunity, and I think we've talked for a few years about how helping sellers set better pricing is a big opportunity. And it's one that we hadn't yet leaned into, but we want to. Now we really are. So we've kicked off a couple of squads focused on what we call sustainable pricing, and there's really two separate areas that we're focused on. The first part is how do we help sellers get the right data so they can set the right price for their listing at the start. And so we can share with them, for example, data about items that appear to be similar to theirs and what has been the final selling price for those items. And we showed a screenshot of an example of a test of that, that we're going to be launching. We'll see. We'll iterate and learn exactly how to do that, how to give sellers the right context. But probably, there are some sellers that are really underpricing and some sellers that are really overpricing and some that are getting it just right. But in our market, there are no MSRPs, right? Every item is unique and made by the seller. And so it's, I think, particularly helpful to be able to give sellers context. The second piece is having set your initial price appropriately when, how and if should you use promotions. And I think a lot of sellers are just winging it, and so we're doing a lot of research to see when do promotions pay off and when do they not. For example, is a 10% promotion worth it? Maybe a 10% promotion isn't enough to get a seller to buy, so you're just kind of wasting that sale, if you will. So giving them more insight about when it makes sense and what doesn't make sense to use promotion and how much promotion may make sense. I think that's also an opportunity for us to gather a lot of insights that we get through the marketplace and then share those insights back. So sellers, it's always up to sellers what they want to do, but we give them the insights so they can make better informed decisions that build their business better.

Okay. Great. Rachel, I want to give you one from Shweta Khajuria from Evercore. Just to clarify the guidance comment that you made. Does the guidance assume August worse than July and September worse than August? She was just following up on that, and I think that's an important one we want to clarify.

Yes. So first of all, the midpoint of our guidance is actually 0.7%, not 0.5%. So I want to clarify that first and foremost. Second, we don't guide to the months. So we don't guide to August or September individually. My comment was meant to say at the low point of our guidance, it would imply some decel. July was positive, as we said several times in our call. It would imply some decel in August and September.

Thank you, Rachel. That's perfect. And then I'm going to give another one from Shweta since I have her right here. I'm going to give to Rachel also. Etsy ads once again drove revenue growth and take rate expansion. Where do you see the clear growth opportunity? Is it driving relevance, ad load, more sellers, something else? And maybe Josh wants to comment on that one, too. It's an exciting one. So Rachel you go first.

Thanks for the question, Shweta. Yes, we've continued to be able to grow Etsy ads, I want to say, organically, but it's not without a lot of hard work from a lot of release. Smart machine learning engineers making the algorithm and better, better retrievable engines. And because we are able to make the ad results so relevant to a buyer's query, we're able to increase the CPC, which increases our revenue and also at the same time, maintaining the ROAS for our sellers. And as you know, we get a lot of budget from our sellers, and we don't spend it if we can't give them a certain amount -- a minimum amount of ROAS. So the more that we can match a buyer's query to a seller's product, the more of that budget we can utilize. So we see some continued growth and opportunity for Etsy Ads. I will remind you that we do see Etsy -- our take rate actually, it's softer in the fourth quarter. We called that out on the call. And that's because Etsy Ads, even though it's the gift that keeps on giving relative to the growth we usually see in GMS in the fourth quarter, is lower. So that's the one thing to think about is the seasonality of that product.

Okay. Great. Did you want to add anything, Josh? Or are you good? Okay. Fabulous. And I'll go to the one for both of you from Ygal Arounian from Citi. I'll start with Rachel. Are you able to quantify the AI and ML investments? What they are and how they're impacting margins? And then perhaps -- and then connected to that, I'm going to have Josh talk a little bit about the benefits we're seeing from Gen AI and whether it's helping develop better product development velocity? And do you have any proof points yet that the AR tools are driving GMS growth? And sort of for both of your questions. Rachel, do you want to start? And then…

Sure. Thanks, Ygal. We've been doing machine learning at Etsy for a very long time. So we have a lot of talent of the company that is in machine learning, and that's already embedded into our cost base. And one of the things that we are focused on is doing what Josh described as democratizing ML, so that many people throughout the company can leverage the suite of tools for machine learning and AI and do their own -- leverage that capability and that technology themselves without having to sort of ask for that service from a separate group. So that means that our entire installed base of engineers and maybe even others, like people in my finance organization, will be able to really leverage the capabilities there without having to hire armies of people to go do machine learning for us. We've also been leveraging the investments that other companies, many of them are existing partners have invested already in machine learning. And so we're doing a lot of beta testing and experimentation with other companies. And at the moment, that is coming at a very low cost to us. We would imagine that at some point, there will be some kind of license fee arrangement. But we are -- typically, we do not invest in anything unless we see a high ROI for that investment. So if we decide to license different tools that are out there or to invest in our own workforce to be able to lean more heavily into machine learning and large language models, that would be because we see significant GMS opportunities from doing so. And as you know, we measure everything pretty carefully. We expect about an 18-month return on those investments and that things that, say, way we would measure any kind of new product development as well.

And then on how Gen AI might affect the customer, I would talk about internal and external customers for that. So there's a set of productivity potential benefits that come from Gen AI, for example, for our software developers. And I'm really pleased by the data we shared in this earnings call about just how much velocity continues to improve in spite of getting better. Velocity per squad continues to get better, and we're really excited about the value creation per squad we're seeing right now. So we continue to focus on making Etsy more efficient and more nimble even as we get bigger. Gen AI, things like CoPilot are going to be another tool to help with that. I would caution, I don't think we're testing, and we're leaning in and we're excited about it, and I think it's going to be helpful, but it's not the only thing. It's not a silver bullet. We're actually constantly looking at how can we streamline our processes, how can we be more agile and how can we get more productivity and more value creation out of every squad. I do think that the way that we measure value creation per squad in this company is part of our secret sauce. We've always been obsessed with that. I think it can be a tool that can really help our sellers. So for example, answering queries from buyers. Can it help to auto generate some suggested responses? But the seller is still going to want to look at that, put eyes on that before they send it. So it will be helpful for them, and we want to help sellers every way that we can, help them auto generate listings over time, things like that. Yes, maybe. It could be good again if…

Great. Thanks, Josh. I'm going to give one from Alexandra Steiger from Goldman Sachs, and I think I'll get this one to Josh. In terms of GMS per buyer, how should we think about declines in that metric? And can you talk about what you're seeing at the cohort level that gives you confidence that you can actually return to positive GMS provider growth once macro conditions normalize?

Yes. Great. Thanks for the question. So let me talk about GMS per buyer in the U.S. and international. In the United States -- well, around the world, when the pandemic happened, most places you could shop shut down or were out of stock, and Etsy had enormous tailwinds. And during that time, in the U.S., we saw GMS per active buyer grow by over 30%. Since that time, there's been an onslaught of competition. There's been inflation and all the other things everyone knows about, and yet the GMS proactive buyer in the U.S. has stayed almost exactly the same. We've held almost all of those games. The declines we're seeing in GMS productive buyer are that we're growing faster in international than we are in the U.S., and we've seen a little bit of pullback in GMS per active buyer in international. I'm not mad about us growing faster in international. There's a lot of opportunity in international. There's a lot of buyers to be added in international. And the fact that we've done such a good job maintaining a GMS per active buyer in the U.S. in spite of these headwinds, in spite of all the new competition says, wow, people came to Etsy and they loved it and it was something really different. And now with a lot fewer dollars to spend and a lot more places to spend it, they are continuing to come back and spend in roughly the same amounts today as they were back then. As a platform from which to drive further growth, I take a lot of optimism, excitement, confidence from that. I talked at I think the first question about all the things we think we can do to grow and drive even more from there. But I take…

Great. Thanks, Josh. I'm going to just slip in one more for Rachel from Nick Jones at JMP Securities. The press release indicated there will be more investments in noncore markets and performance marketing in particular. How are you thinking about the pace at which Etsy can capture share in Europe? Can success in North America and U.K. help accelerate the pace at which you can win active buyers in the European -- rest of Europe?

I really -- we're super excited about what's going on internationally, and what we said on the call was that we've seen growth in non-U.S. markets up 5%. And we've been able to invest profitably in our core markets with performance marketing and within the U.K. and Germany with brand marketing as well. We've also been investing with performance marketing in our noncore markets. And we're seeing this lovely yield from that spend, where we're getting lots of visits in GMS coming from some of these noncore, especially Western European markets. So look, we'll stay tuned for that. We'll talk more about it. It's a nonhuman intervention kind of things, so we're able to spend there with a fairly light lift and with good ROI on our adjustment.

Okay. Great. Thank you, Rachel. I think we went over by a few minutes, so we're going to end it there. Thank you all for your time and attention, and we'll talk to you very soon.