Hi, everyone, and welcome to Etsy's third 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, 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. I'll be reading questions from covering self-side analysts and Jessica will help me get -- try to get to as many as we can. Forward-looking statements involve risks and uncertainties 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. Before we begin, the last few weeks of conflict in the Middle East have been devastating for impacted communities and beyond. Etsy has taken actions that can most directly and immediately help our sellers, who live in the impacted region, including covering their existing balances as of October 31st, which represents a contribution of about $1 million, and we're providing additional resources to help sellers manage their shops during this incredibly difficult time. Turning to our results, Etsy performed in line with expectations for modest to top-line growth and strong profitability continued. Consolidated GMS was $3 billion, up 1.2%, compared to last year. Revenue grew 7% to $636 million, and our adjusted EBITDA margin was again very strong at 28.6%. As you all know, there's been significant pressure on consumer discretionary product spending, as high inflation, elevated interest in mortgage rates, splurges on [Zola] (ph) experiences, and declining savings balances have meant that there's little leftover for many consumers after paying for food, gas, rent, and child care. These issues are magnified for lower-income buyers, and we feel the impact on the Etsy marketplace. We're also experiencing an increasingly competitive retail environment with a very heavy emphasis on deep discounting and in some cases competitors investing it potentially unsustainable levels in marketing and promotions. While the headwinds we're facing at this moment in the cycle are undeniable, I'm pleased that once again performance green shoots for the Etsy marketplace were evident in the third quarter. GMS grew about 1% versus the prior year and the prior quarter. We had another new record in active buyers, now at $92 million, with slight growth in U.S. active buyers as well. And buyer additions were up over 6% year-over-year. On a sequential basis, we reported accelerated international…

Thanks, Josh. And thank you, everyone, for joining our third quarter 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 were all reflected in our consolidated financial results and KPIs for the third quarter 2022 with Elo7 divested on August 10, 2023. Etsy delivered $3 billion in consolidated GMS, which increased 1.2% year-over-year, our first positive GMS growth quarter since Q1 ‘22. Revenue increased 7% year-over-year to $636 million, and adjusted EBITDA was $182 million, up nearly 9% from the third quarter of last year. Note that Elo7's mid-quarter divestiture resulted in small headwinds to both GMS and revenue and was modestly accretive to adjusted EBITDA margin. Given the volatile macroeconomic landscape that continues to impact consumer discretionary product spending, we believe these results demonstrate the underlying strength of our brand and consumer relevance. Our year-over-year consolidated GMS growth was positive each month of the quarter, driven by strong Etsy Marketplace growth in several of our top international markets and continued active buyer expansion, as well as meaningful acceleration at Depop that outpaced consolidated growth. The FX headwinds that impacted our business in the prior seven quarters reversed in the third quarter providing a 130 basis point tailwind. GMS for our subsidiaries increased in the third quarter, driven by the strong growth at Depop I just mentioned and partially offset by softness at Reverb. Within our consolidated year-over-year revenue growth of 7%, consolidated marketplace revenue grew 4%, due to an increase in the volume of GMS, including growth in payment speeds for Etsy, primarily driven by a mix shift to more international transactions that yield higher fees, growth in subsidiary payment fees, as well as growth in revenue from offsite ads. Services revenue…

Okay. Hi, everyone. Happy to be here this evening, and we're going to take your questions. We've got a bunch in queue, so I'm going to dive right in from Lee Horowitz at Deutsche Bank. Josh, you were able to impressively reaccelerate growth at Etsy when you landed the company back in 2017. And the environment was much different than it is today, but what are the learnings from that initial time? And how can you apply that to getting Etsy growing from here?

Yes. Thanks, Lee. I appreciate the question. When I arrived in 2017, we had a lot of opportunity to improve our operations and our execution. And a few principles: one, picking a few things and focusing on them, moving really fast and making sure that every single dollar we spent worked hard to drive growth. And I think we continue to get even better at those things. When I look at the progress we've made this year, when I look at how much we've executed, over the course of this year and how good our shopping experience is going to be this fourth quarter versus what it was last fourth quarter. I'm incredibly proud of what this relatively small team has done. So we stay very focused. We stay very urgent, and we work hard to make sure every dollar is working really hard. This is the toughest macro I've run this business in by far. And in spite of that, we think we have gained share against our pure plays. And even when you put mass discounters in we think we're at least holding share within our categories. So even in this tough environment, I think we're more than holding our own. And I think that's because the team is executing with a ton of focus and with a ton of urgency, and we feel a huge responsibility to be driving growth for our sellers, for our shareholders, for everyone, and we're going to keep driving super hard to do that. Appreciate the question.

Great. Thanks, Josh. From [Indiscernible] at Citi, and it's a connected question. There remains growing concern from investors on the competitive environment in e-commerce you touched on it last quarter, but are you seeing anything different from here, particularly from the newer Chinese entrants?

Now if I'd seen anything different, but there's no question that Temu and Sean are having an impact in the market. You don't get that big that fast without taking share from many people. And I think we and most players need and e-commerce have had some impact. And the other thing that is happening is they're spending a large amount of money on marketing, not clear that they're using ROI thresholds to do that. And so I think those two players are almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta. We are the opposite of Temu. If I had to think about what is the polar opposite of Etsy, I'd probably get pretty close to Temu. And so continuing to focus on the incredible quality of the merchandise for sale on Etsy at affordable prices delivered really reliably I think the more people experience super cheap and super disposable, the more they crave something different and something better, and that's us. And even as they invest a lot in certain marketing channels, we have other channels we can invest in. We are not going to drive a race to the bottom. We're not going to invest unprofitably. But we are, for example, shifting some spend to TV. So if we can't invest as much in some paid marketing channels, there's other channels we can invest and we're going to keep competing, and I believe can keep winning over time.

I just had just a couple of notes just to what Josh said. And just to reemphasize, Etsy is a very differentiated marketplace where we have a human being on the other end of every transaction. This is a marketplace that is -- we're creating economic empowerment. Most of them -- most of our sellers are women and they're handcrafting these items oftentimes customized or personalized to the buyer specification in a sustainable way. So to underscore Josh's point about being the opposite of some of the new mass merchant entrants, these are things that we really care about and matter to many of our buyers.

And the next question is also connected from Mike Morton at Moffett Nathanson. During the quarter, there were some announcements to Etsy sellers from the trust and safety team about keeping Etsy special through doubling down on enforcement, adding more human reviews. And improving the integrity. We've observed a difference in recent weeks, and we were wondering if you could speak to any impacts it could have on GMS and how you would size the impact of the stepped-up enforcement. That Josh, that's for you.

Yes. So thanks for noticing. First, we're investing about $50 million in enforcement throughout our policies this year. We've hired a lot of people, and we also have been investing a lot in machine learning and machine learning is really helping us to be able to identify among the 120 million listings on Etsy, those that may not conform with our policy. Takedowns are up 140% year-over-year. And we've really been focusing on what percentage of buyers come across one listing or more that doesn't comply with our policies. So the fact that something exists on Etsy doesn't mean that it's seen. But what percentage of buyers will see a violating view we've cut that number in half in just the past four months. So I'm glad you're noticing, I think it is very noticeable and we think there's even more we can do. I'm also proud to say that we are seeing no deleterious effect to GMS from that. People don't come to Etsy wanting mass-produced product, and we're finding that as we do even more to suppress those listings on the site, the site experience only gets better. We only get more differentiated.

Great. Thank you. The next one I'm going to give to Rachel is from Anna Andreeva at Needham. Product development line item leveraged for the first time in several quarters. What drove that? And how should we think about the growth in that line item in the fourth quarter and into 2024?

Yes, I think that the top line is that we're adding product development people that are -- were investing in them for growth. They are actually driving more GMS and revenue than the cost to have them in our overall cost base. So the biggest driver of product development costs coming down was employee compensation. A technical answer to it is also that we divested ourselves of Elo7. So there's a chunk of cost that came out of the product development line and because Elo7 was not profitable, you would have expected that cost to be higher than the amount of revenue they were generating. And then just a reminder that we really -- we measure our product development investment with an eye on ROI just like we do with marketing, and we invest in areas where we believe they're going to drive incremental GMS and they are, and we talked about how product development velocity increased -- the product -- number of product launches actually increased 40% this last quarter. So it's just a great demonstration of how we're getting return on the investment in product.

And then there's two questions that I would say are very connected, one from Shweta Khajuria at ISI Evercore and one from Maria Ripps at Canaccord. Really asking for some initial thoughts on 2024 in terms of marketing and product spend, how we balance growth and profitability, could we expect to see any margin expansion? How are we thinking about next year's macro? It's sort of a loaded question around all of the things for 2024 from multiple analysts. So I think I would start maybe with Josh and then Rachel, I think you'll have a lot to say or whichever one of you want to go first because I think there's probably both room for both of you here. Josh?

Well, we haven't given 2024 guidance yet. But what I would say is we are always thoughtful about balancing growth and profitability. You have never seen us be a growth at all cost company or throw discipline to the wind. You've never seen us try to buy market share indiscriminately. So when -- I just was speaking about competition from some of the Chinese recent competitors. And if they drive costs up in the auction too much in performance marketing, let's say, we'll go to other channels. But we're not willing to bid higher than a keyword is worth. We also measure, as you well know, our product development and what value have they created our team, each squad in terms of additional GMS, additional revenue or cost savings. And I'm really proud of the team and how they're delivering. We talked about launches being up 40% year-over-year, but productivity is very high. We feel great urgency to be giving everything we can give right now to help our sellers grow at this time to deliver even more value to our buyers and even more value to our shareholders. And so the team is acting with great urgency and we are thoughtful and careful about hiring. We are thoughtful and careful about the investment we make in R&D to make sure that it is delivering it is driving growth. And we're going to keep doing that. When we see opportunities to invest to grow, we'll take them, but we're always going to do it with discipline and care.

And I can just add just a couple of notes on -- first on the marketing point, we have been able to scale additional marketing channels. One of them is paid social. So we've gotten a number of paid social campaigns to work, and we gradually increased our level of investment in paid social as a channel so that we're just about at the same level as many of our peers in that space. We've also been able to scale CRM, where we've got really effective targeted e-mails going to our buyers. And we have also been able to scale internationally. So we're bringing in many new and reactivated buyers internationally. We talked about being in three markets, but also testing television in Austria and Switzerland in this last quarter. All of those are campaigns that reach our marginal ROI threshold. On the product side, and Josh will probably talk about this more, but we have really been able to leverage machine learning to make all of our engineers more productive and more efficient so we can develop and produce faster, bringing -- decreasing the payback period on our product investment. So we're always -- we're never really done optimizing. We've been able to work down cost on our Google Cloud investment considerably as we've leaned into that platform first for our cloud computing costs. And so that all gets baked into our ROI calculations on product development spend.

Great. And since we were on the topic of marketing, and you touched on this, but I'll just ask the specific question we got asked from Sharanjit Cheema. I hope I said that right, at D.A. Davidson. And I'll give this to Josh. Can you give your current thoughts on advertising, including your efforts on linear TV, OTT and digital advertising, including TikTok. We touched on it, but I might as well ask that.

Yes. Great. Great question. So if you look at Etsy back since 2017, and 2017 and 2018 really we're focused on performance marketing. We've gotten a lot better at performance marketing. We've got a lot more sophisticated there. Then we started moving up the funnel, we moved into social, social video and then TV above the line. We are getting a lot more sophisticated at TV, and we're now -- the affordability of OTT has been a bit of a challenge for us. The CPMs are just so much higher than linear that you've seen us mostly invest in linear are starting to crack the code on being able to pay for OTT and get enough value out of it to have the ROIs really work. Obviously, with OTT, you get more targetability and some other benefits, trackability as well. So really excited there. But mid-funnel is also an area we're really working on using things like YouTube and paid social video to find people who are planning a wedding, let's say, or having a baby. The opportunity to build consideration when you don't necessarily have a specific product that they're already looking for, but when you think that they're in the market generally for things is an area where I think there's a lot of opportunity for us to continue to get better. We are investing. We are seeing gains. And we have started, for example, insourcing more creative there. So head count has grown a little bit, but actually, we're paying less agency fees. And when we in-source more of our creative, we can make content for mid-funnel really fast and really cheap, and that allows us to have more targeted content that's more of the moment. So it's those kinds of capabilities and muscles we keep building…

Okay. Great. Thanks, Josh. We have several questions about promotions, so I'm going to combine them. One is from Eddie Yruma at Piper Sandler, and one is from Nathan Feather at Morgan Stanley, but it's basically getting at how do we think our Q3 promotions went the Etsy funded promotions? And how do we think about those more as a go-forward marketing strategy? I think we could start with Josh on that one.

Great. So the Q3 promotion was just $5 off of spend $25 or more and you get $5 off were great. We saw a nice little bump in GMS and buyers really like that sellers loved it and it was ROI-positive. It was a relatively small investment, and it worked terrific. Then in October, we ran $10 off 40 didn't work as well. It was not ROI positive. It pulled forward sales as much as it increased sales, didn't drive as much incremental lift. I could go a lot deeper into how did it work in one market versus another in one category versus another with new buyers for laps buyers. But the point is we're learning. And this is a tool we'll have in our toolkit. I would expect we'll do more in the fourth quarter as we continue to test and learn with an eye towards testing and learning. The investments are something we put an ROI threshold on like anything else we do. But the vast majority of promotions on Etsy are seller funded. It's when sellers put things on sale. And the new deals tab in our app, for example, I'm really excited about. It just launched. It's very early days, but buyers seem excited that there is a deals tab. One place I can go to find deals just for me. and maybe something they didn't think of an associate with Etsy. So I think we have a lot of sellers who want to put things on sale. We can do a better job and we really are focused right now in giving them insights on how, when and for how much should they put things on sale. And then us highlighting those things. That's going to be most of how promotions continue to work. But if Etsy can be the icing on the cake with some Etsy funded things and make that a good investment, we're going to keep testing, and I'm optimistic that, that's going to be a lever in our toolkit.

Great. I like the icing on the cake. That's great. Rick -- next question comes from Rick Patel at Raymond James, Rachel. I'm going to give this one to you. Can you expand on new buyer ads? How much is coming from the U.S. versus international? And anything around categories and how people are spending when the new buyers come in?

Sure. So first of all, we love our growth internationally, and we said up 7%. And so we're seeing that we're opening up new markets, which is fantastic. We've certainly seen a lot of new buyer growth coming from international, but we've also seen a material amount of growth coming from -- for new buyers coming from the U.S. So really in both places that we haven't disclosed the breakdown of new buyers by geography. So that's as much as I can say there. And no, we don't really see any category differences by geographic market. It's sort of a universal appetite for all of our major categories along tail of categories across all of the geographies.

Great. There are two questions about sort of areas of interest that we have for investment. One is from Ashley Owens at Key and the other one is from Nick Jones at JMP, and I'll basically read a version of the combined question, which is for Josh. As you look out over the next couple of years, what are your priorities in terms of investments in mark-for-the-market place for buyers and sellers in search in other tools? And how do you see those types of investments inflecting frequency over time. I think that's really the net result of the question.

Great. So thank you for the questions. We think we are in the early days of unpacking Etsy's opportunity. We think that we can gain a lot of share in our categories and versus e-commerce and through both adding new buyers and frequency. And there's four things we're really focused on right now. It's quality, value, reliability and consideration. Starting with quality, value and reliability. We've made a ton of progress on relevance. So whatever you enter in the search engine, we do a pretty good job of understanding what you meant in finding a set of results that are relevant to what you meant, maybe not what you said. But giving you a diverse set of ideas, what are the five or 10 best ideas for that provided it's a relatively generic thing like gift for mom or whatnot. Giving you a really good, compelling diverse set of ideas and then picking the few best examples within each of those ideas is a big focus. I think we have a ton of opportunity to do better. So we don't just match you with the product you're likely to buy. It's a product you're going to love. And in the process, we show you the breadth of the kinds of things that Etsy can do for you. I think there's a ton of opportunity. And as we do that, we will get a lot more frequency. In terms of value, people assume that if it's mass produced somewhere and lots of hundred thousand, it's going to be cheap and it is. But it turns out that if somebody makes it just for you and there aren't three markups along the way, that also can be affordable and can be special. And so highlighting the fact that you're getting great value on Etsy is something that is a big focus, helping our sellers price well, use promotions well. That's a big focus. And then on reliability, we've made so much progress on making sure items arrive on time. making sure there's clear return policies, making sure it's easy to fix things on the rare occasion that something goes wrong. We now need buyers to understand all the progress we've made, and we can continue to do better, make delivery windows shorter without losing the special nature of Etsy. So a lot we think we can continue to do on reliability. As we do better on quality, value and reliability we then need consumers to understand that we need to disrupt their consideration of Etsy so that we're in their consideration set a lot more of the time. And again, with only 3% of people, if you say, name a place to shop for home furnishings, only 3% of people can name Etsy, you say, name a place to shop for gifts, only 12% of people are naming Etsy. We think there's enormous opportunity there.

Okay. Great. I'm going to jump to a question from Trevor Young and his team at Barclays. And it's related to our seller growth. So you've seen -- we've added over 1 million active sellers in the last three quarters. Can you talk about the levers that drive that strong growth? And Josh, I'll give that one to you.

I'd say that's the other side of a tough macro we candidly haven't done anything different to acquire 1 million sellers. Nothing. It's just -- I think it's a tougher time. A lot of people are learning -- are wanting to make some extra money, and Etsy is a fantastic place. If you make things and you want to sell them, there's no place like Etsy. And so I think it's just a testament to the great value that we offer to our sellers.

Great. Thank you, Josh. And the next one is for Rachel from Anna Andreeva at Needham. Question on take rate. You mentioned there could be an opportunity to still raise some of the fee structure at more Etsy and the subsidiaries. What is the sensitivity towards additional raises from the seller community.

We strive hard to make sure that if there's any changes to fee structure that we are providing value back to sellers that they can actually feel and not just value to sellers, But good for the buyers too. There's really three or four ways to expand take rate. One of them would be to expand services we already offer. So for instance, Etsy Ads is a service we provide that we've continued to improve the efficacy of that product, and it allows us to grow the revenue from that product. Etsy Payments is another example of that, where we just talked about launching more Etsy Payments markets and that expands fees from Etsy Payments. Also benefit to the sellers in those markets. Another way to expand take rate would be to offer new services. So you can -- we have nothing specific to announce on our call today, but I mean you can look at other marketplaces and you can see a lot of services that Etsy does not currently provide and those might be services that are beneficial to our sellers that we could consider investing in. And then there's straight pricing increases, and you've seen us do that a couple of times. And again, we would never just make a -- or we have never make just a wholesale change to our pricing, but we would do it in conjunction for -- to answer this question, what can -- why would we be -- how would we be investing that incremental revenue derived from a higher price? And we think hard about that. So you've seen us, if you go back over time, you've seen us been able to increase our marketing investment because we've taken lifetime value up and we can continue to invest or dollars and still have a high -- achieve our marginal ROI thresholds. And in turn, you've seen as we've done that, not only has marketing increased, but so has GMS. So it's been a virtuous circle that we've really appreciated. So we need to answer that question for ourselves. What way could we put those dollars to work that will be beneficial to the overall marketplace. And that's how we look at it.

Okay. Great. We had a question in from Eddie Yruma at Piper Sandler, and it's really about the financials of Depot, which I want to ask Rachel. But I first want to ask Josh sort of what we're seeing in the business there, talk about the financial performance just in general of Depop and what do we think is attributing their growth? And then Rachel, maybe you can add on how we think about their EBITDA margin drag.

I mean Depop had a great quarter. Depop is doing great. And particularly in the U.S. Depop is doing fantastic in the U.S. right now. And again, I think this is the other side of a tough macro is Depop is a way to get very affordable close that doesn't have a negative impact on the environment. And that's very popular right now. And so Depop is no question benefiting from that. I also think the management team we put in place and the specific programs they're executing are working, the marketing programs that are executing are working. . So it is the benefit of a portfolio as we hoped when we bought that company, that having a portfolio allows you to benefit from different sectors of the economy at different times, and that's where we are seeing.

Yes, Rachel, did you want to add anything there on that?

Yes. The only thing I'd add is that when we talked about our guidance, we said that we expect in the fourth quarter, our subsidiaries to be about a 300 basis point contraction to our overall margins. That's down from the 300 to 400 basis points that we have been talking about previously. Due in part from the divestiture of Elo7 but also strong growth at Depop.

Okay. And then, Rachel, while I have you, a question from Laura Champine at Loop. Is the Q4 GMS outlook in line with the quarter-to-date trend. I assume what she means through October. If so, what do you attribute a slowdown from the pace of Q3? And then she had asked us a connected question separately, which was, is it -- is it really coming from Etsy getting crowded out by other advertisers who may lack a hurdle rate to him their investments. that's one.

So I think that's a yes end. So with the -- just to reiterate the guidance we gave, we said that we grew every single month of Q3, but we started to see some softness towards the end of September, and that continued into October, where we started to see slightly negative trends. The guidance we gave reflects that softness in October, and we said that would -- we would expect about low single-digit declines for the fourth quarter. If the macro were to worsen, and we have a long list of macro that I think everyone is familiar with, but we're seeing decrease in consumer discretionary product spending. And I can double-click on that for a second. If it worsens, we would be -- maybe that would shift to mid-single-digit declines. But if it improves, we could be flat to even positive. The double click on the decreases in consumer discretionary product spending is to just point out what we've seen, and I'm sure you've all seen the economic data is that we've seen actually growth in spending in services and we've seen stability and some growth in goods from durable goods. But the non-durable goods, which is where Etsy primarily is and particularly nondurable discretionary goods is the piece that's really under pressure and is receiving a lot of the headwinds from the macro. The increases in spend in non-durable goods is primarily in essentials and items that are heavily discounted. So we're really in the sweet spot of the eye of the storm, I would say. On top of that, we are seeing a lot of competitive pressure on advertising spend as the CPCs go up. Our model is dynamically pull back, and we just naturally spend less, which obviously would point to bringing in less -- acquiring less traffic less buyers.

The only thing I'd add there is everything Rachel talked about is GMS. So the GMS guide is down low-single-digits. Take rate is actually up year-over-year. You'll notice in our guide. And so a low-single-digit GMS would still be roughly flat, maybe even slightly positive revenue for the quarter.

With very healthy margins, so…

Yes.

That's a good way to end. We are out of time. So thank you, everybody, for your time, and we will be talking to you all as we go through the quarter and shop on Etsy for all your gifting needs.

Thank you.

Thank you.