Hi, everyone, and welcome to Etsy's Third Quarter 2024 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO. Once we are finished with the presentation, we will take questions from our publishing sell side analysts on video. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business, and our operating results as noted in the slide deck posted to our website for your reference. Our actual results may differ materially. 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 and non GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or in our slide deck posted on our IR website along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb, and good afternoon, everyone. We're pleased to have delivered solid consolidated revenue and profit, despite a challenging GMS quarter for the Etsy marketplace, with overall performance roughly in line with our guidance. Consolidated GMS was $2.9 billion, down about 4.1% year-over-year. Revenue grew 4.1% to $662 million, benefiting from continued take rate expansion. And we posted a very healthy adjusted EBITDA margin of approximately 28%. While Etsy marketplace GMS was down about 6% year-over-year, it's encouraging to see our active bio levels remain solid at approximately 91 million. We maintained strong revenue flow-through and profitability, despite continued macro headwinds and multiple mindshare events this quarter. I'm excited to tell you more about how we're investing focus and discipline in the things that we believe truly differentiate Etsy in order to get us growing as quickly and strongly as possible. Earlier this year, we outlined our commitment to driving consideration among our customers, centered around highlighting Etsy's quality, value, and reliability. We said, we would elevate gifting, prioritize quality in search, foster loyalty, and improve shipping. Fast forward to today, we have delivered on those goals. We have created a more intuitive gifting experience, enhanced our search algorithms to showcase higher quality and more diverse listings, launched the Etsy Insider Beta Loyalty program to encourage repeat purchases, and reduced estimated global shipping times and charges on millions of items. Achievements like these are part of a bigger story. At a time when it feels like everyone else in retail is focused on slashing prices and offering steep discounts, we are approaching things differently. We know that our strength lies not in a race to the bottom. It's simply not who we are, it's not who our sellers are. Instead, we're choosing a different direction, choosing to double-down in the…

Thanks, Josh, and thank you for joining our call. My commentary today will cover consolidated financial results, key drivers of performance, and Etsy marketplace standalone results where appropriate. As a reminder, we divested Elo7 on August 10, 2023, So, please take that into consideration when you compare year-over-year consolidated results. Etsy's third quarter 2024 consolidated GMS was $2.9 billion, down approximately 4.1% year-over-year with a 30 basis point FX tailwind. Etsy marketplace GMS was down 6% year-over-year. Strong Depop performance contributed a nice benefit to consolidated GMS as they delivered excellent top line growth in the U.S. and also performed well in Australia. Third quarter consolidated revenue increased by 4.1% year-over-year to $662 million and adjusted EBITDA was $184 million representing a very healthy 27.7% margin, down 90 basis points year-over-year, and ahead of our guidance. We gained leverage year-over-year on employee costs and cost of revenue, which was offset by a higher level of consolidated marketing spend this quarter. Note that Elo7's divestiture resulted in a small headwind to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin. Digging into the consolidated revenue growth, marketplace revenue increased 3.3% year-over-year, primarily driven by payments fee revenue. We continue to drive Etsy payments expansion with penetration of our payments platform now at about 99% of Etsy marketplace GMS, compared to 93% in the corresponding prior year period. Our new seller setup fee and offsite ads fees also contributed to marketplace revenue expansion. In addition, an increase in GMS and resulting transaction fee revenue for the Depop marketplace was a tailwind to our consolidated performance. The growth in consolidated services revenue was even faster at 6%. For the core Etsy marketplace, as revenue performance accelerated on a year-over-year and sequential basis, the results of…

Thank you, Rachel. [Operator Instructions] As a reminder, we are allowing analysts one question today. We will wait one moment to allow the queue to form. Our first question will come from Nick Jones from JMP Securities.

Great, thanks for taking the question. Could you speak to the leverage you're driving in product development? I think you've pointed out in the past that you're able to do a lot with kind of a relatively lower headcount to other platforms. How do you rank or order what you want to invest in, particularly as eye accelerating GMS growth over time? And should we be thinking about a potential investment cycle at some point as you get your arms around a lot of this new technology, and potentially maybe a bigger lift to move the needle more? Thanks.

Yes, thanks, Nick, great question. We go through a process at the beginning of the year where we say what are the -- well, at the end of the year, we're going through it right now for next year, what are the customer experiences we really want to uplift that we think are going to translate into more lifetime value, more GMS, and more revenue. And then, we have a top-down bottoms-up approach to challenge the team with what are your best ideas, and based on the quality of the ideas we decide how many squads to dedicate to those tasks. And as you know, Nick, the unit of work at Etsy is a squad; it's roughly eight to 10 people. And so, those atomic units can operate really quickly, the velocity is usually really good. So, we empower them to, "Hey, you've got to improve this customer experience by this much in those times." You're right that we are seeing some leverage in product development this year based on the reduction in force that we did last year. We've always believed we've never been a growth at all cost company. We've always believed that scarcity breeds focus, and that focus is a great thing. We also care a lot about the productivity of the team and measuring the productivity of the team. This year, as you know, we've decided through the course of the year to invest in some more foundational experiences that we think are really critical to setting up ourselves for growth in the years to come, that are not as focused on getting to grinding out incremental GMS in the quarter. Some examples are adding a Q-score to search. That's a really foundational thing that we think is going to drive tremendous improvements in the marketplace,…

Just add, being disciplined about investments means trying to make sure we're optimized in terms of a cost of a full-time employee. So, we've talked about before that we have development centers that are outside of the U.S. where the cost per FTE is not the same rate that we're paying in the U.S. And we try to load-balance, not only open up the aperture on where we can get the talent in places like Mexico City and in Dublin, in addition to the United States, but also the talent markets have different compensation levels there, so we get to lower the effective cost per FTE. At the same time, we're always looking at what's the right market price for the level of talent that we need, and we do that assessment every single year, and make adjustments as needed, up or down, to be able to make sure that we're paying competitively.

Great. Thanks, Nick. Operator?

Our next question will come from Anna Andreeva from Piper. Please go ahead.

Great. Thanks so much, and great to see you guys. Good to hear about the progress in search and profitability. A couple from us, just curious any color that you can share what you're seeing in the business quarter-to-date, and what's implied at the low end versus the high end of the GMS guide for the fourth quarter? If I'm not mistaken, last year, October started off tougher, but then the business improved in November and December. But then you have the gift mode that's incremental, which should be helpful. And then, just as a follow-up, could you elaborate on the physical Etsy gift card launch this quarter, just sounds pretty interesting? Curious how you plan to be marketing that, and if any of that upside implied in the guide? Thank you.

I'll pick gift card. Well, we're not going to give quarter-to-date how's October gone so far, but I will say that the holiday season this year is later than normal, and shorter than normal. So, we think November and December, and particularly mid-to-late November and December are going to loom particularly large in the quarter. And it's always the case that they do, but probably even more so in this quarter. Obviously, we have an election going on in the United States, that's an incredibly distracting mind share event where lots of people aren't necessarily thinking about shopping in the early part of November. So, we'll see how that goes. Of course, we consider that in the guide, but it's hard to know exactly how that will affect things. We certainly do consider though that we have an election coming up, and that we have a shorter Christmas. In terms of the gift card, it is baked into the guide. I think it's, over time, going to be really exciting for Etsy. We are marketing through a third party that has deep relationships with the retailers. But building awareness and mind share for retailers, I do think, takes time. So, we think that, as we said, gift cards for us are maybe 1% of GMS, maybe even a little bit less. And for many of our peers it's two or three of percentage points, so we think there could be real upside. I doubt it happens all at once. I bet that's something that builds over a little bit of time.

But I just wanted to quickly remind you about the accounting for that because we don't get to recognize a revenue from a gift card until the gift card is redeemed. So, in some cases, people will get the gift card and redeem it immediately. In some cases, it sits in a desk drawer somewhere and it takes time, and then we're recognizing the breakage over some period of time. So, it's not a straight sale of gift card to hit the P&L directly.

The other thing I'll say about gift cards is that what we do find is people who redeem a gift card tend to buy more than the value of the gift card. We think that's a great opportunity to bring new people to Etsy. We think it's a great opportunity to also gain more frequency. We also have started testing refund to credit. And in the rare occasion someone is not happy and then get a refund, sometimes they're happy to get a refund to credit, and that actually drives a lot of incremental purchase behavior too. So, I think there's gift cards and generally stored value is a really interesting place for Etsy to be investing in the years to come.

Just want to add one more point to the shorter shopping season. We do have a gift teaser in our gift mode. So, I think that really helps a lot where you can actually buy something and still get it to people on time for Christmas because they'll get the gift teaser even if they're not getting the gift. So, we're excited about that.

All right. Next question? Thanks, Anna.

Our next question comes from Scott Devitt from Wedbush. Please go ahead.

Hi, everyone. Hope you're doing well. Had just one question, I think part of the growth in the business recovering seems to be related to just the categories at which Etsy sellers do well in. And so, that will take care of itself over time. And then, you have these initiatives that you're pushing, that when that does happen can be more stimulative than maybe they right now. And you talk a bit about gifting, and search, and shipping, loyalty, and app. If you were to look at those five categories, if those are the five areas where you're investing to enhance consumer experience in different ways, what would be the one or two that really stand out that you think could move the needle?

One I'm most excited -- normally you don't pick amongst your kids and hedge. But honestly, the thing I'm most excited about is consideration. And the way I'm most excited to build consideration is on the site in the experience itself. I think we have the opportunity to show people a lot more to inspire new shopping missions in addition to fulfilling the shopping mission that they're already on. And I think that the advances we're seeing in GenAI are really, really helpful. For example, it is very common for someone to type in wedding cake topper or cake topper would be a very common search term on Etsy, cake topper. And GenAI suddenly can understand, aha, cake topper is related to wedding. This person is probably in the process of planning a wedding. That's an interesting context for us to know. And here's five other popular things that people planning weddings would also want. And so, freeing up screen real estate to not just show people cake toppers, but say, by the way, did you realize that we also can do table stakes, table scapes, stationery, bridesmaids gifts. And Jenny is even good at, if you're at the stage of the wedding where you're buying the cake topper, what are the other things at that stage of wedding planning that are particularly relevant? And I think that the opportunity to just spark new shopping missions in addition to the existing missions that you're on, I think is a huge opportunity. It is requiring us to refactor our use of screen real estate so that we can make the real estate available to do that. And so, for example, this holiday season on the app, we said that on the homepage, we've got a third more screen real estate leaning into discovery and away from what we call pick up the thread or recommendations based on the thing you most recently did. It took a lot of work to figure out how to consolidate that pick up the thread without a meaningful loss of conversion. It took a fair amount of iteration to get to flat. But now that we've freed up that screen real estate, I'm really excited about how we can learn to use it to drive a lot more shopping missions. And over time, we've talked for a long time about consideration and having people think of us for more things. The place to really make that work is on the site. And I think we've done a lot of foundational work this year that I'm really excited about.

Thanks, Scott. Next one?

Our next question will come from Nikhil Devnani from Bernstein. Please go ahead.

Hey, guys, thanks for taking the question. Josh, it's encouraging to hear the incremental hiring plans. How do you -- when you step back big picture, how do you think about the right margin level for Etsy here? Is there room to be more aggressive, even if it means trading off a bit of margin? I feel like we've seen you lean into Depop and it seems like it's working quite well, even in this macro backdrop. Not that you need to deploy the exact same playbook on seller fees there, but I'm just wondering if that experience is the right inspiration to rethink the margin structure for Etsy and the level of investment intensity for Etsy, if it means the tradeoff is a better growth profile and a bigger pool of profit dollars down the road. Thank you.

Yes. We're trying to grow the market cap of the business and thinking about what is going to grow the market cap of the business. And obviously, we care about profitability and free cash flow, but we care a lot about growth. And this year, we've been investing in a fair number of foundational things that I really believe have been incredibly powerful to position us for future growth. I would like to see those things start to translate into the growth we expect to see. And as we see proof of that, leaning more than it may well be that leaning more into hiring could make sense. You know us, we are very data driven and we like to see proof of ROI, at least green shoots, and then invest behind that. I think we're taking a very prudent approach. We do have a team that is capable of investing in a fair number of things at the same time, but we think that a good number, not too many, not too few. And so, we're going to continue to try to strike the right balance here. A few quarters ago, people were worried that maybe we're investing too much. Now, people are worried that maybe we're not investing enough. And so, maybe we're just the right place. Maybe we're goldilocks, yes.

There was another question within his question, which was about Depop.

Yes.

And how we think about that and the seller fees there, and if that had any relevance.

Yes. I mean, I would like to just do a shout out for Depop. I mean, if you look at our guide baked within that is Depop growing more than 30% year-over-year, GMS at Depop growing more than 30% year-over-year. I will say the U.S. within that for Depop growing substantially faster than 30% year-over-year. I think it's really exciting what's going on there. And I think it's a testament to the leadership that, that team has been providing. I think it is also some validation of the portfolio strategy we've invested in. I've been more popular sometimes than others with our investors, but gaining exposure to resale, apparel resale, which we've always thought is a great sector. We're seeing some benefits from that now. And lastly, what we see in the environment right now is it's just exceptionally promotionally driven. And Depop is an opportunity to buy brand name clothing at a relatively deep discount because you're buying them secondhand from someone else. And those kinds of products are the products that we think are really winning in this market where people are so focused on promotions and discounting. So, we're really pleased with the work that team is doing and the performance of Depop. And I think it plays into the portfolio that is the Etsy House of Brands.

Okay, great. Next question?

Our next question will come from Maria Ripps with Canaccord. Please go ahead.

Great. Thanks so much for taking my questions. So, as you approach your first holiday season with gift mode, what are your expectations for the offering and how are you measuring success here? Either is it in terms of GMS, in terms of percent of GMS, in terms of number of active buyers? And can you maybe expand a little bit more on what you're doing on the sort of -- on the marketing front to drive awareness of this offering?

Sure. So, we are measuring it based on absolute GMS. We're pleased that in the third quarter, gifting GMS grew substantially faster than the overall marketplace as it did also in the second quarter. We think that's some validation that the investments we've been making are showing real benefit. And so, we've launched some great product features that we think set us up to have the best gifting experience this year. The gift finder has many times more -- three times more gift ideas, 5,000 different gift ideas. The adoption of wish lists and the gift teaser are great. By the way, at a time when the shopping season is shorter, the gift teaser is a great thing for people who are giving gifts more last minute to still have the teaser arrive on time. So, we think the investments we're making are great and you will hear us talk in all of our marketing channels a lot about gifting in the fourth quarter. We have a great above the line campaign that launches in just a couple of days that really is focused on seeing someone and your gift being an expression of really seeing that person in a way that we think is super cool and we think you're going to like.

Maria, there's one part of your question I just want to clarify. You mentioned active buyers in gift mode and I think we've talked about that a little bit in the past. We don't track in gift mode if you're a buyer in gift mode. We're just tracking gifting GMS because you can start out in gift mode and then you can actually buy a gift somewhere else on the site. So, I just wanted to clarify that.

Yes.

Our best measure for tracking you is if they select this as a gift for somebody else.

Yes.

Yes.

So engaging with the gift mode is just a part of the funnel which leads them to other items that they consume and purchase.

Yes, exactly. Okay, cool. Next question?

Our next question will come from Naved Khan with B. Riley Securities. Please go ahead.

Hey, it's Ryan on for Naved. Thanks for taking the question. So, I wanted to ask on Etsy Insider and the seller reaction to Etsy Insider and then also initial takeaways. Maybe seasonal versus monthly subscription numbers or anything that you can kind of give clarity on. So, thanks.

We're very early in. In fact, I think we're in spring training. We're not in the first inning. We're in like spring training. Yes, we are in the earliest of early days. It's been live for six weeks in a beta that by design was only a limited population of people have been invited to. So, we're really trying to learn what is the -- what happens when shipping price goes away? What's the propensity to want to subscribe to a loyalty program? What are the kinds of value props that make people want to subscribe? What are the economics of that look like? So we're intentionally limiting the population and the uptake so we can have a sandbox, if you will, to play with that. And so, we're pleased with how it's launched. I think it's pretty beautiful, pretty well presented. And the sellers are mostly concerned that we don't cause their economics to get worse. So, when we did our seller research and our buyer research, they both said we'd love free shipping as long as it doesn't mean that sellers have to have lower margins. So, for the buyers, interestingly, and this is one of the wonderful things about Etsy that I think is so different than anywhere else. When we said to buyers, do you want free shipping on it? Or what do you want out of a loyalty program? They said, I want free shipping, that's the thing I want, but I don't want the sellers to have to pay for it. And that's cool. I don't think people are thinking that on eBay or Amazon or other marketplaces. I think it speaks to the real connection between the buyer and the seller and the care of the buyer and the seller. So, the seller reaction, I think, has been generally positive and I think it's early days. Well, this is something, when we look at loyalty programs that have succeeded, it typically takes a while to work through and figure it out. And they evolve quite a bit from start to the point that they really get scaled. That's what I would expect for us as well.

Thank you. Next question?

Our next question will come from Robert Coolbrith with Evercore. Please go ahead.

Hi, good afternoon. Thanks for taking our questions. Josh, I think you just confirmed it earlier, but wanted to check if the Q score has remained conversion and GMS neutral as you scaled that up. And then, in a similar vein, any additional color on the scale of the GMS headwind from the changes in mobile app and web, would you expect that to be a consistent headwind into Q4, or do you perhaps refocus a bit on conversion versus downloads and longer term consideration in Q4? Thank you.

Yes. So, we were able to get the Q score when we launched it in search to be roughly neutral to conversion rate. We have been putting more friction in the mobile web experience to drive people to app. I said in the pre-recorded portion that, for example, like an interstitial on the signed out listing page is driving, we think, incremental 3 million annualized downloads. There's obviously some cost to conversion rate, but it's not that high. We think it's very appropriate and ROI positive to do that. So, I think the headwinds from the changes that we've made are actually quite modest. The bigger cost, candidly, is opportunity cost. Had we decided to keep running the business the way we have in prior years and just grind out GMS wins, we probably could have had several percentage points less decline in GMS this year, but towards what end? I don't think that that would have set the business up in the strongest possible way to differentiate itself and grow. I think the things we're doing to really lean into what makes Etsy different, what makes it special, to highlight the quality, the uniqueness of Etsy, to show more diversity, to spark, to create screen real estate, to spark more new missions instead of just leaning into the mission you arrived already knowing. I think the investments we're making in that are a great investment to set us up better for growth in future quarters. So, I think it is that opportunity cost that is the bigger piece of the cost we've felt this year.

Great. All right. Next question?

Our next question will come from Laura Champine from Loop. Please go ahead.

Laura, are you on mute?

Laura, your line is open. Feel free to unmute. Okay, we can return. We'll take our next question from Marvin Fong from BTIG.

Can you hear me?

All right. Please go ahead, Marvin.

Okay, awesome. Well, thanks for taking my questions. I really appreciate it. Just two quick ones for me, so, you gave out the category numbers, which always appreciate that, I mean, I know you just give us some full numbers here, but maybe there was, as I calculated, maybe some small marginal improvement in maybe the home category. But just as a broader question, are you seeing anything different among the different categories in terms of sort of like the pressure on your business, or am I over-reading into that? And then, second question, just on the buyback you guys are generating north of $700 million, $800 million in free cash flow, so, kind of similar to the buyback, what's sort of the appetite here to outrun the free cash flow generation and maybe lever up the balance sheet here? Obviously, you guys have called out that you think the stock is undervalued here. Just any thoughts on how you think about capital structure and deploying the buyback would be great. Thank you.

I'm going to take that last one first. And then, -- so, we did say in the call that the Board approved the additional billion, and that does give us the flexibility to lean more into buying back even above the current levels, which we've been doing about 90% of our free cash flow return to shareholders. And we can do that. We have the luxury of being able to do that and continue to invest the way we want to in our organic investments. So, we feel pleased about that. The balance sheet is levered up. We have three outstanding converts and the first one coming due in the fall of 2026. So, we want to be thinking about that. And we don't have to lever up right now to be able to be leaning more into the share repurchase we're doing pretty ample; we're purchasing and we have the flexibility to go even beyond what we've been doing currently.

And it's a pretty great thing about this business that our capital requirements are so low. For many companies EBITDA still does not translate into free cashflow. For us, it largely does. And so, this is a business that generates a lot of free cashflow has $1.2 billion on the balance sheet which we think is more than we need. So, it gives us the flexibility. And on the categories, candidly, not a lot interesting, if I'm being very direct. Not a lot interesting. The one insight, and I think, I might have even talked about this in the last call that we continue to see is where there are pockets of real value. So, for example, in jewelry, we are growing in what we call demi fine jewelry. So, think like an engagement ring that you're giving to your partner that might cost between $100 and $500. On Etsy, you can find real gold handmade by a goldsmith just for you at a price that's really compelling relative to what you pay, may pay at the mall. And so, we're winning in that jewelry under $20 is under more pressure. You've got to pay shipping on Etsy for something under $20 where you might be able to go to the mall and buy a $15 something without needing to pay that. So, we are seeing pockets within every category and value right now in this market is very important.

Cool. I think we'll take one more in, operator.

Our next question comes from Shweta Khajuria from Wolfe Research.

Hello, Shweta.

Hey, Shweta.

Hey, everyone. This is Brian Kraska on for Shweta. Sorry about that.

It's okay.

Anything like Shweta.

Congrats on the quarter, really nice to see the upside and the take rate, both in Q3 and the GAAP for Q4. Just was curious, if there's any incremental drivers beyond advertising that you called out in the letter, payments as well, anything we should consider on the seller side, either with the quality score or other initiatives and how to think about this into 2025? Thank you for taking the question.

Yes, thanks for the take rate question. What I'm really excited about is we made significant gains in take rate this year. If you look at it through the year, it's like 130 basis points of take rate. We did that without impacting our sellers' margins. I think there's often a view that somehow, if Etsy's take rate goes up, it must come at the expense of sellers. That's not true, certainly not this year. We saw payments coverage go up. That means instead of paying some other third-party payments provider, they're paying Etsy instead and having a better experience. Our buyers and sellers are both safer when it runs through Etsy payments and they're not paying more for that. Etsy ads just got better. It were getting better and better at picking the right ad that a buyer is likely to buy. And so, our sellers ROAS stayed roughly consistent, but Etsy earned more take rate. That's a win-win for everyone because it allows Etsy to go back and invest more in the business without sellers margins on average being negatively impacted. The seller onboarding fee is a small component of that as well. What we're seeing is that it's doing a good job of stopping bad actors, and it's not stopping sellers that were likely to succeed. So the amount of sales from new sellers has not declined in any meaningful way as a result of that. So, it feels like that's been a very healthy amount of friction to add to the marketplace and then OSA is the other component of it. So, we feel like the take rate gains we've made this year are healthy, we think they're sustainable and we feel good about that and we think there continues to be opportunity for a fair exchange of value and for Etsy to continue to get better at offering services that add value to our sellers, help them grow their business without coming at expense to their margin.

And I'll just add real quickly that the payment schemes we made in 2024, we'll annualize that in 2025. So, that because we didn't do them all on the first day of the year. And then, OSA just as a definition is offsite ads. So, when we spend more on our performance marketing, we are able to collect more OSA revenue.

Great, we are at time. Operator, I think we're going to call it the evening.

Thank you.

Thank you, everybody.