ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2020-Q1

[Debra Wasser, VP, IR]

Hi everyone, and welcome to Etsy's First Quarter 2020 Earnings Conference Call. I'm Deb Wasser, Vice President of Investor Relations and joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Gabe Ratcliff, our Director of Investor Relations. So we are trying something a little different, given our work from home status. Our first ever video earnings call.

For quality purposes, our prepared remarks have been pre-reported along with the accompanying slides. The slide deck has been posted on our website for your reference. Once we are finished with Josh and Rachel presentations, we will transition to a live video webcast Q&A session. Question can be submitted by the Q&A chat window just laid 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 Gabe will help me 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 for the second quarter of 2020 and key drivers thereof. The impact of investments on top line growth and certain impacts that the COVID-19 pandemic may have on our business strategy, operating results, key metrics, financial condition, profitability and cash flows and changes in overall level of consumer spending and volatility in the global economy and the impact of ongoing settlement of intercompany balances on future foreign exchange rate volatility.

Our results - actual results may differ materially. Forward looking statements involve risks and uncertainties, which are described in our press release and our 10-K filed with the SEC on February 27th and subsequent reports that we filed with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures, reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR website along with the replay of this call.

With that, I'll turn it over to Josh.

[Joshua Silverman, CEO]

Thanks Deb, and hello everyone.

And let me start by saying that our hearts go out to everyone that's been touched by the COVID crisis and it's in this crisis that we're reminded ever more of the mission and the purpose of Etsy and how important we are in the lives of our sellers, our buyers, and our team, and I hope you'll see in the course of this call that we take that responsibility really seriously and we are acting with urgency and in this moment, I think it's also demonstrating the resiliency and the agility of the Etsy model to rise to this crisis.

We stood up a COVID crisis task force in January. We tested work from home in February, so that we were as prepared as we could be to be continuing and productive in an entirely work from home environment, and I'm pleased to say that so far we've seen productivity hold up really quite well and you'll see on the slide in fact software releases are up 20% year-over-year in the first quarter in spite of all the changes and that's really a testament to the hard work that the team has undertaken and the seriousness and the urgency that they take their work and it's not without real personal stress on them. So I do want to take a moment to thank the team for all of their hard work.

And with that, let's dive in. So I know we're all very anxious to discuss the trends we've seen in April and our thoughts for the future and I want to spend the bulk of my time talking about that. But because this is our first quarter earnings call, let's hit the headlines very quickly.

We delivered $1.4 billion in consolidated gross merchandise sales in the first quarter, 32% year-over-year growth. Etsy standalone delivered 16% year-over-year growth in GMS. Revenue was about $228 million and adjusted EBITDA was about $55 million and Rachel is going to go into more detail about the first quarter and take you through that in a disciplined way. So I'll just hit those headlines and now move on to April.

April was an extraordinary month and I mean it in the sense of extraordinary very, very big and extraordinary very unusual and there were two separate things happening in April. First was the effect of the sale of fabric face masks and Etsy sold about $133 million worth of fabric face masks in the month of April. Separate end, in addition to that, the core Etsy marketplace grew very, very robustly in April, 79% year-over-year growth.

In early April, the CDC changed its guidelines to recommend that Americans wear fabric face masks and we saw a tremendous surge of demand for fabric face masks right away on our site. In fact, it was like waking up and discovering that it was Cyber Monday, except that everyone of the world wanted to just one product and that one product was an extremely limited supply.

And so we needed to respond extremely quickly to that new reality. And there were a set of things that we had to do, the first was really within hours to change our search results. So that when you search for fabric face masks, you actually saw masks.

Previously when someone would search for masks, they would be thinking about Halloween masks or may be cream for their face. So the search engine needed to be retrained literally within hours to respond to that. And thanks to our Google Cloud implementation we've been able to respond much more quickly and having very relevant results very early on was a big part of what earned us good rankings on Google SEO, which has been incredibly important for the future. But in meeting that demand, we then all a sudden had a lack of supply and so we put out a call to our sellers and were able to get thousands of sellers to begin making masks within a matter of days.

In fact at this point, there is over 60,000 sellers making mask and selling mask on Etsy. But not only did we need to recruit sellers to make masks, we needed to make sure that we could understand what their delivery times were, so that we could manage customer expectations on delivery. We needed to distribute demand so that it wasn't too concentrated in just a few sellers and on and on.

This effort touched almost every single team at Etsy. It was truly an all hands on deck. We sold over 12 million face masks in the month of April alone. In fact if face masks were a standalone category, it would have been the second biggest category on Etsy in the month of April. So as we look forward, obviously, our opportunity is to really work on deepening our engagement with these buyers, so that they understand that Etsy can do a lot more for them then just sell them fabric face masks.

So why am I going into so much detail about masks, it's not because I'm convinced that masks are going to be an enduring category for months to come. They may not be nor are we convinced that this new cohort of buyers is going to be with us for months and years to come in a highly active way. We're going to work really hard to try to earn their loyalty and we'll have to learn and see what their behavior is over time.

The reason I wanted to tell the story is because I think it really highlights the dynamism of the Etsy model and our Etsy sellers and how they're able to shift so rapidly to meet new demands. But April was about so much more than just masks, in fact non-mask sales on the Etsy core marketplace were up 79% year-over-year.

So the strength of Etsy sales came really from two factors, the first was a ground swell of demand across a set of categories including home and living, craft supplies, self-care, toys and games, and gifting, combined with fewer alternatives in the marketplace with many retail stores closed and e-commerce players having shipping delays or sometime supply chain disruptions.

And I think that this combination of both macro factors and the dynamism of the Etsy marketplace, Etsy sellers and the Etsy team created an opportunity for Etsy to step in and fill the void in what we think could be a really meaningful and enduring way, but it's our responsibility to step up and really communicate to the world how we can fill those needs, how we can be there for them at a time when they might not have often thought of Etsy. And so the marketing team has been really hard at work to develop and then communicate that message to the market.

Starting with our brand strategy, we asked the team to come up with some brand pillars that would really speak directly to this moment, but have real enduring value and I think they did a great job with the brand campaign that centered around three core messages to the buyer, first Etsy sellers are open for business.

Second Etsy is there was everyday essentials that you need. And third, when shopping on Etsy, you were supporting small businesses. And when shopping on Etsy, you're supporting small businesses, that's a message that might be familiar, that's been a core pillar of our messaging strategy for some time.

But the idea that Etsy is reliable and the idea that every - that Etsy can meet everyday needs, those are messages that I think are may be newer to many of our buyers, and we know that we can live up to those commitments. And this is a moment of truth when we think Etsy can really do a great job of that and maybe disrupt some people's understanding of Etsy in a really positive way.

Our message to our sellers has been singular, which is we have your back and we think now more than ever, it's important that we're communicating to them, and taking actions that demonstrate that we have their back. Look at our merchandising strategy, we are able to take search query data and almost in real time, within hours, iterate the kinds of merchandise that we're showing on our site to reflect what's currently happening in consumer demand, which as we all know has been exceptionally dynamic at this time and the ability of the team to be super responsive, we think is a real strength of Etsy.

All of this is underpinned by some core evergreen messaging, like we have many items that are ready to ship, the fact that when shopping on Etsy, you're supporting small businesses and many of our sellers are running sales right now and promotions that really speak to the economic realities that we're facing at this moment.

We then asked the team to develop a TV campaign to communicate that and you'll remember that in the April 2nd call, we talked about how we pushed back our TV buzz into May. So within days again the TV - the marketing team had to both create all new creative, by the way, without getting to bring any new actors into the studio and shoot any new footage, they had to find a way to take existing footage and cut that into entirely new TV campaigns and get on the phone with TV stations and others and negotiate new ad buys and by mid-April, we were alive with all new creative reflecting this new brand strategy in a pretty loud and prominent way on TV.

We're proud of this TV creative, we think it's not just the same as every other TV campaign that's running right now. We think it is unique and stands out in a way that really does speak to Etsy. So I'd like to take a second to show you the TV creative now.

(Video Presentation)

So we've millions of people shopping on Etsy now that might not have shopped with us before or might not have shop with us in this way before, obviously the task ahead is to deepen our engagement and earn their loyalty over time and that's the task for our CRM and loyalty team and fortunately, we have an entirely new set of tools that launched just in April that are going to make us much more capable of doing that and these are tools that allow us to create segments in a very rapid way, and then push message is specifically to each of those segments across any touch point we have via email, app, onsite, or any other channel, even Offsite Ads and paid advertising, we can start to target the same segments with these messages.

But I don't want anyone to think that we've only been doing COVID-related work, we laid out a strategy that we've been executing on quarter-after-quarter that centered around the four key pillars of our way to win and that has been a true and enduring strategy that mattered before it matters every bit as much now and our team is hard at work continuing to deliver against each of these four pillars, search and discovery, human connections, a trusted brand, all built on the foundation of our sellers' collection of unique items.

And just to give a very quick highlight in each of these four, starting with search in Q1, we launched a deep learning model to close the cemented GAAP and that can for example determine that the word dress and the word gown actually identical in meaning and use gown search results for dresses and dress search results for gowns. And that's another meaningful step forward in the quality and relevance of our search results and it's just one of many examples of the great work that the search team is doing to continue to push the frontiers and make our experience more relevant.

We've talked a lot about trust and the Trust team has been working very hard to gain more reviews, get buyers to leave more and richer reviews. Speaking of our sellers' collection of unique items, our sellers are so agile in responding to the demands of consumers and this current environment highlights that now more than ever. We're seeing so many great examples of sellers innovating to meet needs that didn't exist even a month ago. A favorite example of mine is a pocket hug, this is a little trinket that you send to a loved one to give them a virtual hug and let them know that you're thinking about them.

And last but not least, I certainly want to mention the successful launch of Offsite Ads. It launched in the first quarter and we feel great about how it's going so far. And of course, Etsy Ads, which is formally known as promoted listings is also are continuing to perform very, very well.

And I also want to take a quick minute to talk about Reverb. Reverb is benefiting from many of the same trends that Etsy is seeing. They're seeing a ground swell of first-time buyers coming to Reverb, many of whom might not have played an instrument before and are coming to tick up their first instrument and at a time when many retail operations are not open or even e-commerce musical instrument companies are having a harder time shipping, Reverb is there and so it's doing a great job rising to the challenge in meeting the needs of both its existing buyers and many new buyers with a lot of innovative strategies.

In particular, they did a great job I think of innovating how to communicate that things are available and ready to ship right now and also bringing some brands, the manufacturers directly on the site and having those brand sell directly to consumers in a way that's been very successful. As a result Reverb's GMS in the month of April was up over 50% year-over-year.

So let me close by acknowledging that these are very challenging times. The challenging times for our many of our sellers, the challenging times for many of our buyers and these are challenging times personally for many people on the Etsy team and yet, we're really proud of the fact that our model allows us to be really helpful too many of our sellers at a time when they need the income, we're really proud of the fact that we were able to be really helpful too many buyers at a time when they have maybe fewer alternatives and a lot of really important needs and really, I am personally really proud of the Etsy team, who in spite of many personal stressors have risen to the challenge. They take the responsibility of serving this community really seriously and are working really hard every single day to live up to that responsibility.

And with that, I'll turn it over to Rachel.

[Rachel Glaser, CFO]

Thanks Josh, and hello everyone. I hope you're all doing well and staying safe and comfortable during this uncertain time.

My commentary today will cover consolidated results as well as key drivers of performance, which includes Etsy's stand-alone results where appropriate. You can find select details on Reverb's contributions in our press release and soon to be filed 10-Q. Heads up, I'm going to be reading my prepared remarks since there are quite a few numbers and I want to make sure I get them all right.

We've got a lot to tell you about Q2 financial performance, but before I go there, Q1 was a very strong quarter and I want to walk you through those results first. Despite the headwinds growth caused by COVID-19, primarily during the month of March, we delivered a solid quarter. On a consolidated basis, Etsy's first quarter GMS grew 32% to $1.4 billion, revenue grew 35% at $228 million and we delivered adjusted EBITDA of nearly $55 million or margins of 24%.

As mentioned on our update call in early April, consolidated GMS growth during January and February was very strong trending at 41% for the quarter. Etsy's standalone GMS growth for the first quarter was 16%, reflecting a strong January and February with a significant deceleration in March compared to last year and last quarter.

Q1 revenue is driven by growth in both marketplace and services revenue, as our consolidated intake rate expanded 60 basis points sequentially to 16.9%. We reported strong growth in revenue related to advertising, which was up approximately 70% year-over-year. Google Shopping contributed about $11 million to advertising revenue for the quarter. As a reminder, in the first quarter, we are accounting for our old Etsy Ads model, which recorded the Google Shopping products as revenue was zero margin as it carried an equal offset in cost of revenue.

As planned during the quarter, we transitioned the Etsy Ads product separating Offsite Ads to a standalone products and introducing the transaction fee on every product listing ad that resulted in the successful sale for our sellers. This new product was ramped during the second half of March and into early April. Sellers have now had the chance to see the advertising of their product that stands in action.

We began billing for this product on May 4th, having waived the first month of fees for sellers during the turbulence of the COVID-19 environment. Waiving the first month of fees is part of a basket of initiatives we implemented to provide some relief to our seller community. I'll touch on the financial impact of the whole basket in a few minutes. Reminder going forward, Etsy Ads is now our name for promoted listings in Etsy advertising products.

In Q1, we tested our PLA channel, which has been excluded from the incrementality testing we did in 2019. This had the effect of reducing our performance marketing spend in the quarter. Q1 marketing expense was $49 million or 21% of revenue, which was flat compared to Q1 2019. Of that, performance marketing from the Etsy Marketplace was $26 million and delivered 16% of overall GMS.

Despite the deceleration in GMS we described in March and the consolidation of Reverb into our financials, our Q1 adjusted EBITDA margins expanded 400 basis points sequentially. Our cost structure is highly variable to revenue and we've continued to take measures to optimize and scale our business. I'll talk more about operating expenses and the variability of our cost base in more detail shortly.

Net income in the first quarter was $12.5 million with diluted earnings per share of $0.10. Net income was primarily impacted by non-cash foreign exchange losses of $9.3 million or $0.08 loss per share. Foreign exchange fluctuations on our P&L are primarily related to intercompany activity between our US and foreign entities, the ongoing settlement of these balances, which we did in Q1 reduces future foreign exchange volatility on our P&L.

Key operating metrics for the Etsy Marketplace were relatively stable during the first quarter. We maintained our momentum in driving frequency on the platform. Etsy's GMS per active buyer on the trailing 12-month basis grew 4% year-over-year and on a 2-year stacked basis increased 6% flat compared to last quarter. On a consolidated basis in Q1, active buyers grew 16% to $48 million and active sellers grew 26% over $2.8 million. Present international GMS was approximately 36% of total GMS, up 27% year-over-year on a constant currency basis.

Now turning to April as Josh said, April has been an extraordinary months and I'm going to dimensionalize that for you. During the month, we saw in March increase in the demand for face masks and other self-care products and this had a significant impact on GMS growth and on our Q2 financials. Etsy standalone GMS for the month of April was over 100% resulting in $780 million of GMS. Of that, masks were 17% of Etsy's standalone GMS for the month. We're also seeing demand for masks driving engagement with new buyers and buyers that have not purchased for a year or more.

During the month of April, we acquired nearly four million new buyers, which was up 160% year-over-year; 22% of mask related GMS was from new buyers. Year-over-year growth in overall GMS from new buyer accelerated from 5% in Q1 to over 130% in April. We've also re-engaged 2.5 million buyers that have not purchased for a year or more, an increase of 186% year-over-year. Overall, 32% of buyers who purchased a face mask returned within 14 days to make an additional purchase and the majority came through Etsy's direct channels, which is free.

As shown on Slide 29, our new and older cohorts sign inflection higher in April. We've shown you are cohorts before and historically, they've been stable and predictable, but we're now experiencing the disruptive change to the positive. This is a brand new cohort acquired during an extraordinary time and we don't have any basis to believe they will perform similarly to our existing cohorts.

With that said, they could provide a tailwind to future growth. This is an unprecedented time for us and we are unsure when these trends stabilize in the future. In addition to masks, we're also seeing additional momentum in other categories, excluding face mask related items, Etsy's standalone GMS growth was 79% during the month of April.

Now of course, these results are likely magnified by broader industry tailwinds specifically a shift from offline to online. According to external industry data, online retail sales for major marketplaces have risen dramatically in April. On the supply side, new sellers that join the platform in April accounted for 13% of mask related GMS.

Over the past three years, we shifted one of the largest fixed expenditures to variable with our migration to Google Cloud. Both Etsy and Reverb have highly variable cost structures, so in an environment where top line growth contracts, a large portion of our expenses can dynamically adjust with growth. In response to the rapidly changing macro environment, we took a thorough look at operating expenses and implemented actions to reduce costs, where it makes sense, while simultaneously continuing to invest for long-term growth and playing offense where we see the opportunity.

We're currently seen times of exceptional volatility and we hope for the best, but we plan for the worst. We recognize that this is a moment for Etsy, where we are uniquely meeting the needs of millions of buyers and sellers. We want to embrace that moments as a potential inflection point for consumer behavior and habits and invest into it. We're being very careful about our fixed costs while leaning into variable investments that we think can change the slope of the curve and engage these newer cohorts, so how are we doing that?

First, we've leaned into marketing more than we planned in Q2. Television marketing is affording great placement at CPMs that are 20% to 30% lower than normal. With many people at home and more screen time being consumed than ever before, we believe increased investment in brand marketing makes sense, as we are able to engage millions of new buyers and buyers who have not purchase for a year or more for whom Etsy is top of mind right now. Performance marketing is yielding higher ROIs with a lower cost per click.

As we've mentioned before, performance in marketing naturally flexes with demand when demand is high, we spend more. In addition, our Offsite Ads program will enable us to lean heavily into this channel. So if you take them both together, we're talking to buyers at the top of the funnel and we're catching them at the bottom. Second, we also undertook a product prioritization exercise the double down in areas where we see the highest potential.

Some of these areas are more experimental in nature and have longer term, hot time horizons to deliver expected returns, so they may not yield in-period returns. We expect work in this area will enable us to drive progress in areas such as search and frequency that will be important to drive growth over the longer term. We've also made significant one-time investments to help our seller community during this difficult time.

These total approximately $11 to $13 million, the majority of which will be incurred in Q2. These include waiving Offsite Ads fees until early May, deferring seller bill payments for months increasing member support operations and providing listing credits for mask sellers as well as listing in ad credits to some of our hardest hit sellers in categories like weddings and party supplies.

We donated thousands of face masks to hospitals and have supported many of our small contracted vendors by keeping them employed despite our own office disclosures. Overall, we have conviction in the investments we're making and believe they'll enable us to support our community and sustain growth over time. As of 03/31, we had almost $900 million of cash, cash equivalents and short and long-term investments in addition to $200 million revolver that's currently undrawn.

In the first weeks of Q1, we repurchased 543,000 shares at an average price of $46, a $25 million investment. We've now cost share repurchases in light of the current macro environment. With minimal CapEx and margin on working capital needs, we believe we can continue to deliver a very high percentage of our adjusted EBITDA into free cash flow.

Before I discuss guidance, let me provide some background about how we forecast our business. No easy task given all the uncertainty right now. We built up our own internal models and look at cohort data to establish baseline trends and layer in the impact of our investments in marketing and product, which drive incremental growth.

In addition, we evaluate a lot of external economic data, closely monitoring headwinds and tailwinds and from there we develop a range of scenarios that could play out. It's been an incredibly dynamic couple of months. You'll recall that we told you that on a consolidated basis GMS was down more than 2% in the third week of March and then up over 100% in April.

To give you a bit more color on our recent performance, the Etsy Marketplace delivered our highest ever month of GMS as a public company in April. And the two highest days of GMS of all time were Thursday and Friday of last week. And so far, May performance remains consistent with what we saw in April.

There are a number of tailwinds that we believe contributed to our strong April including but of course, not limited to increased sales and categories unique to this client environments, such as face mask, leveraging millions of new buyers and buyers who have not purchased for a year or more. The benefits of attractive CPMs in many channels, enabling us to spend deeper, widespread shift from offline to online commerce, so many fewer places to shop. Dislocations in the competitive landscape, some of which may be only temporary and government relief packages including stimulus checks.

So there's things that we know and there's things that we do not know. For instance, we continue to monitor the possibility of very real headwinds, which we haven't experienced yet such as a potentially deep and broad economic downturn, mounting job losses, small business closures, fragile consumer confidence, and many other macro factors. Our best view today is that the recent surge in demand is likely to ease, but GMS strength in April will support strong top line growth for the quarter. Because of the uncertainty, we're going to provide guidance for Q2, but we're not able to provide guidance for the full year.

We currently estimate consolidated GMS for Q2 in the range of $2 billion to $2.2 billion, which is up 80% to 100% compared to Q2 of last year. Revenue of $310 million to $340 million, up 72% 70% to 90% and adjusted EBITDA of $75 to $90 million with the margin in the range of 23% to 27%. This implies a deceleration in growth rates for each of May and June, but a strong quarter overall.

Our own internal model the assumes that retail begins to reopen, creating more choice for consumers and then economic hardship announced during this time. The combination of the two could potentially lead to meaningful deceleration both in this quarter and as we go through the year. A couple of thoughts for your model. We would encourage you to think about the headwinds and tailwinds we discussed and their implications on growth in the back half of the year.

Offsite Ads revenue will reflect a partial quarter beginning in early May, given the free trial period, as we transitioned from our prior model, you can expect gross margin to benefit from the marketing offset shifting from cost of revenue to marketing expense. Our Q2 take rate will contract temporarily a bit given the delayed fee charges for Offsite Ads and the impact of the large increase in GMS without a corresponding increase in certain seller services.

As we mentioned last quarter, Q2 marketing spend will increase significantly on a sequential basis due to our transition to Offsite Ads and now also with our incremental investment in TV. Of the $11 million to $13 million in costs to support our seller community, approximately $1 million were incurred in Q1 and the balance in Q2. These costs are non-recurring and after the mid-point of guidance for present approximately 300 basis points of adjusted EBITDA margin for the second quarter.

Also keep in mind that we'll be lapping the Reverb acquisition in Q3 2020 reflecting a partial quarter. Based on our Q1 performance and Q2 guidance, we believe that we are extremely well situated to execute on our strategy in this environment. With the marketplace model that allows us to scale our investments and respond to changing conditions very rapidly. We have a disciplined investment approach, and an agile team for rising to the challenge of our current environment and executing superbly.

Deb is going to now moderate our live Q&A session. Thank you.

[Debra Wasser, VP, IR]

Hi everyone, hope you're all doing well. I'll start with a question, we see from Kunal Madhukar at Deutsche Bank. As you think about marketing spend in Q2, what is your strategy with regard to brand versus performance, search versus social versus TV, and then Offsite Ad supported versus own spend. That one, I think is for your Josh.

[Joshua Silverman, CEO]

Great. Okay. So as with all of our investments, we try to have a very disciplined framework around how we make those investments and so let me start with performance marketing because performance marketing is really a natural shock absorber that rises and falls with consumer demand.

So we've talked a lot about our ROI threshold and we're very disciplined in looking at the next dollar spend and whether we see the next dollar spend is going to deliver a good return. And for all of our performance marketing budgets that continues now just as it did before the crisis and that would include both our Google performance marketing spend as well as performance marketing spends that we have on Facebook and a couple of other places.

And in terms of the question about Offsite Advertising, which gets billed back to the seller versus the part that is Etsy funded, overall there is still a subsidy in performance marketing where Etsy is paying a portion of the performance marketing budget and that comes in a number of different ways.

If someone goes to Google, and they see a search result for Etsy and they click-through, they may not buy from that particular store, they may buy from a different store. So in that case, neither of the sellers gets charged, neither the seller who's ad was shown on Google nor the place that the purchase was eventually made. Neither of those sellers gets billed for offside advertising. That's something that Etsy funds.

So there may be times where the cost of advertising and Offsite - from an Offsite Ad is higher than what the seller pays and again that will be something that Etsy subsidizes. But again, we think that's a great partnership with our sellers, because the seller is selling a product and gaining a new customer, which is great for the seller, but Etsy is also gaining a new customer and that's great for Etsy.

So the performance marketing spend will vary naturally with demand and the portion that is seller funded versus Etsy funded will vary a bit as well. But I would say we expect it to be broadly consistent with the kinds of guidance that we gave before the crisis in terms of the Offsite Ad versus Etsy funded portion of it. I do think the performance marketing spend is elevated right now because demand is elevated.

Now let's talk about the brand, the mid and upper funnel advertising. They are the way we look at it is we look at reach and frequency. So we look at GRP points against the audiences that we really want to target and we think what is a GRP, a reach and frequency number that's high enough to really be above the noise and where - we think that this is a really great moment for Etsy to be communicating above the line, millions of people may be trying to Etsy for the first time or trying Etsy for things that they hadn't realized that they could turn to Etsy for and they're having a great experience, but rather than just having them land on the site and buy something, we want the opportunity to really tell our story to create an emotional connection to help them understand the connection that they have with the seller and the opportunity to do that on TV is really special. And you saw the creative lean into that in a way that you haven't seen our creative do before. We're really telling our story from our sellers' point of view.

And so, we are looking at reach and frequency that's meaningful implement dimensionalize that for you, similar to the kinds of reach and frequency that we'll be doing in the fourth quarter during peak holiday periods. And again, given the kinds of traffic that we've been seeing, we think that that kind of spend is appropriate.

The other place we're spending and what I would consider mid funnel is video on social channels and the opportunity there again, we're going to think about that in terms of reach and frequency, we have a better opportunity to A-B test that over time, even then we do with TV and we can rapidly iterate new creative and test new creative in front of these audiences, which is also really helpful for us, as we think about how our message is resonating and how to tell a very targeted messages to different audiences.

So broadly speaking, that's how we're thinking about our investment framework, and I'll just close that question by saying I think that this is a really fantastic time for Etsy to be leaning in to these investments. But these are variable spend, so if conditions should change significantly, it's quite easy for us to pull back - to pull back this investment level if we think it's appropriate at that time.

[Debra Wasser, VP, IR]

Thanks Josh. Next one is from Shweta Khajuria from RBC. I understand that you aren't guiding to the full year, but can you please talk about the general philosophy strategy and how you plan to manage costs this year with respect to top line growth and what are some of the places, we plan to continue to lean into and where you'll be seeing cost savings. Will it be more areas to pull back on costs, you talked about the three scenarios doing our intra-quarter COVID update, do those scenarios still stands.

[Joshua Silverman, CEO]

Thanks Shweta. Maybe I'll start and then Rachel can fill in - fill in the gaps. Yeah, I mean in the April 2nd call, we talked about how we took some pretty fast action to look at our operating costs and we're always I guess I'd start by saying that we've always been very disciplined about our cost structure. And if you go back and you look at our earnings call from the prior quarter, we pointed out that we have some of the highest revenue per headcount of any one in our peer group.

And so, we entered this crisis with already quite a lot of fiscal discipline and we are continuously looking at how we can get better and how we can make sure that every dollar is going to its best and highest purpose, minimizing waste is one of our core values, as a company.

We also said that we're not going to take short-term actions about our investment levels based just on short-term trends and, oh boy, am I glad that we did not over react to the events in the third week of March. Because we were very, very busy in April, rising to the challenge on the side, I think the team did a fantastic job doing that in the fact that we were continuing to invest appropriately meant that we had the resources and the capacity to take to step in, when we were needed in the month of April.

So Rachel said in her prepared remarks, we're going to hope for the best, but plan for the worst and what do we mean by that, we mean that we're going to continue to have a lot of discipline around our fixed cost. We're going to be taking very careful eye on our fixed cost, because we just, it's hard to predict what the future will hold.

But in terms of variable investments, we are leaning into variable investments right now that we think are going to have a good payback, because we think this could be an inflection point for Etsy in a really positive way and we want to make sure we really embrace that and take full advantage.

The last thing I would say is just in our product roadmap. We put a lot of thought into our product roadmap coming into this year, and we think we're working on a lot of really high value projects that align very clearly with those four pillars of our right to win, if we got to May and said we've thrown everything out the window and started over, that would be strange and in fact that's not at all what we've done, the vast majority of work that was underway, as we entered 2020 continues because we continue to think it's really important work.

At the same time if we said that we haven't changed the thing, as a result of the current crisis that would also be strange and in fact, there are things that we need to do in two directions. So we took a look at what are the things that really speak to the moment now, and that have a lot of urgency are both important and urgent. And we have made some pivots in our product team to go and respond to those things and I'm proud of the way that the team has responded.

We've also looked and said, hey, this is a moment when we actually have the opportunity to do some investing in some fundamental platform pieces of our business that are going to make us much stronger for the future, that might have slightly longer time horizons.

And one example I would give of that is within search the quality of all of our data pipelines, are we capturing the right data, are the data clean, are they in usable formats, how can we give the teams the right tools to use those data. And there is an opportunity for Etsy to get much stronger there, which is going to result in much better search and recommendations and we're taking that opportunity right now and we are investing deeper there and that's not something that I would expect to have a payback in the next 3 or 4 months, but I think it's going to make Etsy much better for the medium term and the long-term and we are embracing that opportunity right now. And Rachel can...

[Rachel Glaser, CFO]

Yes. If I can, I'll jump in with a few additional notes, specifically around margins. So I just want to - I want people to remember that we've now consolidate Reverb into our financials, which creates a lot more revenue on the top line with potentially zero margin for now, we have said about speaks expect them to be breaking even the past and as we exit the year.

In the first quarter, we accounted for Etsy Ads with a - as a cost of revenue, sorry as revenue with zero margin, so that's also dragging down Q1 margins, now that will shift as we get into Q2 and beyond. We also spent pretty heavily in Q1 this year on television brand marketing, which we didn't spend in Q1 of the prior year and we're, as Josh talked about, we're leaning into that in the second quarter.

So we'll continue to spend on television advertising and the last thing I would remind you, as it relates to margin is that we're capitalizing less about product development labor, this year than we were last year, so a lot more of our parked element team is expense to our P&L, so those are the - I know your question is what it was specifically about cost reduction and we've been judicious where we can, but also keep in mind, those other puts and takes that impact our bottom line.

[Debra Wasser, VP, IR]

Thanks, Rachel. The next one I'm going to give you is from Darren Aftahi at Roth. You said masks would have been the number 2 category in April, if it was its own category, so what was number 1.

[Joshua Silverman, CEO]

Number one, as historically often been the case was Home and Living. So everything around nesting right now to get your home more comfortable was our top category and I think that again speaks to the enormous opportunity for Etsy, the tam of Etsy, that that Home and Living is only one of our categories, it's a very large category in the world and it's a very large category on Etsy, it's our number one category right now and in a moment, like this, a lot of people were thinking about how can they make their home more cozy, how can they get home office up and Etsy is there for them and can do that in a way that no one else can really do, but it's still only one of many categories. Other categories that were really robust this quarter included things like craft supplies, toys and games, card and name, self-care. So many different categories on Etsy that are really relevant, gifting is a really big deal in this moment.

So many categories that are really relevant right now and the challenge for us historically has been getting people to think of Etsy for those particular products and suddenly, we have the opportunity to do that in a bigger way than we've had before and what I know is our sellers are doing a great job delivering and delighting those customers. And so that makes me optimistic for the future.

[Debra Wasser, VP, IR]

Next one comes from Laura Champine from Loop. In Q2, should Services' revenue grow faster or slower than GMS and what are the drivers?

[Joshua Silverman, CEO]

So I would expect Services' revenue to grow slightly slower in Q2 than GMS for what is a kind of a unique reason to this moment. So GMS is obviously growing really, really nicely on the Etsy Marketplace and of course GMS is a fact - is a function of three things visits, conversion rate, and AOV and right now we're seeing visits grow really rapidly, and we're seeing conversion rate improve over its historical averages, obviously then AOV is the third factor, AOV a slightly down from its historical averages. But we very rarely see visits grow very rapidly and conversion rate improve at the same time significantly. So that's very positive for Etsy.

What we now call Etsy Ads, what we used to call promoted listings is really driven by views. So if visits are growing slightly slower than GMV, then it means that we may see Etsy Ads grow slightly slower actually than GMS overall. And I want to emphasize that we think Etsy Ads is doing great. It's not a great trajectory, but again if visits is growing slightly slower than overall GMS, then we may see Etsy Ads grow a little slower than GMS in the second quarter in particular.

[Rachel Glaser, CFO]

And may I add one thing to that - to Josh's response, which is also just to point out that in the first part of April, when we are seeing the surge in mask sales, we took the Etsy Ads formerly known as promoted listings off of the mask listing pages, it's now back on but for a portion of the month of April, there were no promoted listed there.

[Debra Wasser, VP, IR]

We have a couple of questions that are guidance related, I'm going to go with this one from John Colantuoni, I hope I said that right John, from Jefferies. Q2 GMS guidance implies a high level of growth in May and June. Can you talk about some of the key assumptions in your internal model that get you to the full quarter forecast.

[Joshua Silverman, CEO]

I'm happy to start and I would start by emphasizing what Rachel said before, which is that, it's really hard to forecast right now, and we had a lot of conversations about whether to give guidance or not. And we know there's been a broad range of people giving guidance and not giving guidance. We wanted to be as transparent with you as we can, as we always try to be as transparent as we can and it's helpful as we can without over promising.

And so what we gave you is a very broad range, if you think about the fact that there is only two months left in the quarter and we're giving you a 20-point range, it's pretty broad range and I think that just speaks to - speaks to the time and so there is a set of tailwinds and we are currently benefiting fair materially from those tailwinds, things like a raising demand and fewer alternatives. Etsy's sellers being able to rapidly pivot to produce in demand products and not just masks, lots of other things that are currently in demand. The fact that we're not reliant on logistics, central logistic fulfillment warehouses like others.

There is also a set of headwinds that we anticipate. So it's a very tough economic background and we - our hearts go out to everyone who's lost their job or if feeling economic insecurity and we think that that could will get much more real in the months to come. But we haven't seen that headwind show up much yet. We expect that retail will reopen. We hope for everyone's sake that you know the economy gets back on its feet sooner rather than later.

And so it's very hard to model when we will start to feel those headwinds and at what pace, we will start to feel those headwinds and how to continued tailwinds might counteract them or not. So we did the best within our guidance range to anticipate those trends. I don't know, Rachel, if there's more you'd want to say there.

[Rachel Glaser, CFO]

Yes. I would only just point out a couple of things. First of all, we gave you the first couple of days of May, don't get too attest of that, because we're not planning to update you daily, but - so we've seen some trends holding and we told you that we expect May - the numbers you could back into the numbers we've given you assume will decelerate in May, we said we thought we tolerate May and then follow that trend line through to the end of the quarter accelerating again in June.

And lastly don't forget, we're giving you consolidated guidance, so Reverb is performing strongly, we've given you, I think some information there that will help you understand the two respective marketplaces, but the Reverb's is a smaller percentage of our total and Etsy's deceleration will obviously have a higher weight into the total guidance we gave for the quarter.

[Debra Wasser, VP, IR]

Okay. Thanks, Rachel. The next one is from Nick Jones at Citi. Though it is still early days in this crisis, what are you learning about your habitual buyers, your active buyers, and your occasional buyers, are you seeing early trends that each of these groups are growing.

[Joshua Silverman, CEO]

Yes, I mean to break it down, starting with our habitual buyers and we love our habitual buyers. You will see that the number of habitual buyers grew again. But because they are already habitual, they already know so much about what Etsy you can offer, and they are already coming to us frequently and so we have seen frequency in that group improve, which is great, but they are kind of the folks that have figured out the secret sauce of Etsy.

The big opportunity in this moment is there's a lot of people who maybe have never shopped on Etsy before or who have shopped only very occasionally on Etsy they might think of us only for one very specific product category and now they're thinking about us and now they're coming for other product categories.

And that's a moment and so we're excited about the opportunity that we are seeing frequency gains in the lapsed buyers and the occasional buyers. We're also encouraged by - its very early days, but this brand new cohort from April, we gave you some data in our prepared remarks that the frequency of this brand new cohort looks very healthy as well, so the task ahead now is to do a great job engaging them so that we continue to earn their loyalty in the future, and we're really excited about the new tools that we have that allow us to really be able to identify different segments and communicate to those different segments in a very personalized way and really dynamic way really quickly and we're really focused on that and investing in that.

[Debra Wasser, VP, IR]

Okay. Next one is from Maria Ripps of Canaccord. When you think about your Q2 guidance, can you talk about the relative contribution from new customers versus engagement from existing customers. It seems like with this much visibility, you must be seeing a lot of activity from your existing customers, but can you just talk about a little bit more.

[Joshua Silverman, CEO]

Yes. I guess I'd start and Rachel, feel free to pile on, of course, but first I'd say that. We define new customer at Etsy as new ever and many other people use - everyone uses different definition, a lot of people have a definition of new that means they haven't been around in a while. And when we say new, we mean - we are not aware of having seen that buyer before at least using that ID, and so we are seeing a very strong growth in brand new buyers and we're excited by that and in 2020, we have to remind ourselves, there's still a lot of people that just don't shop online much. And there's a lot of people who have never shopped on Etsy.

And so some of those people are showing up now and shopping on Etsy and it's really exciting. So new buyer growth is very strong right now. And I'm excited about the fact that I feel like we're really well prepared, the hard work that we've done over the past few years to make search much better to make the shipping experience feel really good to build trust.

These are people that are coming onto the Etsy for the first time and they're finding a marketplace that we're proud of - that we think is well organized and trusted marketplace, where sellers do such a great job delighting them, but as we've talked about before, there is a very large number of infrequent buyers. They've bought on Etsy before, they had a great experience, they think of us in fondly, but they just don't think of us very often, they don't know when to see us and suddenly we're more front of mind, and we're one of the one of a smaller set of places that is open for business and shipping and shipping a lot of different products that they might want.

So we're definitely seeing improvements with the occasional buyers or the lapsed buyers, people who just haven't been on the site for more than a year. And then of course we are also seeing frequency improvements with people who already shop and shop frequently and it's just the delta with that community is not as high, because they started from a higher point already. I don't know, Rachel, if there's anything else you want to.

[Rachel Glaser, CFO]

I mean, I'm just - I mean, I'm probably just being redundant, but I just want to point out this by the definition most other companies use for new buyers or buyers that have not been to the site for 366 days or more, if you add those two groups together, then we would reactivate. We had 6.5 million new buyers in the month of April and really about half of our - that's about half of the April buyers. So that cohort, the new and reactivated is a material portion of our growth, and they're are the ones that are the opportunity for us to capture and be top of mind for as we lean into marketing and other things.

[Debra Wasser, VP, IR]

Okay. Thank you. Next one is from Naved Khan at SunTrust. What kind of uplift do you think you may be seeing from the lift in spend - consumer spend due to government support stimulus.

[Joshua Silverman, CEO]

Yes. We have been looking at that as well. And again, it's hard to parse out because it's all fairly recent. But what I would say right now is that the growth and we gave you pretty specific data on how April and early May have been trending, so you can kind of see for yourself that it's probably true that the stimulus checks were helpful. We certainly think on behalf of the American people and the American economy that they've been helpful. But we've continued to see sustained growth, so we feel good about that.

Now we anticipate that over time that growth will decelerate, as we get past the stimulus checks as people's savings get worn down a little bit that the economic hardships will get even more real for people. But it's just hard for us to know all the puts and takes that very precisely.

[Debra Wasser, VP, IR]

Next one is from Jason Helfstein at OpCo. Are you seeing better seller demand for your new ad products and/or seller re-engagement with those products, any way to quantify that.

[Joshua Silverman, CEO]

I'll start and then, Rachel, if you want to jump in, but we are very happy with. So we basically had two seller ad products, we've got Offsite Ads and we've got Etsy Ads. So Offsite Ads is off to a great start, we're with the launch. By the way, we think the team did a really nice job getting that product launched and just to take a second on Offsite Ads too, I'm really pleased with how the team had a real biased action, I think they also we're ready to pivot when that made sense and they came to a new model, actually they launched Version 1 and then they came to Version 2 that's even better and I think is even more fit for these times, we couldn't have anticipated these times, but we do think that this new version is even more appropriate for the current environment that we're in.

And in addition to having the right strategy and being willing to pivot, they executed really nicely on both the technology, which is complicated and the messaging to sellers and so we're pleased with how the launch is gone, we are pleased with what we're hearing by enlarge from the community and the early metrics are very encouraging on Offsite Ads. It's very early days, it's very early days, but the metrics are encouraging around things like opt-out rates in seller churn, and we're very encouraged by what we see there.

And on Etsy Ads, what used to be called promoted listings, we continue to see that be a very popular product. And so our sellers like it, they're investing in it and it delivers really good value for them. So we're also pleased with what we're seeing on Etsy Ads.

[Rachel Glaser, CFO]

And if I may just add a couple other notes, so because we were - the product was live for months before we started billing and one of the - so one of that was - that was part of the seller relief basket that I talked, but it was also designed to that sellers could actually see and start to calculate how this product was performing for them economically, they could actually start to see sales that they had made and on their bill, it would say a fee and then a waive, it's a strike-through, so they were seeing, what would I have paid and what sales would I have gotten or would I not have gotten had they not had the opportunity to be listed in one of these product listing ads, and so we've been collecting feedback for several weeks now on whether they like to product and whether they think that it's performing and we've been very pleased with what we've read, it doesn't mean that everybody loves it, we certainly get our share of issues and considerations being raised, but what we see now, since we've had the daily live for several days is that everything is performing exactly as we expected and as Josh said, it's very, very early days, but nothing is out of line with how we have modeled the product to perform.

[Debra Wasser, VP, IR]

Thank you. We went over time here a little bit, I'm going to squeeze in one more high level question and anybody else who's questions that are stuck in the queue, we'll make sure we get back to you.

This one is for Josh from Tom Forte of D.A. Davidson. As a long-time industry participant, what are your thoughts on e-commerce next coming out of the Coronavirus outbreak for example the home category online mix today is about 40% versus 20% last year. How much does the increase mix hold near term as physical stores reopen?

[Joshua Silverman, CEO]

Yeah, I mean I think that - I think that this is going to be an inflection point for e-commerce and I think that inflection point is going to be meaningful and lasting as much as many of us are really native to online and have been shopping online for years and shop online for many, if not most of our purchases, it's still a very large segment of the economy that shops offline and I think this is a moment when a lot of people are suddenly turning online and discovering that it's really convenient and it works really well for them and I think that that could create some very lasting behavior changes and I think that in that world people aren't going to want to remember 5,000 or 10,000 or 50,000 brands and I don't think they only want to shop in one or two places.

So in a world where everyone's on Amazon every day, all the time, which is great because Amazon meets a lot of needs a lot of the times, they're going to one alternative to Amazon and I think Etsy is super well positioned to be one of the few meaningful alternatives that stands for something truly different than what you get at Amazon, but can meet a wide range of your needs and this is a moment when we're actually getting to demonstrate that to people and we're embracing that moment and we're investing into that moment and most importantly, I think our sellers are doing a fantastic job of rising, they're innovating on products that are really cool, they're delivering delights, the handwritten notes, the personal touch that you're never going to get from almost any other place.

So I do think that this is a moment that's going to create lasting behavior change and I think that Etsy is going to be a winner in that over the - over the medium term and the long term and I think that's incredibly exciting, most of all for our sellers and for buyers. And so it's a time when our team, as I said in my prepared remarks, has a lot of stress in their lives. But they understand how important this is for all of our stakeholders and so again, I guess I'd like to close by saying how grateful I am to all the people on the Etsy team that are really pulling out all the stops, to try to do everything they can to support the community, it means a lot and I'm really grateful for it.

[Debra Wasser, VP, IR]

Great. Thanks Josh. And thank you everyone for joining us. We hope you stay safe, and we'll talk to you soon. Thank you so much.