ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2022-Q1

[Debra Wasser, VP, IR & ESG Engagement]

Hi, everyone, and welcome to Etsy's First Quarter 2022 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG engagement. Joining me today are Josh Silverman, Chief Executive Officer; Rachel Glaser, our Chief Financial Officer; and Jessica Schmidt, who joined us in March as our Senior Director of Investor Relations.

Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. [Operator Instructions]. I'll be reading your questions, and Jessica will help me to try to get to as many of them as we can.

Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the global macroeconomic uncertainty, including additional or unforeseen impacts of the COVID-19 pandemic and general market political, economic and business conditions may have on our communities, business strategy or operating results, our opportunity, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic marketing and product initiatives and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially.

Forward-looking statements involve risks and uncertainties, which are described in today's earnings release and our 10-K filed with the SEC on February 25, 2022, and which will be updated in any future periodic reports we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which we'll find on our Investor Relations website, along with a replay of this call.

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

[Joshua Silverman, CEO, President & Director]

Thanks, Deb, and good evening, everyone. In recent years, it seems one of the only real certainties has been uncertainty. You could say it's the new normal. We believe that over the past 5 years, our team has demonstrated its agility and adaptability, and our business model has shown resiliency through many types of macro conditions.

In Q1, we rose to the occasion once again to deliver solid results in a challenging quarter, maintaining almost all of the gains reported during the extremely strong year ago period. Our consolidated GMS was $3.3 billion, up 3.5% year-over-year or approximately 5% on a constant currency basis, with the Etsy marketplace GMS down about 2% as we lapped the exceptionally strong growth of the prior year. Consolidated revenue grew 5.2%, and our adjusted EBITDA margin was 27.5%. Rachel will cover the results in more detail shortly.

Etsy experienced a tidal wave of growth over the past 2 years. As so much of the world shut down, we went from serving 2.6 million to 5.5 million active sellers and from 47 million to nearly 90 million active buyers, and etsy.com GMS grew from about $1.2 billion in the first quarter of 2020 to $2.8 billion this past quarter. We have provided a pathway to economic opportunity for millions and a meaningful alternative for buyers looking to not be just another cog in the complex and increasingly commoditized global supply chain.

As we move from the COVID pandemic to what appears to be an endemic, people have regained their mobility. And with that, come so many more choices for where to spend their hard-earned dollars. This is a great thing for humanity, and I personally couldn't be more relieved to see it. It also means that in the near term, we'll have to fight harder and invest more to continue to earn and grow Etsy's share of wallet with consumers, which is the only way that our much larger base of sellers can keep growing their sales. We're up for it.

The current macro climate makes the coming months more challenging to predict. However, over the long term, we continue to believe that the number of places to shop online will consolidate as the world continues to become more commoditized. The pandemic perhaps gave us the chance to preview what the world could look like for Etsy, where in a more consolidated, more commoditized future world, Etsy could flourish as one of the few meaningful alternatives amidst a sea of sameness.

Through this change, our mission has remained the same, to keep commerce human. We continue to believe that the strategy we laid out for you in 2019 centered on our Right to Win, keeps us on the right course. The only change is that we have even more conviction that the opportunity ahead is enormous. We plan to go after that opportunity with focus, discipline and heart.

Speaking of heart, the crisis in Ukraine weighs heavily on us all. Our thoughts are with everyone impacted in the region, especially Etsy sellers and buyers, as well as family and friends of our global team. Being part of a community means that when one part is suffering, the rest of us step up and offer support. To do our part, we've taken many steps to help Ukrainian sellers that are facing tremendous hardship. Our financial support, including providing listing credits and canceling current balances owed to us by sellers, totaled $4.6 million in the quarter.

The ability to make sales is more critical than ever for Ukrainian sellers. While shipping physical goods has gotten challenging for some, many sellers have pivoted to listing digital items from printable art to embroidery patterns as a means to generate income. We've also had a groundswell of interest from buyers who want to directly support small businesses in Ukraine. Our team has been working hard to ensure our sellers feel supported and to promote their listings to buyers. In total, our Ukraine-based sellers made over $11 million in sales in March, an average of nearly $1,400 per seller with the sale.

In 2019, we also laid out our levers for GMS growth, bringing more active buyers to the marketplace, getting them to shop more frequently and earning their trust on the larger as well as the smaller purchases. Since then, we've demonstrated that we can meet the everyday needs of millions of buyers across a vast array of purchase occasions, and that Etsy sellers have something delightful to offer. We've also driven our frequency forward in a meaningful way, but we have so much more to do. So I wanted to spend a little time today unpacking how we see these opportunities going forward.

Etsy is sometimes referred to as a niche marketplace, implying that we aren't relevant to most people or at minimum, that we aren't relevant very often. I couldn't disagree more and believe that our recent performance proves just how relevant the Etsy marketplace is to almost every type of person over so many different shopping occasions.

Let's take a look at the numbers. Starting with our current buyer base. We have about 89 million active buyers in nearly 250 countries. And just this past quarter, we acquired 7 million new buyers on top of the 73 million we added over the last 2 years. And moving to our categories. 15 Etsy marketplace categories each had over 1 million unique buyers in 2021. And of those, the 7 shown on this slide, each had over 15 million unique buyers, demonstrating that Etsy is relevant to a large audience across a wide range of categories and occasions.

Digging into who these buyers are, according to our latest surveys and estimates, about 3/4 of etsy.com's U.S. and U.K. buyers identify as women and 1/4 identify as men. While we believe that gender identity is widely recognized as a spectrum, the following gender data relates to these 2 largest cohorts.

Starting with our core women buyers. We estimate that about 30% of adult women in the U.S. and the U.K. shopped on Etsy at least once in the past 12 months. And of those women, about 58% bought on 2 or more days and roughly 56% purchased in 2 or more Etsy categories in that same period. In my opinion, there's nothing niche about that. The inverse of this data is that about 70% of women in our top 2 markets didn't shop on Etsy during this period, leaving a lot more opportunity to grow.

Turning to the other roughly half of the world's population, those who identify as men. That's a huge population we began thinking about only recently. We estimate that about 10% of adult men in the U.S. and the U.K. shopped on Etsy at least once in the past 12 months. Roughly 37% of these men bought on Etsy on 2 or more days and 35% purchased in 2 or more categories over the same period. We recently conducted research to better understand men's shopping attitudes and behaviors, and learned that those who identify as men are as likely as women to be intentional shoppers, valuing handcrafted items, supporting small businesses, wanting to make a positive impact with their purchases or buying items that reflect their personality.

Our data also supports that among prospective buyers who are aware of Etsy, there's no difference in likelihood to visit Etsy by gender. The top 3 reasons men give for not shopping on Etsy are very similar to the reasons women give, although all relate to awareness. Etsy hasn't come to mind. I haven't had a need for the types of items they sell, and I don't know what Etsy offers. We estimate 35% of our new U.S. buyers in 2021 identify as men. We're just getting started understanding these buyers and developing product and marketing strategies to help them learn the when and the why of Etsy, so we can come to mind more often.

For example, we saw positive return on investment from some of our recent tactics using gender-neutral TV creative, with media placements on NFL and Hulu. And this year, we're piloting male influencer content to increase trial and trust in Etsy for buyers who identify as men. And we have so much more room to go on engagement and conversion. While nearly 90 million active buyers is impressive, we estimate that etsy.com had about 180 million unique visitors every month, meaning we can do so much better engaging and converting these visits. And we have over 100 million lapsed buyers. That's millions more who've already shopped with us, are familiar with us, but haven't shopped with us in the past 12 months.

Turning to our geographic opportunity. Etsy's all-time buyer penetration remains below 50% across all 7 of our core markets. The majority of Etsy's active buyers are still in the U.S. And so far, most of the data reviewed today relates to the U.S. and U.K., our 2 largest markets. If you were to look more closely at some of our other core markets, such as France, for example, you'd find that our prompted awareness there is only about 40% compared to about 90% in the U.S. and the U.K., and conversion rate is 50% lower in France than in the other 2 countries. In fact, penetration rates in the next 15 markets beyond the U.S. and U.K. are about 80% lower than those top 2 Etsy markets.

To size this more clearly, these 15 countries have a combined population that's 58% larger than the U.S. and approximately $20 trillion in GDP, similar to the U.S. This slide is not meant to signal any change in our near-term strategy to focus on our 7 core markets. It's only meant to illustrate our fervent belief that we have only just begun to scratch the surface of Etsy's long-term growth opportunity.

In addition to the size of the prize from a total buyer perspective, another key growth lever is frequency. As I mentioned earlier, the Etsy Marketplace has something great to offer across so many purchase occasions. Over the 12 months ending March 31, 2022, 44 million of our repeat buyers purchased on Etsy an average of 5 purchase days, and of these, 8 million or so are what we call habitual buyers. Well, to be a habitual buyer, a customer only needs to make a purchase on Etsy on 6 different days and spend $200 in a year, our habituals actually shop an average of about once a month.

They figured out the magic of Etsy. And yet there are still so many who haven't. In fact, even with all the progress in the recent past, half of Etsy's first quarter active buyers still bought only once during the trailing 12 months, and the vast majority of our habitual buyers are still in the U.S. We believe our frequency opportunity is still in its infancy.

Our last lever of growth is average order value. What I mentioned earlier is earning buyers trust on the larger as well as smaller purchases, otherwise known as our cushion-to-couch strategy. Most of our efforts here are extensions of other -- right to Win strategies. And in fact, we've only done a few specific things over the years, such as multi-shop checkout and Buy Now, Pay Later, targeted specifically at AOV. We see significant opportunity to invest in cross-category experiences and things like Shop the Look, that we believe could drive big wins here in the future, as well as to give our sellers better tools to showcase the high-quality differentiated product and service so that they can be rewarded for it.

Turning again to frequency and earning a greater share of wallet. We told you on our last call, we're centering our frequency investments on inspiration, having a fun and engaging experience that keeps you coming back for more; efficiency, helping you quickly and easily get in, buy and get out when you already know what you want; and reliability, ensuring a stress-free and dependable purchase.

To the first point, many of our visits are from buyers who are on a discovery journey, and there's so much more we can do to make this a more fun and inspiring experience. Recent buyer survey data revealed that those who visited Etsy just to browse or seek inspiration are 1.3x more likely to say they'll purchase on Etsy in the next 3 months. Our teams have been hard at work on new discovery pathways designed to make the Etsy experience more visual, dynamic and inspirational for buyers and to elevate the stories our sellers are uniquely positioned to tell.

For example, some of you have seen the beta version of our new Explorer feature on your Etsy app. It's an early iteration of making Etsy a starting point to window shop, discover and connect, a mall-like experience, if you will, featuring a continuous scroll of short videos made by sellers showing their items being made. Etsy sellers are already creating this content for other channels with nearly 15 million seller videos on the site at quarter's end. And buyers are interested in watching this content. It's pretty captivating. We're focused on making Etsy a unique place to build experiences at the intersection of a seller's imagination and a buyer's inspiration. It's early days in this exciting work.

While some buyers come just for fun or inspiration, others arrive already knowing what they're looking for. For those visits, we need to make shopping on Etsy more efficient, less overwhelming and easy to navigate, so you can get what you need and get on your way quickly. We continue to improve search this past quarter by applying personalization to in-session browsing behavior for U.S. searches on etsy.com, capturing a buyer's short-term interests with a particular emphasis on improving conversion for signed out or new buyers.

This connects to my earlier growth lever comment about how we engage the many millions of visitors who come to Etsy but don't become active buyers. We can now increasingly refine our search results while a potential buyer browsers in real time, leveraging signals we gained during the course of the visit to narrow in on today's shopping mission. In the past, we've needed a buyer to have previously engaged with Etsy to be able to personalize their results. This shift opens the door to better address the approximately 75% of etsy.com web visit traffic from buyers who were signed out or have never shopped with us.

We're continuing to innovate our XWalk real-time retrieval engine to not only use billions more data points, but to simultaneously steer our search engine to optimize for specific attributes such as to help a buyer find a high-quality wallet that is brown and full-grain leather and available in time for an upcoming anniversary, as illustrated on this slide. We have enormous conviction that making Etsy a more trusted and reliable place to shop can be a big growth unlock.

3 in 5 Etsy buyers are unsure we would have their back if something goes wrong with their transaction. Similarly, sellers worry about times when something goes wrong through no fault of their own. And we want them to know that we'll support them. Later this quarter, we'll share our plans for investments in a new purchase protection program that will extend to both buyers and sellers in a generous way. We'll also be doing a lot more in 2022 to further last year's progress towards reducing time to resolution for customer support, ensuring that Etsy Handmade and other policies are enforced helping sellers better manage shipping settings and delivery dates to give buyers the information they need to make purchase decisions and more. We know that in order to gain more wallet share, we need to make Etsy more reliable. We simply can't become a habit unless we do better for our customers.

We have so many other work streams focused on buyer engagement, frequency and trust. In the first quarter, we continued to engage buyers along their Etsy journey by further enhancing our app with new features aimed at increasing purchasing confidence, including driving buyers to reviews, enabling more ways to sort and filter reviews and collecting more review photos. Reviews have been a particularly rich work stream for us. In fact, since 2021, we improved our review rate by 50% globally, which we estimate has driven $200 million in annualized GMS. It's never been more important to be investing to stay top of mind with consumers to keep growing the pie for our sellers.

We're investing even deeper in full funnel marketing to engage existing buyers, reengage our lapsed buyers and keep bringing new buyers to the Etsy marketplace. We've got many new marketing arrows in our quiver this year to better connect off-site and on-site experiences. So I'll just mention a couple about which I'm particularly excited.

The first is our new Creator Collective Program, which leverages influencer and seller-generated content to bring new buyers to Etsy. We've also started to test performance marketing spend in rest of world markets beyond our core, including Italy, The Netherlands, Spain, Ireland, Switzerland, Belgium and Austria. So far, we've seen very encouraging results from these efforts. In the first quarter, approximately 50% of Etsy Marketplace paid GMS for these markets came from new buyers.

As we've talked about, our above-the-line brand campaigns are focused on ensuring we continue to strengthen the Etsy brand in our top core markets, while finding efficient opportunities to expand and scale our reach in ways that will ultimately drive long-term growth. Here's a 30-second clip of one of several brand-new campaigns now running called Live in Original. You'll see us ramping up placements as we go through 2022.

[Presentation]

[Joshua Silverman, CEO, President & Director]

We are emerging from an unprecedented time. And within that, Etsy had unprecedented growth. We expect that this year is going to be unpredictable for us. There are certainly many moving parts both tailwinds and headwinds, which are difficult to forecast. People continue to be nervous about global events and the economy, and we'll have to fight harder for consumers' time and money. Yet we have ample reason to remain optimistic.

We've got a world-class team with the creativity and conviction to invest with purpose on behalf of our seller community. We truly believe we offer something different across every brand in our house and that the size of the prize for Etsy is enormous. It's why I get so excited to come to work every day.

I'll turn it over to Rachel now to take you through the results and provide our outlook.

[Rachel Glaser, CFO]

Thanks, Josh. And thank you for joining us on our call. My commentary will cover consolidated results, key drivers of performance and Etsy Marketplace stand-alone results where appropriate. As a reminder, Reverb, Depop and Elo7 are all reflected in our consolidated financial results and KPIs for the first quarter.

On a consolidated basis, our first quarter GMS grew 3.5% year-over-year to $3.3 billion. Revenue grew 5.2% year-over-year to $579 million, and adjusted EBITDA was $159 million with a 27.5% margin. On a currency-neutral basis, GMS increased 4.8% year-over-year. As we explained on our last call, the first quarter of 2021 was an anomaly, with 132% year-over-year GMS growth fueled by pandemic lockdowns and tailwinds from stimulus checks.

Flash forward to the first quarter of this year, which was marked by a rebound in global mobility and headwinds from the highest inflation the U.S. has seen in over 40 years. Further, geopolitical events appear to be causing additional headwinds, particularly in Europe. We estimate that the direct impact of the crisis in Ukraine, including lost GMS from both Russian and Ukrainian sellers, was about 40 basis points versus the forecast when we set guidance for the quarter. In short, disposable income is lower and competition for share of wallet is higher across our markets.

In that context, we're pleased with our consolidated GMS growth of over 200% on a 3-year basis. Moreover, we delivered better-than-anticipated adjusted EBITDA margins, demonstrating the strength of our marketplace model. So let me double click on our performance, starting with revenue. Marketplace revenue grew 3.4%, in line with GMS, while services revenue increased 11%. Within services revenue, consolidated ads revenue increased 14% year-over-year, primarily the result of continued improvements to ad relevance and expansion of ads in the buyer experience. Etsy Ads strength was a factor in driving consolidated take rate of 17.8% for the quarter, slightly ahead of the take rate of 17.5% implied by the midpoint of our first quarter guidance.

Before closing out on revenue, let me discuss the recent increase to our transaction fee, which went into effect on April 11. We're committed to nurturing our marketplace in a way that enables millions of creative entrepreneurs to succeed. We're incredibly proud that over the past 2 years, the number of sellers on Etsy Marketplace has more than doubled and the number of listings is up 55%. With more sellers on the platform than ever, we need to continue to grow the size of the pie. This requires us to invest more to scale our platform and most importantly, bring them even more buyers than the almost 90 million we bring them today.

When the fee change went into effect, we saw less than 1% of sellers go into temporary vacation mode. Active listings dipped less than 1% during that week and returned to the prior level when the week was over. Based on past experience and significant research leading up to the change, this was all within our expectations. The overall impact to our GMS for the week was not material and seller churn remains at normal levels quarter-to-date. At quarter end, we had well in excess of 95 million listings on etsy.com. And as you know, we have no shortage of items for sale.

And while no one likes fee raises, we actually heard from thousands of sellers supporting our efforts to invest in them. We really value input from our sellers and are confident in our investment plans. We trust that sellers will judge us by our outcomes when they see the value we are able to provide.

Turning now to our consolidated adjusted EBITDA. Our first quarter adjusted EBITDA margin was 27.5%, ahead of expectations, but well below the prior year. As we have described, the first quarter of 2021 was very strong GMS growth quarter, which drove commensurately high margins in last year's first quarter. This year, we have consolidated 2 new subsidiaries into our results, which were not in our prior year numbers. Neither Depop nor Elo7 are currently profitable. And they are, therefore, a drag on our bottom line consolidated margins.

In addition, we continue to invest in headcount growth and increased compensation, including stock-based compensation, with the largest portion in product development. We also saw growth in our cloud computing costs due to increased development activity. Finally, there was about a $5.6 million impact to our adjusted EBITDA directly attributed to the crisis in Ukraine, including Ukraine seller support as well as bad debt expenses related to closing seller shops in Russia and Belarus.

We are also investing in our subsidiary brands. While they are experiencing similar reopening headwinds and other macro factors, each made strides in product and marketing, incorporating the Etsy playbook into their own growth strategies. We summarized their recent focus areas on Slide 28. During the quarter, Reverb launched a new Google integration to further optimize performance marketing efficiency, as well as scaled tests of new advertising channels, which are realizing promising early results.

At Depop, the recently launched Make an Offer feature, where buyers seamlessly submit product offers to sellers, led to a meaningful uplift in both conversion and frequency and was an encouraging needle mover for GMS. We also launched Depop's first-ever digital video campaign in select local U.S. markets. Early results are positive, showing an improvement in brand familiarity.

And Elo7's expanded shipping options for sellers resulted in cheaper shipping costs and faster delivery times, improving the overall buyer experience and driving an increase in conversion. And for the Etsy Marketplace, we have a balanced portfolio of product initiatives, some of which we expect to deliver in-year GMS and others such as visual discovery, or improving the foundation for our development capabilities are expected to take a longer period to bear fruit.

You can see on Slide 29, how we have scaled our product development investments over the past 4 years and how it has increased as a percentage of revenue in the first quarter of 2022. During the first quarter, we increased our consolidated marketing spend to $154 million, up from $151 million in the first quarter of the prior year. Our brand spend, sometimes referred to as above-the-line spend, represented 16% of our consolidated marketing spend, up from 13% in the prior year.

For our Etsy Marketplace, we were on air during the first quarter of 2022 in our core markets, including a male-focused campaign, which shows signs of real promise in that demographic. We plan to expand placement of our brand marketing campaign for the Etsy Marketplace as we go through the year, particularly in the back half.

First quarter 2022 performance marketing spend was down year-over-year as it dynamically adjusted with demand, and the decrease was partially offset by an increase in social media marketing spend. In terms of our performance marketing spend, we maintain our general rule of not leaving profitable marketing dollars on the table. And similarly, we don't chase unprofitable buyer acquisition or engagement.

In addition to our investments in product and marketing, we have made deliberate bets in other areas such as investing in being a trusted brand. These investments are meant to ensure that our customers, both sellers and buyers, find a welcoming home and have a delightful shopping experience even post purchase. To that end, we are investing in the support apparatus we need to create a streamlined and efficient experience if something doesn't go right, including in compliance, both people and systems to keep the marketplace safe and advocacy efforts to support our sellers globally as the regulatory landscape evolves around privacy, taxation and content.

I'll dive in deeper now on Etsy Marketplace performance on a stand-alone basis. During the first quarter of 2022, Etsy marketplace GMS declined 2% year-over-year and increased 177% on a year-over-3-year basis. That is when compared to the first quarter of 2019. The deceleration we started to experience in February 2022 worsened throughout the quarter, which we attribute to headwinds related to increased reopenings, high levels of inflation weighing on consumer purchasing power and consumer mind share loss due to the crisis in Ukraine and its reverberations throughout the global economy.

From a geographic perspective, 45% of Etsy marketplace GMS in the first quarter of 2022 was from transactions where either the buyer or the seller or both were outside the United States. Non-U.S. GMS was up 5% year-over-year on a currency-neutral basis, which was driven in part by strength in Germany, offsetting weakness in the United Kingdom, which was facing much tougher prior year comparisons. Etsy Marketplace category performance was marked by strength in paper and party supplies for in-person events such as baby showers and birthday parties as well as in apparel and jewelry and accessories, consistent with reopening trends.

We've seen strong buyer demand for fashion subcategories and travel-related needs, including tote bags, passport cases and backpacks. Wedding items are also a bright spot for year-over-year growth, including wedding party gifts, wedding favors and decorations. The Home & Living category declined slightly for the quarter on a year-over-year basis. Although we are seeing relative strength in items related to Outdoor & Garden, in fact, ERTs were particularly hot sellers in the quarter. We believe the diversity of our listings and Etsy's sellers ability to rapidly shift to meet changing buyer demands is an important competitive advantage, especially now.

GMS per active buyer on a trailing 12-month basis for the Etsy Marketplace increased to $137, up 10% year-over-year and up 37% on a year-over-3-year basis. Etsy.com ended the first quarter with 89 million active buyers, largely flat to year-end, which includes 8 million habitual buyers and another approximately 36 million repeat buyers, those who made purchases on 2 or more days in a 12-month period, but were not habitual buyers. The stable performance across all of these buyer cohorts is encouraging, providing additional proof points that we are maintaining most of the gains we made during the pandemic, despite there being so many more options for consumers' time and money. 46% of GMS came from habitual buyers in Q1 '22. Our growth of habitual buyers in core non-U.S. markets held up well in the first quarter of 2022, including 55% year-over-year growth in habitual buyers in Germany.

We're also pleased to see continued healthy new buyer acquisition and reactivation of lapsed buyers. In the first quarter, we acquired over 7 million new buyers almost 60% greater than the number of new buyers acquired in Q1 2020. We are also continuing to reactivate lapsed buyers. In fact, we reactivated a healthy 5 million lapsed buyers in the first quarter.

Okay. So moving to our outlook. While in the second quarter of 2021, Etsy reported consolidated GMS growth of 13% on a year-over-year basis, GMS increased 178% from the second quarter of 2019. The strength in the second quarter of 2021 was partially driven by the tail of economic stimulus payments in the U.S., which hit consumer bank accounts in early April as well as high COVID case counts and low vaccination rates that continue to keep many at home.

Contrast that with now, where mobility indices are approaching 2019 levels and pent-up demand may drive this even higher, meaning the possibility of more movement and travel and less time for at-home shopping. We also see increasing headwinds related to broader macroeconomic issues in our core markets impacting Etsy, Depop and Reverb. We started to see headwinds in February, which worsened in March and again in April as well as unusual levels of volatility in our weekly GMS performance.

To be sure, it's been a bit of an unpredictable and volatile start to the year. As such, we currently estimate that our second quarter consolidated GMS will be approximately $2.9 billion to $3.2 billion, about flat at the midpoint compared to the second quarter of last year and up 179% compared to the second quarter of 2019. In a world of so many more choices, our guidance implies somewhere between a decline of low to high single digits for Etsy marketplace GMS year-over-year, retaining over 90% of the gains we have made over the past 2 years.

We are forecasting revenue of $540 million to $590 million, up about 7% at the midpoint compared to the second quarter of last year and up 212% compared to the second quarter of 2019. We currently expect adjusted EBITDA margin of about 25%. Here are a few additional items to keep in mind as you model the rest of 2022. Assuming macro trends do not worsen, we would expect our GMS growth rate to improve for the second half of 2022, as we have said on our last call, with revenue outpacing GMS. We've outlined today that despite the near-term headwinds we are experiencing, we remain committed to increasing investments in core Etsy and our subsidiaries.

The reopening and macroeconomic headwinds we experienced as a company are, of course, also being felt in the households and wallets of our small independent sellers. Our take rate increase enables us to lean deeper into marketing, product development and member support to invest for growth at a time when our sellers need it the most. We are playing through, as they say.

I am noting this here so you can model second half adjusted EBITDA accordingly. In an environment where top line growth is constrained by external factors and with an intent to stay the course on growth investments, we would not expect margins to expand materially other than potential improvement in the fourth quarter. As always, we operate with an ROI discipline and expect that our current period investments will have a payback in the future.

Lastly, for your models, we also expect our stock-based compensation expense to increase sequentially in the second quarter as a result of our annual refresh grants that were priced in March. Since this expense will now have a full quarter impact, we currently forecast approximately a $0.15 pretax impact to our second quarter EPS compared to the first quarter, assuming stable share count.

Thank you all for your time today. And I'll now turn the call over to Deb, so we can take your questions.

[Debra Wasser, VP, IR & ESG Engagement]

I'm going to dive right into questions. Good to talk to everybody. So the first one is from Maria Ripps, and this is -- she's from Canaccord. Josh, this one is for you.

Can you talk about how the near-term uncertainty embedded in your Q2 outlook, impacts your investment planning and considerations as you look towards the second half of the year?

[Joshua Silverman, CEO, President & Director]

Absolutely. Thanks, Maria, for the question. If the pandemic has taught us anything, it has really strengthened our conviction even more in the enormous size of the prize that we believe we have at Etsy. And just to dimensionalize for a second, in the second quarter, pre-pandemic, Etsy sellers sold $1.1 billion worth of product on the core Etsy marketplace. And at the low end of guidance, we're projecting for Etsy consolidated $2.9 billion worth of sales.

Etsy has been transformed, and maybe that is a glimpse towards that future we keep talking about, where we say in the future, we don't think there's going to be an unlimited number of places to buy things online. Amazon is going to likely continue to succeed. And it's not likely that there's thousands of places selling the exact same thing as Amazon, trying to compete head-to-head with them. Etsy offers something truly different, something really meaningful across many categories and many purchase occasions relevant to many people as we talked about in this call.

We think the size of that prize is absolutely enormous. And so we have our eye on that prize, and we're investing for that future time. The next couple of quarters, absolutely are turbulent. We're facing reopening headwinds, we've got a war in Europe, we've got inflation. It's turbulent times for everyone, but the strongest companies invest with conviction and discipline through turbulent times with their eye on the medium term. And we think the opportunity for Etsy is enormous, and we are absolutely investing for that. And this is, by the way, the time when our sellers need us most to be investing, and that's absolutely what we're doing.

[Debra Wasser, VP, IR & ESG Engagement]

Okay. Great. Thanks, Josh. Next one was also from Maria, but I will add it from several other people, including Naved Khan, and we want to talk about the sellers reaction to our recent fee increase. How do sellers view all the incremental investments that we're making? And has there been any impact from the boy cut that we saw in the middle of the month on our GMS growth? And we'll start with Josh on that one.

[Joshua Silverman, CEO, President & Director]

Sure. So we announced a fee increase in mid-February, and the reaction from sellers was actually more muted than in prior fee increases. No one likes it when prices go up. But actually, the seller reaction was less negative than it's been in the past. And what we said before the pandemic was we have an enormous number of sellers with a huge amount of things for sale. And what they need is to bring us more buyers to bring them more buyers. That's more true now than ever. Etsy now has 5.5 million sellers. And they're counting on Etsy to grow the pie at the very moment when buyers have a ton more choice than they had even 3 and 6 months ago. They are feeling a lot more pressure in terms of their wallet, and they have the opportunity to travel, to dine out and to shop offline, it's even more important that we are investing to bring buyers to those sellers and have a really compelling offerings that our sellers can grow. It's the only way that our sellers can grow.

And so what we've been hearing from thousands of sellers is we need you, Etsy to be investing to grow. And when our sellers sell in other places, and by the way, many -- most of the big ones do, they sell on eBay, they sell on Amazon, they have their own sites on Shopify or Wix, they sell on craft fairs. As we've said in all of our seller sentences, our sellers have a lot of choices in terms of where they can sell. And what they find and what we know is that the value on Etsy is greater. We provide more value than the other alternatives. That was true before the fee increase, it's true after the fee increase.

While they have many, many places they can sell, they are more successful selling on Etsy. Our top sellers say that about half of their sales come from Etsy and half come from everywhere else combined, and it's because we invest to bring them buyers and buyers who care about handmade products, vintage products, artisanal products, buyers who care about keeping commerce human. So it's even more important now that we are investing to help those 5.5 million sellers grow.

As Rachel shared, while there were a small number of sellers who managed to get quite a lot of media attention, in fact, less than 1% of sellers chose to put their shop on vacation mode during that week. We saw no material impact to sales for the week, much less for the quarter. And we saw no material impact to churn. And we think the reason is that the value proposition that Etsy offers is really compelling. And whether the transaction fee is 5% or 6.5% right now, what sellers really need is us bringing them more buyers so they can drive more sales and the pie gets bigger for everyone. Thanks for the question.

[Debra Wasser, VP, IR & ESG Engagement]

Okay. Next one is for you, Rachel. This is from Naved Khan at Truist. Why are margins lower in Q2 '22 despite the higher take rates?

[Rachel Glaser, CFO]

Hello, everyone. Thanks for the question, Naved. So the lower margins reflect what we talked about as playing through. We're going to continue making our investments, even though we're seeing constraints on the top line. And first and foremost is really investing in our own people. So we are adding heads. We added heads throughout 2021. We've continued to grow headcount in 2022. And as a reminder, we've also added the headcount in from our recently-acquired new subsidiaries, Elo7 and Depop.

And a lot of those people are pointed at product development. So product and engineering are a lot of the headcount adds. And they are really the growth engine of the company because they are creating all the products that is going to do exactly what Josh talked a lot about, which is increasing more active buyers and increasing frequency to get more GMS per buyer. That's the first bucket.

We're also going to continue to invest in marketing. We showed you a clip of one of our new ad campaigns, but we're also running campaigns in the U.K. and Germany. We tested some above-the-line marketing for Depop in the first quarter, and we'll be looking to scale and optimize that program as well. And we spend on performance marketing dynamically. So we'll continue to lean into marketing where we see that the ROI is there.

And then the third bucket is it's less visible to GMS in the short term, but we are spending a lot on our trust and safety and member support organization. We talked about really having our customers' back in a way that they can see it and feel it more so than ever. We'll talk more about that as we announce it externally, but we're excited about that, and that is an investment that hits the P&L in the short term. And so we believe that's a long-term payback.

Another place we invest is in our -- as we have more product engineers, we're developing more. So we use more cloud computing and hosting costs. So some of those things, you don't see the direct relationship between those investments and GMS in the quarter, but we believe in the long-term benefit of making those bets.

[Debra Wasser, VP, IR & ESG Engagement]

Okay. Great. Thanks, Rachel. The next one I'll give to you, Josh. It's from Shweta Khajuria from ISI Evercore. Could you please provide more color on the most impactful initiatives that have driven buyer frequency growth so far? And of the upcoming product improvements, which ones do you think could be meaningful purchase frequency drivers?

[Joshua Silverman, CEO, President & Director]

Yes, absolutely. Thanks for the question. So let me start with just awareness, because one of the top things we hear about why did you not buy on Etsy more frequently is I just didn't think of it. So we continue -- we said that before the pandemic, we continue to see that as I just didn't think of it, should have had a VA. And so the television campaigns that we showed in the investment and above the line as well as the performance marketing investments that we're making are more important than ever to just remind people of all of the different purchase occasions for which we're relevant.

And we shared, for example, 30% of buyers who identify as women in the U.S. and the U.K. shop in Etsy at least once and 58% of them shop more than one time. So we know we're relevant to a lot of people a lot of the time. If we take a second on those 8 million habitual buyers, they bought an average of 13x over the course of the last 12 months. So we know that we can be relevant to them very, very often more than once a month, and I know we shop on Etsy more than once a week. And I know plenty of people who do. So we know we can be a lot more relevant.

What is it that differentiates those habitual buyers that are shopping once a month or more. They figured out the magic of Etsy. Not only do they think of us more often or we're front of mind, but they know how to speak Etsy. They know how to put the right words in our search engine in order to get the right results. And we got to continue to make it easier to get the average person who doesn't shop on Etsy all the time to get the kind of results that an expert Etsy user gets. And so the search engine is continuing to get better and better, which is super important.

What we talked about in the prepared remarks about XWalk is really important. And to simplify it, instead of having one objective function like leather wallet, you can now search -- we can now optimize for multiple objectives at the same time. Leather wallet that's near me will arrive within this time and is brown. And the ability for the search engine understand plain English and convert it into things that people want is just getting better and better.

We're also doing a better job of getting people to leave tea leaves of themselves to engage in lightweight ways that tell us about themselves, doing things like favoriting or adding things to list, which make us able to understand them better and therefore, provide better search and better recommendations for them in the future. I'm particularly excited about the work we're doing there for buyers who have low or no maybe visitors, people who've never bought on Etsy before or have only bought 1 or 2 things. That's a large amount of traffic on Etsy.

We talked about over 180 million unique visitors each month on the Etsy website. And we're getting much better at taking someone for whom we don't have a lot of data and becoming much more personalized even for them. And I think that can do a lot more to drive conversion and to drive frequency. One of the things that we hear most from buyers is in order to make Etsy truly a habit, a go-to starting point for commerce, they need to trust us even more that we will have their back.

And so while it's rare that something goes wrong on Etsy, buyers don't always trust that we're going to have their back. And in fact, that's one of the big value-adds that Etsy can offer relative to buying on an individual shop, is you haven't heard of that individual shopper that individual brand, but you've heard of Etsy. And so we build that brand. We build the trust of that brand, and we lend that trust to each of our sellers. It's one of the most important things that we do. It's part of why we do ask for and promote certain standards among sellers that we build a brand that stands for something.

And so we mentioned that we'll be announcing something later this quarter, where we're investing to make sure that buyers know that we have their back and that sellers know that we have their back. So when the rare occasion that something goes wrong, people know that they're protected. And I'm really excited about what that can do for frequency over time. Those kinds of things aren't a silver bullet. We're -- immediately necessarily see GMS growth, but building a brand that stands for reliability, we know, we believe, can have very big dividends over time.

[Debra Wasser, VP, IR & ESG Engagement]

Okay. Great. Thanks, Josh. The next one I want to give to Rachel is a couple of questions have come in on the Q2 guide. So I'll read the one from Marvin Fong of BTIG.

Could you discuss how April GMS performed? And what are the assumptions driving both the high and the low end of your Q2 GMS guidance?

[Rachel Glaser, CFO]

Thanks for the question, Marvin. So first of all, one thing I want to point out right at this -- at the start is to think about at the low end of our guidance, it's $2.9 billion. And in 3 years ago, so Q2 of 2019, we had $1.1 billion. So even at the low end of the guidance we gave, we have -- we are 3x -- nearly 3x bigger than where we were 3 years ago, and we were super proud of being able to have retained all of that growth.

We did say on the call, I think maybe your question was written before I said it, and I know everyone's multitasking because there's so many people reporting today, but that we saw successive deceleration in GMS starting in about February. And we have seen that even in April. So it's been a pretty volatile and unpredictable quarter, pretty bumpy for a lot of people. It's part of the reason we gave -- we stayed with a wide range of our guidance and a reason why we're not still not giving full year guidance because there's just a lot we don't know and can't control.

With that said, there's a lot of positive in the numbers that we gave. We talked about adding millions of new buyers in the last quarter, which was up 60% from the same quarter 3 years ago, and we have so much opportunity for growth as Josh laid out. So we're really pleased with the numbers that we're hitting, and we expect the other number that we gave in the guidance that we gave was that we would expect as we get to the second half of the year, generally, the second half is a bigger half than the first half, and we still expect that. And also the other fact pattern is that we're going to start to have lower comps in the second half of the year than we did in the first.

So those things remain true, and we're just playing through with our investments and pleased with the results that we're delivering.

[Debra Wasser, VP, IR & ESG Engagement]

Great. Next one, I think, is also for you. Talk about how performance -- sorry, this is from John Colantuoni from Jefferies.

Talk about how performance marketing ROI has trended for Etsy over the course of 2022? And whether there was any notable change in ROI that coincided with the pandemic reopening? How are trends in ROI guiding your approach to deploying incremental marketing from the revenue generated by the recent take rate increase versus letting it drop to the bottom line or spending those dollars into product initiatives?

[Rachel Glaser, CFO]

Great question. We love talking about marketing at Etsy. So first of all, this is a reminder for everybody, we don't really give our marketing teams a marketing dollar budget. We give them an ROI threshold on performance marketing. And so our spend will dynamically increase or decrease based on demand. And because as we talked about, had a bumpy first quarter with some deceleration in demand through the quarter, the spend dynamically pulls back on performance marketing. So we did see that happen.

Offsetting that is we spent more on brand marketing. And I think we said it was about 16% of total spend in the quarter as opposed to 13% in the period a year ago. So that trend is happening. When we announced the price increase, the price increase takes up our take rate, so it takes up our ability to continue to spend deeper into the ROI curve without compromising our ROI thresholds. And we started to spend ahead of that.

So we knew that the take rate was going to go up and we started to spend ahead of that even before the price increase went into effect. So in March, we started to spend at a higher level. And now that the price increase has been effectuated, we are spending -- we're able to spend more on the performance marketing. We haven't seen necessarily any increases in CPC. So it's not necessarily more expensive to spend to buy that to buy that traffic. But as we've said many times, we don't -- we won't spend beyond our marginal ROI.

Lastly, I want to remind everybody that we have our off-site ad program, and that subsidizes about 40% of everything that we spend. That's just another way of saying we can spend even deeper into the ROI curve, it was effectively when we launched that program, wasn't a take rate increase, but it's a success-based model, so the sellers only pay that additional fee if they've had a successful sale. That subsidy we get is not seen in the marketing expense line, it's seen obviously in the revenue line. So that is another factor that sort of offsets our marketing spend allows us robustly where we go. And lastly, we are spending more on -- you saw the brand campaigns, and we'll continue to lean into our above-the-line marketing as we go through the year more heavily in the third and fourth quarters, as we typically do.

[Debra Wasser, VP, IR & ESG Engagement]

Great. Thanks, Rachel. Next one is for you, Josh, from Victoria James at D.A. Davidson.

How is inflation affecting your business? To what extent are you in relatively favorable position versus your e-commerce peers because your sellers allow consumers to save money when they buy things like apparel or home goods? To what extent are you relatively favorable versus your e-commerce peers?

Yes, that's basically the question.

[Joshua Silverman, CEO, President & Director]

Thanks for the question. I appreciate it. And I appreciate the context behind the question because I think for the past maybe roughly 100 years, the world has been well schooled in the benefits of mass production. And there's been a lot of focus on mass production, making things cheaper. But it's also true that when something is produced in mass production overseas to get on a boat, to end up at a port, to get on a train, to get on a truck, to finally make it to your house, and there's maybe 3 markups along the way, the opportunity to buy directly from the person who made it without all those markups along the way, can offer that seller the chance, that maker the chance to earn a fair price and a fair living, while also offering great value to the buyer.

So that's a story that we want to tell, and we want to make sure that the world understands. To be clear, Etsy sellers set their own prices. That's not something that Etsy is directly involved in. We have said in the past and it continues to be true that our sellers have so far on average, if you look at a basket of goods analysis, not chosen to take their prices up by much at all and far, far less than what you're reading in terms of consumer inflation. And as a result, the relative value proposition of things on Etsy is getting cheaper relative to the market, which can increase appeal for those products.

Some sellers may also choose to raise their prices as their inputs go up, and that's perfectly fair and appropriate. It's a big market with 5.5 million sellers, each making their own decisions on that. But if they choose not to raise their prices, the value proposition of their items can get more compelling. Also, it can be very fair as the competition on and off Etsy, if their prices go up, that our sellers can take price and maintain margins, and that's appropriate as well. Either way, we think that our sellers have a tremendous amount to offer the market, and our job is to make the market aware of that great value available on Etsy, and we're investing with discipline and with conviction to make sure that the market is aware of that.

[Debra Wasser, VP, IR & ESG Engagement]

Great. I'm going to ask the next one from Lauren Schenk from Morgan Stanley. This is for Rachel. Can you clarify the 2H marketing commentary -- margin commentary that you don't expect margins to expand materially? Is that a second half comment or a full year comment and fourth quarter margins are likely to be up year-over-year?

[Rachel Glaser, CFO]

Lauren, thanks for the question. So it's a second half comment, and we -- the caveat there is that to whatever extent seasonality comes into play, that could expand margin slightly. Sometimes we see that happen in the fourth quarter. But I also want to take the opportunity to point out, we put up 27.5% margins in the first quarter this year. And harkened back to Q1 of 2021, our margins were in the 33% range. And I think at some point during 2021, we also delivered 37% margins.

We really have full control because our costs are so variable with GMS [indiscernible] control over sort of how much margin -- how much we want to flow through to the margin line. And what we've said and we want to reemphasize is that we see so much opportunity for growth, that we are staying the course on our investment plan regardless of headwinds that might factor into the rest of the year. And those investments are really all around our people, which are the lifeblood of the company. They're incredibly important to us to actually unlock that growth in marketing, which we think really will unlock more awareness and frequency and in the marketplace to really support our customers and our sellers and their journey all the way through to the end of the purchase -- the point of purchase. And so that, our margin guidance that we gave reflects our intent to keep investing in those areas.

[Debra Wasser, VP, IR & ESG Engagement]

Great. Thanks, Rachel. I know we're out of time [indiscernible] from Deutsche Bank. I think [indiscernible] moving buyers [indiscernible] habitual purchasing amongst buyers on the platform?

[Joshua Silverman, CEO, President & Director]

We're really [indiscernible] offline stores. Many states were in lockdown. And if you could go to offline stores, it wasn't very pleasant. And even online shops often had big supply chain challenges and it really highlighted the benefit of the Etsy model that we were not facing those headwinds. We had ample supply the entire time. Our sellers were doing a great job making great product, responding to the need and being ready to ship. And so Etsy was one of the few places that you could shop reliably for much of the past 2 years.

And I'm delighted by the fact that the vast majority of our buyers are choosing to come back now at a time when they have so much more choice. When there is pent-up demand to travel and dine out and go to all of those stores that they weren't able to go to before. At the low end of our guidance, we say that we'll keep 90% of those purchases in spite of having tremendously more options in a time of inflation when you've also got more pressure on your wallet. So we're really pleased by the fact that people want to come back to Etsy. And I think they really see that we offer something really compelling and really different in a time that matters and in a way that matters. And we think that opportunity is huge, and we're going to keep investing to keep growing it.

[Debra Wasser, VP, IR & ESG Engagement]

Okay. Great. Thank you all for staying on with us a few extra minutes and we will talk to you during the quarter. Thank you very much.

[Joshua Silverman, CEO, President & Director]

Thank you.