ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2023-Q1

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Hi, everyone, and welcome to Etsy's First Quarter 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. And joining me today are Josh Silverman, Chief Executive Officer; Rachel Glaser, Chief Financial Officer; and Jessica Schmidt, 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. Questions can be submitted via the Q&A window chat displayed screen. Feel free to use it at any time as it will remain open throughout the entire conference call. I'll be reading your questions, and Jessica will help me try to get to as many as we can.

Forward-looking statements involve risks and uncertainties and some of which are described in today's earnings release and our most recent Form 10-K, and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.

Also during the call, we'll present both GAAP measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted on our IR website, along with a replay of this call.

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

[Josh Silverman, Chief Executive Officer]

Thanks, Deb, and good evening, everyone. We're pleased to be reporting another quarter of healthy performance to start the year. Etsy's consolidated GMS was $3.1 billion. Revenue grew nearly 11% to $641 million and our adjusted EBITDA margin was again strong at 26.6%. Etsy marketplace GMS was $2.7 billion this past quarter, down about 3% on a currency-neutral basis as we've once again maintained the vast majority of our pandemic gains in the face of stiff macroeconomic headwinds.

As Rachel will review, some of the volatility and headwinds the Etsy marketplace experienced in February, eased in March enabling our consolidated GMS to come in above the midpoint of guidance. The Etsy marketplace is starting to see some green shoots in our biometrics as we move past pandemic period comparisons, including the first year-over-year increase in active buyers in five quarters.

In the last few years, we've all faced continued uncertainty, which, frankly, is feeling like the new normal, but despite the ups and downs, Etsy has thrived. I believe this has everything to do with our agility and resilience, both in our business model and the way we run our company. We stand apart because we offer something different, something we believe is evergreen and enduring.

Summing up our core Etsy marketplace plans for 2023, we'll work hard to knock down barriers that have historically made Etsy or once in a while rather than your every day. These barriers can be summarized in three main areas. First, buyers too often think of us only for very specific needs or at the end of their shopping journey when they can't find the item somewhere else. Second, it simply takes too much time and effort to find the best things among our over 100 million items. And third, buyers worry about the post-purchase experience.

Given our breadth and depth of merchandise, we're confident that we should be more relevant, more often to many more millions of buyers around the world. And if there's anyone who doubts this point, I challenge you to review your recent purchases and search on Etsy to see whether you might have found something similar yet more special and possibly better value if you purchased it from a creative entrepreneur on Etsy. I bet you will be surprised how often the answer to that question is yes. As we lesson these barriers to purchasing more frequently. We believe we can earn the rate to gain a far greater share of our buyers wallet and to reach our aspiration to become the starting point for many more of their e-commerce journeys.

This year our product roadmap is focused on welcoming new buyers to the joy of Etsy, deepening buyer curiosity and engagement, instilling trust when transacting with us and being the platform sellers love to sell on, where they can most effectively and efficiently grow. We're doubling down on initiatives from our core female buyers, building awareness among male buyers and driving the two side at marketplace flywheel in more of our seven core markets. I'm excited to tell you more about some of our plans today.

Improvements to surge technology are obviously central to this roadmap and you will see us invest here in a big way. Many of you ask what inning is Etsy in, in making search better. For the past six years, I've consistently answered very early innings. We've been at the cutting edge of search technology for the past several years and while we use large language models today, we couldn't be more excited about the potential of new or large language models and generative AI to further accelerate the transformation of Etsy's user experience. Even with all our enhancements Etsy surge today is still key word driven and text based and essentially the result is a grid with many thousands of listings.

We've gotten better at reading the tea leaves, but it still a repetitive cycle of query, result reformulation. In the future we expect search on Etsy to utilize more natural language and multi-model approaches. Rather than manipulating keywords our search engines will enable us to ask the right question at the right time to show the buyer a curated set of results that can be so much better then it is today. We are investing additional search engine technologies to identify attributes of an item, multi-label learning models for instant search, graft neural networks and so much more, which will be used in combination with our other search engine technologies.

It's our belief that Etsy will benefit from generative AI and other advances in search technology as much are perhaps even more so than others. Why? Think about the way you shop. You don't walk into a store and yell, blue, shirt, cotton, the way you search on Etsy today. In a store, you walk in, explain to a salesperson that you're going to a cocktail party at a chic place in Brooklyn and are looking for a shirt to fit the vibe, what do you recommend? And you certainly don't expect the salesperson to show you 90,000 options. They'll show you the best handful of items that match the vibe.

What if we can bring the human aspect of retail boutiques to e-commerce? What if buyers could tell us what they want in real time and adjust their search results that way? What if they could show us images during the conversation and particularly intriguing for Etsy? What if buyers could better visualize products that might be similar to but not exactly like the ones initially displayed in response to a search such as, I like that planter. But do you have it in the shape of a duck and not a cat? With over 100 million items, chances are, whatever you're imagining is already for sale on Etsy. We'll help you find it more easily.

While we're in the early days of thinking through how these advances might impact Etsy, you can imagine how conversational search can help bring the human aspect even further into our marketplace or how visualization can enable more seamless product discovery.

Summing it up, we're excited. Combining human -- natural human language with progress on search is pretty on brand for Etsy. Tying back into welcoming new buyers to the joy of Etsy and deepening buyer curiosity and engagement for those coming back to us. For every buyer, we should be able to show you the very best of Etsy for you. We have the opportunity to be far more curated and organized to reduce the clutter in order to be the place you come to more often for your head queries and not just your tail queries.

To that end, we have two very exciting cross-functional initiatives in 2023 that aim to unlock the best of Etsy. The first, we're calling curation at scale. You may be familiar with our editors pick features. Items we select for editors specs have traditionally fueled content for on and off-site merchandising and marketing strategies. These features as well as the Etsy pick badges we use throughout the site are fueled by a dynamic library of a couple of hundred thousand listings curated by humans, Etsy merchandise experts.

Etsy pick badged items show meaningfully higher conversion rates than non-badged items. Why? Because our merch team knows how to select the very best inventory, items with true craftsmanship, those that are well photographed to display key features and are from sellers who adhere to our policies and provide excellent customer service. Our experts also know how to incorporate market trends, localization, and diversity of merchandise into the experiences we're creating.

So our search experience and merchandising teams are working together to feed the best of Etsy human curation into our ML and AL data sets in a highly scalable way with a goal to train our algorithms to better detect the quality of items as perceived by humans such that we showcase the best of Etsy in every search.

Over time, we believe this and other work streams will help make search more personalized for each type of buyer on Etsy, further identify what quality means for you, enable us to make better recommendations, help buyers move more easily from inspiration to purchase and enhance the brand perception of Etsy. We'll also share insights with sellers on what being the best of Etsy looks like for their type of item. So over time, we can help lift our entire seller community.

The second area we're working on to unlock the best of Etsy is related to creating shopping experiences that make Etsy feel more organized. To set the stage, it's worth taking a look at our brand awareness data. While Etsy's aided awareness is now quite high, particularly in the U.S., our largest market.

When we ask consumers the open-ended question, name the top places to shop for gifts. Only about 11% will name Etsy, and only about 3% name us for home furnishings or for style in spite of these being some of our most popular purchase occasions. This lack of top-of-mind awareness represents a tremendous opportunity for us. We believe we have both the merchandise and differentiated shopping experience to warrant significantly greater buyer consideration.

So this year, our product teams will create new pathways or wayfinding to give buyers easy ways to understand our sellers' inventory by surfacing category-specific information and removing friction in the purchase experience in order to surface high-quality items and provide inspiration. For example, a complete-the-look recommendation model is showing early promise to help home and living buyers shop more effectively. And in gifting, we're testing new ways to narrow broad gifting missions, such as gift for mom, to filter by a hobby or other interest or in jewelry, one of the most common gifts on Etsy to help a buyer more easily find a specific type of jewelry.

We'll also leverage our marketing channels and campaigns to associate Etsy with specific purchase occasions, starting with Home & Living, style and gifting. Here are a few of our new TV spots, which seek to raise awareness that Etsy has it for those purchase occasions.

[Video Presentation]

Moving now to the ways we'll seek to instill more trust when transacting with us to build that peace of mind when shopping on Etsy, 90% of active buyers believe items on Etsy are unique, high quality and handmade. That said, mass-produced items, which make up a very small percentage of items on Etsy do continue to find their way on to the marketplace. We know it weakens trust when a buyer or a seller encounters one of these items. Utilizing state-of-the-art ML and AI technologies, we've been dialing up enforcement of our handmade and other listing policies even more in 2023 to remove items more quickly and accurately.

Our 2022 transparency report was published two weeks ago. It's a great source of information regarding our efforts to take down listings that violate our policies. We removed 1.9 million listings for violating our policies in 2022, a 16% increase from 2021. This work is never done, but I'm confident that we're taking the right steps to ensure that Etsy remains a safe and trusted place for our communities.

Another focus for us this year is to improve awareness of Etsy purchase protection. So buyers and sellers know when their orders qualify, feel confident in the process and can more easily resolve any issues that arrive. For those buyers familiar with Etsy purchase protection, over half are likely to say that Etsy has their back if things go wrong compared to about 30% among buyers who are not familiar with the program.

As we track data from this program through the end of last year, we found that pre-purchase messaging about purchase protection improved conversion rate and our post-purchase e-mails spurred by our frequency over a 90-day period. We have so much more to do to make sure buyers and sellers know we have their backs and that we consistently keep pace with expectations across the e-commerce landscape.

And while we've also made meaningful progress over the years on the cost and timeliness of shipping, we still see significant opportunity for improvement. In the first quarter, we saw a nice conversion rate win from making it easier for buyers to filter for free shipping items with no minimum purchase requirement. We could do even better on the timeliness of shipping. For example, by continuing to improve the accuracy of how Etsy sellers set their processing or make times versus their actual times, using ML to get even more precise in predicting point-to-point shipping times and prioritizing items and search results located closer to the buyer for time-sensitive purchases.

Our job is to create an ecosystem with the right incentives so sellers with the skill and will can be as successful as possible. Last year's transaction fee increase, where most of the incremental revenue was reinvested back into the marketplace, enabled us to increase investments in critical areas such as marketing, customer support, and making Etsy more trustworthy.

2022 was exactly the right time to do it when the world was reopening after the pandemic and sellers needed us to step up our efforts to engage and retain buyers. Given that seller growth continues unabated, up about 8% year-over-year, and our future intent to sell metric is consistently high, we believe we're on the right track.

Yet we know we can do even better. So this year, we've got a jampacked to-do list, which includes investing in our seller growth suite, education, tools and the personalized insights they need to market their shops, improve their listings and grow sales on Etsy. We'll make it easier than ever to list items and will provide best practices on pricing strategies and discounting.

In addition, we've recently started testing a new make an offer feature that will give vintage shop owners the option to receive offers from buyers. Since launch, thousands of sellers have opted into the initial test with more than a million eligible listings included so far. And we're also planning our second virtual Etsy Up seller event this month and will try to outdo our wildly popular 2022 event.

We're proud of our marketing team, which continues to deliver great value, bringing buyers to our marketplace and keeping them coming back. We've never been a growth at all cost company, and I'm confident that our disciplined approach has and will continue to serve us our communities and our shareholders very well.

This slide shows just a small sampling of our team's creative work across on-site experiences, CRM tools, social media and brand, including digital TV and out-of-home. And we love partnering with style influencers of all shapes and sizes who want to align their brand with ours. For example, Martha Stewart was our first celebrity collections curator in 2023, this time with a twist. Martha will curate not one, but 20 collections over the year filled with items she deems worthy of her coveted good things stamp of approval.

Moving to our House of Brands. Reverb and Elo7 kicked off the year with strategies to drive long-term engagement with their respective communities. Reverb has been focused on affordability, helping musicians find good deals through initiatives that have provided solid GMS wins such as showing more instruments with price drops and great value badging.

In addition, Reverb has been testing initiatives that could help sellers better understand pricing trends, and we also made it easier for them to engage with budget conscious buyers interested in specific pieces of gear in order to negotiate prices. The Reverb team has had meaningful success with affordability and price discovery initiatives, so we'll be studying some of these for relevance to the Etsy marketplace.

The Elo7 team is making progress in search, such as improving app lifting page speed, implementing user search interpretation, such as did you mean interface that automatically corrects misspelled search terms and introducing filtering capabilities to allow narrowing of search by category or other characteristics.

I'm really excited to report significant progress at Depop, the result of new leadership, new organizational structure, new experimentation tooling and better focus. In just the first quarter of 2023, Depop completed almost as many experiments as in all of 2022. Kruti and our team have not only launched many more experiments, Depop has also improved experimentation metrics and tracking to better align the work with customer outcomes. In fact, Depop's conversion rate is improving, which will be critical to accelerating Depop's GMS.

Longer-term efforts to improve product search using machine learning have started to really pay off. We're exposing buyers to more relevant and personalized content to browse and explore and we're making the seller listing process better to improve the quality and quantity of listings. We also launched an exciting new feature called Repop, which enables users to seamlessly relist a Depop purchased item, a good thing for GMS and the planet.

We're testing and leaning into new marketing formats, such as our I got it on Depop social campaign, and we're seeing better returns from digital marketing investments, and sellers are reacting well to the opportunity to boost their listing with adoption picking up steam.

With economic and geopolitical turbulence continuing to dominate the headlines, it's ever more important for us to find space for the things that bring us joy, enter Etsy. We're built on joy, whether in the form of discovering that perfect gift for a loved one, talking directly with a maker who can craft an item just for you or turning a long-time hobby into a thriving online business.

Our success to-date fortifies our long-held belief that as the world shifts towards fewer, more commoditized online brands, the need for Etsy is even greater, and our disciplined investment approach can enable above e-commerce industry growth and best-in-class profitability on average and over time.

I want to take a moment to thank our team across our house of brands for continuing to drive innovation and bring more buyers to our millions of sellers around the globe in ways that are inherently human, special and different. We believe people will crave an alternative to mass-produced products, and we feel well positioned to continue to invest wisely for the future even in unstable times.

Thanks for your time. And with that, I'll turn it over to Rachel.

[Rachel Glaser, Chief Financial Officer]

Thanks, Josh, and thank you everyone for joining our first quarter earnings call. My commentary today will cover consolidated results for our House of Brands, key drivers of performance and Etsy Marketplace stand-alone results where appropriate.

First quarter consolidated GMS was $3.1 billion, down 4.6% year-over-year. Revenue increased nearly 11% year-over-year to $641 million, and we delivered adjusted EBITDA of $170 million and added approximately 27% adjusted EBITDA margin, which represents healthy profitability, with EBITDA dollars growing at a 36% CAGR since the first quarter of 2019. FX headwinds continue to moderate again in the first quarter to 200 basis points down from 330 basis points in the fourth quarter of 2022.

Digging into consolidated first quarter revenue growth. Marketplace revenue increased over 9% year-over-year primarily driven by the Etsy marketplace transaction fee increase from 5% to 6.5%. Services revenue continued to outpace marketplace growth, up over 14% year-over-year largely due to continued Etsy Ads product enhancements, such as utilizing in-session buyer behavior to further improve ad personalization and incorporating larger format ads into our app.

Etsy adds strength and good contribution from Etsy Payments due to the mix of international transactions with higher fees, drove the consolidated take rate to 20.7% ahead of the take rate implied at the midpoint of our guidance.

Consolidated adjusted EBITDA margin declined about 90 basis points versus the prior year, primarily due to the higher cost of revenue and product development spend. During the first quarter, we also had some discrete tax items that benefited G&A. Our subsidiaries continue to represent about a 300 to 400 basis point headwind in our -- to our consolidated adjusted EBITDA margin.

Before moving on, our stock-based compensation increased 39% year-over-year due to an 11% increase in consolidated headcount and the significant refresh grants made in March 2022, which were only partially reflected in the prior year period. While the overall March 2022 grant increased as a result of the very tight labor market exiting 2021, our March 2023 grant pool was significantly lower than our March 2022 grant pool, and we believe in line with the current market.

Our consolidated product development spend increased 30% year-over-year to $116 million, driven in part by the higher headcount. This was partially offset by lower professional services costs. During the quarter, we continued to hire at a modest pace to fill critical roles aligned with our highest priorities, with headcount up a few percentage points sequentially. As a reminder, our product development line is where most of our engineers sit and represents the largest portion of our headcount growth.

Product development spend was about 18% of revenue, up from 15% of revenue in the year ago period. We carefully measure value creation for Squad, and we continue to see great returns even as we have scaled. Resource allocation is one of the levers we use to drive growth, and we have done that judiciously as we continue to deliver strong profitability.

The chart on the right of this slide compares revenue growth with headcount growth from 2019 to 2022. You can see that revenue growth has meaningfully outpaced headcount growth well above the peer group average. During the first quarter, consolidated marketing spend increased by 11% year-over-year to $171 million, primarily driven by an 11% increase in our performance marketing spend, which represents the majority of our spend. Investments in brand marketing grew 20% year-over-year as we launch new creative campaigns aligned with our category-focused messaging. We'll leverage that creative investment in future quarters.

While total marketing spend was up in absolute dollars year-over-year, it's largely flat at 27% of revenue. By the way, you should also keep an eye out for some fun TV spots where we will be highlighting our search by image feature. As you review our marketing investments, it's important to remember that for Etsy marketplace, we employ a full funnel approach, as shown on Slide 21, targeted to all buyer cohorts, new buyers, those that have lapsed and to keep existing buyers coming back.

Brand marketing builds top-of-mind awareness, helping all our other channels work harder. While we have incrementally leaned into brand marketing since 2018, it remains a small portion of overall spend. We leverage paid social media channels, and I would characterize this spend as early days with a lot of future potential. And the majority of spend drives traffic to marketplace listings.

A few things to note here about our performance investment. First, our attribution models used by our lifetime value. So some return occurs beyond the first 30-day window and may not be reflected as paid GMS in that quarter. Second, some of that performance marketing investment works like display advertising, driving awareness and traffic to etsy.com, but the GMS is attributed to the direct channel rather than to paid. And third, marketing spend is also a revenue driver as more traffic fuels Etsy Ads and Etsy Payments as well as off-site ads revenue, which offsets approximately a third of our performance marketing spend.

Here, we continue to get more efficient as we expand channels and geographies. In fact, the Etsy marketplace performance marketing ROI has improved over 40%, since 2019. That said, we are still early days gaining efficiencies in our channels as well as the markets where we spend. For example, in 2022, about 20% of paid marketing dollars for the Etsy marketplace were spent beyond our top two core markets, the U.S. and the U.K.

Moving to our Etsy marketplace GMS performance. We once again maintained the vast majority of our gains. During the first quarter, GMS declined approximately 5% year-over-year and was down about 3% on a currency-neutral basis. Some of the headwinds we experienced during February eased in March, causing us to deliver results above the midpoint of our guidance.

Three main headwinds impacted these results. First, consumer wallet share shifts from goods to services. Second, year-over-year declines in some of our larger categories such as home and living and craft supplies. And third, pressure on consumer discretionary spending, particularly for lower household income buyers. In fact, our data supports that we have seen an impact from lower tax refunds, the ending of certain tax credits and similar items that pressure the lower household income buyers.

Double-clicking on categories for a moment. While first quarter GMS trends were weak in Home & Living there were pockets of strength in home improvement and enhancement items. We also saw solid trends in apparel, particularly in items such as tops and tees, and hoodies and sweat shirts with personalized and pop culture-related themes as well as in bags and purses and gift tag items.

For comparison purposes, we look at Consumer Edge's U.S. e-commerce retailer data for pure-play competitors in some of our top categories in order to benchmark how we are tracking. For example, in two of our largest categories, Home & Living and apparel, we believe we are at least holding our own. Further, despite our tremendous growth over the past few years, when we look at the market size of our top six categories compared to Etsy Marketplaces, Global GMS, we estimate that our aggregate current share is still very small at about 2.5%. So we see significant room to grow.

From a geographic perspective, 46% of Etsy marketplace GMS in the first quarter was from transactions where either the buyer or the seller or both were outside of the U.S. GMS, excluding U.S. domestic, was up 3% year-over-year on a constant currency basis, driven in part by the particular strength in Germany and France, partially offset by softer trends in the U.K. Growth in our non-U.S. active buyers continued to outpace trends in the U.S. as the majority of our active buyers are still in the U.S.

In 2023, we remain focused on creating domestic vibrancy in more of our non-U.S. core markets. The Etsy marketplace ended the quarter with 89.9 million active buyers, up slightly year-over-year for the first time since Q4 2021.

We're also pleased that buyers who identify as men continue to be a bright spot in active buyer growth with a 6% year-over-year increase. We added 6.7 million new buyers, over 50% above our pre-COVID average quarterly new buyers. We pay a lot of attention to new buyers since those who make a second purchase within the first six months are more likely to become habitual buyers.

We reactivated 6 million lapsed buyers, up 21% year-over-year. It's great to see reactivated buyers continue to grow, since they have about 35% higher lifetime value than new buyers in their first year on the marketplace. Our active buyer retention rates on a trailing 12-month basis remain above pre-COVID trends. On a quarterly basis, retention trends improved both from the prior year and the prior quarter.

We ended the quarter with seven million habitual buyers, up 238% from the first quarter of 2019 but down 10% year-on-year as strong pandemic-related periods rolled out of the trailing 12-months figure. We've seen a year-over-year increase in the number of habitual buyers who identify as men and our habitual buyers accounted for 43% of the first quarter GMS. While there is some degradation coming from habitual buyers moving into the repeat category, all it actually takes one less purchase day or spending $199 instead of $200. It's important to note that very few of these habituals lapsed entirely, and we also saw many buyers graduate from repeats to habituals.

Repeat buyers remained largely unchanged at approximately $36 million with strong quarterly growth in Germany and France. Our GMS per active buyer on a trailing 12-month basis for the Etsy marketplace was $129 in the first quarter, down 5% on a year-over-year basis and up a strong 30% from the first quarter of 2019. The year-over-year decline is partially due to the fact that non-U.S. buyers, which represent a larger portion of our buyer mix versus the prior year, generally have a lower GMS per buyer than buyers in our more mature U.S. market. Plus, we've also seen some FX headwinds.

As of March 31, we had $1.1 billion in cash, cash equivalents and short and long-term investments. In March, we entered into a new $400 million revolving credit facility that is currently undrawn. During the first quarter, we repurchased $148 million in stock under our $600 million Board authorized repurchase program as we effectively utilized a portion of our cash to repurchase shares to offset dilution resulting from stock-based compensation. Our free cash flow this quarter was a healthy $47 million. We are converting nearly 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis as our marketplace operates with minimal capital requirements.

Now turning to outlook. We currently estimate our second quarter 2023 consolidated GMS to be approximately $2.85 billion to $3.1 billion, about $3 billion at the midpoint down approximately 1.8% compared to last year. Given that our year-over-year comps get somewhat easier as we move through the rest of Q2, the midpoint of guidance implies our year-over-year growth rate will improve a bit in the remaining part of the quarter even without any improvement to the macro environment.

We are forecasting revenue of $590 million to $640 million, up about 5% at the midpoint compared to the second quarter of last year, which implies a relatively stable take rate on a sequential basis. We are lapping the transaction fee increase that we made in April of 2022, which impacts our revenue growth rate.

Lastly, we are guiding to an adjusted EBITDA margin of approximately 26%, approximately half of the forecasted sequential margin decline is driven by incremental marketing investment at Depop, including the I got it on Depop campaign, Josh mentioned in the U.K. as well as a hashtag Depop is look campaign on social media in a large U.S. city. We're excited to test and measure our returns here.

We also expect higher employee compensation expense. And as a reminder, the discrete tax benefits we saw in the first quarter are not factored into our second quarter guidance. While we continue to strategically add to headcount, as well as annualizing last year's additions, we are seeing consistent productivity from our product and engineering teams. To close, we are very pleased with our progress so far this year.

We've seen our Etsy Marketplace active buyer trends turn positive. We achieved consistent healthy value creation from our product development investments as our marketing and our marketing program delivered positive ROI even as we invested in new campaigns to further capture top-of-mind consideration.

Overall, we are thrilled with our strong revenue growth and profitability. Even with a volatile macroeconomic backdrop, we are keeping our eyes on the prize. Thank you all for your time today, and I will now turn the call back to Deb to take your questions.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Hi, everyone. I'm hearing an echo. Are you okay now? Okay. Great. I'm going to kick off the Q&A with the first question going to Josh from Anna Andreeva, Needham. Josh, great to hear about stabilization at Core Etsy in March. Can you talk about what you are seeing quarter-to-date? And what is the low versus the high-end of the Q2 '23 guide based on?

[Josh Silverman, Chief Executive Officer]

Yes, happy to. Thanks for the question. The last couple of weeks have been solid, very solid. And so for example, it looks like we're going to have a strong Mother's Day. And if that kind of trend and momentum continues, that would put us at the top end of the guide. But as we've said, it has been volatile. And so if we look back at last year in May on a year over -- versus 2019, we saw a decel in the month of May.

It's really hard to tell if 2022 is, in fact, predictive of what we're going to see in 2023. There were a lot of unique events happening in 2022 with reopening, for example, in a shift away from goods and towards services. And that's been the challenge recently as there were a lot of discrete events in 2022. And there were a lot of discrete events in 2021, and there's a lot of discrete events in 2020. So honestly, 2019 is still the last year, one can look back at and see it as a sort of "normal year", which makes forecasting over a longer period of time just trickier for us. And we've continued to see some volatility.

We're 2.5x bigger than we were in 2019. We are a much bigger business. And so the idea that all of the sequencing of our quarters would be the same and all of that is possible, but we just don't know yet. So we're encouraged by the trends of the last few weeks, and we're especially encouraged that given everything going on in the macro, we've retained so much of the gain since the pandemic and have so many buyers that keep coming back. So many active buyers are able to reactivate buyers, bring in new buyers. We're very encouraged by what we see, particularly as we look out over the medium and long-term for Etsy.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thanks, Josh. Next one is from Maria Ripps from Canaccord, and this also is for Josh. How are you thinking about the cadence of brand investments in 2023? And is there any one strategic goal you're more focused on in trying to drive progress of using brand spend in terms of whether it's getting earlier in the consumer awareness or increasing category awareness and so on?

[Josh Silverman, Chief Executive Officer]

Yes. We're seeing good returns and success from our brand spend. So we tend to run brand in each of our four quarters where I think going to move to more of a pulsing strategy, but you should expect to see us continue to invest in each of our quarters, and I would expect the investment to be the heaviest in the fourth quarter as usual. But the strategic intent is really Etsy has it. That campaign, Etsy has it, is so important.

The fact that Etsy sellers sell billions of dollars of home furnishings. It's our largest category. And when you ask people name three places to shop for home furnishings, only 3% of people unprompted will name Etsy. There is a massive opportunity.

So I know we've said before, people love Etsy. They just don't know when to think of Etsy and connecting the dots much more specifically. When you think of home furnishings, think of Etsy. When you think of style, think of Etsy. When you think of gifts, think of Etsy. And I don't want to be confused that, that is exhaustive or that those are the only three categories that we would market. Of course, you can buy so many things on Etsy for so many occasions. But we want to start being much more concrete with people because when you just say, come to Etsy for virtually anything, people don't really know what to do with that.

The more specific we can be, I think there's a tremendous opportunity because we know when they do come to Etsy for home furnishings. When they do come to Etsy for style, when they do come to Etsy for gifts, when they do come to Etsy for pets and babies and all weddings and all of the other things there's a tremendous experience. There's a tremendous experience. And as I said on the call, look back over the things you've bought in the last 90 days, and I'm willing to bet that there are many times when something you bought, if you went and looked on Etsy, we had something that was more special, great value, and you just didn't think of us.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thanks, Josh. The next two I'm going to combine. They're from Kunal Madhukar at UBS, and I'm going to give this to Rachel. Can you talk about trends in habitual repeat buyers as well as composition of new buyers by geography?

[Rachel Glaser, Chief Financial Officer]

Would love to. Thanks for the question. So first, let's start with active buyers overall being up to $89.9 million. So it's been -- it was positive in the quarter. And then we can shift to new buyers. We added 6.7 million new buyers, which is up 50% versus our pre-COVID levels. We reactivated six million buyers, which was up 21%, and those reactivated buyers are very valuable.

They spend about 35% -- we have about a 35% higher LTV in the first year after repurchasing versus a new buyer. And then we can talk about active buyers on a trailing 12-month basis, remained above pre-COVID level. So on a quarterly basis, retention trends improved both on a prior year basis and prior quarter basis.

And then lastly, and I do want to point out, we did talk about habitual buyers on the call, and so I'm going to give this step, but we didn't have a slide on it. So I'm repeating it, but we did disclose that we had seven million habitual buyers, which were up about 238% from the prior quarter, which is down about 10% year-over-year. They still represent about 43% of GMS in the quarter.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Rach, I think you bet that 200% something was probably -- was the year over four-year number?

[Rachel Glaser, Chief Financial Officer]

Yes.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

That's okay.

[Rachel Glaser, Chief Financial Officer]

Yes, you're right.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. And then the other part of the question was new buyers, U.S. versus non-U.S.

[Rachel Glaser, Chief Financial Officer]

And we have said that in the past, we haven't disclosed buyer cohorts by geography, but we have said that a greater percentage of our new buyers are coming from outside the U.S. So that's the metric that we've disclosed about that.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Perfect. Thanks, Rachel. Well, I have -- I'm going to give you a question from Deepak from Wolfe Research. Can you comment on the inputs behind Q2 EBITDA margin guidance, with the GMS inching closer to positive growth, positive is the deleverage largely driven by planned marketing investments or something else going on? And how do you think about the long-term returns on your investment?

[Rachel Glaser, Chief Financial Officer]

So we guided to 26% approximately 26% EBITDA margins in the second quarter, and we delivered 26.6% in the first quarter. So there's a slight contraction to margins Q1 versus Q2. About half of that decel is coming from investments we're making in marketing campaigns at Depop, so that's about half of it.

And then the balance of it is coming from the fact that in Q1, we had a discrete tax event that gave us some benefit in Q1 that will not repeat in Q2. And we talked about headcount being up about 11% year-over-year in Q1. We did slow our hiring starting last Q2, and we've kept a slower hiring pace, but we are annualizing the hires that we made, and we've continued to strategically invest in hiring.

We're seeing some growth in our product development line, which is where most of the hires have been made between product and engineers, and we carefully measure that product development investment for ROI. We're really pleased with the returns we get, those returns are -- take about an 18-months payback period. So we measure them, and it takes a little time for the return to bear fruit.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thank you, Rachel.

[Josh Silverman, Chief Executive Officer]

I just want to jump in on that and say, as Rachel talked about, and I know we've talked about a lot. We really think about value creation per squad. And every squad is given. Here's a customer problem to fix, and here's a financial metric to measure success. And I think that's been part of the secret sauce of Etsy. We're not afraid to stop doing -- when a squad has gone a little bit and not been able to unlock value, we're not afraid to pivot that squad to other things.

And the team had yet another really strong quarter in the first quarter. So we're really pleased with the value creation we're getting from the team. We know it's making the customer experience better and doing it in a way that shows up in our financial metrics. And we're proud of that and think that this investment right now is a good one for shareholders.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Great. Thank you both. I'm going to ask a question that came in from a few different people, but I'm going to go to Rachel next from a question from Laura Champine about take rate keeps expanding. Where is the ceiling likely to be for that metric?

[Rachel Glaser, Chief Financial Officer]

So the guide we gave for Q2 implies a sort of flat sequential take rate. We have seen growth in take rate coming a lot from Etsy Ads because we keep on making the product better. So we are investing in making the relevancy of a promoted listing as strong as the relevancy of the rest of our listings, and that drives click-through rate up, and we get a lot of -- you see it in the revenue line.

When Etsy Ads goes up and the take rate goes up, as you know, we're also able to invest more in marketing, so it's a nice virtuous flywheel. We also had some benefit from Etsy Payments in the quarter because more of the mix of our GMS is coming internationally where the Etsy Payments fees bear a slightly higher price. So that's another thing that's driving Etsy Payments up. You've heard us talk a lot before about when we do -- when we get a take rate increase, we tend to invest the majority of that incremental revenue back in the marketplace so that it benefits the sellers and it benefits usually the buyer experience and it benefits Etsy.

So we've been doing exactly as we said. We've been taking a lot of that incremental take rate from the price change that we did last year from growth in Etsy Ads and reinvesting it in things like marketing and more product. And we always follow a philosophy of a fair exchange of value where we can see products or services that benefit our sellers that we feel that there's fees that should go with it, we will consider those things, and that's what we've done in the past, and that's what you're seeing with growth in Etsy Ads.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thanks, Rachel. The next one, I think, is from Tom Forte. It's regarding -- from D.A. Davidson is regarding frequency. That seems to be an area of focus for us, Josh, how much confidence do we have that we can move that?

[Josh Silverman, Chief Executive Officer]

Yes. So I think the question, what gives us confidence. And what gives me confidence, first and foremost, is that we have a great product that meets a really wide variety of purchase occasions. We don't need to go and figure out how to be good at weddings or good at babies or good at home furnishings or good at style or good at pets or good at gifts or good at Mother's Day or other things.

Hardly a week goes by when there aren't multiple good purchase occasions to shop on Etsy. So that's the first pillar of strength that gives me confidence. So what do we need to do then to unlock it. Well, there's, first I think, a big consideration challenge. While people love Etsy generally, they don't know when to think of us. And again, 3% of people unaided when you say home furnishings, will name Etsy as a top-of-mind place to go for home furnishings.

Similar for style, and these are two of our very largest categories. So I won't bore you with all the rest, but if we have such low awareness in our largest categories, gifting is the only one where we get to even 10%, we're only 11% there.

So I think there is an enormous opportunity in simply achieving better top-of-mind consideration. In addition to that, Etsy can feel more organized and more curated and we can convey more trust. So when you think, I want to come to Etsy for home furnishings, knowing that we're going to have easy way finding, that's going to make it easy, knowing that the best of Etsy, the high-quality stuff pop and come to the top is important and having confidence in the post-purchase experience. And we have really exciting great plans to tackle each of those.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thank you. We had a question from Noah Zatzkin at KeyBanc. Josh, can you expand on some of the recent initiatives for the House of Brands, particularly around Depop?

[Josh Silverman, Chief Executive Officer]

Yes. And again, we're really excited about the progress at Depop, the Kruti and Rafe and the leadership team there have really been making a lot of progress, and it's very exciting. So we talked in our prepared remarks about the increase in velocity. They are shipping a lot faster now to improve the customer experience, and they're doing it in a way that's highly focused on things that we think are really improving the quality of the experience overall, and it's showing up, as I said in the call, in terms of conversion rate already moving.

So we're getting you faster to the products you want to buy and there's a big focus right now on affordability. So search and affordability are both big focuses at Depop. I will say on affordability, that's also a big focus on Reverb right now. How do you make sure that sellers are pricing at a price that's attractive to buyers? And in a period where we had supply chain issues a year-ago, a lot of sellers have perceptions in mind of what an item might be worth where it's worth less now than it was a year-ago. So how do you coach sellers in the right way to make sure that they set the pricing that's attractive and it's going to actually sell.

Where I learn from each other now, and in fact, Etsy is experimenting now with make an offer, and we're excited, allowing vintage sellers to opt in to make an offer, and that's actually based on the learnings we're seeing from Depop and Reverb. So I think the opportunity for us to share learnings in some of these core strategic areas is super exciting.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thank you. I'm going to give you another one, Josh, and I know we had a lot of content on this on our call, but I'm going to do it any because it's a fun topic from Maria Ripps of Canaccord again. Can you provide us with a little bit more detail on the road map for introducing conversational search functionality into Etsy? What are some of the key milestones in the development process? And are you envisioning a broad launch when the tech is ready? How should we think about that?

[Josh Silverman, Chief Executive Officer]

Yes. Great. So first, we're focused on democratizing ML generally at Etsy. So we have been using machine learning -- a variety of machine learning techniques at Etsy for some time. We've built a really good infrastructure that allows us to be very agile at this. And we've got talent on the team that know how to use these tools. So now it's really about making sure that we have both the tools and the training and the process so that all of the engineers at Etsy can be using machine learning because it's applicable, and I'm not speaking about generative AI more narrowly. I'm speaking with different types of machine learning techniques of which Gen AI is only one.

But it's applicable to so many of our engineers in their daily life to make the customer experience better. I am excited about generative AI in particular. And so we have shifted a few squads to focus specifically on generative AI. When you run a search at Etsy, we already use multiple machine learning techniques. So I don't think generative AI replaces everything we're doing, but it's another tool that will be really powerful. And there are times when having a conversation instead of entering a query and then getting a bunch of search results and then going back and reformulating your query and then getting a bunch of search results, that's not always very satisfying.

And being able to say, no, I meant more like this. How about this? I'd like something that has this style and have that feel like more of a conversation, I think that can be a better experience a lot of the time. And I think in particularly for Etsy where we don't have a catalog, it might be particularly powerful. So we tend not to take a team and tell them go away and come back in a year with a big bang launch.

We tend to be very agile and say, "Just start shipping. Just start testing things. What are problems our customers have that this tool is good at solving and come up with ideas and launch them." And if they work, fantastic. If they don't, we roll it back and we keep going. So we've pulled a couple of squads already, and asked them to begin coming up with ideas for where in the search experience, they think this can help and then start testing those. So I would expect that we're going to try to move fast, be agile and learn. And I'm sure we won't get it all right at the beginning, but I have a pretty high degree of confidence that over time, this is going to be a powerful accelerator for Etsy.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Rachel, I'm going to come to you with a question from John Colantuoni at Jefferies. Last quarter, you provided some color around second half GMS expectations. Can you update us on your outlook for GMS for 2023?

[Rachel Glaser, Chief Financial Officer]

Hi, John, thanks for the question. So we haven't given second half guidance at all. In fact, in this quarter, we gave a pretty wide range. So we had negative 6% at the low, and we had 2% at the high, and we've seen some positive growth days. And so we are -- it's volatile. And so we are even having trouble with one-third of the quarter behind us, we're having -- it's difficult to be able to give you a precise view on what even the quarter will look like. We've given you the best information we can.

So when we extend that out to what the whole second half may look like, it's even a broader range, if you will. So you can see that we could have a case where we plan scenarios or macro conditions worsen, we planned scenarios where macro conditions get better, and you can see that range extending out through the full-year. We're really looking forward to a time where we'd be able to give full-year guidance. Right now, it's just too unpredictable for us to be able to say.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thanks, Rachel. Josh, I'm going to turn to you for one from Nick Jones from JMP Securities. In international markets, how should we think about Etsy's ability to drive similar penetration rates as you have today in the U.S. Is there any structural challenge in these markets, maybe non-English markets in particular to drive penetration for Etsy?

[Josh Silverman, Chief Executive Officer]

Yes. There's -- in my experience, a lot of markets that do very well, international markets that are really well suited for a two-sided peer-to-peer marketplace like Etsy. The U.K. is the first place I'd point where our penetration rates are now approaching those of the U.S. And by the way, I think the U.S. is in its early days. Only one out of three women shopped actively on Etsy in the most recent time we reported that and only one out of 10 men and I think we have an opportunity to grow that a lot. And I think we have an opportunity to grow frequency a lot in the U.S.

That's certainly true in the U.K. But I think it's impressive the progress we've made in the U.K., achieving penetration rates now that are getting to be pretty similar to the U.S. When we then turn to Germany, the next market we looked at was Germany, and we said, what if we lean into Germany. And we do TV marketing a little earlier than we normally would. And the results we've seen in the past year or two in Germany are very encouraging. Germany in spite of a lot of macro conditions in that market more broadly. The Etsy German business is doing quite well.

Now we're focused on France. We also have begun investing in India, and we're excited about India as a further field market. The Western European markets, the North American markets, Canada and Western Europe tend to be the ones that operate the most similar to the U.S., particularly high trust markets where the postal system works well, payments work well and people have a lot of confidence that people they've never met are going to ship a package and it's going to arrive. Those tend to be the ingredients to get to relatively high penetration in a market. So we're certainly focused on some of those Western European markets. But I'm excited about many markets over the world. I think as commerce becomes more commoditized, people are going to crave special. They're going to want to keep commerce human more and more all around the world. And I think Etsy's got what lots of people need.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Well, I have someone slacking me saying that we might have said that stat wrong about women. So it's three out of 10 women in the U.S. and yes. Yes. Josh say something different folks I think possibly, but I just want to make sure that's right. U.S. and U.K. Okay, correct. So to make sure we had it right. Okay. Next question is for Rachel from Shweta Khajuria at Evercore ISI. Rachel, you've suggested in the past that Etsy might be on a different seasonality now. I assume we mean post pandemic because the company is bigger. Anything you can comment about that seasonality, whether it's fourth quarter or Q4 to Q1? And how should we think about seasonality and GMS growth for this year?

[Rachel Glaser, Chief Financial Officer]

Hi, Shweta, thanks for the question. I think we were hypothesizing that it could be that we are becoming a more seasonal business because we did see a bigger Q4 and a bigger sequential decline in Q1. The fact is we -- every single quarter, there seems to be some once in a lifetime event that has happened that we've had wars, we've had pandemics. We've had re-openings. We've had massive tax relief.

So it's really hard for us to pattern recognize anything right now. But that is what we did see in this Q4 to Q1 was that we had a very significant size Q4 and a bigger decel Q1 versus Q4 than we've observed in the past, and it could be that with our top of mind awareness growing, it's a place for Etsy for in a period of time where people are opening up their wallets and shopping for gifts, People think of Etsy more often during that time, and that is becoming more seasonal for us as you see other e-commerce and other retail experiencing.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. Thanks, Rachel. Josh, given this one from Steve Forbes of Guggenheim Partners, given macro-related challenges, can you provide a preview of your Etsy Up event that's coming up soon?

[Josh Silverman, Chief Executive Officer]

Yes, we're super excited about Etsy Up last year. It was incredibly popular with sellers, so we're going to keep doing it. In general, our goal is to take the sellers with the skill and will to succeed and give them as much agency as possible, as much information as possible so they can be as effective and efficient as possible. So a lot of the focus right now is how do we help them understand what are the next few actions they can take to be more successful? For example, in the recorded part of the call, I talked about quality and how the merchandising team has Etsy Picks, and we're able to identify what looks like high quality to a human and then train machine learning to help identify those items that really seem to represent the best of Etsy and make those most prominent in front of buyers.

I'm really excited about that initiative. I think there's a lot of upside there and to really elevate the Etsy brand and drive conversion rate. But part of, of course, what we want to do then is take the insights and give those back to the sellers and say, here are the areas where you could focus, maybe you need better photography or you're not hitting some of the service levels that buyers expect. And give those insights back to the seller, so they can use those insights so they can get more success, drive more conversion rate, get more visibility.

We're -- we've launched a new sell on Etsy app that is going to allow us to have much more rapid releases for sellers. So we can do things like put the right data in dashboards in front of sellers. It's a big focus of ours and a big investment to give them tools and dashboards, offer quality, make an offer, again, how do we help them give them tools so they can think about what's the right pricing. And so all of these are areas that we're really excited about to help again, give our sellers agencies so they can be as successful as possible.

[Deb Wasser, VP of Investor Relations and ESG Engagement]

Okay. Great. I think that is a great note to end on. So thank you, everyone. Thanks, Josh. Thanks, Rachel, and we'll talk to you all in person and virtually soon -- very soon.

[Josh Silverman, Chief Executive Officer]

Thank you.

[Rachel Glaser, Chief Financial Officer]

Bye, everyone. Thank you.