ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2021-Q2

[Debra Wasser, Vice President of Investor Relations]

Hi everyone, and welcome to Etsy's Second Quarter 2021 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 Gabe Ratcliff, our Director of Investor Relations. Today's prepared remarks have been pre-recorded. 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 on your screen. Feel free to use it at any time as it will remain open throughout the entire conference call.

I will be reading your questions and Gabe will help me to try to get to as many as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 or its abatement may have on our communities, business, strategy, or operating results; the potential impact of our strategic, marketing, and product initiatives; the potential impact of our acquisition of Depop and Elo7 on our market opportunity and on our future consolidated financial results; 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-Q filed with the SEC on May 6th, 2021, 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 that.

Also, during the call, we'll present both GAAP and non-GAAP financial measures. Reconciliation of GAAP -- non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website along with the replay of this call. With that, I'll turn it over to Josh.

[Joshua Silverman, President and Chief Executive Officer]

Thanks, Deb. And good evening, everyone. Etsy delivered a strong second quarter. I'm pleased to share highlights with you on our progress and our results. Consolidated GMS was $3 billion, up 10% year-over-year on a currency-neutral basis. In fact, non-mask GMS on an Etsy standalone basis grew 31% year-over-year, which frankly, I find remarkable given the extraordinary comps from last year. And on a two-year basis, this is 153% growth, also excluding face masks. Revenue grew 23% and our adjusted EBITDA margin was 26%.

We feel great about these returns we're seeing as our investments ramp. We also announced the acquisitions of Depop and Elo7 during the quarter, which I'll talk about in just a few minutes. Our Q2 '21 performance is particularly impressive when put in the context of the year-ago period that we're comping. Remembering back to Q2 of 2020, brick-and-mortar stores were largely shut down with the exception of essential services. And even at those essential stores, lines were long and shelves were often empty.

Even e-tailers faced similar challenges with many products out of stock and long shipping delays for the rest. And in the midst of this crisis, Etsy mobilized the cottage industry to the rescue. Etsy sellers had so much of what you needed and were ready to ship quickly, at a fair price, and without significant supply chain challenges. In fact, Etsy was one of the few places where you could shop with confidence and convenience in Q2 of 2020. As a result, we delivered the highest growth rate of any Company that we track in our sector. Flash forward to Q2 of 2021, and thankfully, things began to look dramatically different.

While the situation is still evolving, people are moving about much more freely and beginning to travel and dine out again. Many brick-and-mortar stores have reopened. And there is a wide range of etailers ready to ship almost anything at your doorstep without delay. And even in the face of this renewed abundance of choice, again and again, shoppers chose to return to Etsy. In fact, about 90 million of them. And most importantly, they chose to shop with us more frequently. Given the massive pull forward in new buyer acquisition last year, it's no surprise that new buyer growth has decelerated materially in recent months.

However, that deceleration has been offset by growth in GMS per active buyer which, as you know, is a big focus area for us. We're encouraged to see that shoppers loved the experience they've had with Etsy over the past year, and are coming back for more even in a world of greatly expanded choice. As Rachel will talk about further, we're extremely pleased with the strength and stability we're seeing in our cohort performance, and our conviction to invest in what we believe is Etsy's tremendous long-term opportunity.

Turning to our most important focus area and job number one, growing the core etsy.com marketplace. We continue to make what we believe are very valuable long-term investments aligned with our Right to Win, driving continued material improvements in the customer experience in order to make Etsy even more special and deepen our competitive advantages. I'll now walk through some of the exciting progress we made in Q2. Starting with search and discovery.

In our quest to close the semantic gap and create a platform that better understands our buyers' tastes and preferences, in Q2, our team created and launched a proprietary capability we call XWalk, a large-scale real-time graph retrieval engine that dramatically expands the amount of available data used to capture the semantic meaning and to improve the conversion rate by showing more relevant inventory to buyers. Every click and purchase on Etsy give us information about the relationship between users, queries, listings, shops, and more. And these events have long powered our ranking and retrieval systems.

But due to the sheer volume of information, we could only use a relatively small slice of it. With the walk, we're now able to use nearly all of our relevant data to better capture semantic meaning across all of our inventory. For example, XWalk has significantly reduced the number of dead ends, which have queries that returned zero search results, unlocking over a million incremental searches that are delivering relevant search results. We're only at the very beginning stages of leveraging XWalk, which has many other applications beyond search. For example, making recommendations more relevant, providing better on-site marketing experiences, and improving technologies that keep the marketplace safe.

Turning to Slide 7, in our efforts to amplify the human element of the Etsy marketplace. We've mentioned listing videos in our last few calls, and we're now starting to get real traction as they're incorporated throughout more and more of the Etsy experience, on-site and off. In fact, there are now nearly 8 million videos uploaded on Etsy. Listing videos are driving engagement on social, and we're seeing measurable wins from adding videos to the homepage.

We're especially encouraged by the results our sellers are seeing from their process videos, which show how our sellers make their items and especially Etsy-like experience. Many buyers are viewing these videos and watching them to completion. In fact, listing and process videos drove a significant sequential increase in engagement on our social channels, up 700% quarter-over-quarter. Our third pillar is, of course, about trust. And we've -- as we've said, we're laser-focused this year on the post-purchase experience, and we're making great progress.

This quarter, I'd like to highlight the gains we've made with delivery predictability, setting clear expectations for when items will arrive, and ensuring our sellers consistently meet those expectations. In the second quarter of 2020, only 73% of domestic orders on Etsy displayed an expected delivery date. In other words, before you place an order, almost 30% of the time, we couldn't tell you when you could expect to receive it. Origin Zip Codes, which tell us from where in the US an item is shipping, has also been an area of focus because they help us to more precisely estimate the time in transit.

We've more than doubled Origin Zip Code coverage over the past year, which has cut 1 full day from the Expected Delivery Date, causing a meaningful positive impact on the conversion rate. While we aren't in a race to be the fastest, it's critical that we have transparent expectations that our sellers can meet reliably. This is a needle mover for us, as we deliver on buyers' expectations, they've tended to come back and make more purchases more frequently. We're targeting to get both of these metrics over 90% in time for the holiday season. Last quarter, we told you that we would be exploring ways to define "what good service looks like" for Etsy sellers, leading to last week's global launch of our Star Seller program.

The program's goal is to recognize and reward our best sellers while motivating all sellers to deliver exceptional customer service. As part of this program, we've defined a set of customer service metrics that we know are critical to buyers, such as on-time shipping, 5-star reviews, and responsiveness to buy our combos. And we've set the bar for what good looks like all while providing a transparent dashboard to show sellers where they stand versus each of these metrics. We believe that this creates a race to the top for sellers who will understand [Indiscernible] Later this year, we'll [Indiscernible] ten, let's talk about our [Indiscernible] continuing investments designed to [Indiscernible] And in fact, the Etsy marketplace delivered a 22% [Indiscernible] full of initiatives.

Highlighting just 2; first, we're continuing to see progress with buyer triggers. For example, adding a badge in the upper corner of the app icon, showing how many updates are pending, drove a meaningful increase in repeat visit rate. And second, we've created faster and easier ways for sellers to invest in deepening relationships with their buyers while driving frequency to Etsy. A great example is seller Thank You coupons. For example, get 10% off on your next purchase when you buy again from my shop which, during an experiment, saw a 170% improvement in uptake.

Now, 11% of purchases include a Thank You coupon. As many of you know, the buy-on Etsy App has historically been our highest converting experience. In Q2, we began to test more prominent ways to prompt buyers to download the app at key moments in their journey. We focused on organic product improvements, and today, have invested very few marketing dollars to drive app downloads. We've seen major wins. For example, by promoting app downloads on the post-purchase Thank You page, encouraging you to download the app in order to easily track your order status. The results have been compelling. We're now running at about 1.3 million app downloads a month and have garnered 9 million downloads year-to-date.

And Etsy is now the number 7 shopping app in the iOS App Store, the highest it's ever been. Most importantly, newer cohorts of app users are showing promising engagement signals based on their visits, favoriting, and purchase behavior. In Q2, new app users that made a purchase then went onto favorite and view listings, roughly 20% more than new mobile web users that made a purchase during the same timeframe. Turning to brand marketing. TV and digital video continue to be great tools to drive awareness and engagement with the Etsy brand. As we mentioned last quarter, our investments in the UK and Germany are showing encouraging results.

Double-clicking on Germany, in addition to our TV and digital video investments, we worked with German personalities to support our Etsy HotSeat or Etsy Has Its campaign. We saw 5 points of improvement in prompted and unprompted awareness, expanded social reach, and generated over 4.5 million impressions in earned media during the campaign flight. Other benefits included an uptick in seller growth and a higher return on our performance marketing channels. We're very pleased with these results, which indicate that we're laying the foundation for growth in this important market.

There are so many more product and marketing win I'd love to tell you about. But I also want to give some time to our other marketplaces. We now have four highly differentiated e-commerce marketplaces in our house of brands. And we couldn't be more excited to have found two more businesses that share our mission to keep commerce new. In addition to common missions, strong leadership teams, and performance-based cultures, each brand is connected at the core, with similar growth levers and requirements for success, such as sophisticated search technology, compelling on-site customer experiences, an efficient payment platform, value-added seller services, effective shipping options, strong brand and performance marketing capabilities, and a commitment to investments that protect the marketplace.

As you know, we have deep expertise in each of these areas and we'll be implementing knowledge sharing loops to drive value creation across the brands all while enabling each to serve its customers in its own distinct way. First, turning to Depop on Slide 14. We believe Depop is the best asset in the resale space given its high user engagement metrics. The U.S. secondhand market opportunity is projected to double to $77 billion by 2025. And the resell portion of secondhand is forecasted to grow 11 times faster than retail clothing for the next 5 years.

We're also seeing that young consumers are adopting secondhand fashion faster than any other audience. And Depop is the 10th most-visited shopping site among Gen Z consumers in the U.S. In fact, we think Depop is the potential to Etsy like Venmo was to PayPal, a new way to shop for the new generation. Let's take a look at a quick 30-second video that captures the excitement of Depop.

Where do we want to take Depop? Just like we've demonstrated with Etsy and Reverb, we see significant opportunities to make focused improvements to the on-site product experience that we believe can expand the conversion rate. We'll also explore value-added services to drive monetization. We'll compare insights on how we've grown Etsy globally with localized experiences and focused investments to help Depop take its marketplace beyond its current core regions in the U.S. and UK.

And we'll work to evaluate the efficiency of their marketing investments, focused on improving LTV, driving buyer and GMS growth, and enabling the business to invest more and similar or better returns compared to their current investments. Now, turning to Elo7. Elo7 is known as the Etsy of Brazil, a leader in custom and made-to-order merchandise. We now have a foothold in Latin America, a region with high barriers to entry, where we previously did not have a meaningful customer base.

Elo7 is ranked as a top 10 e-commerce site in Brazil, providing us with a strong local brand, in the largest Latin American e-commerce region. E-commerce in Latin America is estimated to be less than 10% penetrated and is expected to reach approximately $160 billion by 2025. Brazil alone is forecasted to reach $50 billion in the same time period. Here's a quick glimpse of Elo7 through one of their TV ads. We hope you will agree that the similarities with Etsy are obvious.

On Slide 19, you'll see Elo7's near-term priorities, which will focus on; optimizing conversion rate, prioritizing the roadmap to focus on initiatives that will inflect GMS and make the selling and buying experience easier; Marketing efficiency, leveraging Etsy know-how to further invest with a disciplined ROI lens, evaluating lifetime value, and customer acquisition costs. Seller transparency, giving sellers visibility into their performance metrics. And shipping, ensuring sellers have the very best options for fast and affordable shipping that buyers can rely on.

We've just kicked off integration work for both businesses, so it's important to keep in mind that it will take multiple quarters and years to operationalize all of the many ways that we believe it can help Depop and Elo7 grow. And last, but certainly not least, Reverb delivered a solid quarter despite prior year comps that benefited from many competitors having to close their retail stores and warehouses.

We're confident that the Reverb team is focused on the right areas and are excited about their future opportunities. In particular, this past quarter, we launched personalized recommendations and invited more music makers to add to their gear collections, which now includes over 175,000 pieces of gear from players across Reverb. This capability not only helps us to learn more about buyers and personalize their experience, but it also helps players consider selling their gear through a greater understanding of how much it's worth.

We launched a new premium ad platform for Bump, and we formed a new international product team that delivered its first global-specific feature enhancements. Taking all of this together, we believe that Etsy is now an even more valuable Company with an even larger opportunity than we had before. We have a large and expanding TAM, and we're moving in a different direction in commoditized marketplaces. The pandemic proved to just how many purchases occasions Etsy is relevant for, and we have more confidence than ever in our core opportunity.

Reverb has a compelling value proposition in musical instruments, and we see a clear path for future growth. Depop enables us to deepen our penetration into apparel, specifically in the exciting and fast-growing sector of resale. And Elo7 gives us a local presence in the large Brazilian market. Our ambition is driven by a true love of lightning in a bottle of peer-to-peer marketplaces and a well-defined investment strategy that, we believe, can drive strong top-line growth and profitability for these brands.

Many of you have asked whether these deals are a sign of more to come. I can tell you that our primary focus now is to integrate Depop and Elo7 into the family while continuing to drive strong performance at Etsy and Reverb. We're incredibly proud of what our team has accomplished. And, hopefully, we've demonstrated to you that we balance our ambition with discipline, making thoughtful and strategic moves that build long-term value for all of our stakeholders. And with that, I'll turn it over to Rachel.

[Rachel Glaser, Chief Financial Officer]

Thanks, Josh. And thank you, everyone, for joining us for our call. My commentary today will cover consolidated results, key drivers of performance, and etsy.com standalone results, where appropriate. As a reminder, Depop and Elo7 results are not reflected in our consolidated financial results or KPIs for the second quarter.

We had a strong quarter across the board despite macro headwinds and challenging year-over-year comps, delivering GMS revenue and adjusted EBITDA, squarely within our expectations. Before diving in, I want to point out that we're now growing off a meaningfully larger base. Just taking GMS, for example, we've added $2 billion incrementally to the 2019 base. And we're just beginning to benefit from the power of what this larger scale can do for Etsy over time. Moving to the financials.

On a consolidated basis, Etsy's second-quarter GMS grew 13% year-over-year to $3 billion, revenue grew 23% year-over-year to $529 million, and adjusted EBITDA was $139 million with a margin of about 26%. On an etsy.com standalone basis, we see non-masked GMS growth as an important barometer of underlying trends in the core business. In Q2, face masks declined to 1.4% of etsy.com standalone GMS, declining sequentially each quarter since Q2 of last year. And as you can see on Slide 23, non-mask GMS grew 31% year-over-year, particularly notable considering last year's unprecedented spike in new buyers with the onset of the pandemic. Non-mask GMS growth on a 2-year basis remained fairly stable relative to last quarter in the historical trend line.

These are encouraging data points that highlight strong underlying trends in our business. While we don't anticipate showing the monthly cadence of growth in the future, we thought it was important to show the stability of our trends in light of the expected headwinds in the coming quarters. Here you can see the monthly cadence of growth on a 2-year basis for the etsy.com stand-alone marketplace. April was up 177%, May was up 150%, and June was up 143%. This trend details how we delivered strong growth throughout the quarter, particularly on a 2-year basis, but in light of the expected Q2 headwinds, there has been steady deceleration as the world has reopened.

On a consolidated basis, percent international GMS expended 900 basis points year-over-year, to 41% of overall GMS. International GMS grew faster than our overall growth and was up 45% in Q2. Our fastest-growing trade route was once again international domestic sales, in which both the buyer and seller are in the same market. New and existing international buyer growth trended in line with each other unlike in the U.S., where we are seeing a deceleration in new buyer growth.

Growth in international has been fueled by-product investments, such as an improved English to German translation model and higher investment in brand marketing in the U.K. and Germany. Consolidated Q2 revenue was again driven by growth in both marketplace and services revenue, with key drivers being Etsy Ads revenue, Etsy Payments, and GMS volume. Transaction fee revenue grew 15% year-over-year driven by higher GMS from visit growth and frequency. Payment’s revenue was up 19% and we processed 92% of our etsy.com standalone GMS to Etsy payments in Q2, a direct result of the expansion of Etsy payments to 9 new countries in Q3 of 2020.

Consolidated advertising revenue, which includes Etsy Ads and Reverb's Bump, was up 44% year-over-year. Consolidated take rate expanded to 17.4% in the second quarter, up 150 basis points compared to last -- compared to Q2 of last year. Etsy Ads revenue growth, excluding Reverb's Bump service, was up 47% following nearly 100% revenue growth in the prior year. Etsy Ads revenue was driven by experiments that improved our ad ranking function, resulting in a significant increase in the post-click conversion rate, while maintaining the same attractive return-on-ad spend for our sellers.

As a result, sellers have continued to increase their overall budget for Etsy Ads, to procure prominent placement and increase sales. In fact, for the month of June 2021, the seller budget was 92% higher when compared to their overall budget in June of 2020. Gross margin was 72% on a consolidated basis, continuing to benefit from our shift to offsite ads, which delivers incremental revenue without an equal offset in cost of revenue, and which we view as a significant subsidy to our performance marketing spend.

As you may recall, our introduction of Offsite Ads, which we began to bill sellers for in May 2020, drove a 500-basis point expansion in gross margin at that time. In Q2 '21, Offsite Ads opt-out rates were still less than 2% and chargeability remained healthy. In fact, the number of sellers who've chosen to stay in the program is growing at a faster rate than active sellers, a testament to how many sellers value our Offsite Ads product. Our product development investments continue to deliver strong returns, driving higher conversion rates and frequency. For example, we now have more squads focused on frequency initiatives and have seen significant increases in hit rate.

Q2 consolidated product development spend was $62 million, up 37% year-over-year, mostly driven by our planned increased headcount. Note that consolidated headcount was nearly 1,600 at quarter-end, up 24% year-over-year with much of this increase sitting in product development. We have continued to ramp our marketing spend to lean into this time when the Etsy brand is capturing global attention. Q2 consolidated marketing spend was $167 million, up 46% year-over-year.

Brand spend was 23% of consolidated marketing, up 73% year-over-year. An important driver of the increased marketing spend in Q2 was our TV campaigns in the UK and Germany, which each performed well during the quarter. In Germany, where we have not tested upper-funnel marketing before, we jumped 4 places in comps for retail rankings during the month of May. In both markets, we also observed the halo effect of making other performance channels work harder.

We're seeing significant progress prompting buyers to download the app, which represents our smallest share of visits. It has the highest conversion rate, and nearly all of this is coming from product investments rather than marketing spend. We believe success here could lead to more traffic from repeat and existing buyers shifting from paid to organic, which would enable us to spend more to acquire new buyers through higher LTV, as well as improvement to adjusted EBITDA as paid clicks and visits shift to organic.

Moving to our operating metrics for the Etsy Standalone marketplace. In Q2, active buyers grew 51% year-over-year to approximately 90 million. Repeat buyers, those who made purchases on two or more days in a 12-month period, grew 61% year-over-year to 36 million. And habitual buyers, our most loyal buyers, remained our fastest-growing buyer segment, up 115% for the quarter to nearly 8 million. As of Q2 2021, this buyer segment accounts for only 9% of active buyers that contributes on average about 40% of our GMS. These metrics demonstrate encouraging stability in our buyer base, signs we've all been looking for as barometers for how sticky the 2020 gains may be.

As you know, the pandemic significantly accelerated our acquisition of new buyers. In 2020, we acquired 38 million new buyers, nearly 2 times the number of new buyers we acquired in 2019. Remember, a new buyer is someone who has never before shopped on Etsy. As anticipated, our new buyer growth rate declined in Q2 but remained at a healthy level of 8 million, nearly double the number of new buyers acquired in Q2 2019. On a trailing 12-month basis, we've acquired over 40 million new buyers. We're excited to see that the underlying purchase trends for our new buyer cohorts remain healthy as well.

For example, Q2 GMS per new buyer expanded to $46, growing 24% year-over-year. Many of you asked us during the past year if the buyers we acquired during the COVID-19 pandemic were valuable or only came to Etsy during the pandemic given limited shopping options. We are only a few months into the world gradually reopening and so far, all signs indicate that these buyers are at least as valuable as those we acquired prior to the pandemic.

GMS for the active buyer on a trailing 12-month basis accelerated to $129, a record 22% year-over-year growth, driven by repeat purchases and frequency. We're extremely pleased to see our cohorts continue to show stable underlying trends as we invest to drive further stickiness and habit-forming behavior. Moving to the balance sheet, as of 6/30, we had $2.5 billion in cash and cash equivalents and short-term investments.

In addition to a $200 million revolver that is currently undrawn. Note that the acquisitions of both Depop and Elo7 were completed in July, so these acquisitions are not reflected on the quarter-ending balance sheet. During the quarter, we also issued $1 billion of 7-year convertible senior notes. A portion of the proceeds was used to repurchase $180 million of our stock and to purchase kept calls. Free cash flow was impacted by the timing of cash payments compared to accruals for sizable expenses such as sales taxes and marketing spend. And now turning to our outlook.

We currently estimate that our Q3 consolidated GMS, which will now include Etsy, Reverb, Depop, and Elo7, will be approximately $2.9 billion to $3 billion, up about 12.5% at the midpoint compared to Q3 of last year. Our Q3 revenue will be $500 million to $525 million, up about 13.5% at the midpoint versus Q3 of last year, and our adjusted EBITDA margin will be about 25%. Within our Q3 GMS guidance, we are forecasting very solid growth for the etsy.com stand-alone marketplace.

We expect to deliver mid-single-digit GMS growth, and growth in the mid-teens, excluding face masks. In Q3 2020, etsy.com's stand-alone marketplace GMS grew 116%, which was the highest growth rate among the U.S. publicly traded e-commerce peers that we track; a really big number to comp. Please also remember, that 11% of Etsy's stand-alone GMS, or $264 million, was from face masks in Q3 2020. Consolidated revenue guidance assumes a take rate of about 17.4%. Excluding Depop and Elo7 from the Q3 guidance, our take rate guidance for just etsy.com and Reverb, our former consolidated reporting, would have been about 17.7%.

Consolidated adjusted EBITDA margin guidance for Q3 is also impacted by the addition of Depop and Elo7. The addition of these 2 businesses is about a 300-basis point contraction to what our guide would have been without them. Given very similar fundamental economics to etsy.com and Reverb, we're confident that with scale, both can deliver strong margins and healthy levels of profitability. It is important to keep in mind that the etsy.com marketplace will continue to be the vast majority of our top and bottom-line performance, at least in the near term. In fact, given the transaction timing and the relative size of Depop and Elo7, we expect the only modest contribution to our Q3 and FY '21 top-line performance.

Also, for your models, I mentioned that Q2 consolidated headcount was up over 20% and you can expect this rate of hiring to continue this quarter. And we recently welcomed 550 new employees to Etsy Inc. with our July acquisitions of Depop and Elo7. As we look beyond Q3, we are excited about the upcoming holiday season with so many product and marketing initiatives already bearing fruit and more to come. For Q4, keep in mind that we will be compared to the very strong 2020 holiday period which benefited from an extended shopping season, stimulus payments, continued shutdowns in certain regions, and some logistics disruptions for other E-commerce players.

Also, recall that the fourth quarter had $133 million of facemask GMS or about 4% of our total. We are currently forecasting very little GMS from face masks in our Q4 2021 internal model. We've previously pointed out that our comps get tougher as we progress through 2021, with Q1 2022 potentially our hardest go-forward comp given the sizeable positive impact from government stimulus in Q1 2021.

We operate Etsy with a disciplined approach that maintains a healthy balance between growth and margins and our results have historically landed us between a Rule of 40 and a Rule of 50 Company. We plan to continue to live by this principle and are confident that our long-term profitability model remains intact. Thank you for your time today. I will now turn the call over to Deb, so we can take your questions.

[Debra Wasser, Vice President of Investor Relations]

Hi, everyone. Good to see you today, and we're going to dive right into questions. Okay. I'm going to start with Alexia Tsimikas from D.A. Davidson. We've had a lot of investors ask us about the impact of the economy reopening on Etsy. How should we think about the impact overall? And additionally, what categories are benefiting from the reopening, such as weddings, and what categories would you say are being negatively impacted? I think, Josh, we can at least start with that one?

[Joshua Silverman, President and Chief Executive Officer]

Sure. First, we feel really good about our Q3 guide. We're talking about Etsy Standalone growing in the mid-teens Q-over-Q in a world where we anticipate that in Q3, the world will be largely reopened and people are going about their lives much like they were not entirely like they were before COVID, of course, but much like they were before COVID. So, some of the things that are powering that, we are seeing a resurgence of growth from some categories like weddings.

So, weddings, for example, was up over 100% year-over-year in Q2. And it was the second sequential quarter of growth for weddings, so that's certainly helpful. We're also seeing building momentum in some categories like back-to-school. So last year was all about homeschooling and people were buying desks for their kids at home. Now they're buying backpacks and they're buying all sorts of things to get ready to send their kids back-to-school, and we're already seeing that.

We're really pleased to see sustained momentum in many categories. For example, Home Furnishings is seeing nice sustained growth and, as you know, that's our largest category. And some of the things that are really hot in-Home Furnishings right now are kids' furniture, gardening activities, and things like that.

And then, as always, we're seeing the viral trends; whatever is hot and new right now is showing up on Etsy. Things that are hot on TikTok, for example, show up on Etsy within moments and actually can drive millions of dollars of GMS. So, those are really the 4 buckets. And Deb did I -- I think I got the beginning well.

[Debra Wasser, Vice President of Investor Relations]

No, you got it. You got it. That's great. Thanks, Josh. The next one I'm going to take from Ana Andreeva from Needham. This one is for Rachel. A question on taking rate came in flat sequentially. What's driving the upside, excluding the new businesses to the second half and how do you think about the take rate opportunity, longer-term for Etsy?

[Rachel Glaser, Chief Financial Officer]

First of all, I think we gave a lot of color on taking rate because we gave you what take rate would be with and without the new businesses. So, you can see that without the new businesses, our take rate would have been 17.7% and the new businesses, though much smaller than Etsy, have lower take rates and make some contraction to that overall number. Etsy's gotten take rate gains from the expansion of Etsy Payments to 9 new markets globally, and Reverb actually took a price increase last year as well, which helps keep the former consolidated Etsy take rate high.

We look at taking rate improvements as a value exchange. So, where we can offer more services that are -- that benefit the seller in exchange for some fee increase, we are open to doing those things.

So, for instance, last year, we added Offsite Ads and that was a win-win for sellers and for Etsy. So, there are lots of opportunities to continue to add services, and where we see a fair exchange of value, we'd consider taking fees for that. But right now, we have no plans for that and there's nothing in our guidance that would suggest that we have any plans for that.

[Debra Wasser, Vice President of Investor Relations]

Great. Thanks, Rachel. The next one is from Eddie Yruma at KeyBanc. Josh, I'll toss this one to you. "You moved very quickly to bring selection inventory from DaWanda onto the core Etsy marketplace. Do you see the same opportunity existing with Elo7?"

[Joshua Silverman, President and Chief Executive Officer]

Great question. Thanks, Edd. With the DaWanda arrangement, we had an Etsy business in Germany, and we did a referral agreement with a basically Etsy look-alike Company called DaWanda in Germany. And we just combined the 2, you're right, very, very quickly. Brazil is different. Etsy doesn't really have a presence in Brazil. And in fact, cross-border trade between Brazil and other markets outside of Mercosur is really tough for a bunch of reasons.

And so, we expect that Elo7 will remain a standalone brand and a standalone business, giving us a presence in Brazil for the first time. And when we look at who has succeeded in Brazil, it tends to be the native companies. Mercado Libre is very successful there, and eBay didn't manage to penetrate. So, we think having a native indigenous brand in Brazil, built for Brazil, that is focused primarily on domestic trade, is the right way to go. And we're really excited about the Elo7 team and brand as our way to do that.

[Debra Wasser, Vice President of Investor Relations]

Great. Since we're talking international, we'll go next to a question from John Colantuoni from Jefferies. Last quarter, Josh characterized the advertising strategy in Germany as being different than in the U.S., because Etsy is leaning into brand marketing early on. After having success with your brand marketing campaigns in the UK and Germany, is the next step, to begin layering in more performance marketing spend, to take advantage of the improved awareness that you were achieving. Josh?

[Joshua Silverman, President and Chief Executive Officer]

Yes. Is that for me or Rachel?

[Debra Wasser, Vice President of Investor Relations]

I think for you. Yeah.

[Joshua Silverman, President and Chief Executive Officer]

Okay. Got it. Sorry. So, I think the short answer is yes. We are seeing that the brand marketing spends we're doing in Germany and the UK is making our performance marketing more effective and, therefore, we are spending more. The performance marketing spend is quite mechanical. We have very clear ROI thresholds and we have quite clear ways to measure impact in nearly real-time.

So, as the performance of our performance marketing gets better, we just automatically increase spend, and if things happen to depress it, we automatically take spend down. But you're right that because the TV advertising is making brand awareness higher, it means the propensity to click on our ads is higher and the lifetime value of the customers is higher, and that allows us to spend incrementally -- incrementally more in those markets.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. The next one I will take is from Laura Champine, from Loop. This one is for Rachel. what drove the decline in a mix of GMS from paid channels in the quarter?

[Rachel Glaser, Chief Financial Officer]

Good question. We said the percentage that was paid was 19%, which is down from the previous quarter. Remember that one of the things that we do is invest in top-of-funnel marketing, which we don't count in our paid spend because the traffic from the top of funnel marketing comes in through the direct channel. We spend a lot of money incrementally marketing in the second quarter.

The dominant portion of that incremental spend was on top of funnel marketing in the UK and Germany drove a lot of toplines that we count as direct. That's one of the answers to your question. The second answer is that we actually spent a relatively flat amount of money on performance marketing, and we got the same or better ROI.

And also recall that our performance marketing is now subsidized by our Offsite Ads product. We don't actually see that subsidy in the marketing line, that shows up in revenue. All of those factors together drove a really high return on our performance marketing spend and a relatively lower percentage of total traffic coming from paying.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. Thanks, Rachel. Next from Nick Jones at Citi. Josh, we'll throw this one to you to start. Can you talk about the effectiveness Etsy has had in managing Reverb and the implications for its ability to manage Elo7 and Depop? And how many other opportunities might there be out there that could look similar to these, in terms of focusing on products or demographics or geography? I assume that means in terms of potential future acquisitions.

[Joshua Silverman, President and Chief Executive Officer]

Yeah. We feel great about the progress to date with Reverb. And, really, job 1 was to partner with the Reverb team to think about where can their product efforts be most focused to improve conversion rate. That makes the value of a visit go up, and the lifetime value of a visitor and a customer go up.

And, at the same time, how can we optimize their marketing spend? And those 2 are actually a virtuous cycle because if the conversion rate goes up, the value of the visit goes up. That allows you to actually invest more in marketing. And if your marketing is more efficient, you can really get the flywheel to turn. And so, we're excited about how that has worked at Reverb and we hope to execute similar ideas, not the exact same, but similar kinds of playbooks at both Depop and Elo7.

They're both very different marketplaces and they have different dynamics and they face different trends. And so, step one is to get in and partner with their teams and understand where they are and see where we can add value and what their current roadmaps are. The teams are doing that very actively. I think we've owned those two businesses for 2 or 3 weeks in total. And the teams are already there and working, and we're excited about what the future can hold.

I will say that this takes work, and it takes time, and it takes effort. And we are very conscious of the fact that the big prize here is the core Etsy marketplace, which we are incredibly excited about the massive opportunity ahead of us at Etsy. And so, we want to be thoughtful and disciplined as we always are. Integrating Depop and Elo7 I think is meaningful, and we want to take the time to integrate those 2 and make sure that they're successful and really set up for success. That's very much our focus right now.

To the question of, are there other two-sided marketplaces out there? Maybe. As I've said, it's lightning in a bottle. It's not every day you come across a truly authentic, organic, two-sided marketplace that really has mojo. In a place, it's additive to Etsy where Etsy is really positioned to help, where we can acquire it at a fair price, and where we have the bandwidth available to do it. So, we've got a high bar and, I would say, we are going to be patient and picky. And right now, we're very much focused on the core Etsy marketplace and integrating Depop and Elo7.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. Thanks, Josh. I'm going to give a couple to Rachel that also have to do with Depop and Elo7, more on the financial side. So, from Shweta Khajuria from Evercore ISI; Rachel, could you quantify the impact from Depop and Elo7 included in the Q3 guide?

[Rachel Glaser, Chief Financial Officer]

Hi, Shweta. Thanks for the question. First of all, I'll start by saying that our 3 subsidiaries in our new House of Brands together represent less than 15% of our total GMS. So, they're still important. We see a huge opportunity for them, but they're a relatively minor impact on our total guide. And at Etsy, we try to think about focus and we're very focused on continuing to grow the Etsy marketplace. What we've disclosed for Depop and when we announced the acquisition was that Depop did about $650 million of GMS in 2020 and about 70 million in revenue, and it was growing about 100% at the -- in 2020. You would expect that Depop is experiencing the same macro headwinds from the economy reopening, that all of the e-commerce is experiencing.

So, we -- while we're not giving specific guidance for Depop now, you can consider that that's factored into our guidance. Elo7 is much smaller. Also, they had -- they did not have a tailwind from the pandemic in 2020 as Depop and Etsy did. A lot because they're -- they've had significant impact from COVID in that region, and also their business is much more concentrated in the event space, which has been more hampered by shutdowns.

We did, however, say in our guidance that the addition of those 2 new businesses to our former consolidated numbers, a former consolidated meeting Etsy plus Reverb, creates about a 300-basis point contraction to the bottom line. These are very new businesses. We've owned them for 2 weeks. Reverb's a perfect example of how we've been able to grow and optimize that business. We're super excited about it while we invest in them for growth.

[Debra Wasser, Vice President of Investor Relations]

Rachel, while I have you. Similar question -- similar topic from Jason Helfstein in Oppenheimer. "If we assume a 10% take rate for the acquisitions of Depop and Elo7, can that get us close enough to the revenue impact for the acquisitions as well in Q3?"

[Rachel Glaser, Chief Financial Officer]

So, I think we gave pretty clear and transparent information on the impact of taking the rate from our subsidiary businesses. Because we said our total take rate for Etsy would have been 7 -- for our former consolidated businesses would have been 17.7% without them. And I believe we gave take rate specifically for Depop when we acquired them in about that 10% range, so that's a good number. And Elo7 today is very, very small, so it's not going to move the needle. So, I think you're safe in that assumption.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. The next one is from Ygal Arounian from Wedbush. You added 8 million new buyers this quarter, after a big last 12 months of new and reactivated buyer ads. What is driving the continued uptick in new buyers strategically? And how is this behavior from this cohort similar or different? Maybe Josh, wants to talk about overarching new buyer behavior?

[Joshua Silverman, President and Chief Executive Officer]

Sure. We feel great about that. And so, adding 8 million new buyers is a sequential decline from what we were adding in the pandemic. But it's 8 million new buyers. In fact, it's almost twice the level of new buyers we were adding before the pandemic.

I think that's, again, quite remarkable. And they're coming from a number of sectors. One, international has been great and we are growing in international markets a little faster as a percentage of the total than we are in the U.S. and in places like in the UK and Germany, for example, our core focus areas, the investments we've been making over a period of years to make those markets more robust.

We're seeing some of the fruits of that. But even in the United States, there is still a lot of people who don't shop online, don't regularly shop online, or haven't really heard of Etsy. Etsy is coming into the common vocabulary now and people are starting to say, "Oh, yeah. My neighbor told me about that," and, "Oh, yeah.

I hear that's really hip and cool." There's a lot of people who still haven't yet experienced Etsy. And then there's new demographics that we're starting to really lean into. For example, men, that's about 50% of the population, and it's very underrepresented at Etsy, as we've said. And we think that leaning in more there, we can do a lot to open up to new segments and new categories even within the United States.

[Rachel Glaser, Chief Financial Officer]

The only thing I'd pile on to that with is that our new buyer growth on a trailing 12-month basis we said was 40 million, so it's a really huge number. And we've talked about on this call and internally about the pull-forward effect of -- we acquired so many new buyers in a short amount of time that we were actually pulling forward new buyers that at our old rate, we would have acquired in future years.

And just to remind you that you can only be a new buyer once. What we're seeing with new-buyer deceleration is 100% in line with what we expected, and we take -- we get excited and take great comfort from the fact that all of these buyers are coming to Etsy more often and shopping more frequently. The GMS per active buyer number up 22% in the quarter is super exciting to see.

[Debra Wasser, Vice President of Investor Relations]

Great. Okay. We've gotten several versions of this question, but I'll ask the one that came in from Ana Andreeva from Needham. We have heard from several online companies talking about the intra-quarter slowdown as the economy reopens. Can you talk about what you are seeing quarter-to-date in Q3 2021, and if there are any call-outs from a category standpoint?

[Rachel Glaser, Chief Financial Officer]

Do you want me to grab it?

Q - Debra Wasser: Yeah.

[Rachel Glaser, Chief Financial Officer]

Okay. So, we're not giving any -- unfortunately, giving any guidance about what we're seeing in Q3 now. But, maybe, a simple way to answer your question is our guidance assumes that there are no further locked downs. So, of course, as we see what happens in the world, that may or may not change the forecast in the guidance that we've given.

[Debra Wasser, Vice President of Investor Relations]

That's great. Thanks, Rachel. The next one is from Nick Jones, and I'll give this one to Josh. "Can you talk more about the Star Seller program? Is this an icon on the seller profiles? And can you give us any data that you can share about how this might help sellers to sell more?"

[Joshua Silverman, President and Chief Executive Officer]

Yeah, great question. Thank you for that. Yeah, the Star Seller program is really designed -- Yes, it will be an icon on people's shops. That will show up in a few months. We might do featured marketing around our Star Sellers. It might influence your prominence in search. We're going to experiment with a lot of things.

But at minimum, it will be a badge on your shop to highlight to buyers that you're one of the very best sellers. I think one of the most important things it does though, is it provides agency to sellers to tell them very transparently, "Here are the customer service metrics that buyers care about the most, and here is what good looks like." And that sets a bar, an aspiration for our sellers of where they want to go and where we want them to go.

And one of the things we hear from sellers over and over again is, "What can I do to be more prominent?" And if you look online, the tips and tricks they hear from a lot of others are like keyword stuffing, put more keywords in your title. That doesn't necessarily make the buying experience better. Do you ship on time? Do you answer bio convo -- buyer convos in a really timely fashion? Do you get 5-star reviews on your products? Those are things that buyers really care about and we want to focus sellers on those things.

And so, the Star Seller program is a great example. And by the way, it's not the only way we can do this. But it is a powerful example of how we can really tell sellers exactly what they can do to be more prominent, and give them agency in their own success, in a way that creates a race to the top and lift itself up. And I'm really excited about this track-up work in the coming years.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. Thank you. And from Marvin Fong at BTIG. Here's another one on Q3 guidance. Would you say you are contemplating mainly a slowdown in traffic or are you also seeing changes in conversion rate, items per basket, or purchase frequency? Rachel, did you want to take that on?

[Rachel Glaser, Chief Financial Officer]

Sure. So, no, we are not contemplating a decrease in conversion rate in frequency. We're really excited about the product and marketing initiatives that we have that are actually driving growth in those metrics. And you can -- as we've talked about and answered a few other questions, there's a deceleration in new buyers, largely associated with masks. Remember that in Q3 of last year, 11% of GMS came from mask sales, and new buyers were a lot of the mask buyers.

So, those things go together. And that we have these really, really big numbers to comp. We said that non-mask sales in Q3 last year grew 119%, and we've roughly added $2 billion of GMS on a 2-year basis. So, these are really big -- big numbers to comp, and so it's mathematical gymnastics that we're doing, but with lots of underlying growth opportunities in the core business.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. And then I will squeeze one more in under the wire here from Navi Khan at -- Naved Khan, excuse me, at Trust. What -- how are you thinking about the opportunity to migrate payments on Depop to Etsy 's Payments and how should we think about the timeline for that? It's for you. Rachel, you want to do that one or -- Josh?

[Rachel Glaser, Chief Financial Officer]

I'll take that one. Depop has a great payment structure today. And so right now, each business has its own CEO, they have their own operations. We want them to run and fully optimize their businesses. We are thinking about, loosely, where we can find optimizations maybe in 3 categories. First are things that are back-office like G&A, where we don't necessarily need to replicate certain functions in every single business and we can handle those things from a corporate perspective.

Things like legal and finance and treasury and things like that. The second tier is things that we can operate as services across all of our brands. So, payments might be an example of that and we'll certainly explore that. There might be other things like member support, and trust, and safety. There might be other services like our ad network. And then there are things that we think need to be operated directly, and with innovation and creativity in those management teams, like product and engineering.

And so, we're just -- again, we've only owned them for 2 weeks. We will look -- we continually will look for opportunities to optimize and scale as we grow. Payments might be one of those areas and we'll be happy to talk to you more about it as we dig into it.

[Debra Wasser, Vice President of Investor Relations]

Okay. Great. Josh, did you want to add anything on that one or are we good?

[Joshua Silverman, President and Chief Executive Officer]

Thanks very much for your interest. I think -- when I think back to a year ago, the question we kept getting was like, is this just a flash in the pan? All these people are coming to Etsy just because they have to. And are they all going to go away when the world reopens? And I'm not saying we fully post-pandemic or the world has completely reopened, but people have a lot of choices right now. And I couldn't be more excited about the fact that in a world of a lot of choices, Etsy is growing.

And it's growing materially and people are coming back. They're choosing to come back more and more often to Etsy even when they have vastly more choices than they did before. And I think that's super encouraging for the future.

[Debra Wasser, Vice President of Investor Relations]

Great. All right. Thanks, everyone for your questions, your attention. And we will talk to you, I'm sure, very soon. Take care.

[Joshua Silverman, President and Chief Executive Officer]

Thank you.