ETSY Inc

NASDAQ:ETSY

Earnings Call Analysis

Etsy Reports Modest Revenue Growth Amid Market Challenges

In Q2 2024, Etsy's consolidated GMS fell 2.1% year-over-year to $2.9 billion, impacted by macroeconomic headwinds. However, revenue grew 3% to $648 million. Adjusted EBITDA improved to $179 million, with a margin of 28%, up 130 basis points year-over-year. Despite a 3.2% decline in Etsy marketplace GMS, this was better than the prior quarter's 5.3% drop. The firm expanded Etsy Payments to 98% of marketplace GMS. There's cautious optimism for Q3, with a low single-digit GMS decline expected. Full-year 2024 adjusted EBITDA margin is anticipated to match or exceed 2023 levels. CFO Rachel Glaser announced her retirement.

Strong Financial Performance Amid Challenges

Etsy reported a consolidated Gross Merchandise Sales (GMS) of $2.9 billion for Q2 2024, reflecting a minor decline of 2.1% year-over-year. However, revenue grew by 3% to $648 million, and the company posted an adjusted EBITDA margin of 28%, showing an impressive increase of 130 basis points from the previous year. This performance exceeded both the company's guidance and analysts' expectations .

Etsy Marketplace and Diversified Revenue Streams

The highlighted metrics show resilience in the Etsy marketplace despite a tough macroeconomic environment. The Etsy marketplace GMS was down 3.2% year-over-year, an improvement from a 5.3% decline in Q1. The company's revenue growth was driven by a 3.8% rise in marketplace revenue, fueled by payments and offsite ads. Importantly, Etsy Payments now covers about 98% of the marketplace transactions. Initiatives like new seller onboarding fees have contributed nominally to revenue while bolstering marketplace safety by reducing fraudulent activities .

Strategic Investments and Product Development

Etsy has been significantly investing in AI-driven product development to enhance customer experience. These investments include organizing extensive seller inventories and improving search relevancy through advanced machine learning models. A clear example is the integration of AI for better categorization and search module improvement for fine jewelry, leading to a 9% year-over-year increase in GMS for this category. Initiatives such as the Etsy Insider loyalty program are in beta testing, and they aim to drive buyer frequency and loyalty by offering perks like free shipping and exclusive first access to items .

Operational Efficiency and Marketing Strategy

Etsy continues to operate with high efficiency, boasting strong financial health with a $1.1 billion cash reserve. The company also repurchased $150 million in stock, reflecting a commitment to returning value to shareholders. Furthermore, the marketing spend increased by 10% to $183 million, focusing on return-on-investment (ROI) positive channels such as paid social media. This strategic investment aims to retain and frequently engage existing buyers rather than just acquiring new ones. This is critical as habitual buyers decreased by 3% year-over-year, but retention rates have shown slight improvement .

Outlook and Future Plans

Looking ahead, Etsy expects Q3 consolidated GMS to decline in the low single-digit range year-over-year. The company maintains a stable take rate similar to Q2 and anticipates a consolidated adjusted EBITDA margin around 27%. Although there are macroeconomic uncertainties, Etsy remains focused on enhancing customer experiences and driving growth through strategic initiatives in AI, marketing, and loyalty programs. Despite the challenges, the company is optimistic about sustaining profitable growth and maintaining its competitive edge in the e-commerce space .

Executive Transitions

Etsy announced that CFO Rachel Glaser is planning her retirement. Glaser has been instrumental in driving Etsy’s strategic and financial success since 2017. The company is in the process of searching for her successor and will provide updates in due course. Glaser emphasized the strength of the team she leaves behind and the strategic initiatives in place that ensure Etsy's continued growth and focus on enhancing customer experiences .

Earnings Call Transcript 2024-Q2

[Debra Wasser, executive]

Hi, everyone, and welcome to Etsy's Second Quarter 2024 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO. Once we are finished with the presentations, we will take questions from our publishing sell-side analysts on video.

Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business and our operating results, as noted in the slide deck posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-Q and which will be updated in future periodic reports that filed with the SEC. Any forward-looking statements that we may make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.

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

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

[Joshua Silverman, executive]

Thanks, Deb, and good afternoon, everyone. We're pleased that Etsy's consolidated results came in at the high end or ahead of our guidance. GMS was $2.9 billion, down about 2.1% year-over-year consolidated basis, revenue grew 3% to $648 million, and we posted a very adjusted EBITDA margin of approximately 28%.

Etsy marketplace GMS was down about 3.2% year-over-year, a 210 basis point improvement from our Q1 performance of negative 5.3%. Etsy Marketplace is a high level of approximately 92 million active buyers held up very well in another challenging quarter for our type of goods. While we continue to face stiff macro headwinds, we're making meaningful improvements to the customer experience, which we believe are beginning to inflect the curve along our journey to get Etsy back to growth.

We also announced today that Rachel is planning to retire. She's been a strategic partner and a key to the tremendous success Etsy has achieved since 2017. I believe every CFO wants to be measured on results, and Rachel has so much to be put in that regard. Beyond the numbers, Rachel leads with optimism and helping craft our culture and our team's operational excellence. She has built a strong team, and I'm grateful she chose Etsy to serve as the culmination of her impressive career. Our entire community will continue to benefit from the impact she We're going to have some more time together, and we'll stay focused on driving Etsy's success. You'll all have ample time to chat with her over the coming months as we launch a search for her successor. And of course, we'll share updates with you at the appropriate time.

As a reminder, our key focus for 2024 is to continue to build consideration for Etsy, to help buyers think of us more often by making it easier to find the best stuff driving association that there are great deals on Etsy and make shopping on Etsy more convenient. We're working to make Etsy more of a go-to shopping destination. And in particular, to really lean into what makes Etsy different and special. And we're making excellent progress in our bold initiatives to do just that.

As you know, we've evolved our way of working in 2024 to shift some of our focus from building incrementally better customer experiences to investing in the creation of more big bang, truly engaging experiences and moments on-site and off. Since 2017, Etsy's operating model has been quite unique and the teams were tasked to bank GMS in a very disciplined way to drive valuable incremental improvements to the customer experience. This worked extremely well for us. And I believe has been a key contributor to our remarkable success, including being able to maintain a very large part of our extraordinary pandemic gains.

Given our much larger scale and the increasingly crowded and promotional e-commerce landscape, we're now allocating a significant portion of our efforts to bold integrated initiatives that combine product improvements and marketing novel ways. We're working backwards from what great customer experiences look like and are laser-focused on driving buyer engagement, not just conversion.

I'm really excited to update you about how this new way of working is driving the success of several key 2024 initiatives, including in gifting. Our work to highlight quality on Etsy, plans for our new Etsy Insider loyalty program and work to make our Etsy App the center of our customer experience.

Starting with gifting, which is proving to be a winning theme, better on-site gifting experiences combined with clear and engaging marketing initiatives for seasonal and evergreen gifting and specific campaigns for product innovations such as our new gift teaser video messages, worked together to deliver excellent second quarter performance in this strategic investment area. Site-wide GMS for purchases identified as gifts grew 4% on a year-over-year basis and significantly outperformed the overall Etsy marketplace. Further, Etsy's gifting performance surpassed that of the pure-play competitors we've been tracking for benchmarking purposes. And our U.S. Mother's Day, Father's Day and graduation performance meaningfully outpaced the NRF's forecasted performance for these events.

Video gift teaser messages weren't our only product innovation in the second quarter. We launched gift lists and reminders allowing you to track ideas you have for a loved one special event and then, of course, reminding you to make the purchase. And new occasion pages, curated for things like anniversaries, birthdays and so on.

In addition to GMS growth, we're utilizing monthly U.S. buyer surveys to gauge the impact of our gifting strategies. And this data shows a significant year-over-year increase in prompted consideration of Etsy for gifts. We're also tracking an increase in perceptions that Etsy makes it easy to find a great gift. Of course, gifting initiatives will remain front and center as we move into the all-important holiday season.

Moving on to bold initiatives we're making in quality, to ensure we highlight the very best of Etsy, differentiating ourself in a sea of commoditized merchandise. We stand for keeping commerce human. And we have an enormous conviction that doing this in a way that no one else can in important competitive advantage, and that these initiatives represent a tremendous unlock for buyer consideration.

We mentioned on our last call that we're using large language models and GenAI techniques to better understand both the shopping mission you're on as well as our sellers' inventory along these 4 key focus areas: Suppressing and removing items that violate our policy, up ranking better quality listings and search and recommendations and better curating and organizing our marketplace.

I'm extremely proud to report on the fantastic progress our search team is making to move beyond our historical focus on solving for relevancy in search when you know what you want and can't find it anywhere else. To new initiatives meant to also highlight the best of Etsy and feature the incredible diversity and uniqueness our sellers merchandise.

In the past, our search algorithms ranked each listing individually based on likelihood to convert, which often resulted in buyers seeing far too many similar items rather than a more holistic set. Here's some powerful data. We roughly cut in half the percentage of searches where a high percentage of listings seen on Page 1 are seller. We reduced the percentage of searches that have 2 or more listings that may appear identical by over 70%. We're incredibly excited about what this might mean for the future visitation as buyers see a more diverse and higher quality set of listings each time they visit Etsy.

In addition to helping buyers, these initiatives also support our sellers, given how important it is that we the best of Etsy across our seller base. Our latest search experiments resulted in approximately 70% of shops having more visibility in search with the share of search impressions from small and medium shops increasing by nearly 30%. Later this summer, we'll empower sellers by giving them more agency and actionable insights than ever before into factors like listing quality and completeness that can impact how they show up in search.

Active to this work and to further allow our sellers' unique items to shine, we've made some bold changes to our marketplace to reinforce who Etsy is, so that everyone who comes to Etsy understands why we're different and special. We know that people love what Etsy represents as a marketplace that offers original items made by real people, and that being a place that supports small businesses and offers original goods are Etsy's top drivers for consideration and relevance. Yet in the past, the label Handmade was the default applied to any listing which wasn't vintage or craft supply. Even while our policies allow for the inclusion of items that were designed or personalized by the seller, but not made with their own hands. This lack of distinction could be confusing for both buyers and sellers.

So on July 9, we announced a series of updates to our listing labels to be clearer about why items belong on Etsy and the role of the seller in the making process. We've labeled virtually all of Etsy's listings along 4 creativity standards: One, physical items made by a seller by hand or using personal or computerized tools; two, items designed by a seller using their own designs yet produced by a production partner; three, handpicked items, which can include vintage items, items from nature and certain collections of items that a seller personally curated for sale; and four, items sourced seller, specifically in the categories of craft supplies or party supplies, along with items that are personalized a seller.

We've already seen lots of love from our sellers related to these new standards with overall high engagement and positive sentiment in our community spaces. Many sellers even amplified the news and shared the campaign on their social media channels. In the spirit of moving boldly, as we make these meaningful changes to highlight the quality, diversity and differentiation of our sellers' most unique inventory and feature the seller's role in the creation of each item. We simultaneously launched a 360-degree marketing campaign touching owned, earned and paid channels to reinforce Etsy's quality, originality and humanity.

When you shop many of our competitors, you don't know who or where you're buying from. With Etsy, the is stitched by Jessica. The glassware is handmade by Chad and the table is built by Tiffany. Our new social creative tells a deeper story on the role of ourself and their love for their craft. We've created a dozens of assets that range in style based on the audience platform and goal.

Here's our new Hero brand spot for TV, streaming and YouTube, which shines a spotlight on what makes our sellers so magical.

[Presentation]

[Joshua Silverman, executive]

The team and I couldn't be more excited about the changes we've made and how we're telling the world about them. Note that this is just one, albeit large step in our quality journey with much to come. I firmly believe that we will look back at this initiative as one of the most important factors which readied Etsy's growth.

We mentioned last quarter that we're making significant investments in our app to engage our existing active buyers capture more new buyers and help encourage more engagement and browsing, which we believe will in turn convert into loyalty and sales. Our app continues to lead both desktop and Mobile web in terms of GMS growth and represented about 42% of the GMS in the second quarter, providing an excellent opportunity for low-cost, native traffic acquisition, particularly given it's our highest converting platform.

We've launched and are leaning into optimizing our app store position, running paid ads for app downloads, featuring app download prompts on our mobile website and utilizing our owned channels in CRM. We're working to make the Etsy app our marquee customer experience, shifting most buyer usage to the app rather than mobile web or desktop, and drive frequency and engagement with lower intent shoppers who come just looking for ideas and inspiration, while continuing to convert buyers who are on a clear shopping mission.

And speaking of frequency and engagement, I'm excited to unveil some details of our new buyer loyalty program, another bold move for Etsy in 2024. Etsy Insider, will be launched invitation only to a highly targeted group of occasional U.S. buyers in beta form in mid-September. We've accomplished a lot so far, including many rounds of research and competitive audits to inform our program and roll out. We focused on developing key benefits for buyers that highlight both the emotional and the rational characteristics of Etsy's unique value proposition and are in the process of finalizing our pricing strategy for launch.

Our beta program is buyer fee based and will include free U.S. domestic shipping on millions of items, item discounts, first access merchandise and more. We'll test, learn and iterate. And are optimistic that over time, Etsy Insider can be a needle mover driver of buyer frequency and Etsy love.

I've said before that I believe Etsy has more to gain from advances in AI than most of our e-commerce peers, especially given the incredible breadth and uniqueness of our sellers' inventory. And we've been investing to unlock this value across almost every area of our business. This slide highlights 20-plus use cases in product development alone. We're fortunate to be building upon a strong base with many years of investment in leading-edge ML and data infrastructure talent and systems allowing us to move quickly.

A key foundation of the discovery and engagement work I've discussed today has been powered by our investments in AI. For example, better curate merchandise to improve the buyer experience and drive GMS. We're making it easier for buyers to find quality listings for mid-price jewelry known as Demi-fine by having human experts determine what jewelry attributes are most important to a buyer's search, think material, gold purity or hot trends, then utilizing GenAI to infer those attributes to create new search discovery modules and pathways and incorporate this into on-site experiences such as landing pages.

Well, this search is very much in progress. These better on-site shopping experiences, combined with targeted marketing initiatives such as tailored social media content, CRM efforts and improved data feed curation and organic search contributed to a 9% year-over-year increase in GMS for Demi-fine jewelry in the quarter.

I'm really proud of the strides our team is making in 2024. We're confident we're working on the areas that will meaningfully impact Etsy in the months and years to come. We're leaning in more than ever to what makes Etsy We're nowhere near being as big or as successful as I believe we can be. Nowhere near achieving our full potential. This inspiring and motivating to us all.

I'll now turn the call over to Rachel.

[Rachel Glaser, executive]

Thanks, Josh, and thank you for joining our call. My commentary today will cover consolidated financial results, key drivers of performance and Etsy Marketplace stand-alone results where appropriate. As a reminder, we divested Elo7 on August 10, 2023. So please take that into consideration when you compare year-over-year consolidated results.

Etsy's second quarter 2024 consolidated GMS was $2.9 billion, down approximately 2.1% year-over-year with a 20 basis point FX headwind. Revenue increased by 3% year-over-year to $648 million and adjusted EBITDA was $179 million, representing a healthy 27.7% margin, up 130 basis year-over-year and ahead of our guidance. Note that Elo7's divestiture resulted in small headwinds to GMS and revenue growth a quarter that was modestly accretive to our consolidated adjusted EBITDA margin.

The Etsy marketplace GMS continued to face ongoing headwinds from tough macroeconomic environment, yet results came in a bit better than we had anticipated, with the $2.5 billion in Etsy marketplace GMS representing a 3.2% decline on a year-over-year basis and better than the 5.3% decline in the first quarter. In addition, strong Depot performance contributed a nice tailwind to consolidated GMS. I'll cover Etsy marketplace GMS performance in more detail later.

Our consolidated year-over-year revenue growth of 3% and can be attributed to solid growth in our Marketplace revenue, which increased 3.8% year-over-year, primarily driven by payments and offsite ads. We continue to drive Etsy Payments expansion with penetration of our payments platform now at about 98% of Etsy Marketplace GMS. We saw a nominal revenue increase from our new seller onboarding fees, which was rolled out in additional regions at the beginning of the second quarter. When combined with stronger trust and safety efforts, this new fee is helping to reduce fraudulent onboarding, protecting both our marketplace and existing sellers.

Consolidated services revenue grew by [ 5% ], led by higher Depop shipping label and ads revenue as Depop continued to drive shipping label adoption and improve the visibility of boosted ads on their marketplace. For the core Etsy Marketplace, ads revenue growth moderated during the quarter as we comped Q2 of 2023, which featured strong growth significant product optimization efforts. Nevertheless, Etsy Ads still saw modest year-over-year take rate expansion as we unlocked value for our sellers by refining our retrieval engines and ranking models to improve ad relevance. All in all, our consolidated take rate improved to 22%, above our guidance of approximately 21.6% and above the 20.9% reported in the same period last year.

This strong performance is primarily the result of previously mentioned marketplace revenue growth. Our second quarter consolidated adjusted EBITDA margin was about 28%, ahead of our guidance and up 130 basis points from last year. We gained leverage year-over-year on employee costs and cost of revenue, which was partially offset by a higher level of performance marketing investment this quarter. Just a quick note, you may have noticed in our PR that our second quarter net income was impacted by a nonincome tax expense for digital services tax ruling in Canada effective the end of June and retroactive to 2022. While this did not have an impact on our adjusted EBITDA results, it did impact our GAAP G&A and consolidated net income.

We continue to drive leverage within consolidated product development spend, which decreased 6% year-over-year to $114 million during the second quarter, primarily due to decreased employee compensation expense connected with our 2023 workforce productions. You can see from the chart on the right that revenue per head count for the Etsy marketplace continues to grow on a year-over-year basis, and remains well above many of our peers even those of significantly larger size and scale.

Second quarter consolidated marketing spend increased 10% year-over-year to $183 million. Most of this increase can be attributed to the Etsy Marketplace, where we leaned into ROI-positive channels and expanded into mid-fund and newer performance channels, particularly within paid social, which is the second largest performance channel behind PLA. The chart on the left shows how we have leaned further into paid social in the first half of this year, and we expect this trend will continue in the second half. Keep in mind that we believe that as we shift our mix towards paid social, this will support buyer retention and frequency more than new buyer acquisition, since a lot of our paid social advertising is retargeting existing buyers, and you see that reflected in the buyer metrics I'll outline shortly.

In the second quarter, we also comped a period of lower investment in the prior year when testing across our performance channels temporarily reduced spend. As a reminder, revenue from our off-site ads program offsets more than 1/3 of our performance marketing spend. Consolidated brand spend declined 26% year-over-year and 42% sequentially, as we pulled back in this area following our significant Q1 2024 marketing investment to support the launch of gift mode.

Let's move now to our Etsy Marketplace second quarter 2024 GMS and biometrics. We believe that the improved year-over-year GMS performance we saw versus our first quarter results can be attributed to 2 factors: first, about 1/3 of the sequential acceleration can be attributed to tailwinds from the Easter holiday timing shift, which we noted was a headwind to our Q1 results. Second, we believe the initiatives we've been investing in this year drove the remaining portion of the sequential improvement, demonstrated in part by stronger mother's and father's purchases this year, despite ongoing macro pressure on consumer discretionary product spending.

From a geographic perspective, our GMS, excluding U.S. domestic, declined slightly on a year-over-year basis, but improved about 120 basis points sequentially. We also saw some improved performance in a few of our categories, which, as you may recall, were all down on a year-over-year basis in Q1. You can see here that paper and party supplies was flat year-over-year and toys and games grew. In addition, year-over-year trends improved in Q2 2024 versus Q1 2024 in 5 of 6 categories.

We are pleased to report that Etsy Marketplace active buyers of approximately 91.5 million demonstrated continued resilience, growing 1% on a year-over-year basis and remaining roughly flat to the last quarter. Drilling down a bit, buyer metrics were a bit of a mixed bag. We reactivated over 6 million lapsed buyers in the quarter, up 8% year-over-year. And we added over 5 million new buyers. And while this metric is down 9% year-over-year, the decline moderated sequentially. Collectively, we added approximately 12 million new and reactivated buyers.

Habitual buyers decreased by 3% year-over-year. However, our retention rate of habitual buyers was slightly better on a year-on-year basis. Lastly, GMS per active buyer was down 3.2% in the quarter to $124, continuing to show signs of stabilization on a sequential basis. In totality, we believe these metrics continue to indicate that Etsy remains highly relevant to tens of millions of consumers despite discretionary budgets, albeit spending a bit less because we fill a need like no one else. Depop continues to be a source of growth and opportunity in the e-commerce apparel sector. They deliver year-over-year GMS growth, driven once again by the U.S. market. Depop removed selling fees for sellers based in the U.S. effective July 15 and introduced a small buyer marketplace fee, a change designed to empower sellers to earn more from their wardrobes, offer improved value and choice for buyers and make it easier for people to take their first steps into second half. The evolved fee structure follows similar changes made in the U.K. market earlier this year.

And turning to Reverb. They continue to outpace the performance of the musical instrument sector and gain share by highlighting affordable music gear of the experience. For example, Reverb launched the Reverb outlet in June, which showcases new and like new music gears sold at discounts of 20% or more from trusted and authorized retailers and brands.

As of June 30, we had $1.1 billion in cash, cash equivalents and short- and long-term investments. During the second quarter, we repurchased a total of $150 million in stock under our [ $1 billion ] June 2023 Board authorized repurchase program, of which approximately $416 million remained available as of June 30. Our capital-light business model allowed us to deliver strong free cash flow this quarter of approximately $141 million. We also continued to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis. And you can see here how we have continued our commitment to return a significant portion of our free cash flow to shareholders through share repurchases into '24.

Turning to our outlook. We are pleased to have already seen a modest acceleration in consolidated GMS from the first quarter to the second quarter of 2024, ahead of what we expected in May. Our guidance is that third quarter consolidated GMS will decline in the low single-digit range on a year-over-year basis. As you know, consumer discretionary product spending trends remain volatile with mixed signals about the health of the U.S. consumer. So this guidance is based upon current expectations that the macro conditions, which impact our business don't get worse from here.

Q3 '24 consolidated take rate is currently estimated to be similar to the second quarter and remain relatively stable for the rest of the year. And consolidated adjusted EBITDA margin will be approximately 27%. The sequential pressure on Q3 adjusted EBITDA margin can primarily be attributed to 3 factors: A shift in timing of the cost of creative for our new seller-focused brand campaign, which moved from the second quarter into the third quarter; two, continuing to lead into more exploratory marketing channels from the Etsy Marketplace, including unlocking paid social; and third, some select incremental hiring to support our app investments.

We continue to expect full year 2024 consolidated adjusted EBITDA margin will be at least at the level of our 2023 performance as seasonal volume and cost efficiencies should benefit our fourth quarter margin this year. The Etsy Marketplace also historically has a larger share of revenue and adjusted EBITDA in Q4 relative to our subsidiaries who are expected to continue to be about 300 basis points to the consolidated results.

In closing, I want to comment about my plans to retire from Etsy. It has been a privilege and honor and a joy to be Etsy's Chief Financial Officer. I could not be proud of I think we have accomplished over the last 7 years. Working alongside this accomplished executive team has been a capstone to my career, and I want to especially acknowledge Josh, who, for the past 7 years, has been equal parts partner, mentor and friend, and who I know will be an important part of my life in the years ahead. And perhaps most importantly, enough can't be said about the spectacular financing we have at Etsy. I truly stand on the shoulders of a world-class organization, and I am confident they will carry on without missing a beat once I have moved on.

I'm excited to help identify and transition my responsibilities to a successor. And after that, I'll look forward to continuing board service, including in my current role on the New York Times Board serving as their Audit Committee Chair. My husband and I are looking forward more travel and maybe a little more downtime, but be assured I will remain a habitual Etsy buyer and a huge champion of the company.

I'm confident Etsy can continue our ambitious strategy for sustainable, profitable growth and advance our mission of keeping commerce human. It's bitter sweet to be saying these words that now my colleagues will deliver outstanding product and experiences for our buyers and sellers.

Thank you for your time today. I will now turn the call over to the operator to take your questions.

[Operator]

[Operator Instructions] Our first question will come from Jason Helfstein with Oppenheimer.

[Jason Helfstein, analyst]

So before I ask the question, I want to say, this is probably what our third rodeo. So maybe they'll be a fourth. I think going back to is it Home.com or [indiscernible] move as Home Store, right?

[Rachel Glaser, executive]

So, yes.

[Jason Helfstein, analyst]

So it's definitely been a blast over the years. So question. So Josh, I want to dig into the new seller classification program. When do you think you'll be able to tell if -- ultimately, when it improves buyer conversion, which then ultimately presumably gives you confidence lean more into marketing and kind of just get the flywheel going? So that's just a timing question. Back in, any thoughts on getting your sellers to raise their prices?

[Joshua Silverman, executive]

On the first one, I actually -- not turtle rates converge, I hope it will raise frequency. So our search engine right now is really optimized for conversion, which is why we have historically shown you, for example, multiple very similar variance of an item. If the black box algorithm thinks the most likely thing you're going to buy is this, it might show you a variance of roughly the same thing. And if that's actually what you wanted for the 2% or 3% of people who are really ready to buy that thing, that was a great experience and it drives conversion. But what about the other 97% who really weren't necessarily ready to buy, we would be much better served to show them a broader variety of things so that they understand everything we have on offer, whether they're going to buy this session or come back more often. So I think what we're going to end up with now dramatic improvements in the diversity of items we're showing on Etsy, the diversity of sellers we're showing on Etsy, I think, is going to drive a lot more people to say, "Wow, there's a lot more stuff for sale than I realized. There's more categories of items for sale that I realize and they're going to come back more often." and that's what I'm really excited about.

In terms of getting sellers to raise their prices, we're a marketplace and sellers set their own prices, and we're not telling them how to price. We do give the market information to help them price. I think the more we can do to emphasize the humanity of Etsy and the Etsy seller, the artisanal craft role that was played, the more we can give the seller her rightful pricing power. And so you should expect to see in Etsy in the quarters to come, us doing more and more to center the seller, her role in the making process, things like video of her actually making the thing, so you really understand how artisanal the item is. And that I think is going to really support our sellers in their pricing power, and I'm excited about it.

[Rachel Glaser, executive]

And just to add a note to the frequency comment you made because you asked about when can I get the going again. Increased frequency obviously drives what led so we can actually get the marketing label going that way to more frequencies I could think.

[Operator]

Our next question comes from Jian Li with Evercore.

[Jian Li, analyst]

First, congrats Rachel on really good run here. I just have a question on the shape of GMS growth recovery in the back half of the year. I guess, like a couple of things, like how has macro changed versus 3 months ago? Has it gotten better or worse versus where you stood 3 months ago? And why wouldn't we expect GMS recovery to continue sequentially given that you're leaning more into marketing in Q3 and all these product initiatives in the back half?

[Rachel Glaser, executive]

I can start with the macro that we're seeing. I'd say it's been sort of tough sledding pretty volatile. So it's -- we've seen -- when we look at external data, we see things going in a positive direction, we see things going in a negative direction. What we've experienced Q1 to Q2, it's probably about the same amount of pressure on the guidance that we gave. Does we expect about the same for the rest of the year? If it were to get worse, that would influence the forecast that we have. We -- there's a lot of other mind share or going on in addition to macro. So we had a presidential assassination. We had a pretty volatile -- pretty exciting and volatile democratic competition going on right now. We have Olympics. We have, I think, Wimbledon World Cup and one other European soccer going on at the same time. And those things in addition to macro tend to influence our -- we've always talked about what we call the CNN effect to influence our outcomes. So we're fighting against those things that go one direction. But in the meantime, we're really planning for great Q4, particularly with investments in quality, as Josh just talked about and gift mode which keeps getting better and better with new product launches, getting ready for the holiday season. So there's a lot to be excited about, just cautious with this environment.

[Operator]

Our next question will come from Nathan Feather with Morgan Stanley.

[Nathaniel Feather, analyst]

Congrats, Rachel. It's been great working with you. A few quick questions on the new loyalty program going into beta. So first off, who is the primary customer you're targeting here? Is it primarily that repeat customer that maybe isn't habitual yet, do you think you could bring them over the line? And then can you talk through how you're thinking about pricing that program and the goals for profitability?

[Joshua Silverman, executive]

Great question. Yes. So all great questions. So the target customer is people who shop only occasionally on Etsy, think people who shop 3 or 4 times a year. And the idea is by having a paid loyalty program. Once you're paying, you want to get value out of it. So the idea is, can we take those people and turn them into people who every time they're shopping for something, think -- let me start on Etsy, start all of my shopping missions on Etsy or many of my shopping missions on Etsy. We're particularly excited to test what would happen if shipping costs went away. And I want to be clear, Etsy's funding this, we're not asking to sort of fund this and obviously, the fees will charge to the buyers will help fund it. But that would be a very interesting experiment. And then we're also leaning a lot into emotional rewards. So I think deals and drops, special value and new product releases for customers. We think all of this, we can create something very exciting. We don't have specific pricing that we're ready to announce yet, but we're thinking in the range of the cost of a per month kind of things. We know people are very value-conscious right now. And again, we're not targeting our most -- most habitual buyers who already come to Etsy to shop for many, many missions. We're targeting more occasional shoppers and seeing if we can upgrade them. So we think something in the range of the cost of late is probably about right.

[Rachel Glaser, executive]

And just -- josh said it in his prepared remarks, but -- it's an invitation-only beta right now. So it's a very limited group of people and then we'll learn and iterate from there.

[Joshua Silverman, executive]

And you asked about profitability. Obviously, everything we do, we want to be profitable in time. I think in the beginning, we're going to test and learn on this one. And I think the program -- I would expect the program to evolve. I spent 4.5 years at American Express, which not only runs a massive loyalty program of its all membership rewards, but it partners with Delta and Starwood, and so many other loyalty programs way. So I've had a chance to look at the loyalty market for a long time. And typically, these firms evolve and you learn a lot about how to make the economics work. And I expect we're going to be on a bit of a learning curve here. I'm really excited about that, and I'm quite optimistic about what this can be in the future.

[Debra Wasser, executive]

And yes, we don't get invited because we're

[Rachel Glaser, executive]

De minimis impact to margins in 2024.

[Operator]

Our next question comes from Shweta Khajuria with Wolf Research.

[Shweta Khajuria, analyst]

Rachel, it's sad to see you go, and I wish you all the best. But at least from my side, definitely, we'll miss you. Two questions, please. One is, just at a high level, if you could talk about, Josh, what do you think is the most exciting as you think about all these different initiatives and everything that you're launching for 2025? There is a lot of concern around consumer spend pulling back around, competition, et cetera. So what would you say to those who are doubting that there could be positive growth in next -- for next year? And then second, is on the -- a follow-up on your -- on the prior question, actually. Why did you decide on this strategy now on the subscription? And what was the reason for launching it now?

[Joshua Silverman, executive]

Congrats on your new It's nice to see you. Okay. Two questions. The first is economic outlook and what am I excited about and why should we be excited for 2025. I guess I'd start with, if you ask 5 economists, their opinion on 2025, you're going to get 6 opinions. So we're trying to control what we can control. And we can control having an amazing and highly differentiated customer experience. So in a world where it may feel like we're swimming upstream in the economy, I think, first, we're maintaining our position when swimming upstream. And I think we're getting a lot state, which is going to position us even better. And most importantly, we're not going to get pulled downstream. We're not going to be part of that race to the bottom. We're leading into what makes Etsy even more Etsy. We're leading into differentiation. And I'm so excited about you asking me about the things we're doing in gifting. We're seeing some green shoots here that are really encouraging. The performance in Mother's Day than Father's Day, then than graduation. I'm encouraged that, that strategy is showing some encouraging green shoots. I am really excited about the quality work that we're doing.

When we seeing 50% fewer searches have a high preponderance from one seller, 70% fewer searches have multiple items that appear to be largely identical. I think that what that can do to the customer experience over time, we've done a ton in the past to suppress items that violate our policy. Now we're really focused on elevating the highest quality items on Etsy. So we'll be launching to our sellers a dashboard showing them how we score the quality of their items and the quality of the service level, creating even more of a race to the top for sellers. So they have agency over how to rank higher in search, and that makes the buyer experience only better and better. I am super excited about elevating the very best of Etsy, letting our sellers shine, helping our buyers understand the role that the seller made in that process and really differentiating Etsy. I think it's an exciting path, and I'm really encouraged by the early start we're on right now.

[Rachel Glaser, executive]

And so we're not giving 2025 guidance here. So the other part of your question was to see growth next year. We did show data on this call that talked about the categories where we've seen -- last quarter, we were down in every one of our major categories, along with many other competitors in each of those verticals. This quarter, we saw improvement in all of those categories, except for 1 and 2 of them were actually flat and positive. So we're starting to see the green shoots that we want to see in the categories that are most important to us.

[Debra Wasser, executive]

I think there was a second question from Shweta, which was why loyalty now.

[Joshua Silverman, executive]

Why loyalty now, we -- consideration is a huge focus for us. People love the experience when they're on Etsy, but they only think of us they only very -- I think a way to think of Etsy is we're the place to go when you can't find it anywhere else. And we've been amazing at that. And we've gotten better and better at that. I mean you know what, if you want it and you know what you want, we haven't at Etsy. And we've gotten great at showing you it.

And for a few years, there was a period of time when you couldn't find almost anything anywhere else. And we were the beneficiary. Since that time, we've done, I think, a remarkable job replacing almost all of that GMS with other here at Etsy. But we want to move from being the place to go when you can't find it anywhere else at the end of your process, to the beginning of your process. We want you to start at Etsy.

I'm planning a wedding, I just had a baby. I'm redecorating my home. At the very beginning, we want you to start on Etsy, and we know we have so much opportunity there. And we've not been great there. We think we have an opportunity to become really great there. And I think that LOMs are going to really help organize this enormous corpus of listings we have to be understandable by humans help to navigate it and make it a great starting point. So a loyalty program is a way of saying, "Hey, join our loyalty program and start your commerce missions."

We want you to pay a little bit of money every month. And now that you've made that commitment, we want you to think every time you're buying something online, why don't you start that mission on Etsy. We tested paid and free together. And if you launch them together, they tend to cannibalize the free tends to cannibalize the paid, thought better to start with paid, not saying we would never do it free. I'm saying, we're going to evolve. We're going to test. But our consumer research suggested if you're going to task best to start with a paid program.;

[Operator]

Our next question will come from John Colantuoni with Jefferies.

[John Colantuoni, analyst]

Just wanted to add on marketing. So on the performance marketing side, up 31%, that's the biggest increase since 2020. Given that, that is currently significantly faster than the trajectory of GMS, just talk about what gives you confidence that once you recalibrate the trajectory of performance marketing to better balance growth and profitability that you won't see a big pullback in GMS?

[Rachel Glaser, executive]

Can I start with -- first of all, last year in Q2, we did pull back on marketing spend because we were running incremental tests during that quarter. So the base was sort of not a normal base. So that's one of the reasons for the growth in this year's Q2 marketing -- performance marketing spend. We also spent a bit of time talking about we've been able to -- and we've done this throughout to test our way into new channels, and we will test for a while until we can optimize to get the positive. And we've been very happy that on paid social and paid social video. Those are new channels for us, and we've been able to bring them up to be ROI positive, and we showed a chart that shows that they are an increasing percentage of our total performance marketing spend. And that's not instead of PLAs and other existing channels that's in addition.

So we feel confident in those investments as well. And then -- the other thing that we're testing as more markets outside of the U.S. where we've seen really positive in some of those countries that are noncore to top 6, and so that's -- some of those are in the phase of incubating them and optimizing to get the ROI positive and some of them are actually producing at this point.

Do you want to take the second part of his question? The second part, John, was how do we have confidence that those, I guess, not be dilutive to margins over time?

[Joshua Silverman, executive]

Yes. I mean we always have a lot of discipline on when we invest a dollar are we getting a meaningful return back all the way down the marginal return curve. What I'm encouraged by right now is we're starting to make progress on paid social. And I think that's really helpful for us. And it's an area that we want to lean in. And when I talk about going from the place to go after you've looked everywhere else and you already know exactly what you want, that's really a PLA, right? I know exactly what I'm looking for, and I've searched for it in Google. To a much higher level use case like I'm generally planning a wedding, but YouTube, these places are much better at these very high-level generalized use cases, and the better we can get is targeting those users and then having a landing experience that's highly organized that takes you from mid-funnel consideration all the way down to here's really the few items that make the most sense for you all the way down to here's what you're going to want to buy, I think that unlocks a whole new opportunity for us. So I'm encouraged by the progress we're making in paid social. We're always going to have a strong eye for ROI.

The other work that we're doing on quality, for example, on loyalty, on abstract is really to make sure that once we've engaged you, we're really pushing to engage you in the app and then get you to come back again and again and build that frequency loop. And that's going to be another big unlock for us.

[Rachel Glaser, executive]

And just one last note is that we did reiterate that we expect our full year margins to be at least as high as last year's margin. So we have confidence in the way that are going to flow for the rest of the year for us to be able to achieve those margins.

[Operator]

Our next question will come from Rick Patel with Raymond James.

[Rakesh Patel, analyst]

Rachel, congrats on an amazing career. Sath for us, really happy for you in your next chapter. Can you talk about your efforts to emphasize value on the marketplace. So how are you working with sellers to communicate the importance of offering sharper price points and discounts? And secondly, how do you execute that in terms of making sure you put the right deals in front of the right buyers?

[Joshua Silverman, executive]

Yes. So the efforts we've had in place in the past continue in terms of having a robust toolkit for sellers, so they can put their items on sale. They can offer a discount to a returning customer. If you left an item in checkout, they can offer you a coupon to get you to come back and close. And we see sellers continue to use and adopt those tools. We have, for example, as part of the loyalty program, deals and drops, we're going to be highlighting like things that we think are really cool value and really special value. We want to lean more into discovery on Etsy, where we just -- we highlight things we think are cool and we don't put all the effort on the buyer to have to have the keyword in mind a search for it. But the main thing I want to emphasize in this call is we're investing a lot more in the differentiation of Etsy. Who's the human behind the item? And what was her role in the process and really elevating that. And I think there's a big opportunity in our user experience for us in the coming quarters to do a much better job centering the seller and her role. And in doing that, I think it can really emphasize how special this item is, how this item is and give her more pricing power for the value that she deserves. And that's an area that we want to lean into as well. I think it's important.

[Debra Wasser, executive]

Another good example you might want to do is just -- it was on the prerecord for the demi-fine.

[Joshua Silverman, executive]

Yes. So look, if we look at our jewelry category, jewelry under $10 is under a lot of pressure, right now. And there was a period of time when malls were closed. And so you couldn't buy jewelry many other places, and Etsy sold a lot of jewelry under $10, but under $10, they have $5 or shipping. It's not obvious that buying it on Etsy is going to be the place where we're going to shine. And I'm not saying there isn't wonderful jewelry under $10 on Etsy. There is. We have wonderful sellers who sell that. But demi-fine jewelry of, let's say, value between $100 and $200, we have amazing value there. And those items are growing quite nicely. For example, engagement range on Etsy, you could buy a beautiful engagement ring just for you often to your specifications for a price at a fraction of what you pay in the mall. That's an area where we have real competitive differentiation. We have a real right to win. And we want to make sure that those really get elevated and get a chance to shine. So we're leaning in a lot more there.

It's another place actually to talk about LLMs. One of the challenges is we have such a diverse set of inventory there that getting all of the attributes for all of those items labeled accurately has historically been a chance for us. That's a task LLMs are doing quite well. So we've asked LLMs to go after our whole jewelry category and tell us what's the material, what's the carrot, what's the weight of it and it's doing a nice job and then allow us to do that filter. What are the filters a customer would expect, how do we apply those attributes and create a more organized shopping starting in jewelry, and we're seeing LLMs there have a very nice effect.

[Operator]

Our next question will come from Chris Kuntarich with UBS.

[Christopher Kuntarich, analyst]

Could you just talk about sustaining the 23% EBITDA margin for '24? Is this really just a 24 dynamic? Or is there really a willingness to revisit this against a different backdrop? And then, Josh, can we really 0 in on the app? Who's using the app today? How is engagement maybe differ from buyers that were pre-COVID versus new buyers? 42% of GMS is a very material amount. Just any that you can kind of share on that.

[Rachel Glaser, executive]

What we love about our model is that we have a very variable cost base relative to our fixed costs. So when we drove much higher GMS and revenue, a large percentage of that flows through to EBITDA. We demonstrated that for many quarters when we were in the peak of our pandemic. We were showing tremendous flow through to bottom line. And since then, we've continued to maintain the Etsy stand-alone margins, most of the contraction we've seen has come from the addition of our subsidiary. So we've really kept both those things steady, the amount of contraction from our subsidiaries and the amount of Etsy margin. And we've been doing that in spite of flat to down GMS and modest increases in revenue. So what we expect going into the last part of this year, is we expect to see -- we have a traditionally higher fourth quarter GMS in revenue because of holiday sales. So that happens against the backdrop of this relatively high variable cost base. So we see higher flow through to bottom line during that period of time.

And we see some things working in our favor versus last year, where last year, for instance, we had sequential from Q3 into Q4 on above-the-line spend, there was a bigger increase than we're expecting this year. Last year, we saw higher cost of revenue related to fraud that we don't expect to see this year. And we've been working really hard on things like that in our trust and safety organization to make sure that we keep those costs as low as possible while also keeping our marketplace safe. So we feel very comfortable about the level of our margins. We are a very productive and very lean organization. We showed a slide in this deck that showed revenue per head count. And when we've been asked in the past about why not reduce your cost even further to expand margins, we think if we did that, it would be at the cost of GMS and revenue because we are such a lean organization, and we manage every single head in our product and engineering organizations for an ROI positive results. So we feel pretty good about how we're managing our cost base and the profitability that we're delivering.

[Joshua Silverman, executive]

Yes. I mean we haven't given forward guidance. I don't want to -- we're not going to give forward guidance. This is a team that has always cared about efficiency, as always cared about productivity. Every quarter and every year has been a quarter and a year of efficiency for this team. There's never been a year when we said screw and we don't care. And we want to make sure we're investing appropriately for the future. The margins in the core business are 30%. You can't find a marketplace of our size and scale with the margin anywhere close to that. And when you look at revenue per head count, you've got to start looking at businesses that are multiples of ours getting all of the fixed cost leverage that they get to get to comps like ours. So I think it's a real testament to how much we have always cared about efficiency, and we want to make sure we're investing appropriately the very large opportunity that we feel we have. And we're always thinking carefully about how to balance that to make the value grow as much as we possibly can for all of our stakeholders.

[Debra Wasser, executive]

Do you want to squeeze in the quick answer to Chris' second question who is using it and...

[Joshua Silverman, executive]

Absolutely. So it's about 42% of our GMS now it's growing quarter on quarter. It's about 45% of our active users that have downloaded the app -- but when a user download app, they start visiting us a lot more often, and their lifetime value goes up. In fact, the most lifetime value-accretive thing you can with a user is get them to download the app. It skews a little more young app users. But otherwise, we had thought for a long time that the only people who are willing the app are our most habitual users. We've been finding lately that first time users are downloading the app before they've even bought anything. So I think consumer behavior has really changed and we have an opportunity to make the onboarding and the app the first place in the center of your op experience where historically, it's been a place that people have been wanting to migrate once they've shopped on Etsy several times. I think that's very exciting for us.

[Operator]

Our final question will come from Michael Nathanson with MoffettNathanson.

[Michael Nathanson, analyst]

Congrats again, Rachel. Hope you enjoying the time. Two quick questions, if I can. One, Richard, to follow up on your comment about Fraud, you've highlighted that as a gross margin headwind, I believe, in the 10-K. So I was wondering if you could maybe quantify like the effectiveness of the onboarding speed bump and how that's been lift to gross margins. And if it's something that we should expect going forward?

And then my second question, I think, may be geared more towards Josh. And that's just talking maybe a little bit about the limiting factors for on-site ads. And you've spoken that some sellers try to give you more money than you can allocate. Service revenue growth has decelerated granted against tough comps. But just trying to think about the opportunity to grow that as a percentage of GMS or we're at some type of structural limitation to the ad load?

[Rachel Glaser, executive]

On the fraud, I think, first of all say, I don't think we're ever done. I think all large marketplaces and all businesses that have subscription models or take credit cards in any way, they're all experiencing the same thing. So we've -- I think we've done an effective job of getting our broad rate which mostly result in us refunding buyers because a seller has promised to ship something that never -- that was fraudulent, but they never shipped sometimes it results in chargebacks or other things. So with the rate was very high in Q4 of last year, and what we learned is that these fraudsters way and wait for the Q4 season, and then -- then it comes rampant. So we're -- I think than we were last year, and we've done multiple things, seller onboarding fee was one of many things. And I think it's been modestly helpful. Did we give a stat. I'm sorry, I don't remember on the impact of the seller onboarding -- And it's been modestly additive to revenue, but that's not the main reason we did it was really to create that speed up for sellers onboarding, but we've done many other things in the whole portfolio of I think very sophisticated in fraud, and it's allowed us to reduce the reserves that we put in place for fraud what our fraud forecasts have come down. So we think we're in great shape for Q4, and we're I'll hand on is wide open to.

[Joshua Silverman, executive]

And on Etsy Ads, the rate of ad growth slowed, but actually take rate still modestly expanded as a result of Etsy Ads. So I continue to think there's a lot of opportunity in Etsy Ads. As we've shared, but for most of the sellers big enough to be using Etsy Ads are, some of them are giving us more budget than we can use. Some of them are giving us less budget than we can use. So nudging some of them to give us a bigger budget is a lever. The biggest lever continues to be picking the right ad to put in front of the right buyer because that's the win-win-win. It makes the buyer experience better. It keeps the seller roll off high, and that's something we're always very focused on, making sure the sellers get money, get value for money on this advertising investment. And obviously, it's great for shareholders.

So we continue to get better at showing the right ad to the right buyer, and that's where we're going to continue to drive take rate up from the Etsy Ads I think there is still plenty of room for us to continue. Just as our search engine keeps getting better. It's very related to the Ads search engine, which is also going to continue to get better.

[Rachel Glaser, executive]

Great. Thank you. We went over by a few minutes. So I think we're going to call it.

[Joshua Silverman, executive]

I just want to close by saying, again, Rachel has been a wonderful partnership. I know we're not done. We'll continue working together until the next CFO is seated. But as I told you privately, you have left large small shoes really great for

[Rachel Glaser, executive]

Thank you. And likewise, it's been just joy to be here.

[Debra Wasser, executive]

So be here for a while, and I'll see you all so -- thank you all.

[Rachel Glaser, executive]

Take care.

[Joshua Silverman, executive]

Thank you very much. Thank you.