ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2022-Q3

[Deb Wasser]

Hi, everyone, and welcome to Etsy's Third Quarter 2022 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and ESG Engagement. And joining me today are Josh Silverman, Chief Executive Officer; Rachel Glaser, Chief Financial Officer; and Jessica Schmidt, Senior Director of Investor Relations.

Today's prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session.

Questions can be submitted via the Q&A window chat displayed on your screen. Feel free use it at any time, as it will remain open throughout the entire conference call. I'll be reading your questions, and Jessica will help me 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, key drivers thereof, and underlining assumptions, the global macroeconomic uncertainty and volatility, including the impacts, general market, political, economic and business conditions may have on our business strategy or operating results, uncertainty regarding overall levels of consumer spending and e-commerce generally, the impact and duration of reopening headwinds and stabilization of COVID-19-driven economic trends, our levers for GMS growth and our plans for investments in our marketplaces and in our member support programs, the potential impact of our strategic, marketing and product initiatives and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially.

Forward-looking statements involve risks and uncertainties, which are described in today's earnings release and in our Form 10-Q filed with the SEC on July 28, 2022, and which will be updated in any future periodic reports we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.

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

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

[Josh Silverman, Chief Executive Officer]

Thanks, Deb, and good evening, everyone. We're pleased to once again be reporting strong results. Etsy's consolidated third quarter 2022 GMS was $3 billion. Revenue grew to $594 million and our adjusted EBITDA margin was again very strong.

Etsy marketplace GMS was $2.6 billion this past quarter, compared with about $1 billion in the same quarter three years ago. And when adjusting for rather formidable currency headwinds, GMS for our core marketplace was up a bit on a year-over-year basis.

We believe this performance is the direct result of the actions we've taken to put our larger size and scale to work, investing in our sellers and aiming to drive long-term growth in our active buyer base, with strategies designed to fuel awareness with new audiences, retention, reactivation and frequency. And these investments have really paid off.

Not only is the Etsy marketplace over two times bigger than we were three years ago, but overall, we've held most of our gains. This speaks volumes to the work done by teams across Etsy, particularly within the context of a fully reopened world and ongoing macro challenges.

In my opinion, this is a great setup for future growth. Another reason that we believe our business has held up so well in this post-pandemic environment is because in a world of mass commodities supplied by companies obsessed with speed and scale, Etsy is the antidote. Etsy offers something different, and we've continued to invest to bring even more joy to the very human experiences of selling and buying on Etsy.

During the pandemic, tens of millions of buyers tried Etsy for the first time or for the first time in a long time. And our customer research indicates that most buyers were delighted with the experience. I've spoken with so many buyers who described how it was better than they expected or than they remembered, easier to find great products, easier to buy them and with a more trustworthy and reliable post-purchase experience. And of course, they found the human touch from our sellers to be so differentiated and special.

So while millions came to us during the pandemic, because they had limited choices, it's clear to me that they're coming back again and again now because they want to. We're just getting started advancing our Right to Win, our playbook for ensuring that Etsy is the first stop when you want to shop your tastes and values. By simultaneously succeeding in all four of its elements, we differentiate our value proposition in a highly competitive environment.

As we explained on prior calls, this year, we've organized our investments around making Etsy feel more made for you, more efficient and inspirational, making Etsy more reliable and continuing to support our sellers' growth by offering them more agency and scalability. Some of you have asked if we're running out of ideas to fuel future growth. In fact, the opposite is true. Even as the team has scaled significantly, we're seeing return metrics like incremental GMS produced per squad holding steady at very high levels. While our backlog of great ideas significantly exceeds our capacity.

One of the needle-moving innovations I'm most excited about is the journey we're on to leverage personalization to better tailor Etsy to the tastes and needs of each buyer. Etsy buyers struggle with our tyranny of choice. For example, user feedback I saw recently from an Etsy shopper who complained about his search for lamps. '400,000 results? Hmm. No, thanks. I'm going to take a hard pass on that.'

That's why it's so important that we narrow search results and get you to the good stuff fast, especially challenging since each person has their own idea of what the good stuff is. We need world-class search technology married with world-class personalization.

Your search and discovery journeys, on-site experiences and e-mails, push notifications, app engagement all need to be relevant to you and the mission you're on, whether to find something for yourself or for a loved one, to find just the right thing that truly reflects your style and tastes or to just hang back and be inspired, which, of course, is also a very personal experience.

In this way, we can make Etsy feel made for you. And because it's so challenging, our investments here are a key source of our competitive differentiation. Every quarter, we'll expect to make progress on this journey, and I'm especially proud of the progress we've made in the past few months.

In our effort to get you to the good stuff fast, we began to incorporate signals into our search engine correlated with quality, such as seller reviews, on-time shipping performance, customer responsiveness and price. In this way, we don't simply prioritize items that match your search query, but rather items that are the most likely to result in a delightful purchase experience.

I'm excited that this quarter, we added videos to search results. Similar to the add-to-cart button in search we mentioned last quarter, we're now able to bring highly differentiated information to buyers directly on the search result page without needing to click through to the listing, creating a very social shopping feel on Etsy that we believe can be inherently more personalized.

We also had some early wins incorporating buyer tastes and interests to create more interpretable and personalized recommendations. For example, if we believe you like mid-century modern style and you do a search for lamps, we'd be more likely to show you lamps that fit the mid-century modern aesthetic.

We're making great progress expanding search capabilities in non-US markets, launching in-session personalized ranking to better rank order results, introducing dynamic information retrieval, which helps us to choose more relevant listings for you and adding neural models that help us to understand what you're looking for, even if you don't know how to describe it.

And speaking of making it easier for buyers who may have trouble finding the right words to describe an item, just a few days ago, we launched a new capability for iOS buyers to take or upload a picture of an item and search on Etsy for items that are visually similar.

Cool technology advances like this support the notion that you can find virtually anything on Etsy. And more often than not, that item will be different and more special than what you might find elsewhere. I'd encourage you to check it out around your own homes. It's a powerful way to see the breadth, depth and versatility of merchandise on Etsy.

Our personalization journey is not just in product development. Our marketing teams are also doing great work here, contributing to the great buyer retention and reactivation we've had this year. We're finding so many ways to bring buyers back to Etsy, by reinforcing what our brand stands for in bold and creative ways and offering evermore relevant updates, triggers and pathways to keep you coming back.

For example, this year, we've created a personalization engine that models and predicts the next best action a buyer should take on Etsy and then sends personalized content specifically to them, bringing to life a timely and relevant message. This might be a reminder to visit a shop you favorited, whose listing is now on sale, or go back to your cart to complete a purchase, or suggesting you favorite a listing you recently viewed so you can get alerted if it's about to sell out or go on sale.

In addition to our focus on improving buyer experiences, 2022 has also been a year of tremendous investment in our sellers. We're always listening and trying our best to respond with care. In fact, every month, we hear from hundreds of thousands of sellers through research groups, surveys, forums and social channels, support lines and community events. It's been really encouraging for us to see that our seller sentiment metrics continue to trend favorably.

We strive to understand our sellers' passions, their craft and the scale of their business better than any other platform. We provide affordable access to our global marketplace, scalable tools, support and services for shop management and growing customer relationships. And we elevate their unique items in a global marketing campaign that they could not create alone.

A major area of focus is to give our sellers agency, the ability to understand what can drive their success, enabling them to act on that understanding and be rewarded for it in ways that ultimately grow their sales. One great example of how we do this is our Star Seller program, which provides sellers with a dashboard highlighting the metrics buyers care about, such as being responsive, shipping on time and getting great reviews. It then rewards with badging and increased prominence those sellers that best deliver in these key areas. The number of sellers in the program has increased over 150% year-over-year, and they represent a growing percentage of our GMS. Our data indicates that those sellers who have the badge earn about 18% more GMS than their similarly situated non-Star Seller counterparts.

Even more importantly, we continue to see the Star Seller program positively impact responsiveness and shipping practices across the marketplace, resulting in an elevated experience for Etsy buyers. We're also continuing to give sellers insights to help them understand the macroeconomic pressures and think about creating pricing strategies for their listings, including adding systems for tracking their expenses and income, considering discounting in their pricing strategies and participations in sales events on Etsy.

Being the platform sellers love to sell on, also means having their back when things affect their business that are out of their control. For example, when Hurricane Ian made landfall last month, we saw devastating impacts across Florida, where we have a meaningful concentration of sellers. We reached out to impacted sellers with guidance to help them manage their shops in the wake of the hurricane, and among other things, offered bill deferments and the extension of Star Seller status to ease their burden.

As you know, we're on a multi-year journey to deepen buyer loyalty and trust, a journey we believe will bring even more buyers to Etsy and get them coming back more frequently. The Etsy Purchase Protection Program was launched August 1 as a set of policies built to ensure our customers, both sellers and buyers have a positive experience on Etsy. While it's early days, we're very pleased with how the launch has gone, helping to make shopping and selling on Etsy far clearer, easier and more reliable.

Since launch, average resolution times for order issues escalated to Etsy have been cut in half, while customer satisfaction scores related to how we handle these cases have meaningfully improved. We've had conversion rate wins from adding purchase protection messaging on listing pages and in cart. And our customer support team is seeing positive trends across issues management and ticket volume. The program is off to a great start, well in time for the holiday season.

Another key element of trust is returns. During Q3, we announced significant improvements, moving from having sellers set a single policy for their entire shop to allowing them to set return policies at the individual listing level. This is important, as sellers often sell a range of items, for example, some best sellers where returns are accepted and others personalized or customized where returns are not.

These return policies have been developed as highly customizable parameters that can meet a wide array of sellers' requirements. And by quarter end, approximately 70% of global Etsy listings had a listing-level return policy, offering buyers a great deal more clarity in time for the holiday season.

All of this work contributes to a KPI we're tracking for easy resolution rate, how all of our initiatives, such as delivery transparency, purchase protection and return policies work together to help us resolve buyer problems more quickly and easily, to instill a brand promise that you can trust and rely on. And I'm pleased to report this KPI has been steadily climbing all year.

Moving now to our Super Bowl season, the holiday shopping period. We recently completed a survey to gain insights for how consumers in our top three core markets were thinking about the holiday season.

Our data shows that while holiday shoppers and, even more so, Etsy buyers, will be looking for sales and discounts with an eye on affordability. Finding meaningful high-quality gifts is actually the most important to them. So we'll be leaning into our message of extraordinary, handmade, affordable this holiday season, reminding buyers that for gifting moments, big and small, Etsy has it.

[Video Presentation]

We're pulling out all the stops, as we do every year, to help make sure Etsy sellers have the best holiday season they can, particularly in the face of continued economic uncertainty.

In September, we held Etsy Up: Holiday Edition, our first ever global holiday kickoff event for sellers around the world. Think of it as a one-stop shop for all things holiday prep. The interactive online experience included insider access to trends, tools and actionable takeaways to help sellers' shops get discovered and grow, topics like marketplace insights and trends, social media strategies and SEO tips. With about 80,000 registered attendants, nearly 500,000 views across all content and a 97% like rate from sellers, this virtual event was also the largest-ever gathering of Etsy sellers in our history.

Turning now to our subsidiary brands. When we purchased Depop and Elo7 in mid-2021, we based those decisions on the long-term growth potential we saw in their businesses, their alignment with our core mission and highly differentiated marketplace model and our belief that over time, they could benefit from Etsy's operational and financial playbook to perform better as part of Etsy than they could alone, making the sum greater than the individual parts.

In hindsight, given what we've seen happen to technology and consumer company valuations as well as macro business headwinds and other factors such as rising interest rates, our timing on those acquisitions certainly could have been better. While Rachel will review how these and other factors necessitated the adjustment of goodwill we took in the quarter, I want to reiterate that we have tremendous conviction that we're in the early days realizing value from our House of Brands strategy.

At Depop, Kruti is settling in as the new CEO, focused on building momentum in the business, developing her vital view for 2023, identifying the fewest most impactful things to reaccelerate growth and improve operational efficiency in service of the Depop community. The team will be leaning into some themes that should sound familiar to you, like launching the right growth initiatives to scale conversion and influence user engagement in order to deliver an experience that brings more people to Depop and keeps them coming back over and over again.

Depop is focused on making it faster and easier for users to explore their style and find the items they're looking for. Similar to Etsy, we know today's consumer is looking for both great style and great value. So they're equally focused on improving the value of the shopping experience during a time when the dollar or the pound isn't going as far as it used to.

Accelerating the velocity of product experimentation is a foundational focus area for Depop, as well as optimizing initiatives that potentially scale revenue, such as our newly-launched Boosted Listing Ad Platform. We would then look to reinvest that revenue into areas like marketing that spur further growth, really getting the marketplace flywheel moving. If these initiatives sound familiar, it's because they're the same ones Kruti helped lead back in 2017, which reignited Etsy's marketplace growth.

Elo's business has been building momentum in 2022, as Brazil is beginning to see some rebalancing of wallet share between e-commerce and brick-and-mortar, and our GMS from event-driven categories is now above pre-pandemic levels. We're focused on rebuilding top-of-mind awareness for the brand, which suffered during the pandemic. Elo7 has collaborated with the Etsy team to improve search, optimize performance marketing and negotiate better carrier relationships that bring reduced shipping costs to sellers.

Reverb has continued to perform well this year in a challenging environment, with growth outpacing the musical instruments market in the quarter. Reverb had several work streams to make great deals available on the marketplace, improving search functionality to highlight popular listings priced to sell efficiently; enhancing its price guide, an important tool that allows both sellers and buyers to better understand gear pricing; and partnering directly with manufacturers, brands and authorized dealers to highlight refurbished B stock and demo gear to bring more great deals to musicians.

I want to take a moment to thank our team for continuing to drive innovation and bring more buyers to our millions of sellers around the world in ways that are inherently human, special and different. In particular, I'd like to thank our CTO, Mike Fisher, who will step down from his role at the end of the year. Fish has helped lead Etsy through a period of transformation and growth over the last five years, indicative of our strong bench of talent and thoughtful succession planning, I'm thrilled to congratulate Rachana Kumar, who will step into the role of CTO come January. Her promotion is a testament to her tremendous accomplishments during her eight years at Etsy and to the followership she's earned throughout the company. Rachana has played a leading role in so many of our critical engineering initiatives and has been a tremendous talent magnet, coach and mentor across the business.

I'll wrap it up today by addressing a question a lot of you have been asking lately, what will the 2022 holiday shopping season look like? The truth is, we don't know. Whether consumers will spend more or less on gift-giving or whether they'll do more shopping online or in the mall.

But the good news is, our business, with differentiated inventory across our House of Brands and a variable cost model, doesn't depend on us taking huge bets on these questions in the same way most retailers or e-tailers must. So we'll keep focusing on the things we can control, delighting our customers, investing with discipline and care and helping our people minimize distractions and get the job done.

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

[Rachel Glaser, Chief Financial Officer]

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

As a reminder, Reverb, Depop and Elo7 are all reflected in our consolidated financial results and KPIs for the third quarter of 2022, with Elo7 and Depop included as of July 2 and July 12, 2021, respectively.

On a consolidated basis, our third quarter GMS was down 3% year-over-year to $3 billion. Our revenue increased 11.7% year-over-year to $594 million, and adjusted EBITDA was $168 million with a strong 28% margin.

Our adjusted EBITDA margin was driven by both revenue strength and disciplined operational expense management. On a currency-neutral basis, GMS increased 0.7% year-over-year, as FX headwinds accelerated 100 basis points to a 400 basis point headwind in the quarter.

We continue to face challenging comparisons as our consolidated GMS increased 18% year-over-year in the third quarter of 2021 on top of a 119% increase in the third quarter of 2020 due to pandemic lockdowns, stimulus benefits and other factors. Our business has continued to stabilize, similar to the trends we discussed on our last earnings call. And our investment discipline is evident in the strong adjusted EBITDA margin.

On a consolidated basis, marketplace revenue increased 12% year-over-year, and services revenue expanded 10% year-over-year. The growth of our marketplace revenue was primarily driven by a full quarter benefit of the Etsy marketplace transaction fee increase from 5% to 6.5%.

Within services revenue, consolidated ads revenue increased 14% year-over-year due to ongoing growth in Etsy ads, impacted by prior period improvements such as ads on our homepage, as well as a new capability that utilizes computer vision to help determine buyer intent and serve a more personalized ad experience. This initiative led to higher click-through rates, ad impressions and conversion rates. Solid Etsy payments performance and better-than-expected growth of Etsy ads drove higher-than-expected consolidated take rate, which was 19.8%.

Consolidated adjusted EBITDA margins declined on a year-over-year basis due to factors we've noted on prior calls, investments in headcount growth and increased compensation and, to a lesser extent, higher cloud computing costs related to greater development activity. We delivered strong profitability again this quarter, with overall adjusted EBITDA margins largely stable over the past three quarters. Our subsidiaries continue to represent a headwind to our overall adjusted EBITDA margin.

Moving to our investment areas. Consolidated product development spend increased 47% year-over-year to $108 million, primarily driven by headcount growth. Our product development line is where most of our engineers sit and represents the largest portion of our headcount growth since 2020, both for Etsy as well as the addition of Depop and Elo7.

As we previously highlighted, we scaled our engineering team in a thoughtful and sustainable way during the pandemic, significantly lagging our growth in GMS and revenue. This was followed by a pickup in our pace of hiring in 2021 and early 2022. As our growth rate slowed in the second quarter of 2022, we similarly slowed hiring.

Third quarter product development spend reflects a full quarter of the prior quarter's headcount additions, now representing 18% of revenue, up from 14% last year, which we believe is an appropriate level to enable future growth. During the third quarter, we increased our consolidated marketing spend by 12% year-over-year to $147 million, primarily driven by an 8% increase in performance marketing spend, which represents the majority of our spend.

A combination of optimized attribution models and a higher buyer LTV related to our transaction fee increase, allowed us to lean into performance marketing, while maintaining our ROI hurdles. It's important to keep in mind that with our 30-day attribution model, some of the return on this higher spend will be earned in future quarters.

Etsy brand campaigns in our top three core markets, including out-of-home brand marketing in Germany, drove brand marketing spend up 25% over the prior year. In addition to seller-driven promotions, the Etsy marketing team has continued to use highly targeted Etsy funded promotions to drive retention and engagement in a disciplined ROI-focused way.

We have long stood by the principle of a fair exchange of value related to the commissions we earn on marketplace sales. When we increase a fee to a seller, we do this in exchange for value we provide them, creating a virtuous flywheel that helps sellers grow and invest in their businesses.

The pie chart on Slide 20 illustrates our estimated annualized reinvestment of incremental revenue generated from our transaction fee increase. First, engineering headcount is our largest bucket of spend, and we are allocating a meaningful portion to product development initiatives to improve customer experience.

Second, we are continuing to increase our marketing spend commensurate with a higher LTV. Third, we are focused on building loyalty and strengthening our brand with our new Etsy Purchase Protection Program. It's worth noting that our Etsy Purchase Protection Program issue report rate, resolution rate and refunded GMS estimates are all trending generally in line with our forecasts. Lastly, we continue to increase our investments in trust and safety and customer support, as we've described on previous calls.

Moving to our Etsy marketplace performance on a standalone basis. During the third quarter, Etsy marketplace GMS declined 3.8% year-over-year and increased 134% on a year-over three-year basis as top line trends stabilized following two quarters of deceleration.

In particular, we believe we have experienced the majority of reopening headwinds that have weighed on our GMS performance for most of the year. The third quarter was relatively stable on a monthly basis, and our year-over three-year growth rate trended slightly higher in October, further increasing our confidence that reopening headwinds are largely behind us. We do continue to see quite a bit of volatility in week-to-week GMS trends from the broad macroeconomic factors impacting consumer discretionary spending such as inflation.

On a currency neutral basis, Etsy marketplace GMS increased 0.2% from the prior year, as you can see in the navy bar on this slide. We grew on a year-over-year basis and are well over twice as big as we were in the third quarter of 2019.

While thankfully, face masks are in the rearview mirror, it's worth mentioning that in the third quarter of 2021, we benefited from an increase in GMS due to the Delta variant surge, which accounted for an approximately 100 basis point headwind in the third quarter of 2022.

From a geographic perspective, 44% of Etsy marketplace GMS in the third quarter of 2022 was from transactions where either the buyer or seller or both were outside the United States. Non-US GMS increased 9% year-over-year on a currency-neutral basis, driven in part by the continued strength in Germany, where we have recently been investing to build brand awareness.

As would be expected, the strong US dollar has driven growth in the US imports for the Etsy marketplace, which is providing additional support to our sellers in international markets. Overall, we are pleased with the domestic vibrancy we built in the UK and Germany, where we have domestic demand balanced with domestic supply.

This equilibrium between supply and demand is what we strive for in other emerging markets. For example, in preparation to serve the India domestic market, we launched new pricing capabilities to allow sellers to easily add domestic and global prices, partnered with a local provider to enable payments functionality and added domestic carriers to our shipping options during the third quarter.

From a category perspective, the diversity of our listings continues to be part of an important part of our value proposition. Our eggs are not all in one basket, so to speak. For example, during the quarter, we saw strong trends in fashion-forward clothing, bags and purses, as well as gifting and holiday home and living items.

We achieved a 25% year-over-year increase in GMS from items related to back-to-school purchases. And items associated with Halloween increased 17% from the prior year. Two categories which have been most pressured by reopening headwinds, home and living and craft supplies, showed signs of stabilization in the third quarter.

GMS per active buyer on a trailing 12-month basis for the Etsy marketplace was $135 in the third quarter, which was down only slightly on a sequential basis, providing further evidence that trends are stabilizing at levels far above our $102 in the third quarter of 2019, as shown on this slide.

GMS per active buyer on a currency-neutral basis for those buyers who purchased in the third quarter, once again, increased slightly from the prior year, suggesting that we are maintaining the majority of our pandemic gains. Encouragingly, our buyers are shopping more frequently, with average purchase days up 25% on a year-over-three-year basis.

Our buyer metrics remained mostly stable across active, habitual and repeat buyers. We ended the quarter with 88.3 million active buyers, a slight increase sequentially, after two quarters of modest declines. We had 7.6 million habitual buyers, down 2% sequentially. While, of course, we are seeing some degradation in this number as the lockdown periods roll out of our trailing 12-month figures, these loyal buyers accounted for 46% of our GMS in the third quarter. And habitual buyer growth in Germany and Australia remained a bright spot.

We also continue to see healthy new buyer acquisition and great performance in the reactivation of our lapsed buyers. In the third quarter, we added over 6 million new buyers, relatively flat sequentially and nearly 50% higher than our average in pre-pandemic periods, but down 10% year-over-year. We continue to make progress with buyers to identify as mail, which represented 37% of US new buyers in the quarter.

One interesting data point on new buyers is that we have seen their average number of purchase days increase about 9% on a year-over-three-year basis, meaning we are making great progress getting new buyers more engaged with Etsy. We reactivated over 5 million lapsed buyers in the quarter, representing an increase on a sequential basis. In fact, we've reactivated more buyers in each quarter of 2022 compared with the corresponding quarter last year.

Before moving to the balance sheet, I'll comment on the non-cash impairment charge of about $1 billion we recorded on the goodwill of Depop and Elo7, eliminating the full amount of goodwill we were carrying for each brand. We purchased these businesses when technology and consumer company valuations were at much higher levels. For instance, many peers have seen enterprise values decline by 70% or more. And you have all seen the recent announcement of the sale of Poshmark to Naver for less than half of its IPO value in 2021.

Another key factor that impacted our valuation analysis was the significant change in the discount rate, driven by an increase in interest rates following a series of Fed rate hikes totaling 300 basis points since the time of acquisition, leading to higher cost of equity and debt alongside increased inflation expectations in the UK and Brazil. Other factors that went into our conclusion to impair the goodwill included the performance to-date and near-term forecast of both businesses impacted by the macroeconomic conditions you are all quite familiar with, such as reopening headwinds, inflationary factors, consumer discretionary spending trends, foreign exchange rate volatility and ongoing geopolitical events.

The impairment charge had a diluted loss per share impact of $8.20, resulting in a diluted loss per share of $7.62, or a net loss of $963 million. Despite the timing of these acquisitions, we continue to believe in the long-term growth opportunities for both businesses. As of September 30, we had $1.1 billion in cash, cash equivalents and short and long-term investments and a $200 million revolver that is currently undrawn.

During the third quarter, we repurchased $151 million in stock under our $600 million May 2022 Board authorized repurchase program. Operating cash flow for the quarter was a healthy $207 million this quarter, converting 123% of EBITDA to cash flow.

Now turning to the outlook, I want to first highlight that our guidance assumes currency exchange rates remain unchanged at current levels, and we do not use currency hedges. As a reminder, we reported consolidated GMS growth of 17% on a year-over-year basis in the fourth quarter of 2021. And GMS increased 154% from the fourth quarter of 2019 with a resurgence in COVID cases related to Omicron and global supply chain issues impacting many competitors, providing Etsy with strong tailwinds during the all-important holiday season last year.

As I previously mentioned, we are encouraged to see that our year-over-three-year growth rate in October trended slightly higher than Q3, marking about five months of overall GMS stabilization and suggesting reopening trends have largely normalized. That said, our guidance range for Q4 takes into account the dynamic and somewhat unpredictable period we are in. We currently estimate our fourth quarter 2022 consolidated GMS to be approximately $3.6 billion to $4 billion, down about 10% at the midpoint compared to the fourth quarter of last year and up approximately 130% compared to the fourth quarter of 2019. For the Etsy marketplace, this implies a year-over-year decline of roughly high single digits.

We are also encouraged that our overall trends in our subsidiaries are broadly showing early signs of stabilization this quarter. We don't yet know how the holiday season will play out for e-commerce in general, so we have incorporated a worsening macroeconomic environment and, therefore, a weak holiday period into the bottom end of our guidance.

We're forecasting revenue of $700 million to $780 million, up about 3% at the midpoint compared to the fourth quarter of last year and up 174% compared to the fourth quarter of 2019. We currently expect an adjusted EBITDA margin of approximately 27%, with seasonally higher marketing spend being the primary driver of the sequential decline.

In particular, you should assume a typical seasonal trend in marketing investments, where we will increase both performance and brand spend. We currently expect a consolidated take rate for the fourth quarter to be a bit lower on a sequential basis due to normal seasonality.

On a full year basis, using the midpoint of our Q4 guidance, we would expect to deliver about $13 billion in GMS in 2022, down about 3% compared with 2021, and revenue of about $2.5 billion, up about 7% with strong profitability throughout the year. We are encouraged by the stability in recent quarters, indicating we have indeed kept the vast majority of our pandemic gains.

As you think about 2023, recall that the strong start to 2022 from a COVID surge that kept many of us still at home, gives us a significant comp to grow over in the first quarter and that we started to see reopening headwinds in mid-February that didn't start to moderate until May. So while the year may start off slowly, we are optimistic for growth to resume in 2023, unless macro headwinds intensify.

Thank you all for your time today. And I will now turn the call back to Deb to take your questions.

[Deb Wasser]

Hi, everyone. Good evening. I'm going to dive right into questions. I know our prepared remarks went a little bit long, so thank you for bearing with us. First one, I'm going to give this one to Josh from Marvin Fong at BTIG.

Last quarter, you lost about 1 million buyers -- Etsy buyers. But this quarter, you added 200,000 on a similar number of gross adds. Is it fair to say that churn improved this quarter? And if so, which of your key initiatives do you think is most responsible for that improvement in buyer retention?

[Josh Silverman, Chief Executive Officer]

Yes. The short -- first, thanks for the question. I appreciate it. And the short answer is yes, that is a fair assumption. Churn decreased even further. Also, gross adds held up pretty well and we continue to reactivate lapsed buyers.

If you think about our trends, the reopening headwinds we felt, really, most severely between January and May, and so active buyers is a trailing 12-month metric. And as that gets further into our rearview mirror, things should stabilize even further, we think or we believe. But when I really pull the lens back, we went from maybe 40 million active buyers to close to 90 million active buyers during the pandemic.

And at the time, millions and millions of those were people who came from masks. Millions and millions of those came in 2020, when you couldn't shop offline in very many places. And even online, most places we're having shipping delays or supply chain issues or other things. And we were all asking ourselves how many of these people will come back. And we're really delighted that here we are in Q3 of 2022, where you've got a multitude of options and the vast majority of people are coming back, the vast majority. And so we feel really great about that.

To your question about what is keeping them coming back, what specific tactics, honestly, I think the most important thing is they really love the experience they're having. They find that it's easier to find products than they thought, that the products come within a reasonable amount of time, that they're fair priced and that they're delightful when they arrive. So it's kind of the best of all reasons, in my opinion, in that people just like the experience and it's different than what they find anywhere else.

In addition to that, we are pulling smart marketing levers, I think, to really remind people to think of Etsy at the right time. And I think that matters a lot. And then we're building more into the product. We talked a lot this call about all the personalization effort we're doing. And I do think that makes a really big difference that we're finding things that are right for you more and more, and able to present you with both e-mail and push notifications, but also recommendations on site that makes sense to you in different times. I think that has a big opportunity. I think it's helping. And I think there's a lot more for us to do with a lot more opportunity in the future.

[Deb Wasser]

Great. Thanks, Josh. Okay. So the next, I have two questions on take rate, and I want to combine them. One is from Laura Champine at Loop Capital, and the other one is from Anna Andreeva at Needham & Co., and I'll give this one to you, Rachel. The guide seems to imply a negative take rate trend sequentially. Is that right? And what would account for that? First part of question. And the second part is how should we model the take rate going forward into 2023?

[Rachel Glaser, Chief Financial Officer]

Thank you for the question and thanks for joining the call. I think you've done your math right. So our guide did imply that there's a slight decel in take rate, though we don't guide to take rate. And we've talked about this on a lot of other calls that seasonally in the fourth quarter, Etsy Ads relative to our GMS is a lower percentage, and that's because it takes fewer page views per purchase, because conversion rate goes up so high, and that drives Etsy Ads to be lower relative.

Said another way, Etsy Ads will be great, but GMS is going to be greater, and that's what drives the take rate down. Now we didn't guide take rate for 2023. So there's -- I think you could follow seasonally what we've done with take rates sequentially quarter-by-quarter to try and estimate what take rate might look like by next year. But we're not implying that take rate -- that this is indicative -- that take rate dip in Q4 is indicative of the full year 2023 at all.

[Deb Wasser]

Okay, great. Thanks, Rachel. Next one is also from Anna at Needham. Can you talk about the customer -- this is for Josh, can you talk about the customer reception of the Purchase Protection Program? And then I'll circle back with Rachel about a financial question related to purchase protection. But Josh, if you want to just talk about the overall reception that would be great.

[Josh Silverman, Chief Executive Officer]

Sure. I'm delighted to talk about it. We're really happy with how it's going. So most importantly, on the rare occasion that a customer does have an issue and creates what we call a case, internally, those cases are getting resolved much faster. In fact, the time to resolve has been cut roughly in half, because the policies are just super clear.

Etsy steps in and covers those costs in many cases when we might not have in the past. And that saves time, hassle and stress for everyone. So we're really happy to see that the customer experience is getting a lot better.

It's also true that as we're promoting purchase protection in places like checkout, we're actually seeing some conversion rate lifts. So it's yielding some incremental GMS, so that feels great. And, I guess, we'll let Rachel talk about costs.

[Deb Wasser]

Yes. So they’re weakened, but the costs come in line for the third quarter was a specific question. How is it feeling versus the $25 million annualized run rate that we gave?

[Rachel Glaser, Chief Financial Officer]

Yes, all of our metrics are tracking pretty close to how we originally forecasted them or better in terms of cost, the costs are in line. In terms of other metrics like issue resolution rate and things like that, those are tracking right where we want them to be.

[Deb Wasser]

Okay, perfect. Thank you. The next one is from Tom Forte at D.A. Davidson. Does in -- and I'll give this one to Rachel, I think. Does in-country buying and selling insulate you from changes in FX rates, for example, when there is a transaction between a UK buyer and seller? If so, does that lessen the impact on your performance from the strong dollar compared to e-commerce peers such as Amazon?

[Rachel Glaser, Chief Financial Officer]

No, it doesn't, because what we do is, the sale does happen between a buyer in that country and a seller in that country, but we do convert it back to USD for the purposes of our financials. We do get some benefit, which is that we have a natural hedge from OpEx in some of those markets, not all of them, but where we do performance marketing and where we have offices, we get some upside from the exchange rate helping us in the other direction.

And then the other thing is that, the metrics we've given you about the two-sided equilibrium in those markets is showing us that the FX is insulating buyer spending habits from. It's not -- the FX is not hurting them if they're buying and selling within their same currency. So the demand and the supply are not hindered by FX changes going to USD.

[Deb Wasser]

Great. Thanks, Rachel. Next one is for Josh from Corbin Weyer at R.W. Baird. You had $1 billion write-down after only a year from these acquisitions. What are your learnings from this experience? And how should we get comfortable that this doesn't happen again?

[Josh Silverman, Chief Executive Officer]

Thanks for the question. Fair question, I appreciate it. So, first, I'd say, acquisitions don’t happen overnight. And as we said at the time, we spent about two years courting these companies. They came to fruition, both of those acquisitions, coincidentally around the same time. And we felt great about the acquisitions. And in fact, the market felt overall, quite enthusiastic. I got a lot of really positive reactions from shareholders, and the general market reaction that we received at the time was positive.

And then, reopening headwinds hit, they hit quite hard for Etsy, for Depop and Elo7 and for many, many other e-commerce companies. And then inflation happened and interest rates rose and then a war broke out, Russia invaded Ukraine, and a lot of things happened and the whole market went down across many, many e-commerce names. And you're seeing us acknowledge that.

And so I own that, that's on me, the timing was wrong. We continue to feel great about the companies. We feel good about the strategy. And the timing didn't work out, so we will continue to do our best to make the best decisions we possibly can with the information we have. I think if you look back over the 5.5 years that this management team has been here, I think, on average and over time, we have been very good stewards of shareholder capital. We're very thoughtful. We are -- we've never been a growth-at-all-cost company. We've always cared about profitable growth and making smart investments, and we're going to keep doing the best we can to be good stewards of shareholder capital.

[Deb Wasser]

Thank you, Josh. Okay, Rachel, I'm going to combine a couple of questions on -- I'll start with one from Alexandra Steiger at Goldman Sachs on guidance. What key factors could create an upside or a downside surprise? The GMS trajectory in Q4 relative to your guidance, can you unpack the various building blocks that went into our guidance for the fourth quarter?

[Rachel Glaser, Chief Financial Officer]

Thanks for the question, Alexandra. So first, let me start with what we said about Q3. We said that Q3 was showing stabilization. As we had talked about on our last call, we had seen some deceleration from the start of the year. And as we went through Q3, we saw a pretty stable runway. And in fact, October actually improved from Q3.

So the guidance that we gave at the bottom end of our range would imply that we see some continued pressure that would push that stabilization down lower than what we're seeing in October. But at the top end of the range, it would say that we have a pretty good holiday, a holiday that's similar to 2019. And so that's the -- that's sort of the elements of the guide that we gave.

What would push the numbers down are things that we think are somewhat out of our control, so macroeconomic factors that impact consumer discretionary spending, and we don't have a good line of sight right now to predict exactly how November and December are going to pan out. And the top end of our guide would show continued dynamics and trend line that we've been seeing so far in September and October.

[Josh Silverman, Chief Executive Officer]

And Rachel, I just want to jump in to clarify, when you say stabilization on a three-year stack, meaning relative to pre-pandemic, right?

[Rachel Glaser, Chief Financial Officer]

Yes.

[Josh Silverman, Chief Executive Officer]

Yes.

[Deb Wasser]

Okay. Great. All right. So we've got quite a few questions in about promotional activity, merchandising strategy. So I'm going to combine questions from David Malinowski from Bank of America, Lauren Schenk from Morgan Stanley and Lee Horowitz from Deutsche Bank. I'll do the sort of the first one first. How should we think about your promotional cadence in the fourth quarter? Will the company be -- will the company be co-funded by more seller promotions or discounts, given that it's expected to be a very aggressive competitive holiday season. I'll start with that and then there's sort of a second part question I want to ask related to that.

[Rachel Glaser, Chief Financial Officer]

Yes. So our seller -- we have given our sellers a lot more tools for them to behave more promotionally, particularly in times like a holiday season like Halloween, like back-to-school. And those tools have enabled them to take modest discounts. And they're in the forms of you shop from my shop, here's a 10% off on your next purchase kind of thing. I'd say modest. They're not very deep discounts.

At the same time, Etsy has significantly increased its CRM capabilities. And we've been able to give some -- to put our own P&L to work modestly to also offer discounts. We use that kind of when -- we're putting our own P&L to work, we're using that same ROI lens that we do with all of our performance marketing in that we are also measuring if we give -- if we enable some kind of a discount, what is the impact on that and how much return visitation do we get or how much -- how do we influence the conversion rate from our sellers? So I would consider that that part of our marketing spend de minimis relative to the bigger pie that we're spending on performance marketing.

[Deb Wasser]

Yes. And maybe, Josh, the other part of the question came in from Lee Horowitz, which was more just about how we're thinking about our marketing strategy in general for this holiday season, given where we are in such a tough macro environment. Did you want to add a couple of thoughts on that, too?

[Josh Silverman, Chief Executive Officer]

Sure. And just to build on Rachel's point, we are seeing a lot more promotional activity from our sellers. The vast majority of that is funded by the sellers. The sellers are choosing to give very targeted discounts. A tiny piece of that is funded by Etsy. But the vast majority of the promotional activity you're seeing is sellers choosing to put certain items on sale for certain buyers.

In terms of our marketing spend for Q4, Q4 is an important time to remind people that Etsy is really relevant for them. And so, we lean in, in the holiday season. We plan to lean in, in this fourth quarter like we have in other fourth quarters.

So we're going to be running brand TV spots, which really tell the story of Etsy and why Etsy matters and why it's different, as well as more direct response TV ads, which really highlight the kinds of items you can buy on Etsy and the shoulder tap of very specific kinds of categories where we're relevant.

And then, we typically see on the performance marketing side, things like search queries for gifts go up on Google. And so that naturally drives more performance marketing for us. But again, with all of this, we take a strong ROI lens. We look very much at what kinds of returns we're getting.

So the performance marketing side, there's quite a lot of science. It's very dynamic and it tends to adapt, our models adapt within hours or days to what we're seeing in the market. The brand side is the piece where we've got to make some bets. And so, we think that this is the right time for us to be telling our story. We expect to be telling that story in the fourth quarter. We love the creative that the team has developed, and that's reflected in the margins and the guidance that Rachel gave.

[Deb Wasser]

Great. Thanks, Josh. That's perfect. And then I have two questions from Steven Forbes at Guggenheim. The first one I'm going to give to -- first one, I'm going to give to Josh. As we look out to 2023, what categories represent the greatest opportunity for Etsy to drive market share?

[Josh Silverman, Chief Executive Officer]

So, one of the great things about Etsy is, we just -- we have such breadth. So we have seven categories that have 15 million buyers or more, and we have 15 categories that have 1 million buyers or more. And what we take from that is, there are so many different occasions for which -- in categories for which Etsy is relevant. 15 million people are finding something to shop in that category. It's a pretty good chance that many, many people could find something relevant in that category.

That's why I love that product that we highlighted a little bit in the earnings call, the new release we just did where you can take a photo of virtually anything and you'll see items on Etsy that are similar. I'd encourage you to give that a shot. I think you'll be quite surprised at how often we have a really great version of whatever it is here in the market for.

I do think there's an opportunity for us to improve the shopping experience in many of those categories. So when you survey buyers and you ask them, name great places to shop online, more and more of them will come up with Etsy. And Etsy will be one of the first three places people name more often.

But if you ask people, where do you go to shop for home furnishings, very, very few people will say Etsy. When in fact, we're not even a top 10 name there. And the number 10 name, 6% of people would name was Hobby Lobby and our research came up as the 10th and we weren't even 10th. We're somewhere less than that. And yet, it's our biggest category.

We sold billions of dollars of home furnishings. And so it's about building those associations with very specific categories, jewelry, home furnishings, fashion, craft supplies, art and on and on, paper and party goods. We've sold pets, so many babies, weddings, so many great categories on Etsy, and it's about building those associations more broadly. We are leaning more into starting to verticalize those experiences more so that things like the taxonomy, so you have a better browse experience. And if you come to home furnishings, for example, and you browse, it doesn't feel like a lot of other sites you browse, where you're looking for a kitchen or a living room is typically what you get in a browser experience. Etsy takes you often very deep into very niche category. So we do think there's a real opportunity to up-level and you'll see us focus on that more in 2023.

[Deb Wasser]

That's great, Josh. And the other part of the question from Steve was for Rachel about, do you have any high level thoughts about the potential to reduce the weight of the recent acquisitions on the consolidated margin structure? And what time line should people be thinking about for that?

[Rachel Glaser, Chief Financial Officer]

Hi, Steve. Thanks for the question. And before I answer, I just have to give a second to Josh's point about how cool that Etsy Lens product is. Open your app, there's a little camera icon in the search bar and click on it and take a picture of anything in your household and you'll be able to find it on, see what Etsy has. That's like it's very cool.

On the lessening the weight of our recent acquisitions, one thing I want to remind you, we've said a few times that collectively, our three subsidiaries are less than 15% of our total GMS. And they collectively there are almost immaterial to our bottom line. We do say that it's 400 basis points of drag on our margins. But you have to remember that even if they were breakeven, they are lower-margin businesses and they would still be dilutive to margins.

So you can't do the math on that 400 basis points as a percentage of our revenue and come up with how much the investment is that we're making there. We really think that these investments we're making in the businesses are appropriate to enable them to grow, that's -- they shouldn't be spending less on investing for growth, because we own them that we should be a benefit to their growth, not the other way around.

And they all operate now very similar to how Etsy operates, with a prioritization of focusing on the vital few, an experimentation culture, where they test their way into the things that are going to have the biggest impact. And they are always and probably forever will be optimizing how to make their -- how to be efficient in making the biggest bets and putting the investments in the view of things that are going to drive the highest growth.

[Deb Wasser]

Great. Thanks, Rachel. Next one is from Maria Ripps at Canaccord. I'm going to give this one to Josh. Recognizing that you aren't guiding for 2023, how are you thinking about investment priorities for next year?

[Josh Silverman, Chief Executive Officer]

Thanks for the question. One thing we shared in the call is that we've scaled our team fairly significantly over the past two years. We have not been a growth at all cost company. And when revenue doubled almost overnight, we didn't double headcount overnight, because I don't think that would have been manageable growth. We couldn't have made sure that we were bringing in really high caliber people and that we were making sure that they had clear roles and responsibilities and all the things that -- scaling responsibly means doing at a certain cadence. And -- so we have taken a little bit of time to scale our team to catch up with revenue.

I'm really proud of the fact that when we look at our productivity metrics, things like GMS per squad, that is as high as it's been for years. And so, what that suggests is that, where we are in the marginal return curve, we've significantly increased the team over the course of the past two years and yet they continue to add at least as much value, if not more, than we were seeing before the pandemic even on a per squad basis.

We've got a ton of great ideas and the teams are doing a great job of executing those in a way that improves the customer experience and build shareholder value. If we look at the number of things we talked about in this earnings call, I'm really proud of Etsy Purchase Protection, all of the progress we made on personalization, the progress we made on CRM, the new marketing initiatives that we've launched, the new TV spots we've launched. And by the way, we had to cut four or five things on the cutting room floor, because the call was just too long.

So this team is getting a lot done that is making a better customer experience and building shareholder value. We're doing it with urgency, and we're doing with what is still a pretty small team and we feel great about that. So we're not managing to a margin target, so much as we're looking at, as we scale, are we continuing to drive meaningful growth and measurable growth with the team that we have?

We feel pretty good about the team right now, the size and shape of the team. And we'll keep an eye on as we go through next year. If we invest a little more, are we getting a little more? And make sure that we're always looking at profitable growth and finding the right balance there.

[Deb Wasser]

I think this is a connected question, so I'm going to just ask it right away for you, Josh, from Kunal Madhukar at UBS. And you seem, at least somewhat optimistic for 2023, assuming the macro doesn't get worse is the way we've said that. But do we think that's more from sort of buyers, more buyers or more spend per buyer?

[Josh Silverman, Chief Executive Officer]

Over time, I think we're going to continue to get both. I mean, I'm pleased with the fact that, while new buyer growth has slowed from the pandemic, very unsurprisingly, it's 50% higher than it was before the pandemic. And I think that's pretty exciting.

And so there still are a lot of people out there in the US, in the UK and especially in the rest of the world who have not yet shopped on Etsy. And so, we think there's a real opportunity to add new buyers. And then reengaging lapsed buyers, 100 million lapsed buyers who've shopped on Etsy before, generally had a very good experience and just need to be reminded to come back or come back more often.

So reengaging more lapsed buyers and adding more buyers, I do think there continues to be a runway there, but we think there's a big opportunity in frequency. And over time, I do think we have a big opportunity to get people to have more purchase days per shopper in more occasions.

Again, seven categories have 15 million shoppers and yet very few people shop across all seven categories. And again, that -- take a photo of virtually anything and Etsy's got a great version of it. I don't think people realize how often we can serve them, and so I'm excited about that.

And the last opportunity, the one we -- again, we've talked about in the past that we haven't put our shoulder against it and I'd say we're still not putting our shoulder against it. But average order value. As we get more trustworthy, as people get more familiar with Etsy, having them take larger purchases on Etsy, buying bigger stakes items, I do think is -- continues to be an opportunity for us as well.

[Deb Wasser]

Great. And Rachel, I'm going to -- it's 6:04, but I'm going to try to squeeze one in because it's a pretty hot topic we get a lot from Noah Zatzkin at KeyBanc. I'm hoping you could provide a bit of color around inflation, particularly as it relates to seller pricing. Have you seen them begin to take up their prices? We haven't really seen that in Q2, so has anything changed there?

[Rachel Glaser, Chief Financial Officer]

Yes. I knew we -- I thought we were going to get out of this call with no inflation question. But just under the wire, we really haven't seen sellers. We do a basket of goods analysis and we haven't seen sellers take their pricing up in any material way. And we do try to help them think about pricing strategically and other things, but there's probably more we can do there.

I will say that does make Etsy, relatively speaking, a value play relative to other places where we see prices going up significantly. And some of our creative ads kind of lean into that a bit, talking about you can really find something special, something that only Etsy has, or it's made especially for you and it doesn't break the bank at the same time. So it kind of is another differentiating factor for our marketplace.

[Deb Wasser]

Okay. Great. I'm going to call it there. Josh, do you have any closing remarks or good?

[Josh Silverman, Chief Executive Officer]

No, we feel really good about the progress. And again, if you'd asked us a year ago or two years ago in the midst of the pandemic, what would we hope for in terms of retaining buyers, retaining buyer spend, I'd say, I'm just delighted with how well our retention has been in light of people having so many more choices. And I do think it really comes down to the fact that they really like the experience and it's different, and being different in a way that's better matters. So we're grateful for it and we'll keep doing the best we can.

[Deb Wasser]

Great. Well, thank you all for your time tonight and we'll talk to you over the next weeks.

[Rachel Glaser, Chief Financial Officer]

Thanks, everyone.

[Josh Silverman, Chief Executive Officer]

Thank you.