ETSY Inc

NASDAQ:ETSY

Earnings Call Transcript 2021-Q4

[Deb Wasser, Vice President, Investor Relations]

Hi, everyone, and welcome to Etsy’s Fourth Quarter and Full Year 2021 Earnings Conference Call. I am Deb Wasser, VP of Investor Relations. Joining me today are Josh Silverman, CEO and Rachel Glaser, CFO.

Today’s prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we have finished Josh and Rachel’s presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&A window chat displayed on your screen. Feel free to use it anytime as it will remain open for the entire conference call. I will be reading your questions and we will try to get to as many as we can.

Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof; the uncertain impact the COVID-19 pandemic may have on our communities, business, strategy or operating results; our market opportunity; the potential impact of our strategic marketing and product initiatives, including a transaction fee increase and the intended benefits thereof and the anticipated return on our investment and the ability to drive growth. 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 10-Q filed with the SEC on November 4, 2021 and which will be updated in subsequent reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we disclaim any obligation to update them.

Also during the call, we will 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 a replay of this call.

With that, I will turn it over to Josh.

[Josh Silverman, Chief Executive Officer]

Thanks, Deb, and good evening, everyone. Etsy delivered a strong fourth quarter to wrap up an impressive 2021 with record levels of GMS, revenue and adjusted EBITDA. During the holiday season, when many retailers were struggling with congested supply chains, Etsy sellers brought the benefits of shopping small to scale. And in doing so, we further cemented our place in buyers’ hearts while deepening our relationship with our sellers as well. Etsy’s mission is to keep commerce human, and we believe that these past 2 years have shown that the needs we meet are both powerful and enduring. 2021 was another historic record-breaking year for Etsy. And while the pandemic introduced millions of people to Etsy for the first time, shoppers have loved the experience they’ve had with Etsy and are coming back for more, even in a world of greatly expanded choice.

We’re incredibly proud of our full year performance, which you can see on Slide 3, with consolidated GMS of $13.5 billion, up 29.6% year-over-year on a currency-neutral basis. GMS for the Etsy standalone marketplace grew 29% year-over-year and 158% on a 2-year basis. Consolidated revenue grew 35% year-over-year, and our adjusted EBITDA margin was a very strong 31% despite the anticipated dampening impact on our profitability from our 2 new subsidiaries. Rachel will review fourth quarter details later on.

While 2021 was not the return to normalcy that many of us had hoped for, it did indeed offer greatly expanded options for consumers’ time and money compared with 2020, and many more places, online and off, where you could shop. Yet, Etsy continued to gain market share. In 2019, we laid out a long-term goal to outgrow e-commerce. And you can see that we have done that very substantially. And evidence is mounting through our cohort and brand data that these gains were not transitory. We believe that Etsy offers the world a true alternative to commoditize shopping, that buyers and sellers value this alternative, and we are in the early days of expanding our share of wallet. We grew that market share by bringing new buyers to the Etsy marketplace and encouraging our existing buyers to shop more frequently.

A few things stand out when reviewing our 2021 performance on Slide 5. We continue to grow existing buyers, reaching a record high of 90 million active buyers. We reactivated nearly as many buyers in 2021 as we did in 2020, which is, in my view, simply remarkable. And while new buyer additions didn’t quite keep base with 2020’s spectacular level, new buyers still grew by 84% in 2021 when compared with the pre-pandemic level of 2019. And the pandemic cohort has been sticky. 53% of all active buyers who made a purchase on the Etsy marketplace in 2020 made another purchase in 2021, and 37% of new buyers in 2020 made a purchase in 2021.

2021 frequency metrics also improved, with 49% of active buyers making two or more purchases, up from 48% in 2020 and 41% in 2019. And GMS per active buyer on a trailing 12-month basis achieved a record $136 in the fourth quarter. We have always said that frequency is a challenging metric to move. So we are especially proud of the cross-functional efforts that drove these results. We believe there are several factors, inspiration, efficiency and reliability that will contribute to making Etsy the go-to e-commerce destination for many more consumers.

Our investments in each of these areas have really been paying off. Our teams beat their purchase frequency goals for the year with creative approaches, including app downloads, post-purchase experience improvements, updates and offers. We also exceeded our goals for visit frequency with triggers like app icon badging and push notifications. This slide captures some of the many ways we are engaging with buyers along their Etsy journey to keep them revisiting and repurchasing, and you can expect to see much more of these work streams in 2022.

Search and discovery made some big leaps forward in 2021, and we’ve only just begun to make the Etsy marketplace feel more made for you. Leveraging XWalk, we’re continuing to narrow the semantic gap by relying less on listing taxonomy and more on buyer interests. At year-end, our XWalk engine was utilizing over 4 billion data points, a 50% increase from when we launched in the second quarter of last year. This means we can use 16x more real-time data to capture semantic, meaning across our inventory with XWalk than we could with our prior search capabilities. Putting a finer point on it, Etsy search is simply getting better.

On this slide, you can see some of the great progress we’ve made in U.S. search. For example, by year-end, about 95% of search purchases came from items appearing on the first page of search, up 10 percentage points from the beginning of last year. During the fourth quarter, we incorporated various additional data such as estimated delivery dates, real-time in-session features and listing information to improve organic search results. We also began laying the foundation to apply XWalk to non-U.S. search, clearly, a lot more to come in 2022.

We continue to make Etsy even more human in many ways. For example, seller videos, which are a very visible example of how we drive human connection and engagement on and off the marketplace, topped 13 million by year’s end. Etsy’s dramatic growth has also necessitated that we invest and improve in many other often less visible ways to connect our 90 million buyers with over 5 million sellers. We’ve made meaningful improvements in our member support and trust and safety processes with a combination of people and technology to help make these experiences more joyful, safe and streamlined.

For example, in member support, we’ve invested in self-service, better dashboards and education for our sellers so they can more quickly resolve issues without our intervention. And in trust and safety, investments have included expansion of our content moderation team, investing even more deeply in our handmade and counterfeit item efforts and creating a dedicated machine learning engineering team to support these initiatives. The size of these combined Etsy marketplace teams increased by about 35% last year, and our total 2021 investment was in excess of $100 million. We’re planning to significantly increase our investments in these areas in 2022 as well as we believe effectively managing complex, very human peer-to-peer interactions at scale is a big differentiator for Etsy.

Reliability was a major focus area in 2021, and we made great strides. We improved delivery transparency and provided buyers with more clarity and certainty around their Etsy purchases. Just one example of a small iteration with big impact was the fourth quarter addition of estimated delivery date to our search and ranking models, perfect timing to help buyers narrow their searches for items that could arrive in time for the holidays. We also use new, highly sophisticated models, including many thousands of data points on ZIP codes and postal carrier performance, to anticipate holiday delays and dynamically adjust delivery dates. We had nearly 100% U.S. listing coverage for estimated delivery dates, tracking coverage and origin ZIP codes in time for the holiday crunch.

In addition, 90% of U.S. domestic orders that were estimated to be delivered on time for the holidays did, in fact, arrive on time, up significantly from the 2020 holiday season. You’ll be hearing more about our efforts to further improve reliability in 2022, including work to achieve more consistent and transparent results in our core non-U.S. regions and deeper initiatives designed to ensure that shopping on Etsy feels worry-free. We believe reliability is the cornerstone of a habitual shopping experience, remaining a key needle mover to drive top-of-mind awareness, loyalty and frequency. Etsy marketplace sellers continue to thrive, growing in total number and the success of their shops.

Turning to Slide 10, for the full year, active sellers grew by 28% and more than doubled on a 2-year basis. And even more importantly, our seller cohorts retain more GMS in subsequent years on the platform. We’re continuing to innovate in areas that matter to our global seller community such as improvements to the onboarding experience, particularly for international sellers, and investing in our seller app. And our Star Sellers represented 31% of fourth quarter GMS, with the program gaining traction with international sellers during the fourth quarter. Today, we announced an increase to our base transaction fee from 5% to 6.5% effective April 11. We expect to invest most of the incremental revenue into marketing, seller tools and creating world class customer experiences.

Etsy enables anyone with a creative idea to start a business and reach a built-in audience of millions of shoppers. We’ve demonstrated our ability to drive more sales and value for our sellers and believe that this represents a fair exchange of value between Etsy and our seller community. We see so much opportunity to continue to raise top-of-mind awareness and consideration for Etsy, among those who already shop on Etsy and those who don’t. We have become a top 10 marketplace for buyers in several of our core international markets. We are reaching new audiences in the U.S. and we have made significant progress staying more top-of-mind in order to bring existing buyers back more frequently.

Starting at the bottom of the funnel, we have improved our performance marketing feeds and Offsite Ads. In the middle of the funnel, we’ve had great engagement with our social content. For example, over 1 million people watch the sellers’ colorful weaving reel that’s shown on this slide. And at the top of the funnel, our brand campaigns cut through the noise. As you know, we’ve leaned more heavily into upper funnel brand marketing strategies since 2018 through TV, digital video and paid social to create a flywheel that elevates the effectiveness of all of our other marketing channels. These efforts have significantly moved the needle on brand awareness and loyalty.

Our U.S. Etsy buyer surveys indicate that since the fourth quarter of 2018, we have nearly doubled buyers’ loyalty. Prompted awareness is up 11 percentage points, and unprompted awareness is up 8 percentage points. When we first showed you this data, we said our goal was to move the needle on purchase intent so that we could build top-of-mind awareness and consideration in the minds of buyers. And we’ve done just that. Purchase intent has come a very long way, up over 100%. And visit intent has nearly doubled in that same period. We believe this data further supports my earlier comment that the pandemic will have a lasting impact on our brand.

We are seeing great movement in our brand funnel metrics in the other core markets where we’re investing in top-of-funnel marketing. In the United Kingdom, unprompted awareness was up 10 percentage points year-over-year. And in Germany, that same metric has more than doubled. The vast majority of our brand spend is currently in the United States, United Kingdom and Germany. So you can imagine that we may decide in the future to take this strategy to other regions as well.

In 2021, we also began focusing more on consumers who identify as male based on 2020 data that showed nearly 50% of male consumers in the U.S. were unaware of Etsy. We launched our first ever above-the-line campaign with specific media placements to reach broad male audiences and found these to be highly effective in building awareness and connection with the brand. We have also started to see some good efficacy from new channels like out-of-home, podcasting and highly targeted segmentation with our CRM tools. We see these all as important levers to further expand our buyer base in 2022 and beyond.

2021 was also a transformative year as we deepened our Right to Win strategy by identifying and integrating two great marketplaces that in many ways look like Etsy, creating a house of brands. As we look ahead, our North Star is to accelerate value creation for each subsidiary with the goal that the whole is greater than the sum of the parts. You will see on this slide some examples of fourth quarter 2021 product and marketing initiatives at Reverb, Depop and Elo7, which are indicative of how they are utilizing the Etsy playbook that has unlocked so much value over the past 5 years.

I am also incredibly proud of how we cared for our people, our communities and our planet in 2021. We come to work grateful to be able to support creative entrepreneurs around the world. In this new reality, it’s even more important that we take care of our team with empathy, resources and support to help them stay happy and productive. We continued to attract and retain world class talent in 2021 with a keen focus on diversity. In our soon-to-be-filed 10-K, you will see some strong movement in the percentage of our leadership level employee population who identify as a member of an underrepresented community.

I am also proud that Etsy’s attrition remains significantly below industry averages, a testament, I believe, to the power of our mission, the health of our culture and the care we take of our team. In addition, we created impactful initiatives to support sellers from underrepresented communities, such as our work with the Gullah basket weavers. We drove our climate work forward by setting ambitious 2030 net zero targets and launching sustainable packaging for Etsy marketplace sellers. We collected over 6.8 million donations in 2021 for the uplift fund, our Donate the Change effort that supports the dismantling of barriers to creative entrepreneurship.

And we engaged buyers in the positive impact that they create by launching an impact tracker that delivers a personalized digestive year activities such as the number of supported shops, environmental impact and uplift fund contributions. People want to shop their values. We know there’s so much more we can and should do to connect our mission to the impact our marketplace makes in the world, and we see this as an integral driver of growth for Etsy.

One of my favorite investor questions is when someone asks what my big hairy audacious goal is for Etsy. Well, it’s to make Etsy the starting point for your e-commerce journey. We understand that’s quite a bold goal given that to make that ambition a reality, we must and are competing against the biggest names in e-commerce and all of retail for that matter. But we believe we have a real opportunity to win. We believe that unlike most of the rest, we offer something truly different and compelling. We aren’t trying to sell you the exact same commoditized product just $0.02 cheaper or 2 minutes faster. And that’s why for the Etsy marketplace alone, we see a TAM of about $2 trillion. We believe there are many more millions of potential buyers around the world who should be shopping on Etsy and so much more opportunity to build the Etsy habit for those who already know and love us.

To get there, we plan to inspire buyers with an Etsy that feels personal and made for them, like a friend who gets to know you better over time; make buying on Etsy worry-free; be the selling platform that drives seller and buyer loyalty; strengthen the foundation of our House of Brands to enable growth for each marketplace; scale our infrastructure and safeguards to efficiently and sustainably power our global growth and availability; and foster an equitable and productive environment for our people.

In 2022, you will see us doubling down on increasing buyer frequency through product and marketing experiences designed to inspire and reengage with better personalization, habit formation, intelligent retargeting and strategic discounting. And we’ll be leaning into messaging that reaffirms our belief that Etsy turns shopping into a joyful expression of your taste and your values. We believe it’s possible to achieve our bold ambition based upon the highly differentiated nature of our marketplaces, the clarity of our strategy and the talent of our team. Our Right to Win strategy is more relevant than ever, both for Etsy.com and our subsidiary brands. And I’ve never been more excited about Etsy’s growth opportunities than I am today.

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 Q4 earnings call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace results where appropriate.

We achieved record levels of GMS, revenue and adjusted EBITDA in the fourth quarter, all firmly ahead of our guidance. You can see on Slide 17 that on a consolidated basis, Etsy’s fourth quarter GMS grew 17% to $4.2 billion, revenue grew 16% to $717 million, and we delivered adjusted EBITDA of nearly $219 million. Our fourth quarter caps off a strong year where consolidated GMS grew about 31%, revenue grew 35%, and adjusted EBITDA was $717 million with approximately a 31% margin.

The additions of Depop and Elo7 contributed incremental GMS growth of approximately 5% for the quarter. It created about a 2% contraction to adjusted EBITDA margin. Reverb reported $948 million in 2021 GMS, up about 16% from 2020. And Depop and Elo7’s partial year GMS were $294 million and $32 million, respectively. The primary driver of our excellent fourth quarter adjusted EBITDA performance was sustained momentum in the Etsy marketplace’s top line growth, contributing significant flow-through to profitability.

Consolidated take rate was 17.1%, a solid performance in a quarter where historically take rates contract to seasonality. As we have said on prior calls, our three subsidiaries generally have lower take rates in the Etsy marketplace, which had a take rate of about 18% in the quarter. Etsy marketplace Q4 GMS grew 11.8% year-over-year and 154% on a 2-year basis to $3.8 billion, also ahead of our guidance for high single-digit growth. And non-mask GMS grew 15% year-over-year. 3.2 million masks, were sold on Etsy in the fourth quarter, contributing $38.7 million of GMS, representing a 70% year-over-year decline in mask GMS to just 1% of total. It is worth taking a moment to appreciate the year-over-year top line growth in every quarter of 2021.

Overall, the fourth quarter was quite dynamic given many of the factors we discussed on our last earnings call and those that evolved throughout the quarter, including the Omicron variant, supply chain disruptions, inflationary concerns and other factors impacting consumer behavior and spending patterns.

Our record fourth quarter GMS performance was driven by an early and strong kickoff to the holiday season in October and extended strength through December. Our teams did a wonderful job, making Etsy a key holiday shopping destination with gift finders, exclusive sales and targeted efforts to engage new and existing buyers. Apparel was one of our fastest-growing categories, featuring best-selling items like family jammies. And the top two categories in the quarter were home and living and jewelry.

We work hard to make sure that the marketplace is ready to serve the more than 5 million small businesses on Etsy to give them relevant streams, important time in retail and to ensure we can handle the high volume of activity. And that we did. Exciting marketplace stats included an 8% year-over-year increase in GMS per buyer on Black Friday, a record 2,000 orders per minute on Cyber Monday, nearly 0.5 million seller shops participating in our Cyber sales, up 27% from last year, and approximately $43,000 in GMS per minute during Cyber Five.

From a geographic perspective, 44% of fourth quarter Etsy marketplace GMS was from transactions where either the buyer or the seller or both were outside the U.S., as you can see on Slide 20. Non-U.S. GMS was up 20% year-over-year on a constant currency basis and was driven in part by strong trends in the UK and Germany. In fact, domestic sales represented over 70% of both the United Kingdom and Germany’s GMS last year, proof points of our success creating vibrant domestic markets in our core geographies. Non-U.S. active buyers reached an all-time high of 31 million in the fourth quarter, continuing to outpace the growth in U.S. active buyers.

Consolidated fourth quarter revenue was driven by growth in both marketplace and services revenue, up 14% and 22% year-over-year, respectively. You can see a walk of our incremental revenue from the fourth quarter of 2020 to the fourth quarter of 2021. The majority of incremental revenue within marketplace can be attributed to GMS flow-through, within services, a key driver with strong Etsy Ads growth of approximately 28% year-over-year. Our two new subsidiaries were also sources of incremental revenue.

As we’ve been highlighting, we see investments in product and marketing as critical components to drive future growth. One way to visualize this is shown on Slide 22. We start the year with baseline GMS stemming from prior cohorts coming back over time and which includes the benefit from the prior year’s product and marketing investments. We then layer on top of that new investments in product and marketing that we expect to drive conversion rate and frequency. And together, they form the forecast for our in-year GMS. This becomes the baseline for next year, a virtuous flywheel that helps drive future growth.

Specifically related to our 2021 product investments, you can see here how we have scaled our spend as a percentage of revenue. Some of the most impactful product wins in 2021 were those that drove frequency, improved seller tools such as thank you coupons, app downloads and our investments in search. In fact, product investments generated over $1 billion in annualized GMS return in 2021. As outlined on the prior slide, we get a partial benefit from this impact in-year, and it’s the gift that keeps on giving, with future payback expected in 2022 and beyond as the marketplace improvements we make help drive buyer stickiness and frequency. We ended the year with 2,402 employees, an increase of 70% compared to last year. While a significant amount of this increase was the result of our two acquisitions, Etsy’s standalone headcount grew 31%, with many of those hires in product development and engineering.

Fourth quarter consolidated direct marketing expense was $172 million, down 12% year-over-year. In the third quarter, we had run incrementality tests that surfaced opportunities to optimize our performance marketing spend. This model refinement enabled us to lower spending for product listing ads, SEM and social on a year-over-year basis in the fourth quarter, which helped to drive up our margin. We offset approximately 40% of performance marketing spend for Etsy.com through off-site Ads revenue, which enables us to put more dollars to work on behalf of our sellers in a profitable way. All in all, our performance marketing spend drove approximately $2.3 billion in annualized GMS in 2021.

Consolidated brand marketing spend, which include television and digital video, was 25% of our consolidated marketing spend in the fourth quarter, representing approximately $50 million of spend. For the full year, we increased brand marketing spend by 30%, specifically leaning more heavily into TV and digital video in the United Kingdom and Germany. We’re confident that the incremental marketing spend in Germany, particularly our Etsy HotSeat campaign, meaningfully impacted our brand awareness metrics.

Moving to our Etsy marketplace operating metrics, we have seen excellent stability in our active buyer count with 90 million at year-end, up 9 million total for 2021. And buyers are spending more with Etsy, with our GMS per active buyer reaching an all-time high of $136 in the fourth quarter, up 16% year-over-year. We believe this metric is a useful way to track the success of our efforts to drive buyer retention, frequency and purchases. Repeat Etsy buyers represent shoppers who made purchases on two or more days in the previous 12 months. You can see on Slide 26 that we ended 2021 with 36 million repeat buyers with a 2-year growth rate of 121%. We separate out our repeat buyers from our habitual wires, those that shop on Etsy six or more times per year and spend at least $200. In my view, one of our most exciting data points is the growth in habitual buyers. We ended the year with 8.1 million habitual buyers, a record level, up 26% year-over-year and up 224% on a 2-year basis. These buyers comprise about 9% of our total active buyers, up from about 5% in 2019, yet accounted for 45% of 2021 GMS.

And we are acquiring millions of new buyers. New buyer acquisition grew 44% sequentially in the quarter to 10 million, the highest quarterly level reported all year. As we’ve been highlighting throughout 2020 and 2021, there has also been a massive reawakening of lapsed buyers over the past 2 years. In fact, we reactivated 6.8 million buyers in the fourth quarter, up 65% sequentially versus the third quarter and edging past the year ago quarter. In total, 21.4 million buyers were reactivated in 2021, nearly as many as in 2020. We continue to see buyer reactivation as a key to our long-term growth as buyers often lacks in their Etsy purchases and believe we still have significant room to reengage buyers and build top-of-mind awareness and consideration.

Moving to the balance sheet. As of December 31, we had $1.1 billion in cash, cash equivalents and short and long-term investments. You can see on the right how our capital-light business model has delivered record levels of quarterly operating cash flow even when compared with the prior year’s very strong performance.

Moving to our outlook. In the first quarter of 2021, Etsy reported 132% GMS growth, which we believe is among the highest growth rates ever reported by a U.S. public e-commerce company. Q1 of last year was a particular anomaly, with 8 percentage points of growth coming from the tailwind of seamless checks, coupled with deep pandemic lockdowns, which we estimate contributed a tailwind similar to the stimulus. As we’ve said all year, the comparisons of the first quarter 2022 to the first quarter of 2021 will be difficult.

Now that we are in late February of the new year, it does feel like there is a possibility of a new normal. We’re watching the same economic and consumer data that you are, and we can see that travel, eating out and other measures of mobility are on the rise. People are tired of staying home. We are, too. And so it’s not surprising to see the long-awaited reopening headwinds impact our February results. Following a very strong January, we began to experience reopening headwinds with a notable deceleration in February. So to date, February was still positive on a year-over-year basis.

As a reminder, given the March 2021 round of stimulus checks, March will be another tough comp. Despite last year’s huge spike in Q1 and the reopening softness we’ve seen this month, our guidance implies that Etsy standalone will keep all of the significant gains of last year in spite of the tailwinds from stimulus checks and walk downs turning to headwinds. And that is before the benefit of our new subsidiaries. We think this is quite remarkable and a very encouraging indication of the durability of the growth we’ve experienced over the last 2 years.

We currently expect first quarter consolidated GMS to be $3.2 billion to $3.4 billion. We expect that our first quarter revenue will be $565 million to $590 million, and our adjusted EBITDA margin will be about 26%. While macro conditions remain extremely uncertain, and we are not providing annual guidance, we did want to outline some factors to consider for your full year models. Both the 2020 and the 2021 Etsy standalone quarterly GMS cadence were impacted by pandemic headwinds and tailwinds, anomalies when compared with our historical GMS seasonality. This makes the quarterly GMS cadence in our last pre pandemic years, 2018 and 2019, a more normalized template to use for your modeling for 2022.

Traditionally, Etsy has a seasonally lower first quarter, with sequential growth in Q2 and Q3 relative to Q1 building to a strong Q4. In fact, Q4 is typically about 30% to 32% of annual GMS. As GMS from our subsidiaries is expected to be less than 15% of our total GMS in 2022, this quarterly cadence supports consolidated GMS as well. We currently expect lower GMS growth year-over-year in the first half of ‘22 and higher GMS growth in the second half as our comps begin to normalize, assuming relatively stable macroeconomic conditions.

And while the impact of the transaction fee increase is forecasted to be accretive to adjusted EBITDA dollars, we expect the fee change to be roughly neutral to margins given our planned reinvestments in growth driving initiatives. Keep in mind that the higher take rate is also expected to drive our LTV higher so we can invest in more ways that benefit our sellers. It’s important to remember that our newly acquired subsidiary brands, Depop and Elo7, are completely additive to our first half growth, but we will lap those acquisitions in July. Our three subsidiaries together represent about 400 basis points in reduction in consolidated EBITDA margin, though Reverb is EBITDA positive.

The size of our addressable market is enormous, and we see a clear and compelling road map for continued growth with investments in people and technology across our House of Brands. While reopening and macro conditions inject some near-term uncertainty and headwind into the forecast, we have conviction about the opportunities for growth, and we will continue to invest with discipline and focus in ways we believe deliver strong long-term results for our stakeholders.

Before opening up for your questions, I’ll turn it back to Josh for some closing remarks.

[Josh Silverman, Chief Executive Officer]

While we’re facing reopening headwinds we’ve long anticipated, we see these as short-term with significant tailwinds at our back. In a world that we believe has been forever transformed by the massive adoption of e-commerce, Etsy, too, has been transformed. Marketplaces get better as they get bigger, and we’re now more than 2.5x bigger than we were before the pandemic. We have many millions more buyers who love us and are coming back for more, tens of millions more unique listings from which they can shop. And our core Etsy brand is becoming a household name. And we have a capital-light business model that serves as a flywheel for long-term profitable investment.

While wallet share may shift for a bit to out-of-home endeavors, people still need to buy things. And we believe Etsy is simply a better way to shop. It’s still early days for e-commerce, and it remains our goal to continue to outgrow the broader e-commerce industry on average and over time. It’s a massive opportunity, and we feel extremely well positioned to grab a bigger share.

Thank you all for your time today. I’ll now turn the call over to Deb.

[Deb Wasser, Vice President, Investor Relations]

Thanks, everyone. Before we dive into questions, Josh wants to make one quick opening remark.

[Josh Silverman, Chief Executive Officer]

Thanks, Deb. Those were prerecorded remarks we recorded a couple of days ago. And so I just need to start by acknowledging the events that are happening in the Ukraine today. The invasion of the Ukraine obviously weighs heavily on all of us. So we’re reporting our results as usual, but today is certainly anything but a usual day and wanted to acknowledge our hearts go out to our buyers and sellers and community in Ukraine and Eastern Europe as well as our global community that’s impacted by these events. Thank you.

[Deb Wasser, Vice President, Investor Relations]

Okay. Alright. Great. Thanks, Josh.

[Deb Wasser, Vice President, Investor Relations]

Okay. We will start with the question from Maria Ripps at Canaccord. I’ll start with Josh on this one. Increasing order frequency has been one of your top priorities, and it seems like you’ve been particularly successful driving that metric up for your newer cohorts. Can you just talk about whether that’s a reflection of all the improvements on the platform such as search, personalization, delivery transparency, etcetera or is it the type of buyers that you’re acquiring more recently? How – and how has some of this been leveraged across the buyer base – your wire buyer base, so frequency and products? Yes.

[Josh Silverman, Chief Executive Officer]

Great question. I don’t think it’s due to acquiring a different kind of buyer. We’re really seeing a broad-based lift across our existing buyers as well as our new cohorts. So, habitual buyers continue to be the fastest-growing segment. Habitual buyers doubled in 2021 and then grew by 26% again – doubled in 2020 and grew by another 26% in 2021. To put another point on it, about half of our buyers now are repeat, meaning they buy more than once in a year. And for those repeat buyers, they are actually buying an average of 5x a year. Habitual buyers are about 9% of our buyers but represent about 45% of our GMS, and those buyers are buying more than once a month. And so when we look at the opportunity, I know in my household, something arrives from Etsy every week. And it’s not that I think we shop a lot more than others, but we primarily shop online. And when we shop online, Etsy is our starting point. We know that there is great products available on Etsy. And we start there and we go elsewhere only if we can’t find something on Etsy. So we see a ton of opportunity. And the growth in habituals, we think, is a great proof point for the opportunity for everyone to be shopping a lot more on Etsy.

To the question of how, I’d start with having a great buyer experience. You can have all the tactics in the world you want. But the main thing is when you come to Etsy, did you find something you love? And when it arrived in the mail, did you actually love the product? Was it what you thought? And again and again, buyers are finding something they love on Etsy. And when it arrives in the mail, they are delighted by the actual purchase. And that is the foundation of our success and will continue to be. We talked a little bit in the prepared remarks about some of the tactics that have been particularly successful, but I would start by saying triggering people off-line to remind them that there is something available on Etsy. Having more of them come to the app, as an example, where we have a particularly great experience and where we see more habitual usage, having search work harder to recommend the right things for them as well as to get them to the best item quickly, and then reinforcing reliability. We talked a little bit in this call about having estimated delivery dates and then meeting those expectations. And it’s so important for us to be a habit that people know that they can rely on us. And we can tell them when they can expect the item to arrive, and it will arrive on time as we said. So we’re really proud of the progress we’ve made there, and we think all of those are key to why we’ve seen real success in frequency.

[Deb Wasser, Vice President, Investor Relations]

Okay. Thank you. So Rachel, I’m going to take this one for you. We’ve gotten the same question from multiple people, Naved Khan from Truist; John Colantuoni from Jefferies; and others. What does the outlook assume for core Etsy GMS growth? And then the second part of that question is, can you help us further disaggregate how much of the slowdown is the result of an unusually difficult comparison in the year a quarter ago created by some transitory one-time events like tailwinds, like stimulus? And how much is really the ongoing impact of consumers adjusting their behavior as the world reopen? So I’ll let Rachel start, and then I’m sure Josh will probably want to pile on as well.

[Rachel Glaser, Chief Financial Officer]

Thank you for the question and hello everyone. So let’s take it apart, what did we say about the quarter? The guidance we gave implies about approximately 5% for consolidated Etsy at the midpoint. And we have said that our subsidiaries are less than 15% of our total GMS. And so what we said was, depending on where in the range you pick that Etsy is at least keeping all of the gains that it had from last year. So you would say roughly flat at the midpoint. But it’s important to – we took some time to take you through what last year was like. So Q1 last year was 132% growth. We did some research to see if anyone has reported any number that high. And amongst many, many companies, we were way at the tippy top of the highest growth rate that we could find. And it’s also important to remember what we said last year was that stimulus checks added about 8 full percentage points of growth to that first quarter. And we think the sort of deep pandemic lockdowns that we had last year at the same time, added at least that much also in terms of growth. So if you were to take that flat and add that 16 points of growth, that’s where we think we would organically be panning out at least around now. We also gave some color on what’s happening during the quarter. So we said we had a strong January. And then we started to notice a sharp decel in February, which would be timed approximately with when stimulus checks started to be coming and being distributed last year at this time. And we think March has an even stronger comp to beat. So I am not clearly disaggregating it for you, but there is a blend of help tailwind that is no longer here now and the fact that we are seeing reopening happen and that people – there is this pent-up demand to go out, to dine out, to travel. We’re looking at the mobility indices, and we’re seeing that, that indeed is increasing at the inverse rate to e-commerce declining. And – but we’re very, very pleased that we’re hanging on to all the gains that we had from a year ago.

[Deb Wasser, Vice President, Investor Relations]

Josh, do you want to add anything on that?

[Josh Silverman, Chief Executive Officer]

Nothing to add.

[Deb Wasser, Vice President, Investor Relations]

Okay, awesome. From Kunal Madhukar from UBS. This one is for Josh. Can you talk about the TAM, especially in terms of how much of your market opportunity is handmade?

[Josh Silverman, Chief Executive Officer]

Yes. I mean if you go look at the latest Q, we put a lot of data in there. We estimate it to be about $2 trillion. And if the pandemic has taught us anything, it’s that the distinction between online and off-line is arbitrary. And what do I mean by that? When you talk to buyers on their shopping mission, they don’t say, I’m looking for the best online place to buy this or I’m looking for the best off-line place to buy that. Most of them, they are looking for a gift for their mother or a throw pillow for their living room, and they are going to go to online and off-line places. And what we’re seeing is Etsy can compete effectively against both online and off-line. That’s really one market in the minds of buyers.

When we look at the categories in which Etsy participates, we sell a great many things. We don’t sell consumer electronics. We don’t sell groceries, to name two big ones. We don’t sell travel, but we sell most other things that consumers buy. And we really have seen that over the past 2 years. When home and living spiked, we were there for you. When gardening spiked, we were there for you. When pet supplies spiked, we were there for you. When gifts spiked, we were there for you. Who knew that the bread-making products were available on Etsy? I didn’t, shame on me, until bread-making became a big thing. And all of a sudden, we see it. So, the variety – the versatility of the Etsy marketplace is quite remarkable. And then our global opportunity, we have been investing in some key core markets, but we think most markets make sense for Etsy. And if you look at the absolute explosion in demand on the buyer and the seller side in the UK, it’s a great testament to – we’ve been planting seeds in the UK for many years. And holy cow, did they grow. Great, big forest almost overnight and we think that kind of opportunity exists in many, many countries all around the world.

So when you add it up, it’s a $2 trillion TAM. An analogy I might paint is in a very different category. But if you look at – at Airbnb, for example, they talk about the hospitality industry writ large as their TAM. And if I’m on a business trip in Chicago, and I’m going to – I need a bed for 7 hours, I’m going to fly in and fly out, I might go to a Marriott or a Hilton. I don’t really care. I just want it to be kind of cheap and commodity. If I’m taking my family and I want a special experience, Airbnb is a great opportunity. And so they are looking for the special of hospitality. We’re the special of e-commerce. And I think that opportunity is massive. And obviously, retail at writ large is a very, very big TAM to be playing in.

[Deb Wasser, Vice President, Investor Relations]

Okay. Great. Thanks, Josh. This one is from Lauren Schenk from Morgan Stanley, and I’ll start with Rachel on this one. Is there any additional color you can share on how you’re thinking about full year EBITDA margin given all of the moving pieces such as our M&A, our fee increase and incremental investments?

[Rachel Glaser, Chief Financial Officer]

Lauren, thank you for the question. We’ve said so many times that we love our marketplace model, and I think our profits are one of the differentiating things that make Etsy special, too. So it’s a great question, and I love to talk about it. Why do we love our marketplace model so much? First of all, we have said that our cost base is highly variable. We don’t have distribution centers. We don’t have retail stores. We don’t even have very much capital investment. And so because it’s variable, we are able to pull those levers as we want, leaning into marketing and hiring of people and investing in product development. When we can, like you saw us do in March of 2020, when we first saw the pandemic starting where a lot of companies decided to pull back on those things, we leaned into it, and it was to our benefit. So I’ll start with that fact, putting that out there that we have a highly cash-generative model with a very high flow-through of top line to our bottom line.

Secondly, we did announce a transaction fee increase. And like we did on another transaction fee increase that we did in 2018, we plan to reinvest a considerable portion of that incremental revenue back into the marketplace because we want to directly have that benefit the seller. So a lot of that will go into marketing and customer support and product development like we did before. The lever we can pull the fastest is in marketing. And that allows us to be able to spend more and still achieve the ROI threshold that we set for ourselves. So we plan to invest that at about the rate of our current EBITDA margins, which means EBITDA dollars are going to grow. But with more top line, we might see EBITDA margins stay about the same as where they are now. I want to talk about the take rate for a minute to make sure that people get that right in their model. So, I am going to put a pin in the take rate question. I also want to talk about our subsidiaries. They do contract our EBITDA margins I think we said by about 300 basis points. It’s another thing to think about when you think about EBITDA for the full year. Further, we have lots of room to scale. Our revenue per headcount is considerably higher than peer benchmark. So, you can go check that in your research, but we have checked it. And that means we have a lot of room to invest not only in things that drive top line growth, but in our infrastructure, things that keep our marketplace safe that help ensure our trusted brand and help our developers do what they do in a much more agile way. So, we are continuing to invest in those things. So, real quick on take rate, when you think about take rate for 2021, the full year take rate was an effective 17.3% approximately. But before you add directly the take rate impact to – the 1.5% take rate impact to that, you have to think about what that 17.3% was on a pro forma basis because we didn’t have the subs in for that whole year. And so the pro forma number is more like 17%. So, you would add that 1.5%, but only to Q2, Q3 and Q4 of 2022, because that’s when the new transaction fee comes into effect. And that gets you to something around 18.5% when you add those things in for – on a full year basis for our take rate. So, those are the comments I will make about full year EBITDA. Maybe Josh has something to add.

[Josh Silverman, Chief Executive Officer]

No. I think we mean this is 18.5% for Q2, three and four, right?

[Rachel Glaser, Chief Financial Officer]

Yes, for those quarters. I am sorry if I...

[Josh Silverman, Chief Executive Officer]

That was great.

[Deb Wasser, Vice President, Investor Relations]

Okay. Perfect. Alright. Next one, I will start with Josh on this one, from Victoria James at D.A. Davidson. How, if at all, have you been impacted by consumers returning to physical stores as suggested by some of your e-commerce peers such as Wayfair?

[Josh Silverman, Chief Executive Officer]

Well, just to pick home and living for just a second, because it is an interesting one. We have said that, that has been our largest category. We saw an explosion in home and living during the pandemic. We saw an explosion in almost everything during the pandemic, but home and living more than even most, and it is now our number one category. It’s a very large category for us. Home and living is running roughly flat right now, just barely above zero in terms of growth rate. And I think that’s kind of amazing given that, again, this time last year, there was stimulus and there was lockdowns and you had no other – few other places – obviously, there were some, but a few other places to go to shop. So, the fact that we are growing over that and still keeping that spend, I think is kind of remarkable. Also true that there has been a lot of nesting that’s gone on for the past 2 years. And it’s fair to assume that people might have spruced up their current place about as much as they want to spruce it up. And when interest rates rise, people may move homes less, and that tends to be a headwind to home furnishings. And so I won’t be surprised to see home furnishings as a category face headwinds as we move through this year, and it is our largest category. But what we hear from buyers is they love Etsy, and they love the experience they have had on Etsy. And it feels different, and it feels compelling to them. So, the threat of offline, we are prepared to compete with offline. We are compared to compete with come who may. We do see that, first, our – we think that the category mix on Etsy is a real strength of ours. So for example, home furnishings right now is roughly flat. Weddings is growing in the mid-20s, mid-20%. And it’s a great example of we sell lots of things and lots of categories. And some of them are going to be headwinds, and some of them are going to be tailwinds. Now weddings is a much smaller category than home furnishings at the moment. But over time, that can change. What we are hearing from consumers, though, is general concern with their spending overall. Inflation is a concern with them. They don’t – aren’t getting stimulus checks now. By the way, people have to repay their student loans. There is $1 trillion of student loan debt out there that people haven’t had to pay for a while. There has been a lot of rent forgiveness that’s probably ending. So, there is a lot more demands for their wallet. And oh, yes by the way, they want to travel, and they want to dine out. And as Rachel said, why, so do all of us. So, we won’t be surprised to see more competition for consumer wallets generally where discretionary spend in retail and e-tail is going to have to fight a little harder against some other categories. But we are certainly compared to fight for the share of dollars that are going to discretionary retail and e-tail. We are ready, willing and able to fight for our share of that.

[Deb Wasser, Vice President, Investor Relations]

Okay. Great. This one is from Anna Andreeva, Needham. Marketing continues to be reined in for the past two quarters, if that’s not affecting demand. With GMS beating plan again in Q4 of ‘21, what drove the decision to pull back during Q4? And how do you think about marketing in Q1 and for the full year? I am not sure which one of you want to take that one.

[Rachel Glaser, Chief Financial Officer]

I think Josh was going to start, so I am going to follow-up.

[Deb Wasser, Vice President, Investor Relations]

Josh, you go.

[Josh Silverman, Chief Executive Officer]

Great. Thanks for the question. We have said through the years that we are very disciplined at looking at the marginal return on the next dollar spend in marketing. And we do that with performance marketing. We do that above the line. And we are constantly testing in each channel PLA, social and whatnot. When we spend a little deeper, what do we get for it, and when we pull back, what do we get for it. It’s also worth noting that, that changes over time. Consumer behavior is changing. The competitive landscape is changing. The market rates for CPMs and whatnot are changing. And so we are constantly testing that. And when we find that the marginal return on the next dollar has maybe evolved and isn’t as good as we thought, we can pull back and be more efficient. And we are always looking to be as efficient as we can with spend. What we saw in the fourth quarter is we had a lot of tailwinds. Things were going very well. And the marginal returns on some of our spend, therefore, we are not as high, meaning the incrementality was lower. If we hadn’t spent that dollar, we still would have gotten the sale. So, we pull back. And that’s adjustment that we are always doing. It’s also worth noting that when we raise our take rate, as we announced today, the lifetime value of each interaction, each buyer we bring in or the repeat purchase goes up. And that allows us to spend deeper. And we think that’s a great thing for our seller community and for our marketplace as a whole.

[Deb Wasser, Vice President, Investor Relations]

Great. Okay. This one is from Seth Sigman at Guggenheim. Habitual buyers increased 9% of buyers from 8% in 2020 and to 45% of GMV, up from 40% in the prior year. So, not only is Etsy converting more habitual buyers, but these habitual buyers are also spending more. What are the learnings from these buyers that are applicable to the broader buyer base? That’s a great question for you, Josh.

[Josh Silverman, Chief Executive Officer]

I think the big lesson is that we have an opportunity to be a starting point for commerce. I think that this period of time has caused all of us to be aware of the role we play in this global supply chain where things are mass produced at huge quantity far away to go on a boat, to go on a train, to go on a truck, to end up at your household, to have you look and be just the same as all of your neighbors and then end up in a landfill two seconds later. And I think we are seeing a rise of conscious consumerism where people really want to maybe buy fewer things, but have those things mean more, express themselves in their sense of style and taste, differentiate from others and maybe last longer and not end up in a landfill. And by the way, if you can buy it from the person who made it and have it be within your own state or within your own country and feel like you are supporting your local community, isn’t that nice. And does it even have to cost more, if you think about all the markups that happened from the time that product was mass produced until the time it ended up in your doorstep, there are four or five people that took markups along the way. So, when this maker makes it and sends it directly to you, maybe shopping small can actually give you great value as well as a sense of style. I think we are beginning to realize that there is a different way to shop that is often a better way to shop. And I am not saying for everything all the time. You are still going to need those commodities of life that you don’t care about at all. And you are going to use them, dispose of them, and that’s fine. But for a lot of purchases that we all make, there is a different way to show up. As I said, at least one package a week arrives from Etsy at my household just because we think to start at Etsy. As I said, our habitual shoppers are shopping at least once a month – on average, are shopping more than once a month on Etsy. And what’s different about them, I think it’s just that they have figured out that Etsy is a place where you can find many things. So, our opportunity is to help educate the rest of the market and to help train that Etsy can be a starting point for their e-commerce. And I think the opportunity there is absolutely enormous.

[Deb Wasser, Vice President, Investor Relations]

Rachel, did you want to add…?

[Rachel Glaser, Chief Financial Officer]

I was going to give some data, and he gave it. There is great habitual – in fact, Seth, you had a lot of the data in your question. And then the once per month is actually more than double what we are seeing from our – the average for our repeat buyers. So, there is significant value to the habitual buyer segment.

[Deb Wasser, Vice President, Investor Relations]

Perfect. Okay. I will move to one from Shweta Khajuria. Can you please provide details on Etsy’s initiatives this year, 2022, to drive purchase frequency? Can you give us some examples of what those might be focused on, buyer inspiration, efficiency or liability? Josh?

[Josh Silverman, Chief Executive Officer]

Yes. So, on the inspiration level, you are starting to see us do more to present you with recommendations of things you hadn’t thought of or even things like continuous feeds of lean-back experiences where you can just see streams of all the really cool things on Etsy. So, for example, like video reels of things being made, which is really addictive and compelling. And we are making great progress in our recommendation engine to be able to inspire you with things that you are likely to like, but maybe hadn’t even thought to come to Etsy for. And that understanding things like taste and style would have been impossible years ago. But with advances in machine learning, we start to be able to intuit what your taste is and what of the 100 million things for sale on Etsy, other things that are – meet that sense of style. In terms of efficiency, obviously, the search engine getting better, and I shared some data on the dramatic gains we are making there, but getting you to the right item quickly. So, you feel like when you know what you want, you can get in and out quickly, that’s also very important. And reliability is critical. And I shared some data about how, over the holiday period, 90% of items arrived on time. Another data point we didn’t share, but I think is a great one, 98% of things that we said would arrive in time for the holidays arrived in time for the holidays. And that’s really critical that we do what we say and that you learn to be able to trust Etsy. And that can move us from being the occasional purchase where maybe you can afford for things to go wrong to being something that’s really your everyday tried and true. And we have made great strides there, and you will see us continue to invest meaningfully this year to make sure that buyers really know that we have their back and that they can buy on Etsy in a really worry-free way. And I don’t think it’s a silver bullet that all of a sudden changes things. But I think that over a period of months and years, as people really learn how reliable Etsy can be, I think it can dramatically change consumer behavior.

[Deb Wasser, Vice President, Investor Relations]

Okay. Great. I know we went over, but I do want to get in a concept about our subsidiaries. So, we have gotten a couple of questions, one from Ed Yruma of KeyBanc and one from Laura Champine at Loop that are – regarding our subs. So, can we talk about the growth profiles for Depop, Reverb and Elo7? And then specifically, Laura asked about the marketing strategy for Depop in 2022. So Josh, you want to take those?

[Josh Silverman, Chief Executive Officer]

Sure. So I would say that broadly speaking, Depop and Reverb are facing similar headwinds – reopening headwinds to Etsy. If we talk about Depop just for a second, the UK – and Depop has a lot of their business in the UK. Teenagers in the UK were literally locked in their apartments for 2 years. The lockdowns there were quite extreme. And they are now allowed to go out, and they are availing themselves of that, and I don’t blame them. I have got two teenagers in the home. I can relate. And so there are some reopening headwinds there that we have been expecting and aren’t surprised by and we think are going to be temporary. And then as teenagers get a chance to get outside again, they are going to want to refresh their wardrobes and get back on Depop in levels at and above where they have been. And Reverb similarly, there has been some reopening headwinds there, but all expected. Elo7 a little different, and that Elo7’s business is very event-based. And so their business is really centered around things like baby showers, [indiscernible] and things like that. And the vaccinations have been more broadly spreading through Brazil. We think that’s really encouraging. But people are not gathering together in numbers yet in Brazil. And so we think that, that is going to come – hopefully going to come real soon, and we will provide a real tailwind for Elo7. And so we will see what the coming months bring there. In terms of the marketing strategy, for Depop, we are leaning into above the line with Depop. We are testing that in the U.S. right now to really make their brand a little more front and center. We are also testing performance marketing for the first time with Depop. And so there will be some margin impact to that, but we think it’s great investment over time. We think it’s the right thing to do. We have a lot of faith and confidence in Depop and are excited to invest to grow that business and that platform.

[Deb Wasser, Vice President, Investor Relations]

Okay, great. Thank you all for hanging with us. A little bit over time here. We really appreciate it, and we will be here to answer all of your questions. So, that ends the call for this evening. Thank you.

[Rachel Glaser, Chief Financial Officer]

Thank you everyone.