Etsy, Inc. (ETSY) Earnings Call Transcript & Summary

Good afternoon. My name is Scott Devitt, and I cover the Consumer Internet sector at Stifel. We're happy to have Etsy CEO, Josh Silverman; and CFO, Rachel Glaser, with us today. Etsy is a global 2-sided online marketplace for unique handcrafted vintage and craft supply products. Josh has served as Etsy's CEO since 2017, having previously served as President of Consumer Products and Services at American Express, CEO of Skype and CEO of shopping.com. In the past, he's also held several executive roles at eBay. Rachel has been with Etsy also since 2017, bringing with her years of experience in the CFO role in a number of different companies, including Leaf Group and Move, the parent company of Realtor.com. Rachel was also Senior Vice President of Operations Finance at Yahoo! and spent time at Disney earlier in her career as well. And together, the 2 have done an impressive job over the past few years, overseeing a turnaround in the company's business and reaccelerating growth on the platform. So Josh and Rachel, thanks a lot for joining us.

Thanks for having us.

Thanks for having us.

Sure. I think the best place to start. Josh, the current state of Etsy's business and how you're thinking about the brand and what the company stands for now. You've had this tremendous business turnaround followed by the recent momentum in the business related to the pandemic.

Yes. Thanks for the question. Etsy's mission is keeping commerce human. And I think that matters now more than ever. In a time when buyers, I think, are thinking a lot about how much they want to buy and who they want to buy from and what their values are. I think the opportunity to connect with the person who actually made the thing, maybe owning fewer things, but having those things matter more to them and mean more to them. I think this is really a moment for that. And for our sellers for whom maybe there -- any other form of employment is under stress, their retail store, if they have one might be under stress. The opportunity to really -- are living selling on Etsy is very powerful right now. So I think selling something that comes with a bar code is super hard because you're competing on who can sell it cheaper and ship it faster. And I don't envy anyone who's trying to compete with Amazon in that. But I think Etsy stands for something truly different. We sell an incredibly broad range of things, 68 million items. Most things that you might need, there's a version of them for sale in Etsy. It's just that it's made just for you. And I think we're having a moment or having an opportunity to show the world just how many of their purchase occasions our sellers can meet and just how well they can meet them.

And e-commerce broadly has seen strong demand given retail closures and the adoption of social distancing measures and just the general transition of consumer habits towards the Internet during this time. And that's certainly been true for Etsy. Etsy's GMS increased 130% in April. And I believe those trends, you've said, continued through May. And the company guided the quarter, I believe, to 80% to 100% growth. So I would like to better understand to the extent that you could speak to even more recent trends than May in terms of what you're seeing with growth holding up to those April, May levels? Or if you've seen any change in demand here in the first 1.5 week of June.

Let me just jump in quick with a clarification. So we -- on our Q1 call, we gave the April numbers, and we said that for the first 6 days of May that the trend had continued with what we were seeing in April, but we didn't -- we hadn't and haven't given a full May number at all. The 80% to 100% GMS growth implies that there is deceleration in May and June from the April level. And I think we said specifically on that call that May decelerates from April and June decelerates for May. But we haven't given any update on those numbers. And just, while I have the floor for a quick second, I also refer to our safe harbor can be found on our Investor Relations website.

Okay. So do you want me to go on that or do you want me to...

Yes, yes. Whatever you're willing, able to provide in terms of trends post those disclosures would be useful to the extent that you have anything incremental.

Josh, do you want to...

We haven't given -- yes, sure. So we haven't given any updates since our earnings call, which was, I think, May 6, or let's say, the first week of May. And we haven't been in the habit of giving intraquarter guidance. In fact, we've typically only given annual guidance, but we did give quarterly guidance for the second quarter just because we know this is a time of uncertainty, and we're trying as best we can to give guidance in a time when guidance is really hard. There's a lot that's changing. So there's a set of tailwinds that we talked about in our last earnings call in terms of there just being fewer places to buy and is a major tailwind for us. And also the need for masks, which were in very limited supply, it really sort of highlights the agility of the Etsy Marketplace. Our sellers were able to suddenly start creating masks almost out of thin air in a matter of days and get to a point where they could produce and sell hundreds of thousands of masks a day in a matter of weeks. And I don't know many other retailers who could do something like that, like the agility of our marketplace. So I think it is really dynamic. There's also headwinds that we expect will come at some point both as retail reopens, but also as a recession arrives and deepens, we wouldn't be surprised to see consumers pull back. And so that -- what we talked about in our earnings call is both those headwinds that we expect might materialize in the future, and then the tailwinds that we very definitely were experiencing as of our last earnings call. What are we doing with that? Well, we have a moment, and I've often said for folks who've been following us, if we could just get people to pause for a second before they buy on Amazon and get them to think where else could I shop, Etsy would very often come to the fore as a good alternative to Amazon. And we're having that moment. All of a sudden, people have to stop and think. Anywhere they might want to shop. Is that store going to be open? Is it actually shipping on time right now? All of those things. And in that pause, Etsy is a great beneficiary. I think we are a really great alternative to so many places you might buy. And what's held us back is that so many purchases are habit driven. You're just in the habit. You're in the habit. I need to buy this, I'm going to Amazon. I need to buy this, I'm going to Amazon. And there are very few moments in our normal life when habits get reformed. When you have a baby, when you move home, when you get married, those are the classic 3 times that have it get reformed. All of a sudden, in this moment, habits are up for grabs. And so we want to invest aggressively to take advantage of this moment. Two variable cost investments. We're being very careful about our fixed cost base. But in variable cost, you're going to see a lot of Etsy on television, Etsy ads on television right now. You're going to see Etsy prominently in performance marketing channels because we want to take advantage to really create that sense of habit, be front of mind, right in the moment when many people are shopping on Etsy. We're also thinking about our product road map, and there are many enduring pieces of our product road map that mattered before, mattered now. But we have the opportunity to invest in some longer-term projects at this moment that we think can make things like search and discovery much better, can make fulfillment on Etsy much better. And so we are taking this opportunity to do some of those, let's say, infrastructural investments in our core marketplace that we think are going to pay off for years to come.

And the improvement in growth, I think that there's some that look at the facemask growth and think that that's onetime in nature. I think it accounted for 17% of GMS in April, but you mentioned in the earnings call that face masks would likely be an enduring category. I mean, anyone that leaves their house today understands why that may prove to be true. I mean, is there anything that's changed or even deepened your conviction in the duration of that category within the Etsy Marketplace over the long term from here?

I mean, when facemasks first happened, we were debating whether it was going to last a day or a week or a month. So now I think it's clear that it's last more than a month, and it might be a fact of life for some time to come. Look, I hope not. I mean, we all really hope that we have a vaccine. We have good treatments and that we move past this. I think more than anything, what facemasks highlights is just the agility, the dynamism of the Etsy Marketplace to respond to trends. And that's pretty unique, we think, and pretty compelling about Etsy. But what we also talked about in our earnings call is that nonmask sales grew 79% in the month of April. And that's across a very wide variety of categories. So yet again, home furnishings was the #1 category on Etsy. But toys and games for the kids, gardening supplies, even baking products, were doing very well on Etsy. It's hard to buy flour in the store or yeast mix. And in fact, we have those things on Etsy. People, I think, can be shocked at what a wide variety of things we actually have for sale on Etsy. And so having fewer alternatives cause them to give us a shot and lo and behold, we have those things. So we're seeing growth across almost every category on Etsy. I will call out that weddings has been very hard hit. Weddings is down more than 50% year-over-year. And weddings normally in April and May and June would be a very big category for us. So if we're saying that through the month of April and the first days of May, non -- sales on Etsy, excluding facemasks, grew 79%. What that means is that many of our big categories grew more than 79% to offset the headwinds from weddings. So we're -- I think e-commerce is gaining a lot of share versus retail, obviously, in this moment, but I think Etsy is gaining share versus e-commerce in most of the categories in which we compete.

And if you -- I mean, a lot of these are impossible topics to address with facts at this point because it's a guessing game in terms of what's happening now and how that continues into the business. But given such strength broadly across the platform, you mentioned the shutdown of retail is obviously a factor, but there is a Etsy specific factor, which is just awareness and expansion of awareness from existing customers, of the depth and breadth of inventory and the new customers that are being brought into the funnel. Do you have a way to talk through that in terms of how the company is thinking about the improvement in growth and the drivers being retail shutdowns versus just this incredibly favorable kind of free marketing of awareness because customers are coming to the platform now in ways that they never were before?

I mean, at the highest level, both acquiring new customers and where we -- engaging existing customers more. They are both significant contributors to our growth. And so we have been acquiring new customers at a way far exceeding what we did prepandemic and that speaks to the fact that there's still tons of buyers out there who haven't experienced Etsy. And I will say, there are tons of buyers out there who don't shop online. As much as that may surprise many of us who have been shopping online for so long, I think the pandemic has demonstrated, there's a lot of people who still shop exclusively or almost exclusively offline. And that has suddenly changed. And most people are trying online, and they're liking what they see. And they're trying Etsy, and they're liking what they see. And we think there's a lot of people who've never tried Etsy, who, when they try us, will really like us. We've also had -- to your point, Scott, a lot of people who used us only occasionally and often think of us only for one thing. They come for Mother's Day reliably once a year to buy their mother a gift. Or they only think of us for wall furnishing, wall hangings, and they don't think of us for jewelry. And so suddenly, those customers who have to pause and think, where else can I get this, realizing, oh gosh, I bet Etsy has that. I bet Etsy has kitchen supplies. I bet Etsy has toys and games for the kids. I bet Etsy sells clothes. And lo and behold we do. We sell all of those things, and there's great selection at Etsy. So we're seeing real frequency improvements from our occasional buyers as well. And it really is a combination of both of those in relatively equal measure, I would say, that's driving the growth. I don't know, Rachel, if there's anything I missed.

Yes. I would just add, we have the benefit now of seeing certain countries reopen in phased approaches and certain states reopening in phased approaches. So we're studying that data pretty carefully. Now there's some noise in the background because we have a new crisis that has set upon us that we've always talked about what we internally call the CNN effect of just normal distraction from a flood or a fire or an election causing some -- it pulls eyeballs away. So that's causing some noise. So we're studying that carefully to see if there's impact, and we'll be talking about that on our Q2 call. And the other thing I'd add is in our -- the slides in our earnings presentation, we have a pretty cool cohort slide that shows that all of our cohorts are showing a meaningful inflection, not just the new one. So it's not just the mask sellers, but all of those buyers are actually engaging more and converting more now than they were before. So it -- to us, that implies that there's been a meaningful share of mind shift for all cohorts. And the third point is that we've been making significant -- taking advantage of the relatively lower CPMs on above the line marketing and the lower CPCs on performance marketing and turning the dial up there to try to -- while we've got their attention to get them to come and repeat purchase with us and to really become top of mind for them.

Yes. And one thing that Josh left out, Etsy also does offer homemade scones, as I was happy to hear. You see it in the Washington Journal article, I haven't bought any myself yet, but plan to. So it seems like there's a little bit of everything out there. One question that would be interesting to just kind of get your thoughts are the -- are there any differences that you're noting that you would highlight geographically in terms of markets that are stronger than others? Is it tied very closely to openings of stay-at-home initiatives and things of that nature? If you could touch on that, that would be useful.

Rach, you want to lead? You want me to lead?

Well, I guess, by [ first quarter ], we haven't disclosed any of the sort of state-by-state dynamics as far as the stay-at-home...

Even like beyond the U.S. -- yes. So yes, state-by-state would be useful, but I'm speaking more beyond the U.S. as well.

Yes. So I think I'll fall back and we'll talk about that on the next call. As far as the stay-at-home nature. One point I'd like to point out is that our sellers were ready to be remote and work from home well in advance of COVID happening. And so I think that's one significant difference between that marketplace and others is that we're extremely resilient and agile, as Josh had pointed out earlier, and I think we move to challenge very quickly and productively, both with our seller community and with our Etsy community. So that's been very helpful to us. And I think face mask aside that the proof point that we can do that with a lot of different products and product categories that we [ put ] into ourselves and to our sellers that we can dial up demand significantly from where they typically previously operated in.

And then I would just add that in terms of -- I know where you're going with that, Scott, which is for countries that have started to reopen, what happens to our growth rate and all that, which -- so there's a little bit of noise, there's a lot of things that affect our growth rate in different countries because we're bigger in some and smaller in others, and there's a lot of different dynamics. So we'll talk more about that on our next earnings call. I think the data are a bit noisy. But I would say that we're seeing -- what we said in our last earnings call was the strongest growth in national domestic. What I mean by that is like German-to-German sellers and U.K.-to-U.K. sellers, for example. And that is super healthy for us. So transitioning in the minds for markets outside of the United States, moving from a what is perceived to be primarily a U.S. marketplace to be seen as primarily a local marketplace is, we think, a great leading indicator for real growth in those countries. The more British people think of Etsy as a British site and German people and French people the same, the better. And so I'm really encouraged by those trends.

How about marketing? Marketing, it seemed like ad rates seem to drop precipitously at the outset of this and have begun to recover back to what seem more like pre-COVID levels now. So interesting like how the marketing campaign has changed because on top of that, you also have -- where you're attracting consumers in ways that maybe you're not having to acquire them similarly to what you did before COVID. So as you think about longer-term marketing strategy, are there any learnings that you're getting from this period that will be carried forward that you would highlight that may be modified relative to your previous thoughts on marketing?

Well, broadly speaking, we can divide marketing into brand marketing and performance marketing. Let's start with performance marketing. We have been building out our capabilities to get more and more nuanced in performance marketing, and we're very, very ROI-focused as a company and performance marketing is a great place for that. It's true that we had many people sort of pull out of the auction in Google, if you will, which causes CPCs to go down and we would be a beneficiary. We also saw a lot of interest in searches at Google and places like that. And so that helps -- both of those trends are helpful. And cumulatively, they're very helpful for us. We think we've got a lot of opportunity to continue to get better at performance marketing as we build out our capabilities, get better data feeds, get better bidding strategies and all of those things so that even as the market moves up or down, we continue to have opportunities to grow our profitable investments in performance marketing to invest more at higher ROIs. And so we've got significant tracks of work there, and we're investing more in tools and capabilities to get better there. And so we felt good about that in Q1. We felt very good about that in April, but I continue to feel good about the opportunity for performance marketing for us into the future. TV is an area that we increasingly are gaining conviction around. We have been testing, we have been experimenting. And I think we said in the fourth quarter of 2019, we felt good about our results, and you should expect to see us invest more in 2020. We started to invest in the first quarter. But you're seeing us a lot on TV right now. If you watch TV, you're probably seeing Etsy Ads. That should certainly help, given the levels that we're investing right now, and we are feeling really good about what we're seeing. But most importantly, if you look at the creative on Etsy, we just started some brand-new campaigns that launched just days ago, and they're all about Etsy for everyday essentials. And it's really reinforcing the idea that there's lots of things you're going to need in your everyday life, but why not buy something that's a little special? Why not buy the thing that brings you joy instead of the thing you're just going to throw away a month later? And so reinforcing, and it's very sort of purchase driven, the new campaign we just launched, gives you very specific ideas of the kinds of things you can shop on Etsy and the breadth of things you actually see an Etsy search bar and you see people typing in all sorts of different queries, and then you see the kinds of search results you'll find on Etsy. And so it's meant to plant those seeds. And again, what I'd say, what gives me so much belief and conviction for Etsy for the future is that the people who shopped at Etsy have had a great experience. We're not trying to recover from bad experiences. In general, they've had a great experience. They just don't know when to think of us. So the more we can plant those seeds, the more we can be in front of them and remind them, the better and better and better we're going to do. And TV, I think, is a great channel. It also is driving direct traffic straight to Etsy. We talked about 85% of GMS on Etsy is unreferred. It's people coming straight to Etsy. It's free. It's traffic we're not paying to be the downstream of someone else for. And I think having that love for our brand organically and having loyalty to our brand organically is very unusual for an e-commerce site, and it builds a powerful moat.

Do you want to talk -- one thing we had said on our last call was investment in our marketing and technology stack so that we're better able to segment and target buyers. Do you want to talk about that, Josh, or...

Yes. Sure. So we've made some significant investments in CRM technologies and they've come to fruition just in time. They all launched in April. And they allow, for example, a marketer to define any customer segment they want with a click of a few buttons and then push marketing collateral to that segment through every channel. Be they on our Etsy site, be they through e-mail, push notifications in the app or even on Facebook or on Google. So you can, for example, say, I want to look at only people who shopped in Etsy in the last 14 days and for whom that was their first purchase and for whom they bought in home furnishings. And I want to push the second home furnishing message. Or I want to cross-market fully to them. Or I want to -- and you can do that with just a click of a few buttons without any engineering involved, and that is radically better than what we had prior. Radically better. And so our ability to really communicate and reengage buyers on what's going to feel like a really personalized way is suddenly much stronger. And so one area we're using that is retargeting. So looking at people who have bought just in the first 14 -- their first purchase happened within the last 14 days. And when we find those people on Facebook or when we find them on Google, how do we make sure we're really loud. We're in front of them. And so we're incenting that second purchase. It's that kind of thing that we now have capabilities to do that we didn't before that I am optimistic about the impact it can have for the future.

So you've hit on the tech marketing impacts to merchants and buyer habits. Before we leave this topic, there's about 10 minutes left, is there anything else that you'd highlight related to this kind of unique period? I mean, many companies refer to this as like a free AV test in their business. Is there anything that I left out in terms of questioning as it relates to COVID-19, whether it's work-from-home initiatives or anything else that you'd want to -- that you think would be useful to touch on?

Rachel?

I guess one of the things is -- one of the themes that we've had is that we've been communicating to our sellers that we have their backs. And the sellers are the -- they're the marketplace, the lifeblood of Etsy. We focus a lot on demand because we believe that that's what the sellers need most. But in this period of time where many of them could have been hurting, in fact, that week in March that we referred to that we saw the sort of steep desell, we were afraid for our sellers. And so we did a lot of things that we put in place to really support them during this time and subsequently, we've also done things to support our black seller community and to really put our -- to make what we think is significant investments in support of the Black Lives Matter set of philanthropies. So for the sellers, we talked about an $11 million to $13 million onetime investment in the community. And then the bulk of that was really in waiving fees for off-site ads for a full month when that started. And we can touch on offsite ads in a moment because that's a pretty big and significant new initiative for Etsy that we haven't discussed here. But we also did a number of things to help make sure that they could scale and that they could rise to meet this challenge. And I think we helped prove to them that they can do it, and that will help them through that. And I think that is something that has long-term benefit to the company and to the marketplace. You want to talk about offsite ads? Sorry, go ahead.

Before we go to the ads, I mean, I think it's an important topic that you touched on in that the company actually influenced the way that the marketplace shifted. And that is, I think, maybe understated at this point or not well understood by investors in terms of how influential that you all were in educating the merchant base in terms of how to shift inventory at the very front end of this. It'd be -- that, I mean, I think, is unique to the marketplace. There are other marketplaces that exist that are more horizontal in nature that haven't been able to execute on that. And is that something that you think about impacting the business over the long term in terms of being more engaged with merchants in terms of education process and helping them understand products to sell, et cetera?

It's more that we can give them agency, the better. And so what they all want to know is how do I rank higher in search. And the more we can give them clear signals for what we value and more importantly, what our buyers value. Do you have good shipping policies? How do we feel about your return policies? How good is the quality of your photography? Do you get good reviews? How good are your communications with your sellers? The more clear and transparent we can be with them about what the, let's say, ingredients of a Q score look like, the better we can do. But it's certainly true also that sellers often will experience a life cycle where they'll have a product, it will be a hit product, their sales will increase. And then other sellers will enter the marketplace and start selling very similar items. And what we see is sellers, and I think this is very important for shareholders to understand, I think a lot of them don't get this, sellers go multichannel from Etsy, not when their sales are increasing but when their sales are declining. So we virtually never see a seller whose sales are increasing and increasing and then decide they need to go off of Etsy. They're doing great on Etsy. They're all in on it. What we'll see is then their sales will start to decline. And what they'll often do is raise their prices to hold their revenues constant. So now they have a product, which is similar to a lot of other products on Etsy and yet more expensive. And that starts a vicious cycle, which causes their sales to decline further and further, and then they will go off in multichannels. Now they'll market that less interesting product that's overpriced on other marketplaces as well. And you can imagine that's not often very successful for them. So what would be more helpful is us giving them data on what are some of the new trends. How do they innovate their product line? What they should have done rather than keeping the same products and raising prices is continue to innovate the product line. The sellers that do well sustainably over time are constantly innovating. And so the more signals we can give them about where the next trends might be, the better. And then some of that's always going to be with the sellers. It's their innovation, their creativity, their ability to come up with the new and the next that is the heart and vibrancy of the marketplace itself.

So 2 last questions. First one -- Rachel, sorry for not letting you go here a minute ago, but the -- be interested in how the sellers have been responding to the new ad products that were just referenced Etsy Ads and offsite ads, if you wanted to touch on that. And then I had one question on competition to close it out.

Yes. So just real quick. First of all, just as a reminder to people that are listening, we launched something called Etsy Ads in the third quarter of 2019. And quickly, that product wasn't met with a lot of excitement by our sellers and wasn't scaling as fast as we thought it should. So we did a quick pivot, and we split the offsite ad product from the on-site ad product. The offsite ad product is called Offsite ads, and the on-site ad product is called Etsy Ads, formally known as Promoted Listings, and relaunched that in the March-April time frame and then billing to -- the billing for the product started in May. And we -- I think it's been tracking above our expectations in terms of we expected some noise from sellers, and we got some noise from sellers, but it was out of our -- higher than what we expected, seeing a lot of -- a much higher increase in the return on their ad spend than we had even planned, and they're seeing it in the dashboards that we give them. And we've seen very, very low, what we call hard churn, meaning sellers just leaving the Etsy platform, almost none. And then soft churn, which are people that are able to opt out of the program, that's also been very low, lower than what we expected. So I think it's all very positive and heading in the right direction. And we can give firmer data and metrics when we get to our call in August.

And I'll end with the dramatic. First, eBay is going to kill Etsy, then Amazon Handmade is going to kill Etsy, and now Facebook Shops is going to kill Etsy. So why is that not true?

There's always going to be places to buy and sell, but brands stand for something. Facebook stands for something. Good for them. I mean, it matters what it stands for. It stands for something. Amazon stands for something. Etsy stands for something else and it stand for something very, very different than what Facebook and what Amazon stand for. And we stay true to that. That hasn't changed for us. So there are -- Amazon is a great place to go buy anything. It's the everything store, right? And they will sell you commodity stuff fast and cheap that you will use and throw away and forget. And there are other places that will also create kind of everything stores of different kinds. And their brands will stand for something. I think Etsy's brand is unique. I think it's different. I think it's compelling, and it's all we do. And I think there's a tremendous amount to be said for that.

And with that, we will end. I tend to agree for what that's worth. And Josh and Rachel, really appreciate you joining us today, and for all of your time. Thank you so much.

Thank you.

Thank you for the time. Appreciate it. Bye-bye.