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

Okay. We are going to get started. Good morning, everyone, and thank you all for joining us today. I'm Maria Ripps, Internet analyst here at Canaccord. And it's my pleasure to introduce Josh Silverman, Etsy's CEO; and Rachel Glaser, the CFO. Josh joined Etsy's Board in November of '16 and took on the CEO role in May of '17. And Rachel joined Etsy almost at the same time in June of '17. Josh, Rachel, thank you so much for joining us today.

Thanks for having us.

It's really nice to be here. And before we jump into your questions, Maria, I've been asked to just reference the safe harbor that can be found on Etsy's IR website.

Great. So I'd like to start sort of with a bigger picture question. Congrats again on reporting such strong results last week. Can you maybe talk a little bit about what you've learned over the past month during the pandemic about the Etsy marketplace? And how have you navigated this surge in demand?

I mean there's a few things. It has indeed been an eventful 4 months to say the least for everyone. But there's a couple of things that I think it really highlights about the strength of Etsy's model. One is how dynamic it is. So categories that didn't even exist 4 months ago. Masks, for example, barely existed in March of 2020, and Etsy sellers have sold almost $0.5 billion worth of masks since. So within days, that category sort of got created, supply got created and demand arrived. And it's not just masks. You see that in so many things that are relevant now to the pandemic, things like [ mon ] signs that have suddenly exploded as a way to have a party or celebrate without having people enter your home. We're seeing that over and over again. And I think even in non-pandemic times, the ability of Etsy's marketplace to shift almost immediately to whatever the current trends are in an incredibly dynamic way is something that's always been true, but I think the pandemic has really highlighted it. Another thing that's been true but has been really highlighted is just how resilient the Etsy team is, how dedicated and passionate that they are about the mission and the work of Etsy. And I'm so proud of the team that have worked so hard and in very challenging conditions to be able to really rise to this opportunity and support our sellers and our buyers. And the third thing that I think it's really highlighted for the world is Etsy's opportunity to serve buyers in so many different purchase occasions. I mean we know that Etsy is great for gifts. We know it's great for home furnishings. We know it's great for jewelry. We know it's great for clothing. But we didn't know it was great for bread until recently. When bakeries had to shut down and artisanal bakers went online and started marketing bread and yeast and other things. And there's a lot of demand for it. And so it really shows that Etsy is there to serve almost every purchase occasion that a buyer might have.

That's a really good point. And on the earnings call, you talked about how the pandemic sort of has accelerated e-commerce trends and sort of blurring the line between online and offline retail essentially. And that's expanding your TAM. How have your strategies sort of and medium to long-term plans changed as a result of COVID?

We laid out in our Investor Day in March of 2019 the 4 pillars of our right to win. And that's underpinned by a really unique set of our sellers' items that are different than what everyone else is selling, layering on top of that search and discovery and trust and a human connection. And the 4 of those together make up, we think, a really powerful moat, a right to win for Etsy. And our strategy hasn't changed. We continue to invest in deepening the strength of each of those pillars. I think that the work that we've done over the past few years has set Etsy up really well to rise to the opportunity to fill in the gap. Had our search engine not become much better, we'd be in a different place. But search works a lot better now than it does. I'm so glad we did the work we did on free shipping last year. So when millions of new buyers are coming to Etsy, they're seeing shipping prices that align with what they expect. Making the human connection feel even more prominent in this time when people want to feel connected to each other, they're socially distant, so they want to feel connected. I think that matters now more than ever. What has changed is our capacity to invest and the time frame over which we can invest. So we now have the opportunity to do some things that I think are going to be extremely powerful that may take a little bit longer to pay off, but that can really even further deepen our right to win. For example, in search and discovery, we're doing a lot right now in the data infrastructure around what each item is and how it relates to other items. And because our products don't map to a catalog, we don't have structured data. That kind of work is harder for us than everyone else, but it's a solvable challenge. We're making great progress on it. And in doing so, we only further distance ourselves from everyone else in the very unique place that we play. So we're really excited about our path forward.

I think we have someone else joining the conference there. It seems like demand was pretty broad-based in the platform during Q2 with all categories kind of performing nicely. Your top 6 categories in the marketplace, which make up 75% of GMS, grew impressive 92% year-over-year. Maybe can you talk for a minute about what you're seeing in some of the other categories which grew GMS. I think it grew 75% or so year-over-year. And is there a product or group of products that you're seeing as an opportunity to make a bigger part of the mix over time?

Yes, I mean, it's such a good point. So we've talked about our top 6. Everybody wants us to size our TAM, and we do the best we can. But I think it's all of retail excluding a few categories like consumer electronics, which are, by definition, mass produced. But other than that, we participate in almost every part of the retail spectrum. So outside of our top 6, there are huge categories. For example, in that other that's really growing a lot right now, pet supplies and toys were both huge growth categories for us. Bonnie, my dog, just made an appearance, but lots of people are spending time with their pets right now. And Etsy's got amazing pet supplies, whether you want a customized dog bowl or brushes or clothes just for them. Toys and games for the kids, huge right now. And whether you want wooden toys that are made just for your kids, whether you want personalized things for them, so much for sale on Etsy. And what I think is interesting is that each of those categories are also seen as huge categories. There are retailers out there who only sell pet supplies and have multibillion-dollar market caps. We've got a big and thriving and very quick growing business in pet supplies. It's just not even one of our top 6 categories. So when you think about the size of the TAM of Etsy, it's a collection of multibillion-dollar categories, multi-hundred billion-dollar categories.

Yes. That's a really good point. I wanted to ask about your take rate. There are a lot of moving pieces in your take rate this year. Could you maybe spend a few minutes talking about your marketplace and seller services take rates? And what are some sort of puts and takes in there?

Great question. So for starters, we gave guidance for the second half of the year that we can expect the take rate to be about 16.9% for second half. And there are moving parts. I believe many of you know that we launched a product or relaunched a product in March that formerly was called Etsy Ads. And what we did was we created an offsite ad product that charges a transaction fee for product listing ads that have a successful sale. In other words, a seller will never pay a dime unless they have a successful sale. And if they do, they pay a slightly higher transaction fee than they're paying on their base transaction fee. That is effectively a take rate increase. And you can see when you look at our marketplace take rate, not total take rate, but our marketplace take rate between Q1 and Q2, you can see that 80 basis point increase. So that was one of the things that grew take rate. A couple of things going the other way is that our promoted listings product, which we now call simply Etsy Ads, that's our on-site ad product, performed really great. It was up 94% in the quarter. But GMS was even greater, meaning the conversion rates were so high that actually reduces page views, and that's a thing that can actually reduce promoted or Etsy Ads revenue relative to the size of our total revenue. And so that's something that actually has the effect of contracting take rates a little bit. And overall, on a full year basis, we now have Reverb blended into our total take rate. Reverb has a lower transaction fee. However, they did just do a transaction fee increase in the beginning of April, so they're starting to optimize their take rate as well. But when it blended, it does have a slight contraction to Etsy's overall consolidated take rate.

Thank you for that. And I wanted to switch gears a little bit here and to ask about advertising and buyer growth. So during Q2, you spent nearly $115 million on marketing, which was up almost 150% year-over-year. And you added approximately 19 million active buyers, and that was split into 2 groups. So first, on the 11.5 million new buyers, it seems like you were able to add those in a very sort of cost-effective manner given sort of lower media cost due to the pandemic. So I guess 2 questions here. One is, how has this cohort's early purchase behavior been? And separately, what's your view on the advertising landscape now here in general?

Yes. So for starters, just to talk about the buyer growth number. We added 12 million new buyers and reactivated 7.2 million, which adding those together is 19 million new in the quarter. We added that many in all of 2019. So it was a pretty large growth rate. And what we said on our earnings call was, we have no reason to think that these cohorts will perform any worse than our existing cohorts. They are, at the moment, performing better, but we also don't know that, that's going to continue because we don't know. There's a lot that's volatile and unpredictable right now. But I can say that the repeat purchase rate of the new cohort is up about 500 basis points. So they are performing. It's encouraging. They are performing better than our older cohorts. And we're trying to use the moment to really lean in to marketing and product to be able to really retain them and keep them. So because of lower CPMs right now and lower CPCs, we're able to spend more and extend our dollar spend at the same or better ROI. And so this is a great moment to really be doing that. And our messaging in that marketing is really focused on the everydayness of Etsy. That you can come to Etsy for things every day. They are still special things, but you can come for things for Etsy every day where you might not have thought of Etsy before to really try to lean in to what we're seeing as the beginning of a trend of repeat frequency.

And you mentioned sort of your messaging strategy. Did you change your messaging strategy kind of when the pandemic started? And kind of, I guess, how effective was that in acquiring new buyers?

I'll take this one, Josh, please jump if you want.

Yes.

So what we've done is we've run a couple of different kinds of campaigns. We've run a brand campaign that's more focused on sort of building longer term, top of mind, unaided awareness. And then in the last quarter, we also started testing what is called a direct response campaign that's much more about driving consumers to etsy.com. And in that campaign, we also focused on the everydayness, as I said. And I think going forward, we'll also look at doing those things in tandem with each other and how the 2 things work. Yes, there's been a great campaign. And Josh, I'm sorry, if you want to add, please.

Yes. No. And I do think that also speaks to the resilience and agility of the team. Let's keep in mind that you don't get to cast actors right now. You don't get to bring people into a studio. And in spite of that, they've developed and launched 3 separate TV creative campaigns using footage that we had. And they've been very effective. We've been really pleased with the results. And so if you look at the most recent ad campaign we're running right now, it shows a search bar on Etsy, someone typing in a search and then seeing a diverse set of results. And there's lots of different types of searches you're seeing there from home furnishings, apparel, jewelry and others. And that type of campaign, that campaign framework allows us to be constantly reinforcing different use cases in the minds of buyers. And we think that's really important because it's the shoulder tap that our buyers need more than anything. When you say Etsy, Halloween, you don't need to say any more than that, of course, it must be the best place to go to find a really unique costume, what a great idea, but they didn't think of it before, right? And so it's just about that reminder to create top of mind awareness, and that's where we are encouraged by what we're seeing in our TV creative, and we're working hard. And by the way, the below the line stuff really reinforces that. When you go to Google and you type in a search and the first thing you see are Etsy results, that also creates that linkage in your mind. So it all works together.

That's great. And I wanted to ask you about the 7.2 million buyers that sort of re-engaged during Q2. Anything to mention there in terms of how they came back to the platform, how frequently they're buying now? Was it just face masks or have they come back and re-engaged with some other categories?

Yes. So first, a definitional point is that we call a reactivated buyer somebody that hasn't been to Etsy in a year or more. A lot of companies define that group as new. And so we're a little bit harder on ourselves and our definitions where we say somebody that's new is a customer that's never been to Etsy ever before. The majority of those buyers came back to us organically, and the overall repeat rate was up 520 basis points. And most of those buyers came back to shop for categories that were outside of masks. So Josh gave this stat already that we had growth in non-mask categories up over 90%. So we're seeing really positive behavior for people coming to Etsy just because of that reminder that Etsy has this great breadth and depth in many, many categories. And our frequency metrics are really increasing. So one of the ones that I really like is that for our new and reactivated buyers, almost 10% of them came 4 or more times within 30 days across 2 or more categories. And that's double what it was a year ago. So that's a really positive indicator of frequency really picking up at this time. Now there are fewer places to shop. And hopefully, some of those retailers will come back. The physical retailers will come back when we get past this crisis. We really think at this moment that we've learned the line between offline and online that, that distinction is disappearing in this period. We're educating people about how much great product there is in many categories. We've got our core 6, but then there's really nice growth in the noncore, the other categories as well.

Yes. And Rachel, you mentioned offsite ads. So it seems like your seller advertising platform has undergone sort of a number of changes over the past year. But it seems like you're feeling good about where the platform -- how the platform has evolved. I guess, what have you learned so far from the launch of offsite ads? And what kind of feedback are you getting both from your sort of core group of sellers who are engaged with the platform and the small fraction of sellers who decided to opt out?

Yes. So I mean, first, that stat that you just mentioned, there's 2 categories of sellers. For the majority of sellers, it's optional, whether they want to be in the program or not, then there's a small group of sellers who are very significant to Etsy, they make the market. And so the product is sort of a mandatory product for them to participate in Etsy's marketplace. And they don't have the option to opt out, but they pay a slightly lower transaction fee on offsite ads. And between those 2 groups, there's been less than 2% churn of our sellers. So very, very low number of sellers have opted out, not 0, but very low. And very few sellers that have decided to quit the platform in that mandatory group. And we modeled this extensively going into the launch. We talked to sellers quite a bit and really tried to gauge what we thought was going to happen. So it performed better than our expectations in that regard. So we're very pleased with 98% sellers continuing to participate in the Etsy Ads program. And then we do other things that we monitor and participate in seller forums, where there's all different kinds of conversations going on. And we can gauge the sentiment and the temperament of sellers as we launch new products, particularly those that we mandate. And we have a very robust member support organization that will reactively field calls. And in some cases, we proactively will reach out to groups of sellers that are important or critical to us and proactively work with them to see how they're doing. And so all of that has performed with our expectations as in. We knew there would be some agita with any product that we mandate, but it's been as good as we had hoped. So it's -- we feel very, very smoothly.

That's good to hear. And maybe related to that, so Etsy Ads seems to be doing really well. It grew almost 95% year-over-year in Q2. Can you talk a little bit about sort of your decision to reduce ad load there as well as sort of continued improvements to algorithms and bidding strategies? And how sort of this change is going to benefit the platform over time?

Yes. So first, I agree that Etsy Ads is doing great. And we are pulling out all the stops right now to make sure that the customer experience is excellent because what matters is all of this activity we're having today is sustained. What happens with frequency. We want to make sure that every customer interaction is outstanding. With Etsy Ads, we often have a large number of very relevant Etsy Ads to show, particularly with head terms. But with tail terms, we don't. And so you might see the first 2 or 3 or 4 Etsy Ads are very relevant, and then they get less relevant. And the result in terms of a full page of search results might be irrelevant or less relevant search results because of Etsy Ads. So because of that, we decided to reduce the ad load of Etsy Ads site-wide. Now what we'd like to do is have technology such that you can automatically meter the number of Etsy Ads per page based on how relevant a pool of ads you have. We just don't have that capability yet. That's the kind of thing we're working on, we're building, but it doesn't exist. So to make sure the customer experience is excellent, we just reduced the ad load across the site. We're doing other things to make sure that the customer experience is always excellent. For example, if a customer has an issue, let's say, the item doesn't get delivered. That will often go back and forth between the buyer and the seller. It turns out that items being stolen off of people's porches is happening more and more. And sometimes, it just gets lost in the mail, which should be more of a U.S. Postal Service or Royal Mail issue. Etsy is more often just stepping in right now to take care of it and make it go away because we just want the buyers to feel great at every interaction. And those are examples of some of the investments we can be making right now that we think are wise investments to be making on behalf of the customer experience. So we are pulling all of the stops. But I think that the second part of your question is what's happening with the algorithms. And what we've seen in Etsy Ads, even just over the past 3 or 4 months, is that the seller's return on ad spend, the seller ROAS is up and Etsy's revenue per view is up. And so that means relevance is better. If we pick the right ad to show to the right buyer at the right time, then Etsy earns more money and our sellers get better returns at the same time. And I think we're at the early stages of where that road map can go. I think there's a lot of opportunity for those algorithms to continue to get better and better and better. So we're really excited about the future for that.

Great. And I think we have just a couple of minutes left here, but I wanted to squeeze in a question on search and discovery. I think on the call you mentioned 2 recent priorities, sort of save searches and favorites. Can you maybe talk a little bit about how you take features like this and sort of learn more about purchase intent and sort of driving increased conversion on the marketplace?

Yes, both of those make the customer experience better and more convenient and allow Etsy to know more so that we can serve the customer better. Starting with favorites, one thing we often hear from buyers is that there's an overwhelming number of search results and good items for sale on Etsy, and they have a hard time sorting. So by allowing them to favorite, they can then come back and say, okay, I've narrowed it down to my top 5, let me now just take one. So that's useful for the buyer. But it also tells us a lot about what your style is, what your preference is, that allows us to tailor search to get a lot better. It also can allow you to share your favorites with someone else, maybe you and the other person are collaborating on a buying decision or maybe someone else is just interested in, hey, what are the best jewelry items that you see on Etsy. So that's going to allow for viral spread, which we think is really helpful. And on the save search side, save search allows people when they come back to not have to start the search process over again. Relative to the thing you're interested in, here's the latest and greatest new stuff that's come on to the platform relative to your interest. That's convenient for buyers. But importantly, it tells us that this buyer has a persistent interest in this particular category. It's not just a onetime purchase occasion. They are generally interested in this. And that's also super useful for us in terms of messaging that we target to them through e-mail or offsite channels or when they're on the site as well.

This is great. I think we touched on a lot of good topics here. Unfortunately, we are out of time. Josh, Rachel, thank you so much for joining us today, and we really appreciate it. Thank you so much.

Thanks for having us.

Thank you.