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

Hello, everyone. I'm Shweta Khajuria, Internet analyst at RBC, and we are thrilled to have Josh Silverman, CEO of Etsy; and Rachel Glaser, CFO of Etsy. Josh and Rachel, thanks so much for joining us today.

Thank you, Shweta.

Thanks for having us.

It's great to see you. Well, we have called this a vaccine conference just because so much has already happened over the past couple of weeks, as you know, in addition to elections.

So maybe I'll start off with the COVID question. Josh, what happens to Etsy's business and demand trends when the economy reopens?

Well, look, we think that Etsy has been given a moment to shine. And our sellers in our marketplace has risen to that opportunity. At a time when there are far fewer places to shop off-line and online, when consumers are uncertain whether things can get shipped to them, but when they have a lot of needs to buy things, Etsy sellers have come to the rescue, and the Etsy Marketplace has come to the rescue. And it really highlights the strength of our model. We're not reliant on one single supply chain. We're not reliant on only a few fulfillment centers. And our sellers are incredibly agile in responding to the needs of the community and to doing so in hours and minutes. The results of this are tens of millions of people who have common bought on Etsy recently had had fantastic experiences. And so our -- we came into the pandemic with millions of active buyers who were really happy about Etsy. Those buyers have been shopping a lot more often on Etsy. And they've discovered that Etsy has a very wide range of products, everything from home furnishings to clothing to jewelry to gifts to holiday decor to everything else. And all indications are that they're having a great experience. In addition, Etsy has acquired a massive number of new buyers, people who maybe have shopped online before or had never shopped on Etsy. And reawoken, tens of millions of lapsed buyers who maybe had bought on Etsy 3 or 4 years ago but hadn't been back. And those buyers are also having great experiences. All of our indications are that Net Promoter Scores are really strong. The buyers are delighted with the products that they're getting. And so we think having so many buyers come and have so many positive shopping experiences on Etsy can only be great for the future, for the medium term in terms of what our market opportunity is.

No, that makes sense. That leads me to the follow-up question. So how should we and investors think about, I guess, not only next year, but the long term? So what gives you most confidence in Etsy's ability to grow this buyer frequency to grow retention and grow new buyer growth? I guess that is one of the key questions that we have received over and over again. So in terms of when we think about sustainability of growth, of course, we know all e-commerce platforms, not only Etsy will face off for comps next year. But the question is, what gives you most confidence in that, what you were referring to, buyer frequency, buyer retention as well as new buyer growth going forward?

Look, in order to succeed as a business, you need to stand for something different. You need to do something really different. And the thing that you do needs to be really valuable and needs to be valuable often. And we do that. The world is consolidating more and more around a very few fulfillment companies like Amazon, right? And everyone's going to Amazon. They're buying stuff all the time, and it's fine. It's cheap, it arrives quickly, and you forgot about it 2 seconds after you've used it, and now it's in the landfill. And there's a lot of times when that's appropriate. We want what you want when that's what you need. But the more the world consolidates around these very, very few mass e-tailers, the more they're going to yearn for an alternative. Something that feels more personal, something that feels more human, something that expresses their sense of style, and Etsy, I think, is exceptionally well positioned to be that alternative to Amazon. And we're seeing in buyer research as well that when you ask people, where are the top 3 or 4 places you can go to buy X, Y or Z, home furnishings, clothing, jewelry, gifts, you name it, Etsy's name is coming to the top more and more often. When we ask our buyers, who would you have shopped at if you didn't shop at Etsy? They say Walmart, Target and Amazon and some eBay. These are all businesses that are 25x, 50x, 100x Etsy's size. And yet we have product selection that is very similar in terms of the breadth and depth across so many different categories. So I think there's just massive opportunity for us to grow and become much bigger. Most importantly, because we're doing something really different than what everyone else is doing. They are all competing to sell the exact same products a little cheaper, shipped a little faster. And that's not what we're doing. We're providing a really different shopping experience. And I think that's something the world is going to want and need.

Yes, definitely.

But do you mind if I just jump in with a couple quick points -- and before I do, I just want to remind people that you can find our safe harbor on our Investor Relations website. But to the question you asked about what gives us confidence, we gave some metrics in our last call about the core Etsy business and how much it's grown. So without mask, without COVID-related merchandise, we grew 92%, both in Q2 and in Q3. So -- and that is, I think, a direct result of us being able to lean in with our investments in product and marketing. And I know you'll ask us more questions in a bit specifically about that product and marketing, but we have a very quantitative lens on our marketing spend and whether we're seeing return on that investment. And we've been able to dial up the investment in marketing spend and continue to -- it is what is helping to remind -- give people that top of mind awareness about why Etsy and when Etsy. And so -- and we've indicated that we'll continue that lean in of investments in both product and marketing into Q4. And I think that gives us a great deal of confidence going into 2021 that we will have sustained this reactivation that we're doing and repeat visitation to purchase.

No, that makes sense. And that was going to be one of my follow-up questions. They're 2, 1 is on product initiatives and the second is your market initiatives. So let's start with product. Already, since both of you came on board, there have been a lot of product changes and a lot more focus and deeper than maybe in the years past. Now looking forward, maybe if you could talk about what product initiatives are you working on today? Did you work -- have you been working on this year? And what have you seen so far? And what are you looking forward to the most?

Yes, great. So let me start by grounding us in why we believe we have a sustainable right to win. So we've got this really unique collection of our sellers' items, 80 million items from over 3.7 million sellers. And the one thing they have in common is that they're each snowflakes. They're each unique and different from each other. They don't map to a catalog. Everyone else's efforts. If you look at Walmart, Amazon, Target or others, they're trying to take a mass collection of items and map it to a catalog. Ours don't map to a catalog. And so in order for us to succeed and really achieve our full potential, we think there's 3 things we need to do really well: search and discovery, human connection and trust. On search and discovery, 80 million items and we've got to pick 30 to put on the first page of search results. And we've made enormous progress on that. And so what we talk about in terms of closing the semantic gap, understanding the words you've typed into a search engine and how to interpret what you mean, not just what you said. So that we can show you the best products and the best products just for you. We've made a lot of progress there using very advanced machine learning techniques like neural networks. And the quality of search results on Etsy is dramatically better than it was even just 2 years ago. We're now just starting to not just close the semantic gap, meaning understand what you met, not just what you said. But now start to actually personalize search results, so that if Rachel and Shweta both ask -- both type in the same keyword on Etsy, they'll see very different results based on their prior search history, their prior purchase history, what we know about each of you. And that is a track of work that we just launched in the third quarter that is already showing really encouraging results and has a really long road map ahead of it, where we think we can deliver really great advances in the months and years to come. On search and discovery, where we are only just beginning now is how do we provide you with great discovery experiences when you don't even know the words to put into a search engine. I'll know it when I see it. And so recommendations and browse and discovery experiences that are more lean back. And we think there's huge opportunity for that at Etsy. In fact, many of our buyers report that they come to Etsy to seek inspiration, to find out what's trending, what's new. You see that with influencers all the time, hash-tagging Etsy is a place they go for inspiration. And that's a big track of work that we're really just starting to lean into now that we think can yield tremendous benefits. The second pillar is human connection. And that's really one of the biggest differentiators between Etsy and everyone else. On Etsy, you're buying from the actual person who's making the product for you. And so the opportunity for them to tell the story of how they made the product and why they made this product and what materials they use to make the product, that kind of experience is very unique on Etsy and very different than you'll find anywhere else. The opportunity for the buyer and the seller to actually communicate and for the buyer to say, "Hey, I love it, but can you do it in this color? Can you make it short sleeve instead of long sleeve? Can you build it to this dimension because that's what fits in my home office?" All of those conversations happen all the time on Etsy. And again, it's something you'd never do on a Walmart or an Amazon that happens every day on Etsy. And so we've been investing a lot in allowing buyers and sellers to communicate in more rich and real-time ways and allowing sellers to tell their stories better. So for example, in the third quarter, we launched video so sellers can actually take videos of their items and use those to help tell the story of the items. And there's so much we can still do to make the Etsy experience more human. And last but certainly not least is trust. If you're buying a Gillette razor, you know exactly what it is, and you can buy it from any of 100 places, and it doesn't matter. But the 80 million items on Etsy are unbranded. So Etsy builds trust in the Etsy brand which we then lend to all of our sellers. And the way that we do that is more uniformity around things like what is going to be the cost of shipping? What are the return policies? Who's going to have my back if I don't like it? And we've been investing a lot in those areas with, we think, very good returns. And all of that builds more trust in the Etsy marketplace, which we lend to our sellers to make the whole community better. So we feel really great about the investments in search and discovery, human and trust that are all have yielded great results over the last 3 years, but there's still so much more that we have to do.

That was very helpful. So if I could switch gears real quick on the second piece is marketing. You've talked about marketing investments for not only next quarter, but going forward. So maybe if you could talk about where you are thinking of investing. You've also talked about some international geographies that you plan to leading into -- you're planning going into. And then I'm going to add on an investor question that came in on marketing, while we are on this topic. How are you thinking about performance marketing spend in 2021 now that you're almost 2 quarters of strong ROI on the offsite ads initiative? So maybe that's not as connected, but if you could talk about your marketing initiatives for next quarter and going forward and how that could be a growth driver, that would be great.

Sure. I'm happy to start, and then maybe, Rachel, you can -- we'll tag team on it. But we invest at all 3 levels of the funnel, at the top of the funnel, mid and bottom funnel of performance marketing. To give a little bit of historical context, as recently as 4 and 5 years ago, Etsy barely did any marketing. And so we have been investing a lot to build our capabilities. We feel great about the returns we get from marketing. And we feel great about the road map going forward that there's still so much more that we have to do. And the breadth and depth of items available for sale on Etsy is almost overwhelming. So helping customers to think of when they can shop on Etsy and being top of mind is really the big unlock for us. People love Etsy. When you go and talk to buyers in the U.S. and many other markets, they're -- particularly in the U.S., they're aware of Etsy, and they love Etsy. They just don't know when to think of Etsy. So starting with performance marketing. Performance marketing is a fantastic way to do that shoulder tap. You go to Google, you search for an item and then there up shows an Etsy PLA. And you're like, oh, of course, Etsy would be a great place to go and buy that. And it would then be special, it would be unique to me. And we see great results from performance marketing. We have been really investing in the quality of our performance marketing capabilities, things like our data feed and our landing pages and our bidding strategies, which are driving higher and higher ROI in performance marketing and allowing us to invest deeper in that channel. More new for us even is television, where it's really been only the last 2 years and really only the last year at scale when we've been investing in TV. And what we love about TV is it gives us the opportunity to really tell our story and do that shoulder tap. When should you think about Etsy? Do it in a rich way, but also a channel that's pretty deep, where as we determine where and how to invest in television that's ROI positive, you can actually invest a meaningful amount of money and drive a meaningful amount of growth in this and in future years. So we have been investing through the funnel. We've been seeing great results in the United States, and we are just beginning now to do television advertising in the U.K. and in Germany. We'll be doing TV in both of those markets now in the holiday period. We've also been really upgrading the quality of our performance marketing in our European markets, things like modernizing our Google and our Facebook feeds. And we're seeing tremendous results from that, which are driving really strong growth. And Rachel, maybe I'll pause there and see if there's anything you'd like to add.

Yes. So I have a couple of thoughts I want to throw in. So first of all, I think we've said in the past that our investment approach, particularly on performance marketing, is we don't give the teams a specific dollar budget. We give them an ROI threshold to hit, and we want them to keep spending until they meet -- until they no longer meet that threshold. So every marginal dollar of spend also has to achieve that threshold. And that's a pretty good sort of discipline or policing mechanism so that we're sort of guaranteeing ourselves and our spend is ROI positive. And we're able to increase that to spend as we're able to increase lifetime value and lifetime value increases when we make product improvements that change the conversion rate, which we've been doing, stepping ourselves through for the past 3.5 years since we've had this management team together. And things like the transaction price increase was a one-shot step-up in lifetime value and then even the introduction of off-site ads was also an increase, basically a take rate increase because we've now -- now we can spend more and maintain the same ROI that we had before. So that's the philosophy. And so spending into next year, we haven't given guidance for next year, but we'll have that same philosophy next year. We continue to optimize and do incrementality tests on every one of our channels so that we continue to have confidence that we're hitting those ROI thresholds. The second thing I want to address is your point about the offsite ads. And I think the question that we're getting asked a lot by investors that is a piece of data that we haven't disclosed is the percent chargeability of all of our paid marketing. What percent are we able to charge a fee for -- to our sellers. And we'll take that on board because we've heard that question a lot and whether that's a metric we want to disclose or not. But what we have done is in the communications to our sellers, when we launched the product, we gave a number that I think is at least a pretty good estimate. What we told our sellers, they could expect about 10% of their sales would have this fee attached to it. So I think that's a rate that I think people can think about when you think about how much of our paid spend is actually getting a incremental fee on top of it. The other metric we have disclosed is what percent of our total GMS comes from paid. That number has moved up. So we're now in the 20%, 21% of our GMS comes from paid marketing. And a year ago, at the time that number -- this time that number was more in the 15% to 16% range. So we're able to dial up the percentage of paid and maintain those ROI thresholds that I mentioned earlier. And that's another guiding point to say how effective the fee has been for us to be able to spend more at a kind of positive ROI.

That's helpful. Thanks, Rachel. Okay. So we'll -- maybe we'll come back to offsite ads in just a minute. But if we could now go to fourth quarter and holiday season. This is going to be a busy holiday season for almost all e-commerce platforms just because of what's going on. Do you expect any capacity constraints at all, given the diversity of sellers that you have geographically and a number of sellers you have on the platform? One of the common questions is, well, almost everyone who is using a third-party logistics provider will probably face capacity constraints because of high demand. What are you seeing? And is that a concern for you?