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

Good morning, everybody. My name is Scott Devitt. I cover the Internet sector here at Stifel. We're happy to have Etsy's CFO, Rachel Glaser, with us today. Etsy is a global, 2-sided online marketplace for unique, handcrafted, vintage and craft supply products as well as many other things these days. Rachel has been with Etsy since 2017, bringing with her years of experience in the CFO role at a number of different companies. Rachel was also SVP of Ops, Finance at Yahoo! and spent time at Disney earlier in her career. And since last April, Etsy has seen a substantial acceleration in growth, adding millions of buyers and hundreds of thousands of sellers as the platform resonated with consumers during the pandemic. Now as we're entering the reopening period, Etsy is sustaining healthy growth against challenging prior year compares. Etsy also recently announced the purchase of Depop, which we think is a smart, highly differentiated add-on following the 2019 acquisition of Reverb, and we'll discuss that deal today as well. So Rachel, thanks a lot for joining today.

Thanks, Scott. It's really nice to be here. Before I -- before we dive into the questions, I just wanted to direct everybody to Etsy' safe harbor, which can be found on our Investor Relations site.

And I'll start, but I appreciate that. I'll start with the first question, which probably could take 30 minutes to answer. But as you look back on the past year and you think about really all the success, I think of everything that we cover, the acceleration in your business was the most significant of all e-commerce platforms really globally. What would you highlight some of the things that you learned about the business during that period that you were positively surprised about and as we head now into this recovery period?

I think one of the first things we really learned or we thought we knew but it really punctuated for us was the agility of our marketplace and the Etsy team. On April 2, it was a specific day, our sales started to climb through the roof. So we just started to grow and grow and grow, and everybody was looking for one single product, and that was face masks. And the CDC came out and said, "We think it's important that everyone wears face masks." And lo and behold, you could not find them on the most popular e-commerce sites. But Etsy's marketplace could deliver them. We had an army of sellers who, previously, if you'd typed in face masks to Etsy, you would have found maybe a Halloween mask, you would have maybe found a facial beauty product, but you wouldn't have found the face masks that we're all accustomed to today. But our sellers all know how to -- many of them know how to sell, and they turned around and they delivered on that demand. And not only was that the agility of those sellers to be able to sort of come to the rescue, but internally at Etsy, we had to be able to serve all that demand. We had to be able to work with our sellers to make sure that they could fill this enormous increase in their order volume that they had never seen before because we needed to make sure that the buyers weren't left paying for something that never arrived on their doorstep. So agility would be the first thing. The second thing is we really proved the point that online and off-line is a blurred line. I think previously, people would say that Etsy's marketplace, the TAM that people expected from us was only online sales. And what we saw happen is that there was no off-line sales. And people were very easy to make that switch to "I need something, whether it be a face mask or a birthday gift or an engagement ring," and they could turn to Etsy just as easily on the consumer need rather than today, I feel like shopping off-line versus today I feel like shopping on Etsy. We just became part of the fulfillment of people's needs. And the last thing would be people's needs for something special. So the third point I would make is that we really stand for something that's different. We're not competing on price and convenience, but we're competing on thinking about things that are special in your life. And that we have this enormous, over 100 million items in our marketplace, so down to the most particular special need you have, whether that might be Bernie Sanders mittens because you saw him at the inauguration, you saw those mittens at inauguration, the next day, you're selling over $1 million worth of Bernie Sanders mittens, all the way to everyday things that you need in your life like sofas and items for your child's birthday party, things to set your dinner table with. And so we've really been able to become part of the popular understanding that Etsy has this very, very broad set of things that are very special and unique.

And now that we're heading back to whatever normal is on the other side, which will be, I'm sure, in retail, quite different than it was prior to the pandemic, some of the other online platforms are starting to seize the benefits wane to a certain extent. I mean, of course, everybody has difficult comps. But what's kind of startling to me is when we start to look at various businesses on a 2-year stack basis, if you annualize it, your growth rate accelerated from 2020 through what our estimates are for '21 as well, encompassing this kind of economic recovery period and shift in human behavior back to normal, accelerate from like the mid-20s to the mid-60s on an annualized basis. And so where do you think it is then that really sets Etsy apart? I'm sure everyone will have some benefit, but that benefit is just so distinct, even looking through into this period. You hear the next 3 quarters closing out the remainder of 2021.

Yes. So let me just put a few metrics out there that -- for some of the people that might be listening that aren't as close to our story as you are. So we -- one metric that we talked about is we'll do about $3 billion -- based on the guidance we gave, we'll do about $3 billion of GMS in Q2 of '21. And if you look at Q2 of '20, it was $1 billion. So that is $2 billion more in GMS. And also on the guidance that we gave, we said, at the midpoint, if you remove masks, so forget the mask for a minute because I'm going to make a point about the masks. At the midpoint, we'll do about 27% growth versus last year, and last year was an enormous comp. So just on our base business, we're growing faster than the long-term compound annual growth targets that we put out in March of 2019. We had said we think that we'll do 16% to 20% over that 5-year period. And this one year just on our base business, we've materially stepped up in terms of our growth rate. Masks is a good one. We did almost $1 billion -- we did about $850 million of GMS in masks alone in 2020. And that number, we expect to -- I think we'll all be wearing masks for a long time. But now you can find them everywhere, your local gas station, CVS, supermarket, whatever. So we don't expect masks to be a huge portion of Etsy's business in the long term. So that's $850 million of GMS we have to comp. So you're right, there are -- everybody's got heavy comps, and Etsy is no exception. And we also have been very clear on as the world reopens, not only will physical retail be another place for people to have a choice to shop, but other things will compete for consumers, the dollars in their wallet. So travel, entertainment and so on. So we expect -- it would be perfectly reasonable to expect some headwind in the -- as we go through the rest of this year. So I want to be clear about that. With that said, one of the things that we did in 2020 was the expression when life gives you lemons, you make lemonade. We saw this great significant top line growth that we turn right around and reinvest it in our business, both in product and marketing, and I can talk more about why and how we did that. But that reinvestment, we think, has given us a significant head-start or accelerant to our awareness of the Etsy brand and the frequency of consumers to come back and buy multiple purchases on Etsy. And so I think that they're and we -- that they're -- the marketing plus the companion a better product experience. So we've been investing in search. So that when we get people to come back to Etsy, they just continually have a better experience. That one-two punch of those investments have really given us a good attempt -- a good chance in accelerating and keeping the growth that we got in 2020.

And I failed to mention at the outset. But to the extent that investors have questions, there's a box at the bottom of your webcast. And you can enter those in, and I'll try to weave them in throughout the presentation. But one of the big drivers of the business, and I think something the company has been -- had been working on for many years is trying to get increased frequency of purchaser -- habitual buyers. I think some -- in the last quarter, it was up 205%. So that cohort accounts for something like 40% of PMS now. So you're also acquiring new customers. So you're kind of multifaceted in terms of where the successes are coming from. I think you added 42 million, 43 million new buyers through the period of the last 12 months, which was about 6 or 7 times what we've typically done in a year. But specifically around the habitual drivers, what do you think is driving such a change in behavior among that cohort customer?

So it's a great question. So first, let me -- what we call habitual buyer is somebody who comes to Etsy 6 or more times in a year and spends $200 or more. So it's kind of a low bar because when I think about Etsy myself, I can easily think about shopping on Etsy 1 or 2 times a month. So 6 or more times is somewhat of a low bar. But they did grow 205% in the quarter, and they've been growing -- that category has been growing every single quarter and accelerating every single quarter for at least the last 6, I think even 8, quarters going back. So we've made real headroom even before pandemic. And we've asked ourselves, like what are the -- what's different about the habitual buyers versus all the other buyers? And by the way, the second fastest-growing segment is what we call our peak buyers, so those that come 2 or more times in a year. And active buyer, as you pointed out, has also grown significantly. But when we look at the habituals, one thing is that we find is they know the hacks. Like when you have 100 million items on the site, it's kind of hard to find stuff, and they know all the hacks. Like for instance, you used to have to go in and type very specifically gold print gown to wear to weddings, springtime, like a million words in the search query to be able to land exactly on a beautiful, gold gown that you want to wear to somebody's wedding. And now we've started to invest significantly in things that can make that much more organic and inferred on the site through our investment in search. So for instance, we're really closing the semantic gap. And if you, Scott, were to go in and you wanted something really nice to wear to a wedding and you typed in men's wedding attire or something like that, you would get a list of results that would show men's clothes and wedding clothes and Bermuda shorts. It would infer that you mean you need a navy blazer because you're a man that's going to a wedding and you need something dressy for that event. So we're really closing the semantic gap. We're also using -- doing a lot more with personalization, so what do we know about you and what your aesthetic is that you might like more of a traditional result in your -- for your navy blazer versus somebody else that might want something that's much more contemporary or maybe has a boho or vintage feel to it or whatever. So we were able to give you a much more personalized search result. And we're also able to make more recommendations and using the safe search feature, so that when you come back, you're not having to start from here's 100 million things I'm looking at, that we're able to say based on what we know about you and your last search, we can land you where you left off and we can also recommend things for you, and it -- so it will feel more curated to you. And then the last thing I'd point out is that using CRM, we've really been able to -- we've invested a fair bit in our marketing technology stack so that we can segment specific buyers and target them with specific offers so that we're bringing you back in. So we're making habitual buyers out of people that weren't before because of the experience that those buyers have when they land on Etsy and our ability to go out and find you and bring you back and remind you that you had a good experience at Etsy. Come back, and we're going to show you some results that are going to meet the need that you're looking for.

And I'm going to save this for when we get to Depop, but I did want to -- I want to ask about the importance of search and versus the importance of time spent because there seems to be a distinction. Some companies favor time spend over search. And you've done a lot with the business over time to solve for search, which has actually helped growth, but I'll save that for later in the conversation. You did recently broaden your TAM outlook for the business from the size that you had when you presented at the 2019 Analyst Day. I think in the Depop presentation, it's $1.7 trillion now is the TAM. And I was surprised in your earnings deck that your -- these craft supplies, which is what Etsy kind of has thought of at 50,000 feet is the third largest category. Housewares and home furnitures, jewelry and personal accessories are significantly larger. So there is a little bit of a mischaracterization, which I included in my intro that is characterization of what Etsy actually is. But I'm curious as to why such a significant change in terms of the way that you think about addressable market. Is that from the effects of the past 12 months or otherwise?

A little bit of a blend of both to answer it head on. But I think when we -- our former TAM and the one -- if anybody wants to go back and look at the Investor Day materials from March of 2019, we were trying to refute the notion that Etsy was a niche marketplace, and only a very small subset of people that shop for things would ever be interested in Etsy. And so we were trying to say it's a very big market. And here's -- and even if you believe that it's small, we're -- it's still a pretty enormous market, and we're only less than 5% of the market share of that small market. So we were trying to bring the market size down. To say small is pretty damn large, and there's a pretty big opportunity there. And the way we did that was we slide stock. We said, "Here's what you have to believe. Well, we've competed in many, many categories. But if you only look at our top 6 categories, here's what the top 6 look like." And we compete in -- we're in many, many markets in the world. But if you only look at the top 6 markets and then if you just take the online portion, not the off-line portion, but just the online portion of people that shop, and so we brought the number all the way down to something that was in the $200 billion range. And we said -- and then we're only 5% of that. But one thing we've learned through COVID, and I made this point earlier, is that the lines between off-line and online have just completely blurred. I think, forever, we -- many things will be done online, where they were more traditionally done off-line before. Shopping being one of them. My groceries are primarily bought by Instacart, and I think I'll continue doing that for a long time. It's so convenient. And so the lines have blurred between off-line and online. We wanted to make that cut. And we are in every market in the world, and we're starting to see significant supply/demand equilibrium in markets like the U.K. and Germany, and we've been investing in India. So it's not really fair to just look at the top 6. And then we look at the top 6 categories, and though they represent something in the neighborhood of 80% of our GMS, the other 20% is a huge number. So when you take the limiters off of all those -- the traditional way we looked at our TAM, you end up with something much, much bigger. It's $1.7 trillion. We've -- there's a lot of art and science in all of this, so we've been trying to just use the catch-all. It's something that begins with a T, not a B, rather than get so precise because I'm sure anybody could take out their pencil and come up with a slightly different math than what we did. But fair enough, we removed categories that we're just not in. Like we're not in automotive, really, and we're not in electronics. Amazon sells a lot of books. We don't sell a lot of newly published books. So you can remove those categories, and it still ends up at this $1.7 trillion number.

Okay. And we have a few questions. I want to make sure to get Depop in and go to questions and then come back to my investors as well. But you did recently announced the Depop acquisition, the resale marketplace based in the U.K. Can you give just a brief overview of the rationale? The deck is very detailed for investors to the extent that they haven't looked at that. And I'm interested particularly in terms of the M&A strategy that you've laid out and how Depop fits into that.

Absolutely. So first of all, we're super excited about Depop. It's a purpose-driven resale marketplace that primarily serves Gen Z, just to underscore that. Their -- 90% of their GMS comes from buyers 26 or younger, and Etsy's average is 36. So it's different demographic, and it's resale. So it sits in the apparel category, which itself is over a $500 billion TAM. And just for context, Etsy did about $1 billion in apparel in 2020, and so it's a $500 billion opportunity. And the resale piece of that apparel TAM is itself a large opportunity of about $65 billion and growing according to Euromonitor at about a 39% CAGR. So relative to Etsy's 16% to 20% growth, it's a category -- the resale category within apparel is growing about twice as fast. We look at M&A with a few vectors. So we've looked at geographies. A couple of years ago, we did a deal with a company called DaWanda, which was a marketplace in Germany. We look at things like IP technology or talent. So a couple of years before that, we did a deal with a company called Blackbird Technologies that has really accelerated our machine learning capabilities. And then we look at things like adjacent marketplaces, which this is an example of investing in an adjacent marketplace. And Reverb, which we did 2 years ago, was another example of an adjacent marketplace in which we have very similar characteristics. So we're a 2-sided marketplace. We hold no inventory. We don't -- it's very capital-light. We don't invest in physical retail or warehousing or fulfillment. And so we really -- we have a good understanding about how to run those businesses and how we can add value just through -- without -- put synergies aside, that's just how we can add value by helping them grow. So for -- just as a proof point, Reverb's gross margin went from about 33% in Q3 of 2019 to 53% in Q1 of 2021. And GMS per marketing dollar for Reverb was up about 30% in that time period from $20 to $27 (sic) [ $20 million to $27 million ]. So the -- millions of dollars. And so we -- our competencies on how to do really scaled marketing programs and to do them in an ROI positive way, how to invest in payments platforms, how to iterate on product development so that we are only investing in things that we think are ROI positive from a product standpoint, those are things we do really well, and we think those kinds of competencies will apply to Depop as well. They'll run as a stand-alone business with -- they have a superb management team, and they'll run as a stand-alone business, but we'll start to share knowledge with them just as we've done with Reverb.

Do you think that this -- that gets back to the comment I made earlier. But the search -- because some of it appears in that category, you talked a lot about time spent, and there's a social dynamic to Depop and others in that area. Do you think that search and discovery is something that you can apply to improve Depop's business? Or is it a different dynamic where time spent is a bigger factor than that?

Well, 2 points I'll make there. One is that's precisely a great example of where we've had a lot of experience with building and improving on our search capabilities, and I think that's exactly an area that would benefit them. I mean you want to -- first of all, it's a really fun, immersive experience, but it is still hard to find precisely what you want similar to as it is on Etsy. So that's a perfect example of how we can add some value. They are -- the fact that they're more social and that they have much higher engagement is something they can help Etsy learn from. So it goes both ways as far as us being able to share best practices with them and they can share best practices with us. They have a highly engaged consumer base, of which 75% of those buyers are also sellers and vice versa. So they -- that's a true marketplace, the lightning in the bottle that Josh often captures. And they do that through a lot of -- people come and just hang out, it's really a social environment. I'm not sure that we want to say Etsy is going to become exactly like that, but the idea of getting more of that vibrancy between the buyers and sellers is something that I think -- that Etsy could benefit from.

Just going over to the questions real quick. One investor wants the Analyst Day update, given all the positive changes in the business here recently. So we'll be looking forward to that date here pretty soon. I don't know if you have anything to add on that, but I'll move to the next question to the extent that you don't. And this is all-encompassing because I haven't asked you about advertising yet. There's a question about the recent Apple and Google changes and the effects on advertising in general. So that would be a good opportunity to maybe discuss that topic as well as just the broader advertising initiatives.

Yes. So I think maybe those are 2 separate topics. The Apple's changes, I think you're talking about IDFA. Is that...

Yes.

Yes. So we don't do much for any mobile marketing. So our mobile traffic is more or less entirely organic. We might drive a mobile web user to try the app. And the -- our understanding is that the IDFA changes will impact advertising in the mobile space. So it doesn't impact our business at all. Today, it does make perhaps create a headwind towards the growth that we could get if we had -- if and when we decide to do more mobile download marketing, if that makes sense. On the other forms of advertising that we do, we have been big investors in marketing. We spent about $500 million in marketing in 2020, and we expect to grow from there. We have been -- our marketing philosophy is that we don't give our marketing team a budget as we give them an ROI hurdle, and the idea is to keep spending until that last marginal dollar of spend is no longer meeting the ROI hurdle. And so we've been very good at getting high return on our investment in all parts of the marketing funnel, even at the top and the above-the-line marketing, and we believe that's really helped us to become much higher in a consideration sense. So both in the U.S. and the U.K., we're now a top 10 site for commerce, not just top 10 for special or top 10 for handmade or anything like that. Top 10 of all the places you want to shop in an unaided question to consumers, that -- Etsy shows up in the top list. So we think that's been very effective, and we measure all of that spend very carefully. The performance marketing percentage of our total marketing budget, it's not visible on the P&L, but because we get a subsidy of about 30% of that marketing in Q2 -- in Q1, rather, it was offset by our Offsite Ads program. So we have a product that is a success fee-based product that when we spend money on PLAs with Google and other search engines, when there's a successful sale of a seller's listing from one of those PLAs, they'll pay a slightly higher transaction fee, and that amounted to about a 30% offset to our performance marketing program. What that effectively does is gives a higher lifetime value to each consumer, which means we can spend more and maintain our ROIs. So we really love our sort of integrated marketing approach, where sellers contribute and help us help them to create more sales.

And just we have 3 minutes left, but continuing just broadly on topic of advertising. And you have both the Offsite Ads, which you referenced in, Onsite Ads as well. And I'm curious to the extent you've ever really discussed the split between the 2. I know in the last quarter, $137 million of revenue was services, that had a couple of other components to it as well. But to the extent that you're able to talk about the sizing of those 2 buckets and how you think about where you are in terms of advertising mix as a percentage of the business today relative to where you think you can go over the next 3 to 5 years.

Right. So I'll take them separate and just for -- just a quick minute on the ad products for our sellers. So we offer 2 products for sellers that more or less use their own budgets to advertise their shops and their listings. One product is called Etsy Ads, and that's to advertise on Etsy's site. So that gives them sort of the old paid inclusion model. That gives them a slightly higher prominence in the search result page. And then there's the Offsite Ads product, which is the one I just described, where they don't sign up for any budget. But when there is a successful sale, so as a CPA model, they will get -- they will pay a slightly higher transaction fee. Offsite Ads is mandatory for our top, top sellers. And for everyone else, it's optional. So the vast majority of sellers, the product is optional, they can opt out. With that said, only got 2% of sellers have opted out. And what it is, is an effective take rate increase of about 1%. The ROI for the sellers is very high. It's about a 6 to 8x ROAs. The mandatory -- the sellers -- the top, top sellers for whom it's mandatory, and they get a slight discount on the rate, so they pay 12%, and everyone else pays 15%. That nets out to a 1% take rate increase. And that take rate increase, as I pointed out before, allows us, as a virtuous cycle, allows us to spend more on marketing. So we keep giving it back to the sellers into the marketplace by letting us spend deeper into the ROI curve. And as I said, that program actually helped us to subsidize our performance marketing by about 30% in Q1. And we can grow that product by adding more channels. We recently added our affiliate network, which gets us into a lot more broader distribution into sites like Martha Stewart Home and BuzzFeed and other places. Etsy Ads continues to improve because we work on the click-through rate. So we want the -- even the ads to be very relevant results for somebody's search query. So the higher the conversion rate, the more relevant the search results, and that improves the ROI on the product for the seller. And this is -- in this case, the sellers will opt-in a certain amount of budget and will try and spend it with the greatest efficiency possible and will continue to grow that product by continuing to improve the conversion rate. We give sellers dashboards to look at that, really show them their rate of return and gives them the confidence to keep investing in that product. Relative to our overall revenue, we haven't disclosed or broken out those 2 items separately in our P&L. But in our services revenue line, which is about 25% of all of our revenue, Etsy Ads is the majority, not the only, but the majority of the revenue there. And Offsite Ads, I think that the math is there for you to do, we said it subsidized about 30% of our performance marketing in Q1, which was about $112 million in total. So that gives you a sense of its run rate today, if that helps.

Okay. That's great. I really appreciate your time, Rachel, today. We're well out of time for now, but congratulations on the continued success of Etsy, and we look forward to catching up soon. Thank you.

Thank you so much for your questions, Scott. Take care.

Bye-bye.