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

Hello, good morning, everybody. Thanks again for joining us. I am Ed Yruma, KeyBanc's Internet and e-commerce analyst. We're really excited to have you here at the technology leadership forum. Unfortunately, it's not in Vail as it would normally be, but we look forward to welcoming you all back next year. I'm really excited for this next fireside chat. We're happy to have Rachel Glaser, CFO of Etsy here. Etsy is really one of the most dynamic marketplaces, I think, that we cover. And really, her and her partner, Josh Silverman, the CEO, have created, in our opinion, one of the strongest economic models in all the e-commerce landscape. I'd also be remiss if I didn't mention that their sellers stepped up when we needed masks. They helped us decorate our homes and create entertainment during the pandemic. And now that we're exiting the pandemic, they've been shifting to creating apparel, helping us create these family gatherings, now that we have family back in our homes. And so this has really been one of these businesses that has been so instrumental to our lives. As with some of our other discussions, you will have a chat tool that's available to you. If you would like to ask questions, please feel free to add them to the chat, and I will ask them at the very end. Thanks for joining us, Rachel.

Thank you for having me. I'm so happy to be here. This is one of my favorite conferences, and looking forward to when we get to do it live and in person sometime in the future.

For sure. I guess I want to start with some of the information you provided on the recent call. You guys have made some kind of a longer-term area. You made some really incredible strides improving search. And I think you discussed an initiative called XWalk. Can you help us understand how this takes search to the next level? And maybe more importantly, can you talk about data points or real-world examples of how this is helping consumers find items that they love?

Absolutely. And before I dive in, I just want to remind people that our safe harbor is posted on our Investor Relations website. You can refer to that at any time. Yes, XWalk, it sort of sounds like a sort of new age name, but it's really all about search. And we've really been talking all about search since we've been at it as a company when Josh joined in 2017. Search is actually one of our, what we call rights to win, one of the main pillars of our what we think will enable us to be differentiated and continue to grow into our enormous TAM. And what XWalk walk is, is another sort of step change in how we approach search. We have 100 million items on Etsy. And so there's no lack of interesting unique things to find, but you've got to find them. And so what XWalk does is it's really a large scale, real-time graph retrieval engine, which dramatically expands the amount of available data used to capture semantic meaning. So we're now trying to say not what the actual words were that were typed into the query, but understand what the searcher was probably looking for. And it's really meant to improve conversion rates by showing more relevant inventory to our buyers. So every click and purchase on Etsy gives us more information about the relationships between buyers, what their queries are, information about the listing themselves about the shop and more. And this engine links all of those things together. And we're now using about 11x more data than we were using before. So an example of a better buyer experience, XWalk has significantly reduced the number of dead ends, meaning null results, which are queries that returned 0 search results at all. And so we have unlocked over 1 million incremental searches as one data point that are delivering more relevant search results. And all of these things end up increasing conversion rates and increasing frequency. And I think you've got some questions perhaps that you'll want to know about frequency. So I'll hold my fire in terms of the metrics that show that we are actually making progress in frequency, but XWalk is one of the things that is actually helping us to make progress there.

One of the things that we've noticed over the past couple of years is I think you've made some real strides with helping your consumers understand when products will arrive. And I know with other e-commerce, it sounds we take it for granted, but given your independent sellers, proprietors, it's been a little bit of a different processing. Could you help us just really understand maybe if we step back for a second, is there more that you can do to help improve the delivery experience for both buyers and for sellers? And one question we've got a lot from investors, would you ever consider offering a 3PL service for your sellers?

It's a really great question. 2 years ago, we worked on something that we -- I think we -- the short-hand term for it was free shipping. When we look at reasons why people don't complete a purchase on Etsy, it's the cost of shipping relative to what consumers have come to expect in the world that shipping is actually free. And footnote, no shipping is ever actually free. I mean, there's a large e-commerce player out there that it feels like it's free, but what you're actually doing is paying in advance for a couple hundred -- $150 membership to be able to have all of your packages come free. But in people's minds and understanding, it's going to be free and fast. And so 2 years ago, we worked on having more of the inventory listed on Etsy either include free shipping or to at least eliminate what we would call egregiously priced shipping. We've made a lot of progress doing that. But we still have a ways to go in what the entire post-purchase experience feels like to consumers. We -- I talked about our 4 rights to win. Another pillar is really a trusted brand that customers and -- buyers and sellers both can feel like the marketplace is safe, that we've got their backs, that they know what to expect. And one of the things that wasn't good and it's much, much better now is to know when to expect your purchase to arrive. And it actually is going to arrive within the window of time that you need it. So what we've done is we've been laser-focused on this post-purchase experience. And one of the things, for example, is delivery predictability, which is all about setting expectations from when items will arrive and ensuring our sellers consistently meet those expectations. So a year ago, expected delivery date. We only knew about 73% of the orders on Etsy were displaying when to expect the package. In other words, before you place an item, almost 30% of the time, you had no idea if you were -- could expect to receive it, when you could expect to receive it. We also looked at origin ZIP codes. So that helps us more precisely help estimate the time in transit. So we more than doubled the origin ZIP code coverage over the past year, which has now cut 1 full day from the expected delivery date. So we expect these numbers to improve to over 90% in time for the holiday season as far as listings that show when to expect your package and having origin ZIP codes displayed as well. We're not really in a race to be the fastest, but it's really critical to us that we can be a trusted brand that is transparent and that we deliver on what sellers -- that sellers deliver on what customers' expectations are. And this leads to we've seen improvement in frequency. In terms of 3PL for our sellers, it's really not something we're considering now. We love our model, which is very capital light. We're talking about 4 million or 5 million sellers from all over the world. We've looked at radiuses like how much demand is there within a certain radius of a seller's ZIP code and can we try to consolidate some of that. But right now, we're just really focused on meeting buyers' expectations and being transparent and clear about when that delivery time will happen.

I know you've recently introduced this kind of badging where you're identifying kind of some of your top sellers. Does this delivery compliance kind of roll into that as well? And then over time, like how does that change the way the algorithm works?

Yes. So we did just launch our Star Seller program, which we're really, really excited about. And that's somewhat of a loyalty program on the seller side, where we reward the -- we're trying to educate sellers on what good looks like and delivery time and not speed being part of it, but really setting the expected delivery date and the time -- percentage of time with which you meet your expected delivery date are some of the criteria or factors that go into our sellers being one of our top sellers. And that will be badged and visible to the buyer, so that they'll have more confidence with -- from whom they're shopping. And so we think that's a virtuous circle that will really yield higher conversion rate as well.

You guys have built, in our opinion, a very compelling kind of House of Brands. Each of the brands you've acquired has a very unique and distinct voice target audience. Just so we understand, over time, do you think you can yoke these together? Do you think that you've got consumers potentially that maybe cross-shop for different channels? And how do you think integration will progress long term?

So let me talk about House of Brands for just a minute. First of all, when we joined -- when Josh and I joined Etsy in 2017, we had a lot of work to do just on the core brand itself. So we got really, really focused on what we call the vital few, the fewest possible initiatives that were going to drive the biggest possible value. And that meant saying no to a lot of stuff that really were -- a lot of things that had merit, but they -- we had to pick and choose from amongst the very best. And so we've got a good playbook working on the etsy.com core marketplace. And then in 2019, we found another very attractive marketplace, Reverb. That's sort of the music -- the Etsy of musical instruments, and it had very similar characteristics to what Etsy had. And so the concept of adding another brand into the portfolio wasn't necessarily that we thought Etsy's audience suddenly was going to need this new category of product that we weren't representing on Etsy and was suddenly going to buy -- we're going to cross-pollinate the audience from Etsy over Reverb. It was that we know how to run marketplaces, and we thought we could extract a lot of value from the Reverb marketplace itself. And we did set about immediately using that playbook on improving attribution models and helping to implement our experimentation infrastructure so that in product development, they knew which experiments were going to yield the highest value and which things to -- how to allocate resources and which things to pursue. So very recently, in the -- just in July, so really third quarter, but we were working on it through the second quarter, we found 2 more marketplaces like that. One is Depop, which is a Gen Z marketplace in the fashion category, already a big category for Etsy, been in an entirely new demographic for us or a much sort of underpenetrated demographic for us and in a part of the fashion industry that we're not currently in, which is the fast-moving resale of fashion. And the other 1 is Elo7, which is really the Etsy of Brazil. So very similar to Etsy, but in a market that we are currently not in at all. And the rationale for these additional brands is to use the playbook, which we think we've done really well with Etsy and then again, with Reverb to use that same playbook on these 2 new marketplaces because we really feel like there's some knowledge that we know that can unlock more value. So your idea of yoking the brands together or being able to leverage the audiences of each of these marketplaces is not a bad idea, but it's not the compelling first order of business for us. And there may be a day where we say, "Hey, when you're searching for harmonica on etsy.com that you end up seeing a Reverb result because you're going to have so much more choice for harmonicas on Reverb." Similarly, if you're searching for distressed jeans, maybe Depop is going to have a better source -- better supply or result than Etsy will. But that's not the thesis right now. And I would call that -- and we really think these brands stand for something. They really mean something. Etsy means something that to our audience that Depop's brand means something entirely different to its own audience. And we really want to let those brands stand up and have their own independence and their own power. And so future colonization, it's an idea, but one that we're not running towards right at the moment.

Got it. Can you talk a little bit about how your experience at Reverb has informed your first 100-day priorities with Depop and Elo7? And then maybe where can you move faster and where can you move slower?

Yes, and I was referencing just a bit before, the Reverb is a good example, but maybe even better example possibly is our first couple of months or year with Etsy. So we said we had to sort of turn things around with Etsy. And I referenced focusing on the vital few, but that really helped us figure out how to be -- one of the vital few is being much more demand side-focused on Etsy. We have a lot of sellers and what we haven't focused on prior to that was how to build much more demand by both the experience you have on Etsy and improving things that we're going to improve conversion rate like search, which we talked about at the top of the call, and marketing so that we had much higher brand awareness. And so that playbook is then -- was then what we can -- what we've used to inform the early days of Reverb. And that same playbook is what we're going to use with Depop and Elo7. And by the way, they do things better than we do in some cases. So for instance, Depop. Depop has really a mobile-first mentality, and they have a big -- they're using performance marketing very lightly, but their marketing channel is much more about influencer and social channels. And those are things that we can learn the other way because they're also a tremendously successful marketplace in their own right. But a couple of examples of the Etsy playbook going to Reverb, which can then be thought through and how we might deploy that for Depop and Elo7. We want to make sure that there's a fair exchange of value in terms of the fees being offered to the Reverb sellers and what we give back to the Reverb sellers. So for instance, a year ago, Reverb did take a price adjustment to increase their take rate, and a lot of that incremental revenue was then deployed towards more marketing for Reverb, same playbook that we did at Etsy. We'll look to things like ad products. So Reverb has an ad product that they call Bump. Etsy has Etsy Ads. Today, Depop doesn't have any ad products to speak of. And in fact, there's a bunch of services that Etsy has that Depop doesn't. So those are a couple of examples. I talked about attribution models. Etsy, I think, has gotten really, really good and sophisticated and our performance marketing engine and also our CRM and marketing technology stack. And that are -- those are things that today is amazing how huge Depop has gotten with almost no marketing whatsoever. And so there's a lot that we can teach them and that we feel we can optimize in terms of how to invest at a high ROI basis to increase their demand side as well.

You've touched a little bit upon this, but one of the questions I just got in the Q&A was if you had a specific vision for Depop. And then to the extent you want to talk about it, what does that mean in terms of financial metrics?

So we haven't given a lot of financial metrics. So I think this question is specifically about Depop.