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

All right. We're 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, CFO. Josh, Rachel, thank you so much for joining us today, and we are so excited to have you here in the conference with us again this year.

Thanks for having us. Do you mind if I just jump in with our safe harbor, which you can -- everyone can find on our Investor Relations website?

With that out of the way, just to start off, can you give us maybe an update on how you've seen sort of spending and engagement evolve over the past few months as consumer behavior has been normalizing?

Yes. So we announced our second quarter results, which I think the highlight was that non-mask GMS grew by 31% year-over-year. And just to put that in perspective, Etsy had, I think, historically high comps in the second quarter of 2020. And it's not surprising. The whole world was shut down. People were locked at home. Only essential offline stores were allowed to open. And even there, the shelves were bare. And even when you wanted to shop online, other e-commerce players were having logistics challenges and supply chain challenges and long delays. So in Q2 of 2020, Etsy was one of the only places where you could shop conveniently and with confidence that product would actually arrive. So you might say a lot of people suddenly found they had to shop with Etsy in Q2 of 2020. In Q2 of 2021, thankfully, things looked a lot different. And admittedly, we're not entirely back to normal, but for the most part, offline retail is open again, online e-commerce places are shipping relatively fluidly. And in that environment, people wanted to come back to Etsy again and again. In fact, 90 million active buyers with purchases -- GMS per active buyer actually increasing. So we feel really great about the strength of purchase activity on Etsy even as the world is reopening.

Great. Are you seeing sort of any noticeable difference in various markets that you operate in?

Rachel, you want to take that one?

Sure. So we did talk about our international GMS as a percentage of overall GMS was up in the quarter. So it grew 41%, and it became 45% of our total sales. And one of the things that we were -- one of the fastest-growing trade routes is when there's a buyer and a seller in the same market. So we talk about -- we call that international-domestic, and that has been our fastest-growing trade route. But the second fastest-growing trade route was when there's a buyer or seller internationally in different markets. So international is really growing very strongly. And we've been investing with product and marketing initiatives internationally. And one of the ones that we talked about in our first quarter, most -- sort of significant investment was an increase in our upper funnel marketing efforts. So we said that we increased marketing Q2 versus Q1 by about $15 million. And the vast majority of that, almost $14 million of that incremental spend on a sequential basis, was investment in Germany and the U.K. And so that really helped drive the prominence. And the prompted and unprompted awareness in those markets saw marked increase after experimenting with those campaigns there. We've also done things like made really good improvements in German language translation, and those product improvements also make it a much better experience for the German buyer in those markets.

Got it. So sort of now beyond just most recent quarter, what are some of the biggest sort of changes to the business from pre-COVID to now? And are there any major changes to your philosophy of how to grow the business compared to sort of before the pandemic?

If you go back and look at the Investor Day we had in 2018, where we laid out the size of the opportunity that we saw ahead of us and then our right to win, we're saying the same thing now in 2021 that we said in 2018. And in fact, what powered that growth through the pandemic was not a pivot, it was doubling down on our core beliefs and convictions. I think in many ways, the world has come to us. And what we said in a nutshell is that the more that the world consolidates around one mass retailer, for example, Amazon, the more they're desperate for a true alternative to that retailer, something that expresses their sense of style, something that is made just for them, something that supports another small business, something that keeps commerce human. And while almost everyone in e-commerce is chasing Amazon and trying to beat them by selling a product for $0.02 cheaper or shipping it 2 minutes faster, and we wish them all the best of luck at that, Etsy's trying to do something truly different, to be a true alternative. And what we saw during the pandemic is, all of a sudden, supply chains froze. And the ability to rapidly respond to consumer taste and desires was very important. And that's natural to the Etsy model. Our Etsy sellers can pivot within minutes to changes in the environment where it takes competitors months. Etsy doesn't rely on a single supply chain. Each of our 5 million sellers have their own sources of supply. And we help them with logistics and shipping, but we're not relying on any individual shipping network. And most importantly, I think the pandemic caused a lot of people to look deeply at how they live and say, "Maybe I want to buy fewer things but I want those things to mean more. I want to put my money where my heart is. I want to be supporting other small businesses." And I think those changes are lasting. I don't think that, that's a temporary thing. I think a lot of people are assessing their lives right now. So we've been doubling down on what we've been saying for years. And I think the world is now coming more and more to us. What I do think has changed is as the world recognizes the size of our TAM, and we believe our TAM starts with the T, not a B, we think that our opportunity is absolutely enormous and we're in the early stages of unpacking that. And so we think this is exactly the right time to be investing for growth. You really don't see companies that are growing at the rate of Etsy and have the profit margins of Etsy. I think we're pretty unique in being high growth, high margin. And our margins maybe got a little ahead of us in the pandemic because we're always very careful about spending very responsibly, investing very responsibly, looking at the return. And one simply can't ramp investments at the explosive rate that our growth has achieved. But we do think that this is the right time to be investing because we think that the potential for Etsy is enormous, and we're going to unpack it over many years.

Great. Josh, to one of the points that sort of you mentioned, one of the really sort of powerful dynamics that enable Etsy to grow faster than pretty much any other e-commerce platform was the flexibility and creativity of your sellers. And face mask is one clear example here. But what are some maybe other ways that sort of your platform was able to quickly pivot as consumer behavior was changing over the past 12 to 18 months?

It's such a great point. And I do want to pause on face mask just for a sec because I think that highlights the agility of the team. The CDC changed its guidelines on face masks in early April. And within 48 hours, Etsy had reworked our search engine. We had sent a "calling all sellers, pull out your sewing machine" e-mail to our sellers. We posted guidelines for how to market face masks and what you can and can't say, et cetera. And that earned Etsy the #1 spot in Google SEO, and it earned us a lot of brand awareness. And tens of thousands of sellers within days were making and selling face masks on Etsy. And the result of that was there was $850 million of face masks sold between April and December 31, 2020. That's a product that effectively didn't exist on March 31, and Etsy sellers sold $850 million worth in the proceeding 8 months. And it does speak to the agility of the Etsy model to respond in moments. When things hit the consumer zeitgeist, a traditional retailer will call their suppliers and say, "Hey, when can you start making this?" And if they're really fast, they'll get it 8 weeks or 12 weeks from now. So constantly, they're in the business of guessing what's going to be popular 3 months from now, putting their balance sheet at risk to buy often hundreds of thousands of units or more of that product, store it in a warehouse and then ship it to a customer. Etsy's business has nothing to do with that. Our sellers respond in minutes to what's popular in the zeitgeist. As soon as you can imagine it, they post it on Etsy. And then when a customer buys it, they make it and then they ship it. So for our sellers, also, they're also not putting their own capital at risk in advance. But if you think about things that are trending on TikTok, for example, FreeBritney is very hot right now. And our sellers are very supportive of Britney, as well they should. I think she's getting screwed from what I can tell. But there's millions of dollars of FreeBritney product that's getting sold right now. And tomorrow, it will be something else. And whatever is hot within moments, it shows up on Etsy and it's selling. And I think that does speak to the dynamism of our marketplace, the constant freshness of our marketplace, which for young people -- for all of us now, but especially young people more and more expect things that are personalized, customized and immediately responsive to the moment.

Can I just add just a comment on what Josh said was that one of the other parts of the model that was really agile was the ability to serve all that demand. And that is -- speaks a lot to the fact that we had put in all this infrastructure for moving ourselves to the cloud in the preceding months, which felt like it was a lot of effort, a lot of investment that -- for which we couldn't say, here's the ROI for it. But had we not done that, had we not really optimized our infrastructure, we wouldn't -- we would have been like dead in the water on that first day where all of a sudden sales spike. So we continue to think about the entire ecosystem and how we can stay nimble. Member support and trust and safety was another area where we have made investments to be able to serve all the inbound inquiries through phone and chat, not just through e-mail, which is what the company had previously instrumented. And so all of that work together for us to be able to really prove out the agility of the Etsy model in addition to the agility of the sellers. And just one more comment while I have the mic just because we are webcast, I think I transposed the numbers when I answered your international question before. It is actually 41% of our sales are international, and we grew 45%. And I think I said that the other way around. So I just want to make sure it's clear for the record.

Well, turning to your recent acquisitions. Fashion resale is expected to grow, I think, 11x faster than the apparel market as a whole. And then 90% of Depop users are 26 or younger. So in both of these factors make Depop a particularly valuable asset. Can you maybe talk about sort of your decision to acquire this 2-sided marketplace? And what are some areas of operational expertise that Etsy can leverage to sort of grow this business even faster?

Sure. How about if I start with the first part of that question? And then, Rachel, you take the second. So first, we are patient and picky. We obviously get approached a lot by a lot of companies who would like to be acquired by Etsy. We have a very clear set of criteria around how we would screen potential marketplace acquisitions. And let me start with our fundamental belief that a 2-sided, truly peer-to-peer marketplace at scale is lightning in a bottle. It very, very rarely happens, particularly where you have highly distributed supplies. Supply is not concentrated in just a few businesses but is distributed across millions of sellers and where that supply is special. So we're not just reselling commoditized merchandise, but each piece is truly unique. So that's the first thing we look for. It's got to be the Etsy business model. We're not interested in holding inventory. We're not interested in logistics, et cetera. Second, it's got to fit with our mission of keeping commerce human. So it's got to be about true peer-to-peer and truly a special merchandise. Third, it's got to be a great brand that looks well positioned to be a leader in its marketplace. We're not interested in doing turnarounds or resuscitating brands that are -- that have maybe fallen and their best days are behind them. And we've got to believe that we're in a position to help, where the expertise and knowledge that Etsy has can truly help to accelerate the growth of the business. We've got to believe that we have the bandwidth to actually be helpful in the moment. And we got to believe we've got it -- we can get that business at a fair price. And Depop and Elo7 are examples that tick every single box. And so as high a bar as we have, and our bar is high, and as patient as we want to be, those 2 acquisitions really felt like really great opportunities for Etsy to meet our mission: to make comps even more human even faster. And maybe Rachel can elaborate a little bit on some of the ways we think we can be helpful.

Happy to do that. So first of all, we have 2 example prior to acquiring Depop and Elo7 for where we've been able to optimize and get real value. First is Etsy itself. When Josh started in 2017 and so did our CTO and I did and a few other members of the management team came together, we were able to really think about the right structure for the organization. We were able to think about the value exchange between fees that we were charging and what kind of value we could give back to the marketplace. And you saw us do a take rate increase in 2018, I think it was. We've taken friction out of the system by investing in -- making shipping more free and fair across the board. And now you see us doing a lot of work with the entire post-purchase experience. And search has been a big deal for us. And check, check, check, we've really been able to optimize Etsy. I think one of the big things there is focusing on the demand side of the equation rather than just the supply side, where the company has sort of been torqued to the supply side. And then we bought Reverb. We were able to take that same playbook with Reverb, and we're still -- it's still very early days with Reverb but able again to look at the value exchange in the marketplace. And you saw us do a take rate increase with them last year. We've been able to put -- we actually transplanted one of Etsy's best engineers, became the CTO at Reverb. And they started working on their experimentation infrastructure so that they can do better A/B testing and know where to place their bets. We've created some scale economies in the agreements they had with their payments providers. And we've been able to go through that playbook and really work on Reverb. So we feel like we've got good experience that we've been able to create value twice now and be able to apply that to Depop and Elo7. To think specifically about the opportunities there, Depop, for instance, is spending no money on performance marketing today or very, very little money on performance marketing today. And meanwhile, Etsy has just developed a really, I think, significant muscle in the performance marketing space and not only the sort of analytical architecture to think about attribution model and lifetime value, but the actual technical stack on how to be able to do performance marketing. So that's something very quickly we can look at and say how can we, in an advisory way, help them think about how to invest in marketing. Pricing and services and other things are other things down the road that we can look at. We'll also be looking at efficiencies. So we're not specifically going after reduction in force or anything like that, but we're always looking at efficiencies. And there's things for which they don't have to build it because we have it. So I'll use an example. A lot of the corporate G&A functions, tax and treasury, internal audit, some of the legal functions, we can serve them in those ways where they don't have to be adding on those back-of-house services where they might if they had stayed as a stand-alone entity. So I could go on. I think I've used more than my share of time on this question, but there's -- we see lots of opportunity to extract value and grow and to create value in these businesses.