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

All right. Good morning, everybody. Thank you for joining. My name is Nikhil Devnani. I'm Bernstein's U.S. emerging Internet analyst covering Etsy. And it's my pleasure today to have with me Josh Silverman on stage CEO of Etsy. Josh, welcome back to the SDC.

Thanks for having me.

Before we get started, just a programming note, you can submit questions for this session via the QR code in your agendas or you can do to pigeonhole.at and use the passcode SDC2024. Also, please refer to Etsy's Investor Relations website for the safe harbor. With that, let's get it underway.

So Josh, a lot has changed in your tenure as CEO at Etsy in terms of how the marketplace has evolved. Can you just kind of take stock of what some of those major changes have been and how the business has kind of improved from when you stepped into the role in 2017?

Sure. So when I joined in 2017, there were kind of 2 conversations about Etsy. One, we think it's about as big as it can be. GMS growth has slowed. And two, there's a lot of competition, in particular, there was a thing called Amazon Handmade that was going to kill Etsy. And fast forward to today, and a lot of people are asking is Etsy as big as it can be and can we survive competition. So it seems like deja vu all over again. To put that in numbers though, in 2017, when everyone thought Etsy was about as big as it could be, we were doing about $3.3 billion of gross merchandise sales. Last year, we did [ $12 billion ]. We were doing in 2017 about $440 million of revenue. Last year, we did $2.6 billion. In 2017, we were doing about $80 million of EBITDA. Last year, we did $750 million. So to the doubters who thought Etsy was about as big as it could be and couldn't withstand the competition, we were proud to prove those doubters wrong. Nothing gets our team more motivated than proving the dates wrong, and we're bound and determined again in this moment to show that we're at the early days of where Etsy can be and the fact that we can be a much bigger company, continuing to grow profitably as we have done all along. And we've been through, obviously, historically unprecedented times. But if we think about the macro when one fast forwards to today, obviously, we are seeing a lot of pressure on consumer discretionary, where there's a tremendous focus on value. And Etsy has much more difficult comps than most, starting with comps. Our CAGR from pre-pandemic, our 5-year CAGRs on GMS is 25%. Amazon is 11%, Wayfair is 5%, eBay is negative 5%. So we're just in a completely different ZIP code. Said differently, tens of millions of people came to Etsy during the pandemic because they had very few other places that they were able to shop. And all of -- virtually all of them are still shopping with Etsy today. We had about 92 million active buyers last quarter on a trailing 12 basis, which was at or slightly above our pandemic peaks. And those active buyers are spending about 25% more with Etsy today than they were before the pandemic. So we've been able to retain the buyers that we gain through the pandemic and grow GMS per active buyer. Now GMS per active buyer is down slightly from where it was during our pandemic peaks as people have felt macro pressure. But we're proud of the fact that people who came to Etsy during a time of scarcity continue to come back now when they have so many other choices. And we're at a point where macro pressure is tough, where grocery is taking up a much larger part of people's wallet than it has been in a long time. Gasoline prices are up. And of course, rent or your mortgage costs are much higher. That leaves a much smaller share of the pie for discretionary purchases. And so what we're seeing growing in e-commerce right now are everyday essentials and particularly everyday essentials at bargain prices. So when you look at, for example, Walmart, who's posting good growth overall is saying the growth is coming from their grocery segment and discretionary goods are actually down in the low single digits. We're seeing that across the industry. We are bound to determine in this time to focus on the things not to compete any race to the bottom on price because that's not where Etsy wins and it's not where Etsy should win. But rather to lean into what really makes Etsy different and to lean into creating an even more engaging experience on Etsy, I'm sure we'll talk more about it, but I think there's tremendous value for us to impact from that.

Josh, the macro point is well noted. From a factors you can control on the product side, what are the top few buckets that you're excited about that helps GMS growth get back on track? Because obviously, investors are always asking the question of what's next, right, and looking ahead?

Absolutely. So we're very focused on consideration. We're very focused on reliability. We're very focused on providing a more engaging and an exciting experience. And so on consideration, for example, what are the moments in your day that should cause you to think Etsy is the right answer for that. People love Etsy ask, someone have you heard of Etsy and now in the U.S. and the U.K., nearly universally people will say, of course. And if you ask, what do you think of Etsy, virtually, everyone you talk to is going to say, "I love Etsy." That's incredibly precious and very rare. But when you think when's the last time you shopped on Etsy and why -- what makes you come to Etsy, they're usually going to say, I can't remember exactly, and I come for and then they're going to name a very specific thing or come from my son's birthday or for I come every year at this one date. So giving people more reasons where we are top of mind to think of Etsy, we think is important. Gift Mode is a great example. We think that the average American spends about $1,600 per year on gifts. That's a $400 billion TAM for gifting alone. We think Etsy participates in about half of those categories. So part of that is dining out or cash gifts or entertainment, that's not us. But the other half are physical gifts that Etsy competes in, and that's about a $200 billion market. We think we have only 1% of that market share today. And we think Etsy is uniquely well positioned to win in gifting. When you give a gift to someone else, it's high stakes, it expresses your sense of care for that other person and saying I bought it on Etsy is something you can be really proud of. It's also true that with 115 million things for sale on Etsy, we almost guaranteed have that perfect special thing that speaks exactly to the person. So the opportunity is how do we create a search experience that's easy to buy for someone else. Inevitably, you know that person less well than you know yourself. Often, you're buying for someone where you only know 1 or 2 things about what they like. So creating a discovery experience that's good but also creating a fulfillment experience that's specifically designed around the needs of gifters we think is important. And so Gift Mode is something we just launched in February. We're very encouraged by early results. We shared in the first quarter that gifting grew at Etsy faster than the rate of overall GMS at Etsy and significantly faster than our pure-play gifting peers, and we're just starting. Reliability is another opportunity on Etsy. We said we're going to shorten the time it takes packages to arrive on Etsy by at least 2 days this year, and we're off to a very good start. And we can do that without making the experience on Etsy any less special. How are we doing that? We're getting even more precise in estimating shipping times. So exactly how long is it taking right now to get a postal package from this ZIP code to that ZIP code. Prioritizing in search, things that are located closer to you that are going to arrive faster and be cheaper to ship as an example, and most importantly, elevating on Etsy, the things that are most unique, most special curating Etsy to show you really interesting views of different types of inventory and something we haven't leaned in to a lot over the past years that I think there's a huge opportunity for us to lean into more is lateral discovery. Showing you things you didn't ask for and in fact, didn't even know to ask for never thought to ask for. I think there's a huge opportunity for us to do that in Etsy in a way that is uniquely entertaining and engaging and inspiring that's fun for you that triggers you to think of, oh, I didn't even think of Etsy for these categories and it leaves us breadcrumbs to know, oh, this person is actually interested in this and that and the other, which allows us to make the experience more personalized each time you visit.

Just on the concept of specialness. This is probably a throwback to the type of question you would have gotten in 2017 or 2018. But do you think that, that specialness can, in some ways, limit how big the business gets over time? And I think you said it before, and I agree with you, consumers don't start a shopping decision, thinking I necessarily want something handmade right there shopping for an occasion. And at certain points in time, you might end up competing with more branded product, non-handmade products. Are consumers in some ways or is there a challenge in some ways where consumers are saying the commoditized product, the branded product is good enough?

Yes. So first, thank you for that question. I love that question because it speaks to -- it's difficult for us to size the TAM on Etsy because what is special. So a purchase I bought very recently on Etsy is a dog food scoop. So my [ love bunny ] is overweight and she's a poor girl and just been put on a diet. And I could go to Amazon and I would buy a utilitarian metal 1/3 cup scoop. I want on Etsy, where I got a scope that says bunny on it and we get to pick the color schemes, so it color schemes that matches our kitchen, and we think it's cute. Is dog food scoop special? It depends. Some people could give a hoot and they just want a cheap scoop, and some people love the idea that the scoop has the dog's name on it and feels personalized. And that times 115 million is Etsy. Any item could be special if you want it to be. And so for many people, when they're out in public, they love the fact that they're wearing hearings that no one else has ever seen before, and they get complements on them. When they go into your home, you've got a throw pillow that no one else has seen before that isn't for sale on west elm or Wayfair and your friends complement you. And when they complement you say, you know what I bought that from a seller in Turkey, and her family has been making this textile for 3 generations. And let me tell you a little bit about the fabric that she uses. The fact that everything comes with a story is compelling, it is special, it is exciting. So what we've got to do is elevate the parts of Etsy that are the most special, the most different to make sure that the best inventory gets to the top and that people understand that story and do more storytelling with it. And I think with all the advances in AI and more video in our experiences now, I think there's a huge opportunity to do that better. One of the things we're doing right now that I am very especially excited about is we're evolving the way search works. We've been very focused on search over the past number of years to focus on relevance. So when you ask for something, we give you what you meant, not what you said. Search for dog scoops on Etsy, you're going to get dog scoops, not anything else. Search for, by the way, wedding dresses, you're going to get wedding dresses not wedding dress hangers, which is a really hard thing for a search engine to understand and only using the power of things like Gen AI, do we now understand the difference. But what we haven't had before is a real quality score to balance that. We have thousands of items that are so similar in relevance according to our search engine. So instead of having our sellers try to earn prominence through keyword stuffing, if you're a seller on Etsy and you Google like, how do I get ranked higher on Etsy, you're going to see 10 YouTube videos about keyword stuffing. That's not what we want. That doesn't make the buyer experience better. It actually makes the buyer experience worse. Ship on time and have a fair shipping price. Always get 5-star reviews, respond to customer combos very quickly, include a handwritten note. These are the things that customers care about. And when we can transparently surface quality scores to our sellers in their dashboard. Here's how we rank the item quality of each of your items, and here's how we rank your service quality overall as a seller. And the better you do on these metrics, the more you earn your way to prominence and search, that's how we elevate the best of Etsy. That's how we make a uniquely human buying experience when we create a race to the top. That's not only better for sellers because they have more agency, but it's better for buyers as well. That's something we're very hard at work at, and I'm very encouraged and optimistic by the opportunity there.

How much of an undertaking is that?

We have today a black box search engine. And so what it's trying to do is for every search query, look at 115 million items, pull the, let's say, 6,000 or so that things are most relevant and then rank from 1,000 to 6,000 your likelihood to purchase each one. It's a very, very high level, how Etsy works today. It's a black box, it's magical, and it works pretty well. We've got to create an understandable and explainable search engine that works almost as well. And so factors like do you consistently ship on time and do you consistently get 5-star reviews? Influence search in a really meaningful way. And it doesn't need to be as good as the black box model because as soon as we can start to explain and make sellers scores transparent to them, they'll raise their game in the areas that they need to, and that will make the buying experience better will drive more frequency and that will offset any loss in the benefit of an explainable model versus black box model. But first, the model needs -- the explainable model needs to get good enough, and we need to be able to start to explain to sellers how it works and train them. So it's going to be a bit of a journey, but it's a journey we're very focused on right now, and you should expect to see progress in this year.

Does it roll out in phases in test? How does that work?

We -- that is how we normally do things is we roll things out in phases, we test things. We learn what works and also we need to bring our sellers a lot and we need to bring our buyers along. And so you usually see us iterate. That has been very beneficial to Etsy because we learn a lot, but there's also limits to it. So Etsy over the course of 6 and 12 months gets a lot better. But we do it usually in hundreds of small increments that aren't necessarily newsworthy or notable to sellers. We think that there's limits to that. And so the launch of gift mode this year was an example of Etsy doing some things differently, saying we're going to package together a number of big features. We normally would have taken Gift Mode and broken that out into 40 pieces, tested every single one of them and launch them iteratively. And then we would have launched a marketing campaign where we could have tested every single piece of the marketing campaign. What you lose at that is having a big moment to buyers to tell them there's something about Etsy, you didn't know. You think you know Etsy, you know you love Etsy, but there's things that have happened since you've last been on Etsy that mean you should come back more often. And so this idea of more sort of big bang releases is something that we think is an opportunity for us and gift load was an example of that, and you should expect to see us do more of that. So we're going to continue to do some iterative releases where we think that makes sense. But we're going to do some more big bang things as well.

Maybe coming back to different vectors of competition or your competitive positioning. I think about Etsy is really emphasizing selection and assortment as one of the key value propositions. Otherwise, e-commerce players do this is leading into convenience via quick delivery leaning into pricing. Is there room to do more on some of those other vectors of value of convenience? I think of the servicing of the deals tab, you're talking about shortening delivery windows. I mean, when you evaluate where to put money to work, does it make sense to, for example, subsidize, expedited shipping for sellers or think outside the box a little bit on some of these other vectors than maybe historically have not been top of mind focus for Etsy.

Yes. And what we said coming into this year actually is reliability and convenience are a big focus this year. So for example, shortening times for packages derived by 2 days this year, where we're already making very good progress on that, as I've talked about, shipping price is a big deal and making sure that sellers set shipping prices that are acceptable to buyers is very important. And that is something that is a focus of ours. You should continue to see us focus on and make progress on this year, adding more shipping options, so things like priority mail and faster shipping options, we've actually been quite focused on that over the years, and there's a lot more shipping options on Etsy so that you can have packages arrive, you can pay for faster shipping if you so choose, that has been a big focus of ours as well, getting you through checkout better, making sure that you feel comfortable in the return policy of Etsy, making sure you feel confident that if something goes wrong, we have your back. These have been very big focuses of Etsy. So for example, we launched Etsy purchase protection about 1.5 years ago, where we really have made it much faster. When something goes wrong, you get your money back much faster, much more easily and we think that is important and build confidence, build reliability, it builds frequency on Etsy. So we definitely agree that those levers are very important. They are table stakes. We don't think we win. We don't win on shipping faster than Amazon. We don't win on shipping cheaper than Amazon. And in fact, Amazon's strategy and everyone who's trying to chase Amazon are built around warehousing their inventory. Most products on Etsy are not made until you buy them. That is different. We couldn't warehouse if we wanted to. But that's also incredibly cool. It means that you love that dress, but you want a short sleeve but not long sleep. The seller can do that for you. You want that dog scoop to be orange because it's Etsy and you love it, we can do that for you. So we have a unique set of advantages. It also means that Amazon's advantages or Walmart or pick-and-push don't work against us because they're not designed for made-to-order, customized and personalized. That's our space. So we've got to be uniquely good at sending packages from 7 million different points of presence, 7 million sellers homes to 92 million buyers. It's just a different set of capabilities that we've got to lean into. But as we get better and better and better at that, we think we build the moat.

How do you move at the up to consideration set. One of the things I heard you say last week that stuck with me is that historically, the business has been more focused on in-session conversion. Consumers come to Etsy after they can't find something elsewhere. Again, is it predominantly through branding and marketing? Is that the core strategy there?

Marketing is certainly not a quarrel. It's got to be the product that delivers and then marketing can amplify. So we've been very focused on in-session conversion at Etsy, and it's worked. It's brought a lot of games. It's made the buying experience on Etsy a lot better, but there are limits to that. So every squad at Etsy is goaled based on producing extra GM almost every, if not every there's some that are goaled on cost reduction. There are some that are goaled on revenue. But most squad at Etsy has been goaled on GMS. So every month, what have you shipped that makes -- drives more GMS on Etsy. And that's largely been a good thing. But if you think about what's going to drive more GMS in this session, it's usually showing people versions of the thing they bought most recently. If the last thing I bought on Etsy is a dog scoop, you think the last thing I need is another dog. I just bought one, right? But it turns out statistically speaking, the most likely thing someone is going to buy is the thing they bought last. What that might mean just to use example numbers is, let's say, 2% of people normally buy something. 2.2% of people might buy the thing they bought last. So if you're trying to drive in-session conversion, show them lots of versions, but what does that mean to the other 97.8% of people. They think, "Oh, this is a site that only sells dog scoops or maybe this is a site that only sells pet products, Etsy is for pet products. And -- in fact, we have a big opportunity to show them what about home furnishings, what about jewelry, what about baby goods. If you have a pet in a home, you very like they have a family, right? And so what else might we show you there. And we haven't been as focused on that because that hasn't been core to driving in session GMS, but we actually have incredible strengths in that. We have 7 million creators who create things. We have so many interesting unique items, things that are weird, things that are wonderful, things that are unbelievably value priced at this moment because the seller is trying to clear out her inventory or things that are really the hottest new item from the hottest new seller. And so the opportunities to surprise you, to entertain, to engage you with things you didn't come to Etsy looking for is a big opportunity for us, and it's not been a focus historically. Now dedicating screen real estate to that may come at times at the expense of GMS. But in terms of lifetime value for a buyer, showing her thing she wasn't expecting seeing the thing she might favorite from that, seeing things she might dwell over and learning, "this person does appear to be interested in home furnishings or in clothing or in jewelry " is a fantastic breadcrumb for us that's going to allow us to then feed more of that and engage her more. So I'm incredibly optimistic about the opportunity for Etsy going on offense in being an entertainment site and not just a shopping site.

Why hasn't there been more progress to date on that cross-sell? Is something I feel as a shopper on the site. Again, as you said, if there's so much room to introduce the stated categories I wasn't shopping in before. Is there a historical data hurdle? Is there a technical hurdle, just time and resource allocation? How do we think about why that hasn't been the experience to date?

Yes. First, we are a small and scrappy team. We are not a large team, and we've always embraced scarcity and efficiency in a way that I think is great. Pick a few things and try to be great at instead of trying to boil the ocean and try to do a lot of things. And I think that has led to very profitable growth and some of the highest profit margins in the industry, and we are very proud of that. And the operating model of that we've been very focused on driving GMS. And I think we've done a lot with that. I think it's yielded a lot of benefits. It made Etsy a much better shopping experience. But I think we've reached the limits of that. I think there's a lot of opportunity for us to unlock new growth. And there have been data limitations. When someone comes to Etsy and they've only searched for 1 or 2 things, we just don't have a lot of data. And so we've got 115 million things for sale. So the needle in a haystack problem. You can guess, but if you're only going to show someone 10 things and you know relatively little about them, what are you going to choose is an interesting challenge. Gen AI is making that a lot better, advances through things like TikTok has been learning a lot about that. They published some things about what works in their recommendation algorithm. So what might you want to show people in a world where you don't start -- we have a cold start problem we don't know that much. The industry has made a lot of advances in that. And understanding the inventory on Etsy, one of the coolest things about Etsy has been one of the challenges. There's 115 million things and they don't map to a catalog. So what is this? What other items might it be related to? What does it say about your taste and style generally? The fact that you like this lampshade. What does it mean about what type of shirts you might like? That has been a computer science problem that had been beyond our reach 5 years ago that I think is very attainable today and -- so I think advances in search, and we've invested a lot in our data infrastructure and our search infrastructure over the past 5 years, 6 years to be much more ready for that, I think, makes us now a problem we are very able to solve, where we were less well positioned 3 and 5 years ago. Are there more effective ways to push new things to the consumer such that they're not actively pulling researching themselves because they might not know to search that item in the first place. So how do you push it to them and create that demand before they even realize they need to be the ones looking for it. That's exactly it. And so if you think about a lot of our focus has been on getting you to the thing that you want on Etsy, which -- 7 years ago, it didn't work very well at all. And it was just -- it was a really hard problem. We've made so much progress. What that means though is today too often consumers go everywhere else when they can't find it they come to Etsy. When they come to Etsy, we're going to have it. You're looking for a coffee table that fits this exact space in your living room. That's a weird shape, we got you covered. But we look at the beginning of your journey, not at the end of your journey. We want to fight to win all of those purchases to decorate the whole living room, not just to the one of secure piece. And by the way, when we complete the look and show you what else we can do, we can blow you away with the quality, the beauty, the originality and the value of items for the whole living room. And so that's where dedicating in real estate to engage you in things you didn't come already asking for. I think it's a big opportunity for us. We are going to need to dedicate more [ spring ] real estate to that at the expense of other things that are sort of tried and through proven GMS drivers. But I think it is very likely to yield very significant fruit not just in that striation, but really driving a lot more frequency over time.

And that's a good segue then to how you think about the opportunity within frequency 3 times a year, which is the current threshold is not a lot. You do get a lot of traffic though. So clearly, consumers are searching for things. How do you drive that up? And what does that look like in the future in your mind? What would be -- what's kind of the end goal on where frequency can get to?

Yes. So I think when we -- when I first joined Etsy in 2017, I think about 60% of people shop one time a year and about 40% of people shop more. I think more than half of people now shop more than once a year, but let's call it half of people now shop once a year. So a 10 percentage point improvement in onetime shopper is significant, but there's a lot of -- when you talk to those onetime shoppers, they really think of us for -- sorry to pick on dog scoop, but dog -- you're the place I go for pet products, right? And -- or it's -- you're the place that go from my mother's anniversary. They have one occasion each year. They think of us very narrowly. So exposing them to a lot broader view of Etsy, we think, is a big opportunity. For the half that buy more than once a year, they buy on average about 5x a year. And when we compare ourselves to eBay or other companies that have a relatively broad selection of merchandise, we think 5x a year is too infrequent. We have a lot of opportunity to serve them better. And that's where, again, I think understanding more all of their different purchase categories and their taste and preferences and then doing things like getting them on the app, our app penetration is lower than many of our competitors. We have an opportunity to drive more app utilization. Once they're on the app, expose them to a broader range of things, drive favorites and have them -- once we understand what they favorite, that gives us a breadcrumb to drive push notifications to tell them, hey, items from sellers you've favorited have recently gone on sale or sellers you favorited, have new items in their shop or we know you like this, here's other things you might like. We've not really been focused on driving favorites in the past few years. We've been very focused on driving sales. Favorites compete with the buy button. When you get someone to favorite, it competes with the buy button, but it also gives you a lot of really good information we can use later. So that cycle of driving more people to use the app, expose them to a broader set of things, have them leave more breadcrumbs, use that to drive push notifications to have people come back again and again and again, is a lifetime value cycle that we have not been as focused on over the past number of years that we're very focused on now and I think can drive a lot of lifetime value.

On active buyers, we've seen an interesting dynamic in the last couple of quarters where the reactivated buyers are starting to outstrip the new buyers. It's a small difference, but it is a new trend. Are we at a tipping point now where you think the buyer growth composition is driven more by reactivation of lapsed buyers versus new buyers?