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

Good afternoon everyone. Thank you so much for joining us at the Needham Conference today. My pleasure to introduce the team at Etsy. We have Josh Silverman, CEO; Rachel Glaser, CFO. And before we kick it off with questions, I'm going to pass it to Rachel for the disclosures.

Two seconds, just -- first of all, thank you, Bernie, and thanks for having us, and thank you all for joining us. I just wanted to refer everyone to the safe harbor on Etsy's IR website. I'm not going to read the safe harbor, but it's there for your reference.

There we go. So and then also has an -- I obviously have a bunch of questions prepared, but as anyone has any questions, please type them into the portal, we'll try to leave the minute as well, too. Maybe Josh will start with you. I wanted to start on GMS and just how you're thinking about how Etsy is positioned as you enter '25. There's been a lot of volatility in the Etsy marketplace for GMS this year. And importantly, what's the path back to GMS growth for the Etsy marketplace. If you're thinking about active buyer growth or spend per buyer growth, what the major drivers could be?

Great. Yes. Thanks for the question. So when we look at what's been happening in the macro over the past year or 2, e-commerce is growing, but when you peel that back, what is growing within e-commerce is largely everyday essentials and in particular, everyday essentials at discounted prices. So people are exceptionally focused right now on deals and promotions. Discretionary products have been under pressure and especially discretionary products that are not the cheapest version of that discretionary product. And so we've chosen to really take our efforts this year and focus them not on the race to the bottom of trying to compete head-to-head in a knife fight over who can sell this product cheaper but rather what makes Etsy really different and special leading into making sure the best of Etsy has surfaced that we show more diverse search results that we do a better job solving the tyranny of choice. I think we've made tremendous progress on that this year. I'm really excited about the customer experience. I think we've done a lot of work that's been very foundational in nature this year that I think sets us up to be building on that foundation next year. And in terms of -- we haven't given 2025 guidance at this point. I'm not going to give a 2025 guide right now. But to your specific question around whether it's active buyers or GMS per buyer, I think we have a lot of opportunity in both, which is exciting, only maybe one in three women and two in ten men in the United States have shopped on Etsy in the last 12 months. So there's huge opportunity to both get new first-time buyers to Etsy, but also we've got 100 million lapsed buyers, people who bought on Etsy but haven't bought in the last 12 months to get those shoppers reengaged. We have significant opportunity in our largest markets like the U.S. and the U.K. but also the rest of Europe is a real opportunity for us in terms of getting more active buyers. And then in terms of GMS per buyer, Etsy has done a great job of solving the need of having the thing when you know what you want. I think we have a huge opportunity to not just solve the need for what you want and can't find anywhere else, which is how many people use Etsy today, but also to spark new missions when you come to Etsy to help you realize there's a lot of things we can offer you that you might not have even thought of Etsy for. So I think there's also a big opportunity for us to drive more GMS per active buyer.

Yes. No, that's great. And that's certainly one of the things that -- just going through the initiation process and seeing all the new product and initiatives that you've been bringing to the Etsy marketplace, we watch and are particularly impressed and think [indiscernible] driving frequency just seems like a massive opportunity. And as you mentioned, that [ NiFi ] promotional activity that's going on right now, how does the consumer feel? A couple of weeks we've moved from the election. And what's your approach for discounting and leaning into promotions in this challenging macro environment.

Yes. I mean I'm not saying anything new to say the consumer feels like they're under a ton of pressure. And there's a disconnect between what you read around GDP growth and the economy seems healthy and what consumers really feel. And that is that most consumers feel like they have really very, very little money left over by the time they're done paying for rent and paying for food. And so discretionary products, in particular, are under a lot of pressure. I think a lot of what's happened is that retailers have raised the retail price on things particularly in late 2022 and early 2023 as their input prices were going up. They raised their rate card on most of their products to a level that customers got very uncomfortable with the way they've dealt with that, they don't want to lower their rate cards. So instead, what they're doing deep discounting on high-profile items, particularly sort of everyday essential items. Often, you're seeing like 40% off. And that's just not an area where Etsy is going to win or wants to win. Our products don't have a widely understood MSRP. And so even when our sellers do offer 40% off, which if you go to Etsy right now, you're going to see a lot of really amazing products, our sellers are selling them 40% off. It doesn't have the same power as selling a product -- a jug of Tropicana orange juice for 40% off the price everyone knows the Tropicana bottle of orange juice goes for. So that race to the bottom, that blue light special way of running a business is not where we think Etsy is going to win. And if value is both what are you paying and what are you getting for it. We're really leaning into the other side of value, which is really leading into the best of Etsy, showing people the best of Etsy, showing people that it's worth the value of the price that they're paying on Etsy, really leaning into what makes Etsy different and special, and we think that's the best way for us to be best positioned as we come through the macro to continue to grow and win.

And there does just seem -- there's just a lot of focus on product right now, whether it's gift mode, improving search and discovery, like trying to push people more to the app. How do you think about managing that in terms of pushing in all these directions seemingly at once? It seems like there's a lot going on. So if you can speak to that?

Yes. So thank you for noticing. I appreciate it. We I think a lot of really great work streams underway. As you mentioned, driving a lot more consideration for Etsy. One of the big opportunities we have is people love Etsy. When you walk down the street and ask anyone about Etsy, I guarantee you, 99 out of 100 people are going to say the exact same 3 words, I love Etsy. You'll hear that over and over again. And yet they don't think of us nearly as often as they should. So driving more people to actually download the app, we think is a big opportunity. Our app penetration is much lower than many of our peers as well as using the product experience to work harder. When you're on Etsy, showing you not just the things we have that you came looking for but also other things we have to offer that might be related to that shopping mission or, in fact, entirely new missions. I think we can open people's eyes to the diversity of product that we have on Etsy. And in addition to that, we've launched the Q score and search this year. It's been I think the most productive year of my 7 years, Rachel and I have been here together for over 7 years. I think this is the most productive year in terms of really moving the customer experience forward in a really positive way. We do focus on the fewest biggest things, but we're able to do more than one, we are very lean. And so we have the highest revenue per head count of any of our peers that I'm aware of. We've always been very focused on efficiency, but we're very agile. The unit of work at Etsy is the squad, a squad has maybe 8 to 10 people on it, some engineers, a product manager and a designer and they are giving a very specific customer mission that they're working on fixing and they're giving tremendous freedom to invent. And because of that, they can move very quickly, and we can get a lot done with lots of small teams working really fast. That model, I think, is a really successful model, and it served us well.

That's great. One thing I want to focus on, in particular, was gift mode and gifting in general. It seems like it's not -- it was -- when it was first introduced, it seemed like maybe it was just like a onetime, hey, here's what we're going to start pushing gifting. But it seems like there's almost like an evolution of the process. So I would love just to get your thoughts in terms of what the gifting experience is now and maybe how you can continue to push that customer journey?

Yes. And that builds on this point around consideration. When are the moments in your day or your week that we want you to think, "Oh, I should go to Etsy for that", and gifting is such an obvious example. And gifting happens all year round. Of course, right now, we're all thinking about gifting as we head into the holidays. But there's also birthdays and weddings and anniversaries. And every week and every month, you're probably buying or should be buying a gift for someone. In fact, we think the average American spends about $1,200 per year on gifts. And for Etsy -- in fact, I think that's $1,600, so they just got that stat wrong. And for Etsy, we think if you shop on Etsy, we're only getting 2% share of that gifting dollar. And if you're not shopping on Etsy, obviously, we're not getting any. So we think there's huge opportunity there. We think Etsy is the perfect place to go for gifts. And so what we've done is we've invested in a set of features on Etsy, that really set Etsy apart in terms of helping you to find the perfect gift. And this is where we're leveraging a lot of Gen AI that I think is incredibly helpful to match you with the perfect thing which exists on Etsy, the perfect thing for your -- the person you're gifting to exists, we're going to help you find it and then make the gift receiving experience feel really special as well. And we've built a bunch of product features that help with that, and we're also leading into marketing to tell the world about that. As a result, in the first 3 quarters of this year, we've talked in each quarter about how gifting growth has been a tailwind for us. It's been growing faster than the overall marketplace, and we think we're gaining share versus our gifting competitors. So we think it's a great example of us leaning in to certain moments and being able to show we can build a differentiated product experience market against that and gain share.

I just want to add 2 of my favorite things about gift mode. One is that because we have this gift teaser where you can actually buy the gift the same day or the hour before you need it, and we have the ability to send a teaser. It can be a text teaser or a video or voice teaser and then you can choose to reveal the present or not. It takes -- it really shortens the shipping time, which has been one of the things about Etsy that has been a friction point in our whole shopping journey. So I love that. And it also opens up the concept of gifting is an everyday occasion, there's birthdays every day, right? There's weddings every day, babies are being born every day. So it really opens up the whole aperture of when to think about Etsy for a gift. So both of those things, I think, are really wonderful benefits or dividends of being more focused on gifts.

Yes. No, that's great. And how about -- I mean I wanted to touch on that with something like a wedding, where it might be more like a onetime, knock on wood, onetime in nature for someone. But I can also like drive people into the Etsy experience also it could just be a lot a bigger purchase occasion in general, could be more than the $1,600 or $1,400 per year. So thinking about those other occasions, like how should we think about that product being introduced over time?

Yes. So it's a great example of a wedding where we have so much to offer for someone who's planning a wedding, and many people won't realize that. So they'll use us only for very narrow parts. Let me give you an example. Cake toppers is a very common entry point into Etsy. What's happened is someone has gone to Google, they've searched for personalized cake toppers, Etsy comes to the top, and they land on Etsy, they see personalized cake toppers they buy them and they go. We've gotten good at getting you to that. Now what is it that is meant, what is the cake topper? It means that I'm planning a wedding and I'm at the point where I've actually bought the cake, and I need some figurines on the top of the cake that actually look like the 2 people getting married, so that I can show that for the wedding. Etsy is perfect for that. We sell a lot of them. With the advent of Gen AI, we can suddenly understand that those 2 words cake topper, which in the past we show you take toppers, suddenly, Gen AI can give you context around that. He can tell us, "Oh, this is actually about a wedding. And they're not at the stage of the wedding at the beginning where they're thinking about sending invites or buying an engagement ring. They're towards the end where what they care about is like tablescapes and place card settings and bridesmaid gifts. And that kind of almost human level context can help us to actually show a lot more relevant recommendations to engage people in a lot more parts of the wedding experience. We also, I think, have an opportunity to get much better. You're right. Hopefully, this is your one and only wedding, although if you're participating in a wedding, chances are, many of your friends are as well, great chance to use gift mode for them, but also you might be moving into a new home at that point. Etsy, actually -- home furnishings is the largest category on Etsy. So the opportunity to buy things to decorate that home, planning for a new baby, Etsy is amazing for baby products. So starting to expose people to other categories as well is a big opportunity for us.

Right. And last one in gifting physical gift cards being launched. So Rachel wanted to turn to you. I cover Roblox as well when they first launched physical gift cards. I mean we were going to CVS and see we're all counting all the different places where it could be. But it wasn't -- it did actually help bookings. Like could this be a nice tailwind to bookings in the fourth quarter?

Yes, it's exciting. In fact, Josh, just around a picture over the weekend where we saw the first placement of an Etsy gift card at a CVS in the wild. So they're out there. And they also, in addition to helping to drive GMS, they serve as a little many billboards or brand ads for the company just in very thousands of popular retailers. It's really early days. We've only just launched it. I think the data that we've seen is that from other marketplaces, it can be between 2% and 3% of GMS, through the combination of digital gift cards and physical gift cards and doing that math, that would represent about a $200 million GMS opportunity. We haven't guided to next year. There's some accounting trickery in all of that because you don't recognize the revenue until it either is redeemed or you have -- or you recognize the breakage. So I think it will evolve over time, but we're happy they're out there. It's been a little journey figuring it out, and I think they're going to be a positive GMS growth opportunity for us.

That's great. Want to go over to seller search visibility. So recently launched some suggestions to make shops, listings, customer service is better and just more disclosure to them. Can you just talk about rolling out a product like this and how it has been received?

Yes. So when I talk about leaning into what makes Etsy different and better this year as opposed to the race to the bottom around who can sell the product the cheapest, quality is a perfect example. Since Etsy launched, the #1 thing sellers have asked is how can I rank higher in search. And the answer has always been to stuff the right key words into your tags and titles. And that is not a good use of sellers' time, and it doesn't lead to a good buyer experience either where product titles are just keyword stuff. And instead, what we wanted to create is a race to the top dynamic where we tell sellers, here's how we view your item quality and your service quality. Do you always ship on time? Do you consistently get 5-star reviews? Do you offer a return policy that buyers like? Do you charge a fair price for shipping? It's things like that, that buyers care about. And when sellers perform better, so we've now launched a Q score in search, so not only is search results ranked based on the relevancy of your item. But given that we often have hundreds or sometimes thousands of items that are similarly relevant for any one keyword, we actually use how sellers are performing against these key quality metrics to determine who ranks the highest. That's obviously meaning that we're surfacing the buyers, not just items that are relevant to their needs, but that they're likely to love. It's also giving us an opportunity to incent and motivate sellers offer the right behaviors. For example, since we launched this seller visibility dashboard around quality, 2.5 million listings have had their shipping price reduced to be $5.99 or less, which is what we've told sellers is what buyers think is an appropriate price for shipping. So sellers really like it. We've gotten really positive response from sellers who are really happy to have the agency to see how to drive their growth. And it's going to result in better buying experiences for buyers as well.

Yes. No, that's great. I wanted to jump over to the Etsy Insider to the loyalty platform, so it's in beta. So Rachel, how is it going so far? And what sort of metrics are you tracking?

So it's pretty early days. We talk about it's not even first inning, but it's spring training, we're testing and learning. I think many, many loyalty programs have had many iterations and the thing they ultimately become doesn't look anything like the thing that they launched to begin with. So we're using -- right now, we're using the beta launch to collect a lot of data to learn from that. We have invited -- it's an invite-only beta to a group of buyers, ironically, the largest cohort that we've invited and are not the most loyal buyers because we're trying to move the needle on getting repeat buyers or onetime buyers to become more frequent buyers. One of the biggest benefits of the program is free shipping. And we have this nice -- one of the things we're testing is an annual membership versus what we call a seasonal membership or a 3-month membership. I actually bought one for myself. And every time I buy something on Etsy, I'm surprised by, oh, this is free shipping, and this is free shipping. It keeps giving me the surprise and delight that I wasn't -- I had forgotten about because the price to buy it was pretty low, and I keep getting -- yielding the value every time I purchase something. And we're hoping other buyers will have that same similar experience, but it's too certain it's not going to -- no material impact on the financials of the guidance that we gave for the fourth quarter, and it's too soon to tell how it may or may not impact 2025, only to say that it was game-changing for a company like Amazon to offer something like Amazon Prime. So we want to test our way into something that will really be perceived this high value for our customers.

The strategy you made yourself buy one, just kind of get one for free.

No. We're pretty perkless in this culture.

But the ultimate goal, though, even though you're targeting kind of not the most frequent shoppers right now. Eventually, that would be offered to the most frequent shoppers as well.

Well, when it is not in beta anymore, it's going to be open to everybody. We just might not market it. We might promote it more heavily to the people we're trying to move the needle on. And how these things go, you want to have a -- you want to have the costs not outweigh a bit -- not outweigh the yield that we get from it. It's a paid -- Etsy Insider's a paid program. So you pay for your membership. And if the most frequent buyers were the only ones that signed up, we think under cost would not outweigh the revenue that we received from them. So that's the balance of the fine line that we're walking.

Yes. Understood. I want to transition over to search and discovery with you, Josh. So our survey work we did a bunch of surveys with our initiation a couple of months ago, and it suggested search and discovery remains just a significant opportunity for the largest marketplaces we cover. Can you talk about some of the improvements that you've been making here and the pace of innovation, how do you expect this to continue to improve into '25?

Yes. So we're -- I agree that is one of the biggest areas for value creation, it has historically been during our tenure here, and I think it's likely to continue to be for quite some time. So for many years, the focus in search at Etsy was on relevancy. How do we understand what you meant, not what you said and then show you highly relevant search results. And we've been using neural net translator technology to do that for several years now. And let me give you an example. If you searched historically for wedding dress, what you would have seen even a few years ago was a lot of wedding dress hangers and the reason is it contains the words wedding dress, so it looks like a perfect match. And what in dress hanger is going to cost $6 as opposed to a wedding dress, which is going to cost a lot more. So the conversion rate is going to be higher. So a traditional, lexical search engine is going to think, "Oh, that's what the customer wanted because they bought it, right? With the use of neural net translator technology, when you search for wedding dresses on Etsy, you'll see wedding dresses. If you search wedding dress hangers, you'll see wedding dress hangers, that's an almost human level of understanding of context that a wedding dress is different than a wedding dress hangar. And we've been doing that for quite some time. And so we've gotten better and better and better at relevance. That's been huge for us. We still have a problem of the tyranny of choice that we usually have thousands of very relevant search results for you. That's a good thing. In general, it means Etsy has abundant supply. But for the customer, it can feel very overwhelming. If you look for back to school, for example, you might see 6 or 8 different versions or historically have seen 6 or 8 different versions of customized pencils that to a customer look virtually identical. So it's a lot of cognitive load or not much benefit. In addition, it doesn't highlight the tremendous diversity of the different kinds of things we have for sale in Etsy when a few SKUs dominate search. So in addition now to just relevance, we're really focused on solving the tyranny of choice. How do we show you just the few best examples of each idea and then show you more ideas. The concept of an idea. Gen AI can start to understand these things are all versions of the same thing, which is customized pencils, we don't need to show you 6 of them. We can just pick one, right? That's one opportunity. Now starting to also understand which item might be the best for which use case, right? So this item is best for people who care mostly about it arriving quickly. This one is best for somebody who cares about durability. This one is best for someone who cares about craftsmanship. The understanding of the qualities of the items we have. And again, on Etsy, it's a unique challenge because our items are not SKUs. They don't map to a catalog. So we need to evaluate each of these items one at a time, Gen AI can be hugely helpful. And last and absolutely not least, is I think Etsy has gotten really good when you have a very specific idea of what it is you need. We've not been as good at higher level, I'm just planning a wedding. If you know you're looking for cake toppers, man, we nail it. But if you're just looking to plan a wedding, stepping you through that process, if we can help with the invites, we can help you with the engagement ring, bridesmaids gifts, tablescapes and on and on and on. It's virtually endless, which can also feel overwhelming to customers. Being able to organize that shopping experience into pathways, more browse-based pathways is a very big opportunity for us. Doing that in a very personalized way, requires very advanced machine learning. Great news. That's all happening. And so I think that the advances in Gen AI are coming at the very moment when they have the biggest opportunity to help, and I think are likely to help Etsy more even than most. I'm sure they're very helpful for many people. But Etsy, where we have 120 million items, each of which does not map to a catalog, the opportunity to help guide people to get the perfect thing for them is a massive unlock for us.

Makes a lot of sense. Maybe sticking on supply. I know that you've been removing listings from the Etsy Marketplace to violate content policies. Just -- I mean I'm sure it's an ongoing thing, but where are we just in terms of like a heavy lifting versus where ultimately we want to get to be more of a steady state?

Yes. So if we're looking at items that do not comply with our policy, meaning maybe they're mass produced items that don't belong on Etsy. We did see during the pandemic. We had tens of millions of items flooding the marketplace all in a very short amount of time when we couldn't staff quickly enough to handle that. And by the way, that volume stayed with us. So in 2021 and 2022, we did see an increase in the number of items that did not comply. We made a big investment in both technology and people to combat that. We made huge progress in 2023 such that by the time we exited 2023, the percentage of items on Etsy that did not comply with our policies was very, very low. And certainly the percentage of item views on Etsy is very, very low. We have continued to make progress on that even throughout 2024. But already, it's quite a low number. So if the concern is headwinds from us needing to remove noncompliant items, we got through a lot of that last year. The opportunity for us now is to help customers understand why this item does comply with our policy and then organize them better. That was the point of the creativity standards that we launched over the summer where we clarified -- we didn't change our policy, but we put in more easy-to-understand language. The 4 buckets of items that can be on Etsy. It's either made by the seller. It's designed by the seller, it's sourced by the seller or it's handpicked curated by the seller. So handpicked by the seller, for example, would be vintage items that have to be 20 years or older. Made by the seller means the seller use their own 2 hands to make the thing. Designed by the seller means that the seller designed it with their unique design and then work with a production partner to have that item produced. And as we've tested these different categories with our buyers, the good news is our buyers believe that all of those items belong on Etsy. They all have the human touch behind them and match our brand, but not all the time and not for every use case. And so another big opportunity for Etsy is organizing our listings and being clear around which policy each of the items belongs in and then surfacing the right inventory at the right time. And let me give you an example, print-on-demand. There are times when that is not what you want. It is my wife's 50th birthday gift. And I'm not looking for a relatively inexpensive print-on-demand T-shirt to get her. Maybe someone is, I'm not trying to judge. My wife would not look kindly upon that gift. However, the whole Silverman family is going off on a family reunion and 30 of us are all going to meet in Ann Arbor, Michigan to get the gift. That's exactly the time when people want to all show up with the same T-shirt. So there are times when different types of inventory are exactly what you want and times when they're not. And our ability to do a better job of surfacing and sort of cleaning the aisles and putting you just in the shopping aisles you're likely to want to shop in, I think, is another very big opportunity for Etsy.

And as we're talking about supply, taking stuff off the platform, I just wanted to make sure we hit on tariffs de minimis. Just how are you thinking about the potential for China tariffs and your exposure in vis-a-vis just the de minimus regulations?

So we generally believe in free trade because our sellers are exporting. Our buyers are importing from many different countries to many different countries, and it makes us better to be a global platform. The amount of inventory coming on to Etsy from China, in particular, is really de minimis. I think we demonstrated that during the supply chain lockups of 2022 when all the products from China was stuck on a boat, nothing could get to our shore easily, and it was a real tailwind for Etsy. Etsy really flourished in that environment. So I think it speaks to the resilience of the Etsy marketplace. We've been through some very trying years as a society, global pandemic, supply chain lockups. And during those times, cottage industry has come to the rescue via Etsy to help an Etsy seen enormous growth. Since that time, we faced some really tough headwinds for the discretionary end of discretionary products, which is what Etsy is, small luxuries. This has been a pretty tough time when you sell small luxuries. And yet even in that environment, revenues continued to grow. Margins have continued to hold up, absolute EBITDA dollars continue to grow. The Etsy platform is remarkably resilient.

Great. Rachel, I want to bring you in here to talk about take rate. So Etsy ads continue to be a driver of take rate expansion. Just can you talk with some of the drivers of improvement in ROAS you're making and how much more upside or room there is to be able to grow here?

And Josh and I both have passion for take rate that he might want to pile on as well. So I'll start....

More than Mary.

Yes. I'll start as far as -- I mean we could go a lot of different directions with take rate, but your question specifically about Etsy and ROAS. So the way the product works is we control both the bid and the ask. So it's kind of like the fox starting the in-house. We want to make sure that we're giving a decent return on ad spend to our sellers. And so we self-monitor, but we set a threshold, we won't go below as far as what the sellers are going to earn on their ad spend. And consequently, we don't use all the budget that they give us. They might do something as simple as I want to spend $1 a day or whatever, but we leave a lot of it unspent because we're trying to give them the very best ROAS that we can. And the way we can maintain or grow the ROAS is by giving a higher click-through rate on the ad. So the more relevant that a sponsored result is, the higher the click-through rate, which means we can deliver, we can spend more of the budget that they've given us and maintain the ROAS or actually even increase ROAS if we -- for them if we want to flow it through that way. So we keep working on the product to make the relevancy of the search ad as relevant as an organic ad. And that's just continued to improve over time. And so Etsy as has been just really a workhorse for us. The other thing we've done and toggled back and forth with over time is the amount of the weight of an Etsy ad on a page. So how many ads you give to a page. We don't want to interfere with the consumer experience. So we don't load the page up as much as we could. But we've played around with that concept. But in general, the more inventory we create, the more Etsy ads can grow as well. So theoretically, as traffic grows, as page views grows, you have more and more inventory in place in Etsy ad. And there's a bunch of places where we don't currently run any Etsy ads, for instance, in the e-mails that we send or in the post-purchase confirmation page for instance. So there's other places where we could think about expanding inventory for Etsy ads. But the product itself has been the real delivery engine of being able to increase Etsy ad revenue.

And the only thing I'd add is I think there's a belief that take rate is a zero-sum game. And that every time our take rate goes up, it must come at the expense of sellers and hurt their margins. And that's not necessarily true. And in fact, this year was a great example of that. Etsy's take rate expanded 130 basis points. But we did that in ways that did not come at the expense of our sellers, did not hurt their margins. For example, we've in-sourced more Etsy Payments across more countries. So instead of paying a payments fee to PayPal, they're paying that same fee to Etsy, but getting a better service because it's integrated into the Etsy Marketplace. And then Etsy Ads got better this year in all the ways that Rachel talked about. So we're just doing a better job of matching the right ad with the right buyer, which generates more revenue while holding sellers' ROAS constant. So we continue to find win-win opportunities for our sellers and our buyers to win in ways that help to raise Etsy's take rate as well.

And just -- I know, Josh, you're very clear in the beginning, you're not going to give 2025 guidance. But as you think about payments now being 99% covered, so now that tailwind for take rate will be less. I mean, is there -- can we have the same kind of take rate expansions in the coming years that we've seen more recently?

I don't want to guide to take rates specifically, but just if you look at the cadence of take rate expansion through the first -- through this year, it would suggest that you get some benefit continuing through next year. And the larger point that I think there continue to be win-win opportunities for Etsy's take rate to grow in ways that are also beneficial to sellers in the marketplace is something I do have [ fought ] for.

Okay. Great. Want to move down to -- instead of having the sellers that advertise, how you guys are advertising and rates, so sales and marketing increased 22% in 3Q. One of the drivers was paid social. Can you just talk about this investment, why right now is the right time to be leaning in? And when do you think -- so you mentioned kind of experimentation mode right now when you think you will get more optimized and what the road map is?

So we've always said we spent a lot of money with Google PLA. We've always said if we can light up another thing in the funnel that's like a Google PLA, we would. So we constantly test and optimize all different parts of the funnel. And we've had some good work lately in the past year or 2 really getting the paid social portion of the funnel to be ROI positive for us. So we've been able to lean in. Now there's the upper part of paid social, which is a little bit more I don't want to say nebulous, but it's a little less measurable and there's a lower part of paid social, which is a lot more targeted. And that is optimized. We feel confident that we're getting good ROI on our spend on the lower part of paid social, and we're still optimizing -- the smaller portion of our spend is more in that mid- to upper funnel part of paid social. The world's changed. People are not starting their search on Google as much anymore. They're starting their search on TikTok or they're starting their search on Instagram. And it behooves us to lean into that marketing opportunity because that's where all the people are. So we're happy that we've been able to work with the different social networks to be able to get our advertising dollars to be ROI positive for us.

Great. And just lastly, because I know we're coming up on time, but I wanted to make sure we touched on capital allocation. Would love just to get to your thoughts and priorities. And I know you have the notes coming due in '26 and '28 and just how having dry powder there impacts decisions on how you want to invest now.

Yes. We've always talked about there's three large buckets of ways to spend our free cash flow. One is on organic investments, which we do all the time on. We're lucky that our business model is such that we don't have to use our balance sheet to fund OpEx and fund our investments in people and marketing. But I guess, our investments there are use of our free cash flow in a way. We've been giving back about 100%, in some cases, over 100% of our free cash flow to -- in the form of share repurchase. And originally, that was just to offset the dilution created by the equity we grant to employees is a form of their compensation, but more recently because we see a lot of value in our stock at these low price points. We've been buying back opportunistically when the stock price is below what we consider to be our intrinsic value. And then one thing we haven't done is dividend, that's always on the table though. We feel it's a little premature to be doing dividends. And then lastly, there's M&A. And we've done -- we've made some great M&A. Depop is doing phenomenally well, and we're excited about what that does for us, further penetration of our TAM. We've deepened our penetration, particularly in the apparel category with that investment and extended our demographic reach with the Gen Z population. So we feel good about M&A, and we're always on the lookout and always sort of tapping the market for what is out there. Mindful that we have the converts out there, we do have a balance sheet strategy. Our balance sheet is incredibly strong. We try to maintain 4:1 gross leverage ratio so that we, at any time, could tap capital markets and get -- if we wanted to do rated debt, we would be well positioned to do that. And we -- the converts are convert, so we can settle them in equity cash or a combination thereof. So we feel pretty well situated with where we're at with them.

Great. Well, let's leave it there. Josh and Rachel, thanks so much for joining us. Thanks, everyone, who's on the webcast. Appreciate the time and talk to you soon. Have a great holiday season.