Deb Wasser welcomed everyone to the Second Quarter 2023 Earnings Conference Call and introduced Josh Silverman, Rachel Blazer, and Jessica Schmidt. Questions can be submitted via the Q&A window chat and forward-looking statements involve risks and uncertainties. Results landed in line with expectations, with consolidated GMS at $3 billion, revenue at $629 million, and an adjusted EBITDA margin of 26.4%. GMS for the Etsy marketplace was $2.6 billion, which was about flat with the prior year, and many key metrics were trending positively.

The Etsy brand has been resilient in the face of economic cycles and is positioned for growth in the future. Investments are being made to make the marketplace more organized, curated, and reliable. The company has improved search results and technologies to make it easier for buyers to find what they are looking for. GMS growth has been seen year-over-year in May, June and July, and quarterly active buyers have reached an all-time high.

Etsy is utilizing the latest AI advances to improve their discovery and inspiration experiences, while leveraging their best of Etsy library to train ML models to better predict quality of items as perceived by humans. This work is expected to have a material impact on surfacing the best of Etsy in every search, and two product launches in the second quarter are focusing on highlighting home and living, style and gifting purchase occasions.

Etsy has launched several initiatives to drive higher conversion rates, such as Shop the Look in home and living and a wedding registry, as well as a baby registry. They are also working on features to help buyers find deals on items they are interested in, and are focusing on quality, enforcement, and customer support. This has resulted in a reduction of issue resolution time by 85%.

Etsy is investing in programs to help sellers price their items appropriately and grow their businesses in a sustainable way. They are running tests of a new price discovery functionality and have launched a Make an Offer program to help sellers. During the second quarter, they held an engineering week to focus on how they can use AI and ML technologies to improve customer experiences such as search and recommendations, streamlining the listing process, improving fraud detection, and trust and safety models.

Etsy has implemented an initiative to streamline and automate the process of creating new ML models, so that any engineer can deploy their own models in a matter of days instead of months. They have also released a new Creator Collab with John Legend, featuring handcrafted items produced in partnership with female sellers, and their 5th annual Design Awards has been successful with the winners chosen by Sarah Jessica Parker and Dayna Isom Johnson.

Etsy's campaigns in the U.S., U.K., and Germany are doing well and driving brand association. GMS per buyer has shown early signs of stabilization, and Etsy is working on bringing buyers back to the platform faster and improving seller-funded offers. Additionally, Etsy recently announced an agreement to sell their Brazilian handmade goods marketplace, Elo7, to Enjoei, a Brazilian company that operates an online marketplace for clothes and furniture. The transaction is expected to close shortly.

The Depop and Reverb teams have been taking steps to improve their businesses, such as streamlining their focus, improving customer experience, and increasing product experiment velocity. These efforts have resulted in both GMS and revenue growth for Depop, and Reverb has continued to outperform the musical instruments sector. Additionally, Depop has implemented community-driven marketing such as branded events, pop-up shops, and influencer marketing, while Reverb has focused on affordability and helping musicians find good deals.

Etsy has made efforts to make it easier for buyers to save money and has an energized world-class team working to help sellers and the company grow. This year, Etsy is working to better connect their brand and on-site experiences to become a gifting accomplice and help buyers find crafted quality gifts at great value. They are confident that these gifts will arrive on time and hope to help buyers gift better in 2023.

Etsy delivered strong second quarter consolidated GMS of $3 billion, roughly flat year-over-year, and revenue increased 7.5% to $629 million. Adjusted EBITDA was $166 million with a healthy 26.4% margin, and the adjusted EBITDA has grown at a 43% CAGR since 2019. Etsy marketplace growth was driven by strong international markets, and the FX headwind softened to 20 basis points from 200 in the first quarter. Marketplace revenue increased 3%, and the mix shift to more international transactions also contributed to revenue growth.

Etsy saw strong growth in services revenue in the second quarter, with Etsy ads driving the increase. Investments in product development and marketing showed excellent returns, with product development spending increasing 19% and product launches increasing 50%. The company is focusing its resources on areas with the highest yield, and is confident that these investments will lead to continued growth in the coming years.

The consolidated marketing spend of $166 million increased 1% year-over-year, and the marketing as a percentage of revenue decreased 160 basis points year-over-year to 26%. Etsy has been investing in ROI models to drive marketing spend and has seen the customer lifetime value increase by 50%, allowing them to spend deeper while maintaining strong efficiencies. Off-site ads revenue offsets a portion of the performance marketing spend, and omitting this factor leads to incorrect conclusions.

Etsy has maintained strong efficiencies, with their blended LTV to CAC staying steady and performance marketing ROI increasing over 40% since 2019 due to successful expansion of paid marketing to new channels and countries, as well as increased investments in brand awareness. During the second quarter, Etsy marketplace GMS was nearly flat year-over-year, declining just 0.7% to $2.6 billion, with year-over-year growth trends turning positive.

Etsy marketplace GMS has seen an encouraging trajectory towards positive growth since the start of the year, despite macroeconomic headwinds. This is largely attributed to easier year-ago comparisons, positive order growth, moderating FX headwinds, and healthy growth in select international markets. 47% of GMS in the second quarter was from transactions outside of the US, with growth reported in Germany, France, and other non-core Western European countries. Average order values remained largely unchanged year-over-year, but there is a clear delineation of GMS trends between buyers with income above $1,000 and those below that level.

Etsy had a successful second quarter, with 90.6 million active buyers and year-over-year growth in three top categories (home and living, apparel, and craft supplies). GMS per buyer declined 6% year-over-year but is up 28% since the second quarter of 2019. The company acquired 6 billion new buyers in the quarter, a 40% increase compared to pre-pandemic periods, and reactivated 6 million lapse buyers, a 21% year-over-year increase.

The company has seen a 218% increase in active buyers from the second quarter of 2019 and a 2% increase in repeat buyers. A non-cash impairment charge of $68 million was offset by tax benefits, resulting in a neutral impact to net income and EPS. The company had $1.2 billion in cash and investments, and repurchased $39 million in stock under its May 2022 Board authorized program. Free-cash flow for the quarter was $128 million, and the Board authorized a new $1 billion share repurchase program.

MercadoLibre is expecting a slight positive year-over-year performance for the third quarter of 2023, with revenue of $610 million to $645 million and an adjusted EBITDA margin of 27-28%. They have converted nearly 90% of their adjusted EBITDA to free cash flow in the past 12 months and anticipate a slightly positive GMS at the midpoint of their guidance, with a potential for a sequential improvement in their GMS trendline. External factors such as consumer discretionary spending, student loan payments, and child tax credits could influence their performance, but they are optimistic about a soft landing for the US economy.

Josh Silverman discussed Etsy's expectations for GMS growth in 2023 and 2024, focusing on domestic buyer growth, curation, international expansion, and recovery in softer categories like home and living. He noted that there is still a large opportunity to grow active buyers in the US, both new buyers and reactivating lapsed buyers, and also a big opportunity to grow internationally.

Etsy has recently begun to buy Google PLAs in markets outside of their core markets, and have seen positive ROI. They have translated their site into many languages, and have seen demand for their products in many parts of Western Europe. They are looking to drive up GMS per active buyer and conversion rate, as well as serve only the highest quality items to customers to further enhance the appeal of their brand.

Josh talked about pricing, promotions, and curation as tools to help sellers compete and win on Etsy. Rachel Blazer answered a question from Laura Champine about the ceiling on take rate, saying that they have never said anything about the ceiling.

Josh Silverman explains that the management team has improved the take rate every year through transaction fee increases and offering expanded services. He also explains that when evaluating acquisitions, they have a thesis for each one and that when they bought Elo7, they believed that there would be growth with the pandemic. He also mentions that they charge a fair fee for products and services that would benefit their sellers.

Elo7's business has not seen the growth rates that were expected due to the pandemic, leading the team to take calculated risks and acknowledge when they don't work out. Debra Wasser and Rachel Glaser then discussed the guidance for the quarter, which suggests that conditions remain the same and that macro headwinds would need to improve in order to hit the high end of the range.

Rachel Glaser discussed how Etsy is leaning into promotional opportunities more than ever before and how certain product categories, such as gifting and occasions, are growing while others, like Home & Living, are seeing headwinds. Debra Wasser then gave Josh the next question from Maria Ripps at Canaccord which was about sellers taking issue with the company's reserve system and its process for withholding and distributing funds.

Etsy has a payment policy where buyers' money is transferred to the seller right away, but sometimes things go wrong and Etsy steps in to make sure buyers are held whole. In 2021, they introduced a payment reserve for high risk sellers, but have recently announced improvements to the program, including reducing the amount held from the majority of sellers. They are continuing to listen and learn to make the program better.

The company is focusing on helping sellers set better pricing through the use of data. They are launching tests to give sellers the right context and data so they can set the right price for their listings. They are hoping to help sellers who are underpricing or overpricing, as well as those who are getting the price just right.

Rachel Glaser clarifies that the midpoint of their guidance is 0.7%, not 0.5%. She also states that they do not guide to individual months, but that the low point of their guidance implies some deceleration in August and September, compared to the positive growth in July.

Rachel Glaser discussed how Etsy Ads has been able to grow organically due to machine learning engineers improving the algorithm and increasing the CPC, which increases revenue and keeps the ROAS for sellers high. Josh was asked to comment on the benefits of Gen AI and how it is helping with product development velocity.

Etsy has a lot of talent in machine learning and is focused on democratizing ML so that many people throughout the company can use the suite of tools without having to ask for help from a separate group. They are also leveraging investments from other companies and doing beta testing to explore the benefits of machine learning. Any investments they make in ML tools will need to have a high ROI and an 18-month return on investment.

Joshua Silverman discussed how Gen AI could affect customers, both internally and externally. He is pleased with the data that shows how much velocity per squad has improved, and Gen AI is seen as a tool that can help with that. Gen AI can also help sellers with tasks such as answering queries from buyers and auto-generating listings. However, it is important to ensure that the cycle does not become homogenous or boring. If it is useful for sellers, Etsy will lean in.

Josh Silverman discusses the importance of creating a more conversational search experience for buyers on Etsy. He believes that the technology to do this is becoming a self-solving problem, but that the consumer adoption curve is the longer pole in the tent. In terms of GMS per buyer, Silverman notes that when the pandemic hit, Etsy had tailwinds since most places were out of stock.

GMS per active buyer in the US has stayed almost the same despite competition, inflation, and other factors. This shows that people are still returning to Etsy and spending roughly the same amount as before, which is encouraging. Rachel mentioned that households under 100,000 are under a lot of pressure and may be having a hard time prioritizing non-essential purchases, which may be affecting Etsy's results.

Josh and Rachel from Etsy discussed their success in the current economic cycle, noting that they have been able to maintain a 30% EBITDA margin despite the pandemic. Rachel then discussed their success in international markets, noting that they have been able to invest profitably in their core markets with performance marketing and brand marketing in the U.K. and Germany, as well as in their noncore markets. They have seen a good return on investment in their noncore Western European markets.

The speaker thanked everyone for their time and attention and promised to talk to them again soon.

This summary was generated with AI and may contain some inaccuracies.