Deb Wasser, VP of Investor Relations, welcomes everyone to Etsy's third quarter 2023 earnings conference call. She introduces the speakers, Josh Silverman (CEO), Rachel Blazer (CFO), and Jessica Schmidt (Senior Director of Investor Relations). The prepared remarks have been prerecorded and the slide deck is available on the website. After the presentations, there will be a live Q&A session. Forward-looking statements, risks, and uncertainties are mentioned. Both GAAP and non-GAAP financial measures will be presented and reconciled in the appendix. Josh Silverman acknowledges the recent conflict in the Middle East and Etsy's actions to help impacted sellers. The company's results met expectations for modest top-line growth and strong profitability.

The consolidated GMS for the company was $3 billion, up 1.2% from last year. Revenue also increased by 7% to $636 million, with a strong adjusted EBITDA margin of 28.6%. Despite challenges in the consumer discretionary product spending market, the Etsy marketplace saw growth in active buyers, buyer additions, and international growth. The company is focused on competing and maintaining market share, as well as removing barriers for buyers to shop on Etsy.

Etsy is expanding its market beyond low-risk items and working to improve the overall shopping experience. This includes curating and organizing the large selection of items, utilizing human and ML technology to improve search results, and addressing competition from low-quality mass-manufactured items.

Etsy is working on improving the search experience for buyers by showing a more diverse set of options for open-ended head queries, such as back-to-school items. They are using Gen AI to curate search results and highlight the best items within each idea. Etsy is also enforcing their seller house rules more strictly to stand apart from other commoditized commerce platforms. Handmade policy takedowns have increased and the percentage of visits with violating listings has decreased. Etsy aims to showcase unique, handmade items and not mass-manufactured merchandise.

Etsy is focusing on promoting the value of buying directly from makers and providing sellers with insights and tools to set appropriate prices and offer effective promotions. They have introduced new features such as a pricing optimizer and improved the way sellers can put items on sale. The company has also run successful seller-funded sales and promotions, including a 48-hour sale with a positive ROI and increased reactivation of lapsed buyers. This effort is aimed at helping Etsy sellers compete and succeed in a highly promotional environment.

Etsy has seen success with their Get 5 promotion, which resulted in an increase in average order value. They will continue to test and optimize marketing approaches, including Etsy-funded offers. However, buyer perception of Etsy needs to catch up with the improvements in reliability and convenience that the company has made. To do this, Etsy will be launching a campaign and making on-site improvements for categories like home and living and style, as well as introducing new features like wedding and baby registries.

Etsy is focused on building a strong brand association to help buyers understand the platform and its offerings. They have launched new initiatives and marketing campaigns for the holiday season, including a curated gift finder and a new deals tab. They are also offering a guarantee for on-time delivery and purchase protection. Depop, one of their subsidiaries, also had a successful quarter with double-digit growth in GMS and revenue.

Depop's success is due to their investments in product and marketing, which have led to increased growth and improved user experience. Reverb also saw growth and improved take rate, despite a challenging environment for spending. Etsy is focused on delivering profitable growth and is confident in their market potential. They are working passionately and with urgency to positively impact the company in the future and maintain their unique value proposition of keeping commerce human.

Rachel Glaser, CFO of Etsy, discussed the company's third quarter results, including positive consolidated GMS growth and increased revenue and adjusted EBITDA. She noted that the divestiture of Elo7 had a small impact on GMS and revenue but was accretive to adjusted EBITDA margin. Glaser also highlighted the strength of the Etsy brand and continued active buyer expansion, as well as strong growth at Depop and softness at Reverb. The reversal of FX headwinds provided a tailwind for the business in the third quarter.

In the third quarter, Etsy saw a 7% increase in consolidated revenue, with marketplace revenue growing 4% due to higher transaction volume and growth in subsidiary payment fees and offsite ads. Services revenue increased by 16%, driven by Etsy Ads. The company's consolidated take rate was 20.9%, and its EBITDA margin expanded to 28.6%. Product development spend increased by 5% year-over-year, with a 30 basis point leverage gain. This was partially due to lower employee compensation and professional services costs.

In the third quarter, Etsy's consolidated head count decreased due to the divestiture of Elo7, but their core Etsy head count increased to invest in growth initiatives. Their revenue per average full-time head count was higher than the previous year. Marketing spend increased, with a focus on ROI. Off-site ads offset a portion of their performance marketing spend. Etsy marketplace GMS increased slightly, driven by a higher number of orders and growth in international markets.

In the third quarter, Etsy's GMS growth turned slightly negative due to macroeconomic challenges and a highly competitive retail environment. However, there was positive growth in buyers with household incomes over $100,000 and in international markets. In comparison to mass merchants, Etsy's GMS in certain categories performed well according to data from U.S. e-commerce retailers.

Despite intense competition and a discount-driven market, Etsy is gaining share compared to its competitors. The company has a significant opportunity to continue gaining share as it expands buyer consideration and macro factors improve. Active buyer growth is accelerating, with a 4% increase in the third quarter and positive trends in the U.S. and internationally. Etsy added 6 million new buyers and reactivated 6 million lapsed buyers, with improved retention rates and a stable number of habitual buyers.

In the third quarter, loyal buyers accounted for 44% of GMS, with a slight increase from the previous quarter. The number of repeat buyers grew 3% year-over-year, and GMS per active buyer stabilized but declined 6% year-over-year. The company has $1.1 billion in cash and has repurchased $297 million in stock. The holiday season is expected to be challenging due to various factors, including pressure on consumer spending and competition in advertising.

Etsy's performance marketing spending models adjust based on return thresholds, and recent geopolitical conflicts and higher CPCs have contributed to a deceleration in their marketplace trend line. The company's guidance no longer includes Elo7 and they expect a slight decrease in their top line. They anticipate a decline in Q4 GMS, but the exact range is uncertain due to limited visibility. Their take rate is expected to be slightly lower in Q4, and recent expansion into new international markets is not expected to impact it significantly. They are guiding for a 26-27% adjusted EBITDA margin, with higher marketing spend being the primary reason for the sequential decline.

The company plans to increase investments in performance marketing and use a variety of advertising methods to promote their new mission impossible themed holiday campaign. They expect their subsidiaries to have a negative impact on their adjusted EBITDA margin, but still aim to reach their long-term target. The CEO encourages people to check out their new gifting and deals features for holiday shopping. In response to a question, he talks about the learnings from when he first joined the company in 2017 and how they plan to apply those principles to continue growing in the current environment.

The speaker is proud of the progress made in the company's shopping experience and believes they have gained market share despite a tough macro environment. They attribute this success to their focused and urgent approach, driven by a sense of responsibility to drive growth for their stakeholders. The speaker also acknowledges the impact of new Chinese competitors in the market and their effect on the cost of advertising. However, they see themselves as the opposite of these competitors.

Etsy is the polar opposite of Temu, with a focus on high-quality, affordable, and reliable merchandise. They are not competing in a race to the bottom and are shifting their marketing spend to different channels. Etsy is a differentiated marketplace that empowers sellers, particularly women, who handcraft items in a sustainable way. The trust and safety team has announced plans to double down on enforcement and improve integrity, which may have an impact on GMS.

Etsy has invested $50 million in enforcement to ensure that listings on their site comply with their policies. They have hired more people and implemented machine learning to identify non-compliant listings. Takedowns have increased by 140% and the percentage of buyers seeing violating listings has been cut in half. This has not negatively affected their GMS. The decrease in product development costs was due to the addition of employees who are driving GMS and revenue, as well as the divestment of Elo7, which was not profitable.

The company measures its product development investment with ROI in mind and has seen a 40% increase in product launches. Analysts are asking about 2024 plans for marketing and product spend, and the company is focused on balancing growth and profitability. They do not engage in growth at all costs and are willing to explore other channels if necessary. The company also measures the value of each squad's contribution to additional GMS and revenue. The team is delivering well.

The company is experiencing a 40% increase in launches and is focused on delivering value to sellers, buyers, and shareholders. They are being careful and disciplined in their hiring and R&D investments. They have successfully scaled marketing channels, such as paid social and CRM, and have expanded internationally. The use of machine learning has increased the productivity and efficiency of their engineers, resulting in a faster payback period for product investments. They have also been able to decrease costs on their Google Cloud investment.

The speaker discusses how their company calculates ROI for product development and mentions a question about their advertising efforts, specifically on linear TV, OTT, and digital platforms such as TikTok. They explain that they have been focused on performance marketing since 2017 and have become more sophisticated in that area. They have also started investing in mid-funnel marketing, such as YouTube and paid social video, to target potential customers who are planning a wedding or having a baby. They mention the challenge of affordability in OTT advertising but are seeing gains and have started insourcing creative work to save on agency fees.

The speaker discusses how in-sourcing more creative content allows for faster and cheaper production of targeted mid-funnel content. They also mention the need to disrupt common perceptions of the Etsy brand, such as it being expensive and not offering deals. They highlight the reliability of Etsy sellers and their ability to deliver products on time as a potential disruptive claim for their above-the-line marketing efforts.

In the Q&A portion of the earnings call, analysts asked about the success of Etsy's Q3 promotions and how they will be used as a marketing strategy going forward. CEO Josh Silverman explained that the $5 off $25 promotion was successful and generated a positive return on investment, but the $10 off $40 promotion did not perform as well. He mentioned that promotions will continue to be used, but with an emphasis on testing and learning and maintaining an ROI threshold. Most promotions on Etsy are seller-funded, and the company is also focusing on providing sellers with insights on when and how to put items on sale. The recently launched "deals" tab in the app is also expected to drive sales.

During a Q&A session, Etsy's CEO and CFO discuss the company's potential for growth and its focus on investing in different areas to attract more buyers and sellers. They mention the success of their international expansion and the universal appeal of their various product categories. When asked about their priorities for future investments, the CEO mentions their focus on improving the marketplace for both buyers and sellers, particularly through search and other tools. They believe that these investments will lead to increased frequency of use on the platform.

The company believes they can increase their market share by focusing on quality, value, reliability, and consideration. They have made progress in providing relevant search results and highlighting the unique value of handmade items. They also aim to improve delivery and return processes to ensure customer satisfaction.

The company is focused on improving quality, value, and reliability in order to increase consumer awareness and disrupt the market. They have added over 1 million active sellers in the last three quarters due to the current economic climate, and there is potential for further fee increases in the future. The company aims to provide value for both sellers and buyers in any changes to the fee structure.

The speaker discusses different ways in which Etsy can expand its take rate, including improving existing services, offering new services, and increasing pricing. They mention that any pricing increases would be done thoughtfully and with consideration for how the additional revenue could be invested back into the marketplace. The speaker also mentions that they have been able to increase marketing and GMS as a result of previous price increases, creating a "virtuous circle." The moderator then mentions a question from a financial analyst about the financials of Depot, which will be addressed by Rachel.

Josh Silverman and Rachel Glaser discuss the financial performance of Depop, a subsidiary of Etsy. Depop had a great quarter, especially in the U.S., and is benefiting from the current trend of affordable and environmentally friendly clothing. The management team and marketing programs are also contributing to its success. Rachel adds that Depop's growth will result in a 300 basis point contraction in overall margins for the fourth quarter. This is lower than the previously expected 300-400 basis points due to the divestiture of Elo7 and strong growth at Depop. A question is also asked about the slowdown in Q4 GMS and whether it is due to competition from other advertisers.

Rachel Glaser and Josh Silverman discuss Etsy's guidance for the fourth quarter, which reflects softness in October and a decrease in consumer discretionary product spending. They mention the potential impact of macroeconomic conditions on their forecast, with a possibility of mid-single-digit declines if the macro worsens. They also note that Etsy is in a vulnerable position due to their focus on non-durable discretionary goods. They are also facing competitive pressure on advertising spend, which may result in acquiring less traffic and buyers. However, their take rate is up year-over-year.

The speakers discuss how a low-single-digit GMS would result in flat or slightly positive revenue for the quarter, with healthy margins. They thank the audience and encourage them to shop on Etsy for gifting needs.

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