Deb Wasser, VP of Investor Relations, welcomes everyone to Etsy's Fourth Quarter and Full Year 2023 Earnings Conference Call. She is joined by CEO Josh Silverman and CFO Rachel Glaser. Forward-looking statements and risks are discussed, and both GAAP and non-GAAP financial measures will be presented. Josh Silverman highlights the company's recent performance and previews exciting initiatives for 2024 while remaining focused on profitability. He mentions making difficult choices in the past year to invest in growth, and entering 2024 with a strong team, relevant strategy, disciplined investment approach, and resilient business model.

In 2023, Etsy plans to focus on its core strengths to improve its e-commerce platform. The marketplace performed well during the holiday season, with record-breaking sales on Cyber Monday and Gifting Tuesday. Despite a flat GMS, revenue and adjusted EBITDA were up, and free cash flow was strong. The company's product development and marketing teams were also highly productive, delivering new features and campaigns to improve the buyer experience. Overall, 2023 was a successful year for Etsy in a challenging environment.

Etsy has experienced significant growth in the past few years, with a doubling of their buyer base and increased spending from customers. Despite challenges in the consumer discretionary market, Etsy has exceeded their revenue targets and has a long runway for growth in the e-commerce industry. Unlike other competitors, Etsy stands out by offering unique and high-quality products, which will continue to be a focus for the company in the future. This differentiation is a key factor in their success and sets them apart from other e-commerce players.

In 2023, Etsy gained market share in e-commerce retail compared to its competitors, but still faces challenges in being seen as a destination for everyday purchases. To increase frequency and average order value, Etsy plans to break down brand barriers and improve consideration among buyers to drive growth. While also focusing on expanding globally and seller services, Etsy's main focus will be on increasing consideration among buyers.

The company has many initiatives planned to increase consideration and frequency, including a buyer loyalty program and improvements in value and reliability. They also plan to focus on international growth and have recently launched Gift Mode, which aims to make Etsy the go-to destination for all gifting needs. This is a departure from their usual approach of incremental product improvements.

The company has introduced Gift Mode to create a new product experience and generate consumer buzz. Gifting can be stressful, and Etsy is uniquely positioned to help ease this stress. Data shows that a majority of Americans struggle with gift shopping, making it an ideal use case for Etsy. Gifting is not just a seasonal need, and there are reasons to give gifts throughout the year. The company believes that this can lead to market share gains in their core categories and is an opportunity for them to add value.

Etsy sees gifting as a major growth opportunity, as only 10% of U.S. shoppers think of Etsy as a gifting destination. They estimate that only 43 million of their global buyers bought gifts from Etsy sellers last year, leaving a large untapped market. The gifting market in the U.S. alone is estimated to be worth $200 billion, and Etsy currently holds a 1% market share. By focusing on gifting and introducing a new shopping experience called "Gift Mode," Etsy believes they can increase their market share and tap into this lucrative market. This new experience uses artificial intelligence and machine learning to match gifters with unique items from Etsy sellers.

Gift Mode on Etsy has over 200 recipient personas to choose from, making it easier for shoppers to find the perfect gift. The feature has received positive feedback and is expected to continue to improve. Etsy's subsidiaries, Depop and Reverb, have also shown strong performance, with Depop seeing significant growth in the U.S. and Reverb making changes to achieve profitability this year. Etsy remains optimistic about the future.

Etsy's CEO, Josh Silverman, welcomes Marc Steinberg to the Board of Directors and expresses confidence in the company's mission and future growth opportunities. Rachel Glaser, Etsy's CFO, reports on the company's fourth quarter results, including a flat GMS and a 4.3% increase in revenue. Adjusted EBITDA also reached an all-time high.

Elo7's divestiture had a small negative impact on GMS and revenue, but was beneficial to consolidated adjusted EBITDA margin. Despite a challenging October, Etsy's GMS trendline improved in November and December thanks to strong holiday performance. The company exceeded its revised guidance for GMS and revenue, with consolidated marketplace revenue growing 2.6% and services revenue increasing 9.4%. The consolidated take rate remained flat, but increased by 160 basis points for the full year. Adjusted EBITDA margin was at the high end of guidance, but down slightly from last year due to lower gross margin and higher marketing spend. Due to a non-income tax benefit related to Depop, subsidiaries had a minimal impact on the margin in Q4.

In the fourth quarter of 2023, Etsy's adjusted EBITDA was the highest it has ever been, despite investments in product and marketing initiatives. Product development investments resulted in a significant increase in annualized GMS, although baseline GMS was impacted by external factors. Marketing spend increased, with a focus on building Etsy's brand awareness and improving ROI on above-the-line and performance marketing. There was a decrease in performance marketing spend due to adjustments in strategy and improved ROI efficiencies.

In 2023, Etsy was able to increase its marketing spend and expand into new channels and geographies, leading to a 7% increase in consolidated marketing spend. Despite headwinds in the fourth quarter, Etsy's marketplace GMS decreased by 1.4% year-over-year, with international markets showing positive growth. The top six categories on Etsy saw a mix of positive and negative GMS trends in 2023. The company ended the year with a record 92 million active buyers, with U.S. active buyer trends improving.

Etsy experienced strong growth in international buyers, with a 6% increase in male buyers and over 8 million new buyers added in the fourth quarter. They also reactivated a record number of lapsed buyers and saw stable habitual buyer trends. The number of repeat buyers grew by 4% and GMS per active buyer declined 4% year-over-year but remained higher than 2019. Etsy also had a healthy balance sheet with $1.2 billion in cash and $93 million in stock repurchases in the fourth quarter. They delivered $754 million in consolidated adjusted EBITDA and a 27.4% margin, with nearly 90% converted to free cash flow. They expect to see their gross leverage ratio continue to trend down and maintain a strong balance sheet for future investments and capital return to shareholders.

Etsy remains committed to a disciplined capital allocation strategy that prioritizes opportunities for long-term shareholder value. In 2023, they shifted their capital return strategy to return a higher percentage of free cash flow, especially during times of volatility in their stock. They also made a workforce realignment in 2024 to reaccelerate growth and increase profitability, including reducing operating costs by over $90 million.

The company is reinvesting their savings into growth investments and plans to make critical hires. They remain cautious due to a challenging macro environment and expect a decline in consolidated GMS for the first quarter. The addition of Reverb and Depop is expected to improve performance. They also announced a new shop onboarding process and anticipate a 26% adjusted EBITDA margin, with a headwind from subsidiaries.

Etsy expects the first quarter to be the low point in year-over-year growth for GMS and revenue, with improvements expected in the second quarter due to product and marketing investments. They anticipate that consolidated revenue growth will outpace GMS growth in 2024, with the help of Etsy Ads and the expansion of Etsy Payments into new markets. The company plans to maintain healthy margins and is optimistic about their growth initiatives for 2024. They are unable to provide specific details about the magnitude of growth, but they believe it will be significant. They also mention the possibility of returning to positive year-on-year growth.

The speaker discusses the company's aspirations for growth and their belief that they can outpace e-commerce. They also mention product and marketing initiatives to drive growth, such as a loyalty program and Gift Mode. They plan to continue working on compelling marketing campaigns and are optimistic about their future growth potential. A question is then asked about the company's first quarter guidance.

The speaker is discussing the company's performance in the current quarter. They mention that they have seen a decline in sales, but expect it to improve over the quarter. They also mention that they have reduced their performance marketing and increased spending on brand marketing, which may have a longer payback period. However, they are confident that their forecasted marketing investments will lead to incremental growth in sales. They also mention that they have returned to their normal marketing spending levels after experimenting with lower levels earlier in the quarter.

The company has recently released a successful big-game television ad and is focusing on creating brand recognition and customer consideration. They have also been focused on the value creation of every squad and dollar spent on marketing. The performance of their ads is constantly changing based on ROI and they adjust their bidding accordingly.

The speaker discusses the factors that affect conversion rates and CPCs in the e-commerce industry, such as budget constraints and comparison shopping. They mention using AI to monitor and adjust bidding based on ROI, and how this can affect their profit margin. They also address the question of why Etsy is gaining share against pure-play competitors but not against non-pure-play competitors, and how this may change in the future.

The e-commerce market is dominated by Amazon, Walmart, Temu, and SHEIN, who are gaining share due to their focus on essentials and deep discounting. However, Etsy has added 8 million new buyers and saw a total of $3.6 billion in sales in the fourth quarter. Despite economic concerns and a preference for cheaper products, Etsy's average buyer is spending 20% more than before the pandemic. The current trend of prioritizing cheap products may not last forever.

The speaker believes that the current trend of consumers always wanting the cheapest version of a product will eventually shift. They mention three factors that may have affected Etsy's January GMS, including the lack of a gift card program and big-box stores offering deep discounts. The speaker also discusses how the company is adjusting their marketing strategies to account for higher costs and lower demand.

The company constantly adjusts its models to account for changes in demand and to accurately attribute sales to specific ads. They regularly run tests to determine the impact of clicks on final sales and consider factors like future take rate and frequency in their models. The models are mostly relied upon to avoid irrational investment decisions, and the company is able to increase LTV with new product launches. They have also expanded into new channels and experimented with different types of marketing.

The speaker discusses the company's efforts to increase their GMS growth, mentioning initiatives such as consideration and gifting, as well as quality, value, and reliability. They also mention a goal for each team to create value and estimate that the team produced $1.5 billion of incremental GMS last year.

The company is focused on increasing efficiency through new tools and processes, and constantly working to improve performance marketing and above-the-line marketing. Multiple teams are dedicated to driving efficiency gains and the company has a plan for the year, but the impact of the baseline on their success is uncertain. The company has reduced its workforce and cut operating expenses in order to save money, and their main focus is on the most important tasks.

The main focus of the company is to prioritize and realign teams to work on projects that have the highest impact. This does not mean they have stopped hiring or investing, as they see a lot of potential for growth. The company is very efficient and constantly looking for ways to cut costs and reinvest for growth. The CEO and CFO have been obsessed with efficiency for the past seven years and are always looking for ways to reinvest profits to drive growth.

The company's main focus is on driving growth and increasing GMS growth in order to improve the stock price. They are committed to investing in opportunities that will drive growth, but will also maintain cost discipline and not invest irrationally. The company's core marketplace generates high EBITDA margins, but they are also reinvesting in order to continue driving growth. When asked about their loyalty initiatives, the company did not have any announcements to make at this time.

The speaker discusses the importance of loyalty programs in driving return and consideration for Etsy. They mention their experience with loyalty programs at Amex and the need for both rational and emotional benefits. The goal is to get people to consider Etsy more often and commit to the loyalty program. The speaker also mentions optimism around stabilization in GMS per active buyer and notes that it has increased from pre-pandemic levels.

In the fourth quarter, Etsy's average order values (AOVs) were down slightly, leading to slower start for the company. However, transaction volumes are holding up well and buyers are still coming to the platform, although they are more price sensitive. The take rate for the quarter was better than expected due to the rollout of Etsy Payments to more markets and the implementation of a seller fee. This fee not only increases take rate but also serves as a barrier for bad actors on the site.

The CEO and CFO of Etsy discuss the impact of a new fee for sellers and the company's revenue drivers. They believe the fee is a fair value exchange and will not significantly impact revenue. They also mention that international business and investments in search relevancy are driving higher take rates for Etsy ads. They end by stating that active buyers have remained stable and they are optimistic about the company's future.

The speaker addresses two questions, the first regarding seller pricing and the second about cohort growth. The speaker mentions that they have GMS retention data in their 10-K, which will be filed soon. They also note that the stacking of cohorts has been positive, but there has been a slight compression due to the post-pandemic environment. The speaker then addresses the issue of seller pricing and mentions that they have made progress in reducing non-handmade items on the platform.

Etsy's main focus is to ensure that mass-produced items are not visible on the site, as it is bad for the brand and not helpful for sellers in terms of price competition. They are also working on elevating quality in search results by using a search algorithm that not only picks items you're likely to buy, but also ones you're likely to love. This will be achieved by considering factors such as consistent good quality service, delightful items, and frequent purchases. By creating an explainable AI model, they hope to rank sellers based on these metrics and encourage a race to the top. This is one of their main initiatives for the year and they believe it will have a significant impact in the long run.

The speaker discusses the need to create an explainable version of a model that can match a black box model without causing harm. This requires research and development, which is currently underway. The call is then concluded.

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