Deb Wasser, VP of Investor Relations, welcomes everyone to Etsy's First Quarter 2024 Earnings Conference Call. She introduces the speakers, CEO Josh Silverman and CFO Rachel Glaser. The presentation includes forward-looking statements and both GAAP and non-GAAP financial measures. Josh Silverman notes that while the results were within their guidance range, they were not where they wanted them to be. GMS was down 3.7% and revenue was up 0.8%. The marketplace GMS was down 5.3%, which was a disappointment as March GMS trends did not improve as expected.

The CEO of Etsy is encouraged by the record-high number of active buyers on their marketplace, despite a challenging quarter for their type of goods. They believe that the decrease in buyer activity is cyclical rather than structural, and is likely due to macroeconomic conditions such as low consumer sentiment and high cost of living. The company is focused on improving the customer experience through product and marketing initiatives, and has seen growth in the number of experiments utilizing machine learning. The CEO is confident that these efforts will help drive growth for Etsy in the future.

The marketing team at Etsy has been working hard to improve their paid search efforts and expand their product feed testing across different channels. Their focus for 2024 is to change buyer perceptions and make Etsy a go-to shopping destination. They have made progress with their Gift Mode feature, which has helped increase site-wide gifting sales and improved consumer perceptions of Etsy as a gifting destination. This has also expanded buyer understanding of the breadth of Etsy's offerings beyond just gifts.

Etsy utilized effective marketing strategies to promote the launch of Gift Mode, resulting in a significant increase in news articles and social media conversations. They have plans to further improve the gifting experience and drive brand awareness. Additionally, Etsy is focused on creating a cleaner shopping experience for buyers, highlighting their unique strength of diversity. They aim to make it clear to buyers which items are handmade, designed, or personalized, as this can impact their shopping mission.

Etsy has faced the challenge of managing a growing number of sellers and inventory, but they have been able to utilize large language models and gen AI techniques to better understand the shopping mission and improve inventory recommendations. They have also been actively removing listings that violate policies and have seen a significant increase in enforcement capabilities. However, this has slightly impacted their annualized GMS. Etsy is also working to elevate listings that represent the best of their marketplace and have improved search relevance for buyers.

Etsy plans to improve their organic search algorithms by factoring in attributes such as listing quality, photography, shipping, and customer reviews. They also want to empower sellers through transparency and education to improve their visibility and sales. Additionally, they aim to enhance the window shopping experience by creating engaging buyer experiences and organizing their diverse listings into cleaner aisles. This will make Etsy more fun, engaging, and inspiring, ultimately widening the gap between their site and the competition.

Etsy's main focus is to support small businesses and promote unique goods to increase buyer consideration. They are actively working on highlighting their differentiation, providing deals and discounts, and improving shipping timeliness. They have also introduced new functionality for sellers to help them grow their business and have seen success in tightening estimated delivery dates. Etsy's goal is to capture new buyers, increase conversion rates, engage existing buyers, and reactivate lapsed buyers. They also see potential in expanding the usage of their Buy on Etsy app.

In 2024, only 45% of active buyers use Etsy's app, but the company has set ambitious goals to increase user penetration and drive incremental downloads. They plan to improve app download prompts, push messages, and the first-time user experience. Despite challenges, the company remains confident and focused on growth opportunities. During the first quarter, consolidated GMS was down 3.7%, but revenue and adjusted EBITDA remained similar to last year.

The divestiture of Elo7 had a small negative impact on GMS and revenue growth, but was beneficial to the consolidated adjusted EBITDA margin. While external factors affected GMS trends on the Etsy marketplace, subsidiary GMS growth helped overall results. The first quarter saw a decline in Etsy marketplace GMS, but revenue from payments and offsite ads offset the decline in transaction fees. The introduction of a new seller setup fee experiment was successful in reducing fraud attempts. Services revenue increased, primarily due to improvements in the ad platform. The first quarter take rate was slightly higher than expected and last year. Adjusted EBITDA margin was in line with guidance, with lower employee and variable costs offset by higher marketing expenses.

The company's subsidiaries had a negative impact on their overall profitability, but they have been able to manage costs and make investments while still maintaining a healthy level of profitability. They have reduced their product development spend and head count, but have increased marketing spend, particularly on brand advertising. Performance marketing was a mixed bag, with some challenges in January but improvements in February and March. Paid GMS for the Etsy marketplace remained consistent with previous trends.

In the first quarter, Etsy's marketplace GMS decreased by 5.3%, due to negative trends in January and February that continued into March. Despite positive impact from product and marketing initiatives, macro factors and the timing shift of Easter affected GMS levels. Consumer discretionary spending has been declining, which aligns with Etsy's deceleration in the quarter. Peer sales data for top categories also showed declines, except for craft supplies. These headwinds were more significant than expected, leading to a decrease in GMS across all top categories.

In the first quarter, Etsy performed similarly or better than peers in four out of six categories, but overall there was weakness in the types of merchandise sold. This is due to macroeconomic pressure, particularly in the U.K. and Germany. However, there was growth in other markets and active buyers increased by 2%. The company also reactivated 6 million lapse buyers and added 6 million new buyers, showing healthy growth despite the current economic climate. There was a slight decrease in habitual buyers, possibly due to them spending less or purchasing fewer items.

Etsy saw a slight increase in retention of habitual buyers in the first quarter compared to the previous quarter and the same period last year. GMS per active buyer decreased by 3.5%. The company's subsidiaries, Reverb and Depop, showed positive growth and appeal to value-oriented shoppers. As of March 31, Etsy had $1.1 billion in cash and repurchased $158 million in stock. The company delivered strong free cash flow and expects consolidated GMS for April to be down about 2% year-over-year, ahead of Q1 results.

The company is pleased with its recent performance, but remains cautious about predicting future results. They expect a decline in consolidated GMS for the second quarter, with Reverb and Depop providing a small boost. Take rate and adjusted EBITDA margin are expected to be similar to the first quarter. The company anticipates a modest acceleration in consolidated GMS in the second half of the year, but it is difficult to make accurate predictions. They reiterate their previous commentary on full year expectations and plan to invest in growth. The call is now open for questions.

Maria Ripps asks about the competitive environment in light of the current economic climate. Josh Silverman responds that while Chinese competitors may have become more aggressive, they are not the root cause of consumers seeking deep discounts. He notes that consumers are feeling pressured and looking for value, and this is reflected in the growth of e-commerce. The Chinese competitors will likely continue to be a headwind, but the underlying issue of consumer pressure will remain.

The focus of Etsy is not on being the cheapest place to buy things, but on highlighting what makes Etsy unique and special. The company is working on initiatives to elevate the best products and make them easier to find, while suppressing lower quality items. The loyalty program is expected to launch in the second half of the year, with a focus on turning occasional shoppers into more loyal buyers. Analysts asked for more details on the program and its potential impact on different customer groups.

Laura Champine asks about the implication that GMS will improve as the year progresses and what macro changes may contribute to this. Josh Silverman responds that the team is working on initiatives such as gifting and quality to drive growth in the second half of the year, but external factors like a challenging consumer environment could hinder this. He also expresses confidence in the impact of their initiatives and mentions the success of last year's work. Laura follows up by asking about positive friction with sellers due to the incremental fee.

The speaker acknowledges that there has been a consistent trend of more sellers than buyers on Etsy for 12 quarters, and this has made it challenging for search to improve. They would prefer a balance between supply and demand. They mention efforts to improve the quality and curation of items on the site, as well as actively removing non-compliant items.

Josh Silverman discusses the challenges of search results on Etsy and how machine learning and GenAI techniques are helping to improve the user experience. He also mentions how removing noncompliant sellers could potentially be a gross margin tailwind for the company.

The quality initiative at Etsy aims to improve the overall purchase experience for buyers by favoring sellers who consistently ship on time, receive positive reviews, and have low return rates. This will lead to more satisfied buyers and lower costs for the company. Etsy is also actively working to remove non-handmade items from the site, using new technologies such as Gen AI to determine the true value added by sellers.

The speaker is discussing the importance of providing information about the origin and production process of items on Etsy. They also mention the success of their efforts to remove low-quality listings and how it may offset any gross margin impact. Additionally, they clarify that the removal of these merchants does not have a significant impact on on-site revenue as there are other sellers ready to take their place.

The company has taken down millions of listings and tens of thousands of sellers, resulting in a 50 basis point impact on the site. However, they believe it is a worthwhile investment in maintaining Etsy's uniqueness. The company will be publishing a transparency report next week. In regards to Q1 performance, there were some factors that benefited the quarter, such as tax refunds and an extra day, but there were also factors that will benefit Q2, such as Mother's Day. The company did not analyze the impact of these factors in a granular way, but they expect similar performance to Q1.

Silverman discusses the company's recent financial performance and mentions that the comps have been getting harder each month this quarter. He also talks about their efforts to improve the customer experience and increase app downloads, which they believe will lead to higher GMS. The company is prioritizing app downloads and plans to use more screen space to promote the benefits of the app and add more features to make it more valuable for customers.

Etsy has been offering app-only specials and sales, as well as first access to deals and drops on the app. They are focused on promoting the value propositions of the app to increase downloads and usage. Currently, their penetration on Etsy is lower than their peers, but they believe they can close this gap and drive more long-term value and frequency. When asked about their full-year guidance, they stated that they could potentially see some acceleration in the second half of the year, but the margin of error is narrow and they are cautiously giving a range of slightly better or worse than Q2. They did not specify if they could reach flat or positive GMS by year-end.

The company is optimistic about its future due to planned product and marketing initiatives, but has not seen growth in recent months. They are uncertain about the impact of external factors and may need to be more aggressive in their strategies to achieve growth.

The speaker is asking if the company is willing to spend more on marketing now that they have a better understanding of the market and have made necessary changes. The CEO responds by saying that their internal focus is on being bold and fast, and they have already made bold moves such as launching a new experience and improving quality. They also plan to launch a loyalty program in beta.

The economic model of a third-party seller is different from that of a first-party seller, and the company is focusing on creating unique and attention-grabbing customer experiences. They are also being strategic about their marketing spending and minimizing waste in order to make the most of their resources. Every year, they make tough decisions about which areas to focus on in order to drive growth.

The team at Etsy has a lot of confidence in the work they did last year, which they believe drove $1.5 billion in incremental value. They are convinced that their work this year, with a smaller team, will drive even more growth. They are focused on getting customers to reconsider their perception of Etsy and come back more often. Rachel Glaser adds that they are building great products and marketing initiatives, and despite macro pressures, they are well-positioned for success. She also points to data showing a differentiation between lower and higher household incomes in terms of growth and behavior.

The company's GMS per buyer is still 25% higher than in 2019, despite a decrease in consumer discretionary spending. The company attributes this to their strong brand and initiatives, and the recent big game ad successfully sparked conversation about their new product, Gift Mode. The CEO and CFO both express satisfaction with the ad and its impact.

The company's big game ad for Etsy was a success and helped increase conversations and sales for gifting. The team's execution was praised, but it was also a strategic move to promote Etsy as a go-to for gifting. The company's focus on being bold and fast has become a common mindset, as seen in the quick development and launch of Gift Mode. The team initially planned to launch it in 2025, but with the CEO's support, they were able to launch it in 2024. This exemplifies the company's urgency and willingness to take risks. However, Gift Mode is still a work in progress and will continue to be improved upon.

The Easter holiday had a larger impact on the company's sales in March than expected, but it also provided a stronger boost to sales in April. This was a bigger impact for the company compared to other businesses, but the specific reasons for this are unknown. However, the timing of Easter falling between the first and second quarter was the only reason it had any significant effect on the company's sales.

Etsy executives Rachel Glaser and Josh Silverman explain that the company's lower sales in March were due to a timing shift caused by spring break and Easter. They believe this will have a positive impact on sales in April. They also mention that the team was able to build the Gift Mode feature in just four months using large language models, and hint at potential future developments in this area.

The use of large language models has been beneficial for Gift Mode, as it allows for quick generation of gift ideas for different personas. This has also helped with coding productivity. Additionally, the democratization of machine learning has been helpful in finding the best examples for gift ideas on Etsy. The engineering culture at Etsy allows for quick and agile development, which has contributed to the success of Gift Mode.

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