Etsy, Inc. (NASDAQ:ETSY) Goldman Sachs 2023 Communacopia & Technology Conference September 6, 2023 2:30 PM ET
Company Participants
Rachel Glaser – CFO
Conference Call Participants
Alexandra Steiger – Goldman Sachs
Alexandra Steiger
Great. So good morning, everyone. Thanks for joining us. My name is Alexandra Steiger, and I’m part of the U.S. Internet Research team at Goldman Sachs. We are very pleased to have Rachel Glaser, CFO of Etsy with us today. Good to see you, and welcome to our conference.
Rachel Glaser
Thank you, and thank you for having us.
Question-and-Answer Session
Q – Alexandra Steiger
So Etsy is now 3x the size versus pre-COVID from an annual revenue perspective. Given the scale of the business today, how should we think about Etsy’s broader market positioning within e-commerce and its long-term growth opportunity?
Rachel Glaser
I’m going to answer. But before I do, I’m just going to mention that look at our safe harbor on Etsy’s IR website. I’m always told to say that by our General Counsel. So it’s there for your reading pleasure.
And I’ll start very high level. I know you’ve got a whole bunch of questions and we’ll dive deeper. But I think there’s 3 things I want to point out at the top. So for starters, Etsy is a highly differentiated e-commerce site. We’re hard to think of another company that’s precisely like Etsy, we’re you shock your values with Etsy, there’s a human being at the other end of every purchase that you make where you can actually learn about the providence of your item and get confidence that it’s going to be made to your exact specification and customize and personalize in any way that you want. And we’re uniquely suited to serve things like gifting occasions and to give things that are unique to your very own style.
And the second thing I want to point out is that we’re in an enormous market opportunity. So we’ve talked about our addressable market begins with a T, not a B, that there’s trillions of dollars when you look at the categories we’re in. We talk about core categories, but we’re in many more categories than that. And we talk about 7 core markets, but we’re in many more markets than that. And we talk about online versus offline, but if you take both together, because people more and more blur those lines it’s really trillions of dollars that are available and we are something in the $13 billion on a consolidated basis in total. So we’re barely penetrated in this enormous market. But even if you distill that down into online core categories, people shopping for special, it’s still $200 billion, and we’re really barely scratching the surface there.
And the last thing, if you — maybe you’re new to the Etsy story or maybe you’re not, I’m just going to remind you that Etsy had a — like a huge — it was one of the pandemic winners, let’s call it. We had a huge surge in the size of our audience, the size of our customers, the size of our GMS during 2020, 2021, 2022. And we’ve really hung on to most of that. So if you look at the GMS CAGR on a year-over — 4-year basis, it’s over 29%, revenue is over 35% on a CAGR basis, and EBITDA is a 43% growth on our 4-year CAGR. So we’ve — we guided to a little bit hair of — to the positive side at the midpoint of our guidance. So we’re just beginning to grow. But we’re growing over this enormous base. And just as a reminder, in 2019, we gave long-term guidance that said, we would be — GMS would be on average and over time, 16% to 20% growth and I said 29% 4-year CAGR. So we’re really surpassing our own external goals.
Alexandra Steiger
Before diving more into the business, I briefly want to touch on just the broader macro environment. Can you speak to what you’re seeing in terms of headwinds affecting discretionary consumer spending? And are you concerned about the help your active buyer base into the second half of this year and potentially into next year?
Rachel Glaser
Yes. So macro, macro, macro, it’s like people saying real estate location, location, location. Right now, it’s macro, macro, macro. I mean there’s very clear data that suggests we’ve had heavy macro headwind and particularly affecting buyers with lower household income. We talked about that on our last call. The data clearly shows that there’s growth in buyers with higher household incomes in GMS and there’s declines in buyers with lower household income so it’s really quite telling. We see lots of external data that says people are spending, but they’re spending on heavily on essential, health care, grocery, gasoline. So Etsy is none of those things. Certainly, you can buy diapers on Etsy if you want to, but for the most part, you’re going to another e-commerce player to buy those things.
When we look at data we see, there’s growth in e-commerce, but if you strip out the really large sites that have blended in grocery or heavy orientation towards essentials and you look just more at pure-play e-commerce sites Etsy is holding its own, sometimes winning, sometimes just shy, but we’re — the metrics are stable and solid. We talked about a lot of positives on our last call in spite of the macro environment that we’re in. So for instance, we had our highest ever active buyer count at the end of Q2.
We grew active buyers for the second sequential quarter. We had a positive growth in each of May, June and July. So after having declines, we turned a corner and we had positive growth in those 3 quarters, up 3 months. We had — we reactivated an additional 1 million buyers over the prior year. And we saw, even though the metrics that sort of indicate frequency, which are GMS per buyer and habitual buyers, even though they’re still down slightly, they are improving sequentially. I think we were just about flat on GMS for buyers. So things are trending in the right direction in spite of heavy macro headwinds. Macro headwinds are cyclical. So that means cyclical is cyclical. It means it’s temporal. It’s a thing that will pass. The underlying strength and the fundamentals of Etsy’s business continue to be very strong.
Alexandra Steiger
Somewhat related to that question. We have seen some of your largest categories, including home and living, craft supplies, apparel and accessories, remaining under a lot of pressure. That being said in the past, you spoke about that Etsy has been gaining share in those categories. Can you just expand on that comment? And what do you think explains those share gains?
Rachel Glaser
Yes. So just to set context, we — Home & Living and craft supplies, we said we’re still down a bit, but we’re actually down less than they were in the prior quarter. So they’re starting to come back around. Home & Living is the largest of our 6 core categories. I think it represents something close to 40% of our total GMS. During the pandemic period, people did nothing but stay at home and set up home offices and fix up their gardens and do craps with their kids. And I think those are the first things to be left by the wayside when people could break free and travel again and have in-person experiences in restaurants and other retail. And it’s not surprising to us that you would see those things be neglected a little bit right now.
This is a very promotional and discount-oriented consumer during this macro period, these macro headwinds. We’ve seen lots and lots of deals being made. And Etsy hasn’t traditionally — when you think about a typical retailer it competes on convenience so that might be speed of shipping, they compete on price, and they compete on quality. Those are the 3 things the retailer or e-commerce player can compete on. Etsy really has — our secret sauce is in the quality and the differentiation we give from handcrafted unique special items. We haven’t really competed or tried to compete on price. But in this environment, we’ve started to lean a little bit into discounting. And I think that’s what we’re seeing a little bit in those categories with other e-commerce players is that things are 50%, 65% off. And that’s not where we have played.
We recently just did a home page promotional offering where we were displaying things that were 40% of much larger percentages off. These are at — not on Etsy’s P&L, but their seller offers. And we did some Labor Day promotion that we were advertising on television. And we try to lean into that moment where people are looking for that kind of discount. But we think we have really significant and tremendous things to offer in each of those categories. I’ll talk more about some of the things that we’re doing, but just to give a teaser. We know that the we have 115 million items on Etsy. I think the average search result is something like 10,000. And so we know that the highest quality on Etsy, the highest quality idle on Etsy convert roughly 2 times higher than just the general Corpus. And so we are curating through people and through AI, the sort of the best of Etsy library and serving that at the top.
And so when you apply that to certain categories like home and living or you think about a horizontal category like gifting and you’re able to apply a much more curated result at the top, either through the search result itself or through gift guides, through a gifting assistant. We’re expecting to see a significantly higher increase in conversion rate. We know frequency response to that because we get more repeat as habitual buyers for people that shop on those high-quality items. So that’s an example of how we think we’re going to move the needle in some of those categories.
Alexandra Steiger
Great. Let’s pivot to Etsy’s international business. So you continue to see great momentum and traction in international markets with a number of markets that are growing nicely despite everything we just talked about on the macro side. Can you walk us through what you believe is driving that growth and why trend lines in these markets diverge from what you’re seeing in the U.S.?
Rachel Glaser
Yes. We’re excited about our international growth. We said International grew 5% last quarter. That’s — we call it non-U.S. because we define international as any transaction in which the buyer or the seller or both were outside of the U.S. The U.K. and Germany have climbed up to being a top 10 market, and their awareness levels have actually grown significantly during this time. We don’t spend money or apply ourselves to seller acquisition or listing acquisition in these markets. It happens organically. And that is a — once we get the supply side to sort of equilibrium with the demand side, you get a really nice flywheel going where you can serve up local results to a local searcher and the conversion rate just naturally goes up. And when that happens, when conversion rate goes up, you’re able to spend more on performance marketing in both of those markets, we’ve also tried some above-the-line brand marketing.
And so that’s really gotten those markets going, and we’re seeing some nice positive growth in France as well. So the next frontier. And then in addition to that, we’ve been able to spend performance marketing effectively in noncore markets. And so we’ve seen really nice growth in places like Switzerland, Austria, the Netherlands and some other countries just by turning a little bit of performance marketing on in those places and doing nothing else. All of our product, all of our localization is done centrally through our domestic product teams, mostly in Brooklyn. So we don’t have boots on the ground in those markets. So it’s a nice, efficient opportunity.
The downside of this is that new buyers and particularly new buyers in international, their spend per buyer is just naturally lower because they haven’t matured yet to be a repeat in a frequent buyer. And so it does have some downward pressure on our GMS per buyer because we’re seeing such high, nice growth in markets that have lower GMS per buyer. But we, nevertheless, loves having international growth because we’ll be able to — we build the foundation first, and we’ll be able to get the frequency to grow and improve from that basis.
Alexandra Steiger
My next question is on competition. So there have been a number of reports on how e-commerce is becoming more and more competitive in the U.S. and Western Europe with several new entrants that are focused on cross-border and that are heavily investing to gain market share. Are you seeing any impact from this? And how do you relieve Etsy’s position against that backdrop?
Rachel Glaser
So first of all, we love competition. I think it grows the e-commerce pie. The more people who shop on e-commerce, the more people kind of learn that they learn to wait. They’re going to order that item. It’s not going to — you can’t have the instant gratification of pulling it off the shelf. We’ve always fared well with existing competitors out there. There’s always been lots of places to shop, and there will always be lots of places to shop. So we do love competition. It is a very promotional discounting environment right now. And if you’re referring to some of the new entrants coming from China, they are discounting and promoting quite heavily at quite sort of price points.
And so we do see that. But we don’t overlap with those. If we’re talking specifically about Temu or Shein, we don’t, our customer base is very little overlap. We can study that data and we see that. but perhaps we are competing with the dollar, the scarcer dollars in people’s wallets in this highly macro headwind environment. And so people have a choice of I need to buy — pay my rent. I need to buy growth reason. Here’s this thing that’s 60% off. That’s all I have. I’m not going to spend money right now buying the new sofa that I’ve been eyeing on Etsy. And so back to the macro point, it just from that perspective, it may be us taking more share of consumer wallet right in this moment. Again, temporal, cyclical. We think it’s a moment. We don’t see significant competition. We don’t see CPCs going up significantly, for instance, on our performance marketing. And just as a reminder, Etsy’s audience, our traffic comes 80% to us organically. So our marketing models are dynamic. If CPCs go up, we would naturally pull back, but we’re not seeing that at the moment. But our — we always have this rich audience that comes to us direct and through a SEO as well.
Alexandra Steiger
Moving on to your guide. So your Q3 guide provided in August points to improving trends. However, with GMS growing a little under 1% year-over-year at the midpoint of the guide, we’re still far from historical growth levels. First, can you talk about the factors that informed your view for Q3? And then even more importantly, can you help investors think through the building blocks of a return to double-digit GMS growth?
Rachel Glaser
Yes. Yes. Thank you. So we’ve been guiding 1 quarter at a time because we feel like it’s a pretty volatile environment. We always try to include in our guide during this time, the most recent months. So we — as I said, we did say it when we did our call in very early August that May, June and July had all seen positive growth. And we gave a range of negative 4, positive 2 with 0.7 at the midpoint. We — sorry, our guide was predicated on that we thought that the macro trends would stay stable. So at the 0.7 at the midpoint, stable macro if macro were to get worse, that’s where we’d end up at the low point of our guide and if macro were to improve, that’s where we’d end up at the high point of our guide. So that’s on GMS.
We guided to healthy revenue growth, I believe, it was 6% at the midpoint. And then on the bottom line, we’ve guided to 27% to 28% margins. I can talk more about margins in just a bit. We — we’re — we didn’t give fourth quarter guide. We didn’t — we haven’t updated our long-term guide. We’re super excited about the size of the opportunity. And we — as I said earlier, we have a number of positive green shoots that we think are really indicated a very strong, robust Etsy future.
Alexandra Steiger
Let’s dive a little more into your — some of your key KPIs and you’ve already briefly talked about active buyer growth. but I do want to double-click on that. So how should we think about the puts and takes influencing your near-term trajectory of active buyer additions, especially given all the work you’re doing around improving the user experience. And zooming out, what do you see as kind of like the biggest GMS driver over the next few quarters?
Rachel Glaser
Yes. So great questions. I have so many answers to this question. But I — so let me start that we more than doubled the size of our active buyers. So we’re over 90 million active buyers. And by the way, we have about 200 million unique visits to the site every single month. So there’s a nice opportunity right there that 200 million people come to visit us. And on a trailing 12-month basis, we have 90 million active buyers. So a lot of people go away without buying anything.
We have a — the significant number of our buyers are what we call habitual. So that means people come and shop 6 times in a year, and they spend $200 or more in a year. And today, that number has almost doubled from before the pandemic as far as the total number for visuals. They represent about 35% of our total GMS but only about 8% of our total buyer base. And they’re about twice as many as we had before the pandemic. Now they are — we have been reporting that they’ve been decreasing, although this last quarter, they decreased less. It seems to be coming back around. On average, when somebody drops out of that habitual buyer category, they don’t churn out of Etsy. Our churn is quite healthy. They become what we call repeat. In fact, people never actually churn out of Etsy forever because we keep reactivating them.
I — we’ve talked about the number of reactivations with 1 million more reactivations in the last quarter than it was in the year before. And I think, overall, we’ve continued to grow reactivated buyers quite nicely over the past year or so. So we have a really nice pool of people that never actually leave Etsy, and we have buyers that are highly valuable to Etsy, but are very few in number. I think if we only got 1 million more people to buy 6 times a year instead of 5 times a year of how much value that creates for us. I always say on average, people stop 3 times a year, buyers shop 3 times a year. I always say, why are they not chopping once a month, I can easily think of holidays, occasions, seasons, every month, there’s a birthday of every week, there’s a birthday, every week. There’s an anniversary. There’s things that happen sort of in perpetuity. And we want people to have the habituation to remember Etsy first for those things.
So we’re really leaning into — we’ve talked about our 6 core categories. But now we’re leaning into 3 primary purchase occasions, and that’s gifting, style, and Home & Living and really leaning into owning those things. So thinking about gifting that can you think of a site that actually owns gifting, but you always think of that’s where I’m going from my gift, why shouldn’t Etsy be the primary place when you think about for gifting. And there’s so much that we can do in that area, especially given AI and ML to be your gifting assistant so that you can create a finally — highly personalized and curated gift selection from an enormous range of choices and let us make the experience much easier on the purchase journey, but also on the post purchase journey so that you feel very confident you’re going to get it on time, you’re going to get it quickly, and you can — it’s returnable. So we’re leaning into gifting quite heavily. And compared with that, the investment we make in marketing to make that gifting top of mind. We’re planning to lean in and really make Etsy the place to really think about as the first place you go when you think about gifting.
Alexandra Steiger
So we just addressed active buyer growth. I briefly want to touch on GMS per buyer. On the 1 hand, you often point to cohorts showing higher frequency over time and the potential to actually reach levels of annual expense that are more comparable to other e-commerce side, which would be a substantial tailwind on the other side you talked about it earlier, there is an impact from international where buyers come in at a lower GMS provider. Given all these factors, how would you encourage investors to think about the evolution of consolidated GMS provider over time?
Rachel Glaser
No, I think GMS for buyer is — I call it an output metric because GMS can grow significantly, and that number can actually contract just because you’ve grown into enormous countries where the average order value might be might be a lot lower. So I don’t think it’s the main thing to look at. I think the main thing to look at really is GMS growth. And the second thing that we’re like almost all guns blazing on the concept of frequency, and I gave some — to me that — let me zoom out for a second. There’s a number of ways to grow GMS. The first 1 is more buyers period. The second 1 is more GMS per buyer, which can happen with average order value increases or frequency increases. Then we look at revenue because we — certain ways we can grow revenue without influencing GMS. And then lastly, growing profit.
And we have all guns blazing on all 4 of those things. On frequency, there’s a major, I’d say, thrust in the company to be thinking about what are the ways that are going to really unlock increased frequency. And it’s really the 12 punch of marketing plus product, and there’s a significant number of squads many of them, AI, turbocharged to bring the best of Etsy to the top of the search result and create a much more curated experience. So you’re seeing that on the top and then applying that to categories like gifting and Home & Living.
Alexandra Steiger
You just mentioned AI. So let’s double-click on that. Can you walk us through some of your AI product initiatives? And how do you see these initiatives translating into either a new buyer growth increased purchase frequency or higher GMS provider?
Rachel Glaser
Yes. So I think AI is uniquely suited to a company like Etsy, where we don’t have structured data, and we don’t have MSRPs. We don’t have SKU numbers and each one is like a snowflake. So — and it’s a serial. You sell one and then it’s gone forever, and somebody can make another one, but it’s not like you have hundreds of dozens of a single item in a stack that you know you can sell. And the average search result on Etsy is over 10,000 items. So I’ve always said some people come to Etsy and they love it. It’s like a treasure hunt or the same feeling you get if you want to spend an afternoon in a flee market. But most people don’t have a whole afternoon to pick out the gift that they need or the table cloth they need for their Christmas feast that they’re going to have this year. and they want to get to the good stuff faster.
So think about AI, not only — we’ve been working on at this for a long time. And in fact, I was asked this morning, I would give an example of something that we’ve really leaned our — put our shoulder into we saw a significant result. And the answer is search. Now that has happened in very small increment over time, but the fact that we can now infer what you mean by your query, not just take the exact words, but cocktail — men’s cocktail a tire will serve up the results that is a blue blazer, is an example of using machine learning to get to that answer blue and blazer, we’re neither of the words in that query. The fact that we can understand a lot about the item itself through photos through price points through thematic, it’s not a colo or it’s boho or whatever. I know a lot about the seller, what’s their shipping policy, what’s their shipping speed, what’s their — what’s the quality of the photo they put there, but also know a lot about the buyer what is this person favored in, what is this person shop for most recently at what price point, what code did they come from? And then amalgamate all those things together through x walk. That’s all machine learning and AI already in action. But we are new technology, open AI is allowing us to get to up-level all of that and apply it to things like a gifting assistant, being able to use AI to curate from 115 million items, the best of Etsy library from being able to suggest choices in Home & Living that might match something that we already know that you’ve bought.
So we’re working a lot across AI. We really like the concept of democratizing AI at Etsy so that it’s not a group you go to, to ask for their services is that every engineer knows how to use AI and machine learning. So we’re heavily focused on that, and we’re excited about some of the things we’ll be talking about on our next call related to how we’re applying it to gifting and curation.
Alexandra Steiger
Let’s pivot to take rates for a moment. So after the transaction rate increase last year, how do you think about your current transaction pricing structure relative to the value you’re providing to sellers? And what is the broader messaging around take rates from here?
Rachel Glaser
Yes. Thank you. We guided to flat take rates. And we’ve actually been able to take take rate up almost every single year since we’ve been a management team. It’s not always a take rate increase through change in pricing, but sometimes it’s the take rate increase through improvement in an existing service or a take rate increase through adding a new service. So a good example that has really been a helpful factor in driving take rate up has been how Etsy Ads has gotten to be a better and better product. So through the same improvements we’ve seen in search on the website itself, we apply those improvements into the Etsy Ads algorithm, and that makes conversion rate go up, which allows us to drive a higher CPC but still deliver really strong [ROAS] to our sellers. And so Etsy Ads has continued to contribute revenue growth for many quarters now.
Another example would be something like Etsy Payments, where we’ve gradually expanded the coverage of Etsy Payments to more countries. And so right now, we’re at about 93%. 93%of our GMS is running through Etsy Payments. It has a take rate of something in the neighborhood of 4% to 5%. But as we get that last mile of countries, that’s going to grow our take rate. There are services that we don’t offer to me. You can look at the rate cards of other companies, and you can see there’s potentially new services that we could choose to offer to our sellers. And then there’s been some pricing. We’ve done 2 pricing increases. And those pricing increases have driven higher take rate, and that also enables us to drive lifetime value up and enables us to spend more on marketing.
Overall, we always say that we want to give a fair exchange of value. We don’t have a policy or a process in our company when we say every year, we take a price increase and just suck it up. We say if we’re going to decrease the share that we take from you. We’re going to give you something for it. And in the case of just a straight pricing increase, what they’ve — we’ve given them for it has been more investment in marketing, so driving more traffic to their site which is a win-win for Etsy and for sellers, and we kind of live by that credo is the fare exchange of value.
Alexandra Steiger
Before moving on to some of your investment priorities, I also wanted to ask you about margins. So can you talk about some of the puts and takes around your Q3 EBITDA margin guide of 27% to 28%. And how do you broadly think about striking a balance between your current period profitability and investing against some product initiatives and also marketing.
Rachel Glaser
So ’27 to ’28 — we’ve talked a lot about our subsidiaries are about 300 to 400 basis points of contraction. So when you think about Etsy stand-alone, the margin is currently over the guide we gave would be currently over 30%. And when we gave long-term guidance in 2019, we said our long-term goal was 30%. So we got to that number much, much sooner. And at that time, we were not using any cloud services for — we were on-prem in data centers, and that was running through our balance sheet and now our cloud is running through our P&L. So we’re still getting to the 30% margins with all of these incremental costs running through the P&L.
One might say are we not investing enough. Like are there things. So you’ve seen we’ve got leverage in marketing, but we’re actually leaning into product. And the question might be, is there more we should be investing in marketing. And I think we’re at the efficient frontier on our performance marketing. But perhaps there is a question about whether we should spend more on ATL and just see what happens. So that’s still a thing that we could do. We haven’t done that before, and we really use the discipline of we spend to the last marginal dollar if that dollar is still crossing our ROI threshold, we’ll keep spending. And when we hit that threshold, we pull back. And we’re a little — it’s not quite as precise on the television I said ATL is above the line. So we’re not quite as precise on the television marketing, but that is something that we could decide to lean into more heavily.
Alexandra Steiger
Great. I do want to squeeze in 1 question on Reverb and Depop. You recently sold Elo7. On the other hand, you’re continuing to invest behind these two other brands. Can you just update us on any key messaging around the evolution of your house of brand strategy? And how should we think about the levels of investments from here.
Rachel Glaser
Yes. So our thought process on investing in those other brands was that we have a significant amount of in-house expertise on how to run 2-sided marketplaces, and we feel like the we want to look to similar businesses with similar marketplace characteristics where we can add that expertise into those businesses and help them grow. And Elo7 had those characteristics. Reverb have those characteristics. Depop had those characteristics.
The second thing we look for are, can they be number 1 or number 2 in their space. And that’s true for Reverb. That’s true for Depop. And we thought it could be true for Elo7 as they came out of the pandemic. They are highly event-based business. And we thought when life resumed to normal that we’d be able to kind of turbocharge them and get them to be number 1 or 2 in that space. It didn’t — our theory didn’t pan out. And I think you could say about us that we were willing to take the bets, but then we’re really — we’ll call it win faster, fail faster fast, but we want to know which way we’re going.
And so with Elo7, we are really pleased that we’re able to land them in the hands of another marketplace. Their sellers landed nicely. Their employees landed nicely, and that was a good outcome for Elo7. We’re still extremely excited about Depop. They’ve had really nice growth and traction in — particularly in the U.S. Reverb is number 1 in the online musical instrument space for used gear, super cool and if anybody saw name Jack Anthony the music producer for Taylor Swift was saying, if I spent — I think I spent all my money in all my time just surfing Reverb and he said that online. So it’s a really cool site. So it does have those characteristics can be number 1 or 2 in the space, and we can add our expertise. We really put a lot of Etsy’s experienced executives into the depo marketplace and really been transferring a lot of knowledge.
Alexandra Steiger
Great. Well, with that, thank you so much for joining us.
Rachel Glaser
Thank you for having me. Was nice to talk to you.
Alexandra Steiger
Thank you.
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