Josh Silverman - Chief Executive Officer Rachel Glaser - Chief Financial Officer Gabe Ratcliff - Director of Investor Relations Deb Wasser - VP of Investor Relations

Hi everyone! Welcome to Etsy's Second Quarter Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations and joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Gabe Ratcliff, our Director of Investor Relations. Todays prepared remarks have been pre-recorded. The slide deck has also been posted on our website for your reference. Once we are finished with Josh and Rachel’s presentations, we will transition to a live video webcast Q&A session. Question can be submitted by the Q&A window chat displayed on your screen. Feel free to use it at any time, as it will remain open throughout the entire conference call. I'll be reading your questions and Gabe will help me try to get to as many as we can. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 on our communities, business and strategy, marketing and product initiatives, our future financial results, anticipated investments and the timing and benefits of our seller initiatives, and strategic benefit and impact on our financial performance of Reverb. Our actual results may differ materially. Forward looking statements involve risks and uncertainties, which are described in our press release and our 10-Q filed with the SEC on May 7 and subsequent reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them. Also, during the call we'll present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR website along with the replay of this call. With that, I'll turn it over to Josh.

Thanks a lot Deb, and hello everyone! Etsy’s mission is keeping commerce human, and we feel that that mission is even more relevant today than it's ever been. At a time when our sellers rely on income from Etsy to provide meaningful income to their families, and at a time when there are so many forces that are pulling us apart and dividing us, the opportunity to create human connection through commerce we believe is incredibly powerful and motivates us as a team every single day. I'm going to share with you some pretty exceptional financial results for the second quarter. But before I do that, I wanted to pause for just a second on our social impact goals, because we're as proud of how we achieved these results, as we are of the results themselves. We apply the same focus and accountability to our social impact goals as we do to the rest of our business, because we believe very strongly that being a great corporate citizen makes us an even stronger business. And so for the past many years we have been setting goals, we've been publicly announcing those goals and we've been publicly reporting the results and progress towards those goals as part and parcel of our annual report, and we feel great about the progress we've made, although there's much more work to be done. We think that that's a big part of why we've been as successful as we've been in the second quarter and in prior quarters as well. Sellers across the consolidated Etsy marketplaces sold $2.7 billion worth of merchandise in the second quarter, up 147% year-over-year. That resulted in $429 million of revenue and over $150 million of EBITDA. I'm proud to report the productivity across every team stayed very strong as…

Thanks Josh and hello everyone. My commentary today will cover consolidated results as well as key drivers of performance, which include Etsy’s standalone results where appropriate. You can find select details of Reverb's contributions in our press release and soon to be filed 10-Q. I look forward to speaking to many of you soon in a less scripted format, but for today with so many numbers to report, I’ll be reading my prepared remarks. Q2 is a spectacular quarter, breaking records for new highs in GMS, revenue and EBITDA. On a consolidated basis, Etsy’s second quarter GMS grew 147% to $2.7 billion. Revenue grew 137% to $429 million and we delivered adjusted EBITDA of nearly $151 million or margins of 35%. Both the Etsy standalone and Reverb marketplaces saw unprecedented growth in the second quarter, with Etsy and Reverb delivering $2.5 billion and $227 million in GMS respectively. Q2 was unexpected in many ways. On our last earnings call we outlined that with limited visibility we thought GMS worth might decelerate in May and June from the highs seen in April. In fact strong trends continued throughout the quarter. April GMS was up 136%, May was up 158% and June was up 142%. We saw those trends continue in July, which I'll talk about more when I get to guidance. Another point worth noting, particularly as you think about forecasting, while our overall results were very strong in Q2, we did experience significant volatility, mostly attributed to reopening and closing of local economies globally. For example, in the months of May and June we had a high of 151% and a low of 109%. Q2 is driven by growth in both marketplace and services revenue. Key drivers of growth were driven by an increase in GMS volume, Etsy payments and…

Great! Thanks Rachel. Hi everyone. So we're now going live. We have plenty of questions in the queue. So I'm not going to give it any time to take anymore. If you do want to put a question in, we’ll try to get some as well, but we really have plenty already. So the first one I'm going to turn to today is from Ed Yruma from KeyBank. So Ed wants to know if we can talk about the mask business intra quarter and extend exiting the quarter. Do we see a pick up as COVID impacted Southern States and has demand softened as masks have become more widely available?

I’m happy to start with that. Yeah, I mean I guess what I would say about masks is that it continues to be very volatile. The primary observation we have is that when government agencies like the CDC in the United States or similar agencies in international markets recommended mask usage. We do see a material increase in mask usage, a spike in mask purchases are around that time, but it does tend to fluctuate state-to-state, county-to-county, country-to-country to the point that it's pretty volatile and frankly quite hard to predict. So we've tried very hard this quarter and even last quarter to break out masks sales, because we know that you might want to model those differently as you think forward. It's just really hard to have a crystal ball around what’s going to happen with it in the future.

Okay great, thanks Josh. Next question comes from Rick Patel at Needham. Can you talk about what your sellers are saying about off-site ads and what gives you confidence that they see the value in paying the fee in order to see higher conversion. Can you expect to be more aggressive with this going forward in light of your momentum?

I'm happy to start, and then maybe Rachel if you want to pile-on. You know we’re really pleased with the response from off-site ads. As Rachel said, we have about a 2% opt out rate right now and what that indicates to us is that sellers are really seeing the value in the program and frankly we think they should, because we think it's a really valuable program for them. The return on ad spend is terrific. You know if you look at 12% to 15% of revenue being spent on performance marketing, that benchmarks really well to what a seller would normally have to spend if they were marketing their own website. But in addition to that, we take the risk. So if a seller were normally marketing their own website, they would typically pay per click and be on the hook as to whether or not that sale converted. So as that program has really rolled out and sellers have had a chance to experience it, I think they're seeing first hand that it is in fact really good value and sentiment continues to improve and so we are happy with how the program is going and the value that it’s delivering.

And I think the only thing I'd add there is that just remember for your models that we didn't start billing on offsite ads until May. So there was a month of the quarter that didn't include any of the incremental revenue from that, and the other little factor I put in there, is that you need a very well research and worked with sellers to gauge how – what their appetite is going to be for this product and how it would be received. And so we didn't roll out without noise, it just rolled out with the level of noise we had expected or slightly better than that. And so that the churn and opt out rates speak for themselves. So 98% and it’s something that we feel pretty good about.

Great, thanks Josh and Rachael. Okay, now from Jefferies. Okay, Etsy realized 18% operating leverage and had its highest ever quarterly EBITDA margin despite expanding marketing spend by nearly 150%. As a high level of scale and efficiencies that were achieved in Q2 increase your outlook for 30% or greater EBITDA margins by 2023 or what's your view on margin potential over the long term?

You want me to start Josh and then you can pile on.

Okay.

So first of all we gave guidance for Q3 and didn't even give guidance for Q4. So you can tell we are being cautious about – the future is unpredictable and we're definitely not giving 2021 guidance or guidance beyond 2021 and the guidance that we gave for Q3 by the way is a pretty wide ranging, we gave a 30 point range on GMS, so we talked about a lot of volatility. When we gave long term guidance though, I will say that we gave an average, you know on average and over time those were the rates that we would be at and we also, as Josh just mentioned a couple of questions ago, we took – several times we’ve called out how to think about mask sales which are probably a non-recurring. Now it may be part of our life for quite some time, but it’s probably non-recurring into perpetuity we hope, and so when you think about long term you might want to think about backing those numbers out of your models to look at what our base business would do.

Okay, next question from Nick Jones at Citi. How was Etsy’s free shipping initiative, for estimate [ph] COVID. Given the surge demand in GMS, are sellers more aware of the benefit of free shipping or due to the demand is free shipping less of a factor. That one is for you Josh.

Sure. So we're feeling really good about how free shipping is going and we’re grateful that we took it head-on in 2019 when we did, because I think it positioned us much better for this moment that we're in today. When buyers show up on Etsy, they are most of the time finding shipping prices that are aligned with their expectations and I think that’s really helping Etsy to rise to the moment right now. So we continue to see progress in free shipping and we highlighted – you know the highlight of the quarter was really presenting this concept of bundles. So when you're on a sellers shop looking at an item, we show you another item or two you could add to your cart that would tip you over to $35 that you would get free shipping and that showed positive progress. So I think that there's continued things we can do in shipping to help meet people's expectations on cost, but candidly that is not the friction point that it once was, because of the good work that we've done. When we look at top concerns or headwinds from buyers, shipping cost no longer is often cited as a top friction point. So we're turning our attention now to what are the next things on the list and for example expected delivery date is something that we hear a lot. Is this item going to arrive on time? What happens if it doesn't arrive on time? So we're turning more attention now to setting buyer expectations around when an item will arrive, making sure we have a variety of options for shipping speed, and also showing them if there's a particular date that they need to hit, here are things that can arrive in time for that date. Also I think in terms of keeping Etsy human, helping them to see the making process. You know Etsy may not be the fastest place to ship something, but there's a lot about having the product be made just for them and so giving them insight into where the product is in the fulfillment process, where it is in the making process, we think can actually build excitement and energy around the product even before it arrives. So you’ll see us focusing more in the coming quarters around that post-purchase experience as well.

Great, thanks Josh. Okay, this one is from Maria Ripps at Canaccord. You highlighted performance for a number of product categories, which is very helpful. Can you talk about product categories in terms of behavior of the customers you are seeing? Is there anything in the behavior pattern of new customers that would indicate whether they will stay with the platform longer term or not?

Yeah, great question, and you know Rachel gave some highlights on that in her prepared remarks. So we're trying to give you as much color as we can, so things like repurchase – repeat purchase rates are up very significantly year-over-year from where they were second quarter of 2019 and we feel great about that. Metrics like what percentage of customers are making four or more purchases from two or more categories, that metric is going very well as well, so we're really encouraged by that. But we also do acknowledge that this is anything but a normal time, and so you know how this will trend once you know people have more options again, it is impossible for anyone to predict with accuracy. And so what I can say is that we're working super hard to make sure that our customers have a fantastic customer experience and that we’re engaging them, learning what we can about them to deliver even more personalized experiences to get them to come back and that's really our whole focus right now.

And the only thing I'd add there is that some of the metrics we gave on non-mask sales, so I’m looking at really the core business and Josh gave a lot of information on how categories are performing, but we also said non-mask sales were up over 90% and the GMS per buyer on a trailing 12 month basis was accelerated to almost 6%, where it's been gradually ticking up. We saw a nice little lift in that metric too, which just reinforces the fact that people are coming back more frequently and sticking with the offering.

Okay, great. Moving on to a question from Lauren Cassel from Morgan Stanley. Can you quantify at a high level how much you reinvested either into marketing, technology and so forth into the business in the second quarter. You covered that on the call, but if you can talk about it a little bit more.

Rach, that’s if…

Sure, I can start with the numbers that we gave on the call. We significantly increased our marketing spend. In fact Q2 I think was our highest, is our high watermark on marketing spend for the company and you know you can do some back of the envelope math that will show that we're getting really healthy ROIs on spend, and it's even healthier when you think about if you do that back-in-the-envelope math, you’d just be looking at the in-quarter GMS from the in-quarter spend, but for every buyer that we acquire you get a nice tail on that buyer, more so even when you spend on brand marketing, so you can get a long tail after the fact. So we feel pretty confident that we're placing our bets in the right places. We've gotten our television spends the first time we broke out the brand marketing dollars, and on the television spend we triangulate or even you know from nine or 10 different sources we will pull data to make sure that we're getting to the right place, but the right answer on ROI. So we use our own data, we use the data of our media company. We lay it on brand tracker information so we can get sort of testimony from both Etsy buyers and non-Etsy buyers, and then we use panel data from iSpot to make sure that we're getting healthy return. We feel very, very good about returns we've been getting on that spend. Looking forward, we’re very likely to continue to spend, taking advantage of very interactive CPMs in the digital video and television, linear television markets and very attractive CPCs in the performance marketing and we’ll start to invest more in some of the international markets, particularly the U.K. and Germany, as well as use both brand creative and D.R. or performance related creative in tandem with each other. So we're pretty pleased with the performance we’ve been getting at that marketing spend.

And if I can pile on, you know we are all creatures of habit and shopping is largely habit driven. There are very few times in one's life when you have an opportunity to reshape their habits. You know the classic three are when you get married, when you move home, and when you have a baby, and otherwise your habits are pretty cemented and you're not really open to forming new habits. And so what this current moment has created is, it's created a moment when everyone's habits are up for grabs. Suddenly before you go buy anything, you've got to stop and think for yourself, where can I go to get that, and in that pause, Etsy is winning. If you can get someone to pause for 30 seconds and say where can I go, Etsy’s going to come to mind. But you know in more normal times you don't get 30 seconds. You've got maybe a fraction of a second. So the opportunity is if somebody has one second or less and you say where can you go to buy home décor, where can you go to buy jewelry, where can you go to buy a dress, where can you go to buy a gift for your mother, where can you go to buy toys for your kids? We want Etsy to be on the tip of people's tongues, and this is a moment to lean into that, and to try to rewire those habits, because we know that if we are on the tip of their tongues and they come fast, they are going to have a great experience. It's just about that top of mind consideration. So as Rachel said, we spent at a higher level than we ever had in the second quarter and we feel very good about the returns that we got. We are always very focused on looking at returns and in particular, at the margin. If we spend one more dollar what would have happened. And so given that we feel quite good about the returns we got in the second quarter, we're going to push harder in the third quarter and see what happens. If we go even deeper into some of our marketing spend, both in terms of sort of real time metrics and the brand metrics and the consideration metrics, because we think that this is a moment that we really want to rise to and try to really lean into.

Okay, great, things guys. Next one is from Jason Helfstein from Oppenheimer. How much of the improvement in checkout conversion are top of the funnel checkout can be traced to product and service changes as a result of the cloud migration? What other product changes can you highlight?

I can speak about a couple. First, I mean the cloud migration is a great example of Etsy making a long term investment. It took us several years of work and of course it costs money, but it also took material time from our engineering team. But had we not, and of course no one could have anticipated what would happen in April and in the second quarter, but had we not made that investment when traffic doubled on the site basically overnight. If we had been in our own data centers without the ability to add capacity, you know our site would have slowed to a crawl and this moment would have passed us by. So I think it’s a great example of us making investments both for the near term, but also for the long term in balance that set Etsy up to really achieve its full potential, and we're going to continue to have a very balanced investment portfolio to make sure that we are well set up to achieve our full potential. When you look at conversion rate, and conversion rate was up significantly in this quarter, I think part of that is there are fewer places to shop and so people are arriving with a fairly high degree of intent. But I also think our search engines are just getting better and I don't know that I need to kick out every quarter with you on algorithms, but I will say that we've launched even more robust machine learning algorithms that are consuming more data, that are doing just a better job of serving search results to you. We're doing a better job of organizing those search results in ways that it feels to you a little bit easier to digest or to buyers easier to digest, and we're doing a better job of streamlining - What's the information that needs to be on the page and what information is extraneous or distracting? We are constantly experimenting with that. Frankly, it's just getting better and that's allowing people to make more confident purchase decisions, which is undoubtedly helping with our conversion rate.

Hey Josh, this next one is sort of a follow-up on that one a little bit, so I’ll just go with this one. It’s from Rick Patel at Needham, a follow-up from him. Can you provide more color on the initiatives toward personalization, associated searches and Favorites? It sounds like a stepping stone to product discovery and inspiration. How do you see these features evolving and do you see this as a multi-year journey?

Definitely a multiyear journey, and there's at least two pieces. We've got to know more about you and we've got to know more about the items. And so in terms of learning more about you, allowing you to leave bread crumbs, tell us more about yourself, things like what are your favorites? What do you add to what lists also tells us lot. How do you name that list? Is this value oriented, you know mid-century modern or did you name it you know things from my living room, so all of that gives us a lot more data about you. By the way there's other things that we can start to incorporate that we haven’t. Things like size of wallet that might inform what kind of average purchase price we want to be showing, what part of the country you live in, which might also inform taste. Those kinds of things which may be sound pretty basic, we have not historically incorporated into our search engines. So historically and up until very, very recent times, everyone in America searching for a certain key word would to get the same search results. And so there's obviously an opportunity to do much, much better than that, and you're seeing us now gain, ask buyers for bread crumbs, ask them to tell us a little bit about themselves, their taste, their interest as well as our ability to intuit things about them that are going to allows us to be more personalized. The other piece is how much do we actually understand about the item itself, and we've talked in the past a little bit about knowledge base. But what we mean by that is that we have been extremely reliant on the actual words that a seller inputs when they describe…

Okay, thanks Josh. Next one is from Laura Champine at Loop. Can we get more color around the potential long term impact of offsite ads to margins and more granularity about the impact they have in the second quarter?

I’ll grab that one. So we – first of all, the second quarter, as a reminder you're looking at two-thirds of the quarter from the incremental revenue we generated from offsite ads. We on the other hand, we continue to spend. So we are out there spending our marketing dollars. You'll see the expense in the marketing line and then that's offset by incremental revenue and so some of the accounting that you might see happening is that we formally had Google shopping products and revenue with complete offset to revenue and our cost of revenue line. So with revenue we do our margin, that’s gone away now. We now have revenue at a margin, but the expense is hitting marketing, not our gross margin line. We would expect, you know we've seen great performance from this product, we’ve seem very low churn as a reminder. So every time there's a successful ad that we – a successful POA that we place on one of the offsite channels that we use, a seller will be charged either 12% or 15% of that transaction fee if that sales is successful on their site. So if we buy that POA and it’s not successful or we buy that POA and its successful on somebody else's listing, there's no transaction fee that gets transferred over. So there is nice performance. It's not 100% passed and crossed you know.

Okay, great. Thanks Rachel. Next one is from Rick Patel at Needham. Can you talk about Etsy’s performance in the markets where store re-openings are further along? Have consumers in those markets remained loyal to digital platforms and particularly to Etsy. How do you reinforce your success to make sure you retain these customers?

Rachel, are you going to take that one?

Yeah, I can take it. So we gave a couple of examples, both in France and Texas. So in France we saw there was an impact as both – as that market reopened or has that – I’d say a soft impact to Etsy’s performance in that market as opposed to a state like Texas that reopened, but it's been pretty stable, volatile, but the overall trend line has been stable and there is a slide in our presentation deck that shows that dynamic. I think we're going to see states reopening and closing, reopening and closing and we don't know a lot about what's happening with return to work scenarios and return to school scenarios, which actually might drive more demand for things that Etsy sells in the nature of personal care or personal protective gear. Even with masks, even though there's no more competition with masks, that might be something that sticks with us for a very long time. People might need to wear masks for a very long time. We are starting to see things like accessories, so a hair scruncy that matches the mask. I might have made this joke on the last quarter call, but I started to see trikini which is a mask plus a bikini that all match each other. We started to see face shields and other products that all have to do with the current environment that we're in. So the re-openings and closings by themselves don't necessarily predict what will happen to the performance on the site, and then going back again to the point you made about, there's a core business there completely unrelated to the mask sales that just the line between online and offline has virtually disappeared. People realize that Etsy’s a place to buy anything really and our core – our top core six categories are now over 90%, excluding masks.

So I’ll just pule on there a little bit to say, it has been extraordinarily difficult to look and find one-to-one relationships if a state reopens and you see that more starkly in France and others that’s why we kind of picked that as one example and that’s what’s made all of this so tricky. There is a de-sell implied in our Q3 guidance and we believe that that is appropriate. You know although it's very difficult to find a light switch effect, where you know a state reopens and you see a sudden change, we do see some deceleration as states reopen, as you would expect, we do see some deceleration. When they close back down again, we see some acceleration and so our guidance implies some level of deceleration in the third quarter and based on what we see happening, we think that that’s appropriate and to the best of our knowledge that reflects what we think is most likely to happen, given the very wide lenses that we gave 30 percentage point range in guidance. The other thing that I would point out is federal stimulus, which has been very meaningful and you know again it’s hard to pin down how much a $600 weekly check is making a difference, but we have some indicators to suggest that it is making some difference, and so if those checks were to stop or be reduced, you know we also think that that could have an impact, so all those are things that we are thinking about, in factoring in as we look forward.

Okay. We are just about out of time, so I’m going to squeeze in one more from Ygal Arounian from Wedbush. With the influx of new buyers coming to Etsy, are there one or two things you would like to call out that you think has the best ability to bring new and reactivated buyers back to regular Etsy shoppers. I know there are pockets of users within these cohorts that you think are more attractive going forward that you are marking too or are you just treating everyone equally?

Well as I said, I think we are really trying to get past the day where we treat everyone equally. We have been treating everyone equally up until now, and we are now gaining the tools to be able to start to differentiate and personalize. Again, we value every buyer and we value every seller, but that doesn't mean that they want to see the same things from us, and in fact given the vastness of the Etsy market place, they certainly don't want to see the same things. So the more we can learn about the buyers, the more we can match them with the sellers and the items that are most likely to love, and we are just starting. Things like saved searches, favoriting, these are very powerful, but they are – you know they're just the beginning of the kind of things that we can do to start to understand what a buyer likes. By the way, once we know that, if a buyer has favorited something in particular, if we see them searching for something on Google or we find them on Facebook, our opportunity to be more specific in terms of what we market to them have a better sense of what we would bid to be in front of them again and to reengage them. What's that second purchase worth? What's that sixth purchase worth? You know we're starting to get much more specific about thinking about the incremental value of getting someone to that next step in the life stage, and what's the next likely purchase that's likely to get them there. So I'm really encouraged by the road map that we have ahead of us, to be able to do an ever better job on that. Mostly I think, because I think we're almost out of time, I’m incredibly excited by what this quarter says about the potential of Etsy. When buyers give us a chance, we have an unbelievable ability to meet their needs across almost everything in life that they want to buy, and when they try us, they find we've got something great for sale that's similar to what they have, you know could have found someplace else, except that it's made just for them, and they bought it from the person who made it in a way that feels really human. And so we're seeing buyers be delighted by that and so I think that that speaks volumes to the potential that we have in the years and decades to come.

Great Josh, that’s a perfect way to end. Thank you all for listening. Thanks Josh and Rachel and we will talk to you all soon. We appreciate your time and interest in Etsy. Everyone have a good night. Thank you.