Hi, everyone, and welcome to Etsy's Third Quarter 2020 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. Today’s 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, the potential benefits of our marketing and product initiatives, and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward looking statements involve risks and uncertainties, which are described in today’s earnings release and our 10-Q filed with the SEC on August 6, 2020 and subsequent reports that we file with the SEC. Any forward-looking statements 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 GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings 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 and welcome, everyone. The third quarter was another quarter of really sustained momentum for Etsy, which speaks to we think the strength and the dynamism of the business model. And as much as anything, I'm incredibly proud of how the team showed up yet again this quarter. In fact we took a recent employee engagement survey, which showed that employee engagement at Etsy is incredibly strong at a time when so many forces are trying to divide us, Etsy employees are coming together to support each other and really focus on the mission, serving our buyers and our sellers, and being proud to work for Etsy is something that we don't take for granted at a time when there's so much division in our society. So we are very focused in this quarter on leveraging all of the strength and momentum we've had in the business to lay the foundation for continued strength far into the future. Rachel is going to take you through the numbers in more detail, but it was a very strong quarter across the board. And the headline is that the macro headwinds that we expected to see in the third quarter really didn't materialize. As a result, GMS and revenue were ahead of our own expectations, which meant that EBITDA margins were also significantly ahead of our expectations. So let's unpack what's driving that growth. Turning to slide 5. We are very, very focused on the activity of our existing cohorts and our new cohorts. And I'm sure you all are as well. So let's unpack those together. First, new and reactivated buyers grew at an astonishing rate. In fact, we added 15 million new and reactivated buyers over the 12 months ending in the third quarter. In addition…

Thanks Josh and thank you everyone for joining us for our Q3 earnings call. My commentary today will cover consolidated results, key drivers of performance and Etsy's standalone results where appropriate. Q3 was another strong quarter across the board, as we delivered higher-than-expected GMS revenue and adjusted EBITDA. On a consolidated basis, Etsy's third quarter GMS grew 119% to $2.6 billion. Revenue grew 128% to $451 million, and adjusted EBITDA was $151 million with margins of 34%. On our last earnings call, we indicated that we expected Q3 GMS growth to decelerate from Q2, partly due to lapping the 2019 Reverb acquisition and introduction of Etsy's free shipping initiative in Q3 of last year. Though our results came in better than our forecast, we did see deceleration as the quarter progressed. The month of July was up 152%; august was up 114%; and September was up 98% on a consolidated basis. The sequential deceleration in Etsy's standalone GMS growth was primarily driven by a steady decrease in mask sales and the deceleration of new buyer growth. Masks as a percentage of GMS contracted sequentially from 14% of GMS in Q2 to 11% in Q3. In fact, masks declined 34% month-over-month in September. While masks are still meaningful, we expect this deceleration to continue. New buyers also decelerated sequentially from 159% growth in Q2 to 127% in Q3 and with about half of the deceleration driven by mask buyers. Despite the deceleration in overall GMS, we saw healthy underlying trends in non-mask GMS growth, which was 93% in Q3 the same growth rate as last quarter. Also notable of the four million mask-only buyers in Q2, 38% returned in Q3 for a non-mask purchase. Consolidated Q3 revenue was driven by growth in both marketplace and services revenue. Key drivers for the…

Okay. Thank you everyone. Thanks Rachel and thanks everyone for joining. I'm going to kick it off. We have quite a lot of questions in our queue already if you haven't already put one in, please do -- please do use the chat function. I'm going to start with one from Kunal Madhukar from Deutsche Bank.

How has the GMS growth trends in the quarter to-date? So far how has that gone? I know we covered that, but let's just go over it again. How much of that could be pull forward of holiday spend as consumers anticipate shipping delays? Josh, I think that one is a good one for you to kick off with.

Sure. Hey Kunal, thanks for the question. Hi everyone. Thanks for spending time with us. Yes, as we said in our prepared remarks, October has been largely consistent with September which means we've seen a great deal of sustained momentum through October to-date. And the fair point Kunal that some of that may well be a pull forward in holiday spending. We have been tracking that. So, we look at keywords and we are seeing that purchases related to holiday shopping keywords things like for example, tree ornaments, are in fact happening a little bit earlier, this October than they were last October year. So we do see a holiday shift happening earlier in October than before. What we don't know is is that going to come at the expense of November and December or not? I'd say it's too early to tell but we certainly are encouraged by the momentum that we've seen sustained all the way through October.

Okay. Great. Thanks, Josh. Next one is from John Colantuoni from Jefferies.

Can you talk about recent improvements Etsy has made to Search and Discovery? And help parse out what portion of the increase in conversion is coming from those improvements versus a generally higher intent shopper resulting from the pandemic? Also can you detail any observations and purchase behavior that help you give you confidence the surge in spending on Etsy represents a permanent shift in consumption and habits?

Thanks for the question. So we are seeing conversion rates elevated on Etsy and that has been sustained for some time. Part of that is no doubt, the fact that our customer experience continues to get better through things like improvements in search and discovery. And part of that no doubt is that people are arriving on Etsy with fewer options in the outside world and higher intent. And it's hard for us to parse out exactly how much is one versus the other. What I would say is that we've seen steady and sustained progress in search. Month-after-month and quarter-after-quarter we launched new models that are better than the last models. So we've launched neural network models that are substantially more sophisticated. They're doing a better job. As we talked about in the prepared remarks, in the third quarter we actually launched for the first time the personalization of search, meaning that two different people will see two different search results for the same keyword based on their purchase history. And that's having some impact on conversion rate already even in the very first launch of that model. So -- and by the way we haven't even rolled that out yet to recommendations and browse. So we talk about search but more often we talk about search and discovery. And I will point out that those two are similar but not the same, with search we're given the benefit of someone typing in a keyword, which gives us a lot of understanding of what their intent is. Recommendations, we just need to infer what we think you might like. So it's actually related but separate technology. We haven't begun to apply personalization to discovery or browse yet but we will soon. We'll also be able to apply it to Etsy Ads, which we think will make Etsy Ads even more powerful. So we continue -- and that's just search and discovery. We are doing things to make the trust in the marketplace better every month. We're doing things every month to make the human interface between the buyer and the seller feel better every month. So no doubt that's having some impact on the customer experience and on conversion rate and then the impact of the pandemic certainly is as well.

Okay. I'll pick up on that last one in terms of a macro question. This one is from Naved Khan from Truist.

Any thoughts on the impact from reopening of physical stores for the expiration of extended federal unemployment benefits?

We talked about in the second quarter, how the data are noisy. And we showed you some states and some countries and how reopenings have been not necessarily correlated with the trends that we've seen on our site. And I'd say that has continued to be true in the third quarter. So things like states reopening retail may have some impact -- undoubtedly have some impact on what we're seeing in Etsy, but it's not like there's a one-to-one correlation. And part of that may be that a city might technically reopen stores but in terms of what is the culture of that city, how often are people going into those stores and what it feel like to be in those stores? I think there's quite a lot of difference around the country and around the world in terms of how that's impacted. So what I'd say is that it's been pretty difficult for us to do things like tie store reopenings directly to the traffic trends that we've seen on the site. No doubt, it would stand to reason that those things are correlated over the medium term, but if you look over the short term sort of day-to-day and week-to-week, it's a little harder to see consistent patterns right now.

I'd just add some of the data that we gave, what showed that, even though there are stores that are kind of consistently reopening, our core business grew 93% in Q3 and it grew -- the core business also grew 93% in Q2. So it's remained stable. This is the business that is excluding masks. So it seems thus far store reopening haven't had a huge impact on Etsy's business.

Okay. Thank you both. Next one is from Heath Terry at Goldman Sachs.

What are you seeing from your shipping partners in terms of their expectations for delivery times and costs during the holiday season? How are you messaging these issues to your buyers and sellers? And can you quantify the impact this has had on your guidance for the quarter?

I'll start and then maybe Rachel will want to add. We are able to track daily, what shipping times are like with different shipping providers and we can even track that down to the city level. And so as we present to buyers what the expected delivery date is, we're able to update that expected delivery date in nearly real time based on what we're actually seeing in terms of shipping times in their region or for that particular from-to pairing. And by the way, we didn't mention in our prepared results, but expected delivery date has been a very big focus of ours in the third quarter and we've made significant progress. So at the beginning of 2020 only in the low 30% of listing views would have an expected delivery date. And now in October about in the mid-50% of listing views have an expected delivery date. So there's been a fairly dramatic increase in coverage for expected delivery date. We're doing a better job of telling buyers when they can expect the item to arrive and we do incorporate shipping times into that. We are also tracking shipping pricing of course a very large percentage of items on Etsy shipped for flat rate mail in some of the lowest tier and cheapest parcel rates. And so we think that increases in pricing there while on a percentage basis may be meaningful in terms of the total cost of the total item, we don't think they're going to be as much of a headwind as maybe you're seeing in some other e-commerce sites. So we are communicating very actively with buyers and sellers. We don't anticipate at this time it being a particularly material headwind for Etsy. And I'll say that, I think a lot of e-commerce sites are pretty nervous about Cyber Week because their ability to fulfill large quantities in a short amount of time is constrained. And that's where I think the benefits of the Etsy model really shine through. Our sellers, our businesses largely have won working from their home and they're not as constrained in terms of having a supply chain dependent on a few factories or having everything shipped through one or two fulfillment centers. And so we're leading into Cyber Week. And I think this is going to be a time that also highlights the strength of the Etsy model there.

And the only thing I would add to that is that Etsy is known for it takes a little longer to get the item because you're buying things that are customized and personalized just for you on spec. And so our customers are somewhat conditioned to order early and maybe our holiday season has traditionally ended earlier than traditional retailers. In this case if the shipping speed is slower for all it sort of levels the playing field for all. So I think that across the board and e-commerce we're all going to have the same sort of order by December 15th, the order by December 18th, if you want to get it in time for holiday not just Etsy in this case.

Okay. Thank you both. So we obviously gave a lot of cohort data and there's a good multipart question here from Shweta Khajuria from RBC.

What is driving greater spend levels? Is it fair to say that basket size is most cohorts increased? You point a 50% increase in your 2018 cohort spend in Q3 2020 versus Q3 2019 and also a 50% increase in spend in the first 90 days among new buyers in Q2 versus last year. What is driving direct greater spend levels? Is it selling across the categories? Is it your marketing initiatives? Is it bundling of products for free shipping? Lots of questions, but I think I'll turn it over to you Josh, you can start and then Rachel may want to add some things.

Great. I'll start and I'm sure Rachel will catch what I missed. So I'm going to try to take that question in order. At the beginning, the first thing you said is it AOV that's driving an increase in cohort purchases? And for the most part I would say, no, it's not. AOV has not moved appreciably. In fact, mask is a low AOV item. So the mask surge that we saw actually drove down AOVs site-wide. And as masks have shrunk as a proportion of sales AOV has recovered somewhat. But if you take out masks, I think AOV has been relatively consistent throughout the pandemic period. The biggest factor that's driving this increase in cohort behavior is the reactivation of lapsed buyers. So when we talked about that 2018 cohort a higher percentage than normal of the people who joined in 2018 have come back and bought at least one thing in the third quarter of 2019. And that reawakening of the lapsed buyer base across all of our prior cohorts is the number one thing that's driving that increase in GMS for each of the cohorts. A second and still very substantial factor frequency in period or 90-day repurchase rate. Meaning that for people who did come back and buy in the third quarter, it was more often that they bought a second or even a third or fourth item in that quarter. So both of those factors are at play. And we did a bit to quantify the relative impact of those. You'll be able to see it when you look at how many active buyers and reactivated buyers there were and how much that accounted for in terms of increased GMS.

And we did give -- we gave a lot of data on this call. So the other metrics, I would point out would be some of the metrics that talk about frequency specifically. So our fastest-growing and most valuable cohort are what we call our habitual buyers. Those are buyers that come to us six or more times in a year or spend more than $200. And they -- that cohort grew 100% in the third quarter. I think last quarter we said, I think, grew 64%. And prior to that, that cohort has been growing in the low-20% range. So we really had a nice spike in the people that are coming the most frequently to us. The next category down is, what we call, repeat buyers, which are people that come two or more times a year and that grew 70%. So we've got a nice uptick in the frequency. And then, the last metric that helps to sort of triangulate the frequency picture is that for our new and reactivated buyers so that was 15 million buyers in the quarter. 12% of them came four or more times across two or more categories. And so, they are coming more frequently and they're coming across multiple categories, not just a single category. And so those -- I think a lot of the marketing and product initiatives that we've put -- we've laid down since the beginning of the year are really helping to encourage repeat frequency.

Okay. Thank you, Rachel. Moving to a question on Offsite Ads from Ygal Arounian from Wedbush.

How has the traction been on Offsite Ads? How is it contributing to take rate? How are sellers reacting to it so far? Anything you can share on conversion and how it's driving sales? Is number one. And then number two, with the biggest top of the funnel -- excuse me, with the biggest spend top of the funnel, what are you seeing there? And anything you can share on your ROI on your top of the funnel spending, understanding that it's early days?

I can start with just some of the specific numeric answers to those questions and then maybe, Josh, you want to talk about top of funnel value and impact. On take rate we didn't break -- we did say that the largest movers to take rate in the quarter or -- and I think we said it went up 120 basis points, were inclusive of Offsite Ads but also Etsy Ads, which performed really strongly and then Etsy Payments expansion into nine new countries. And I don't think we gave the numbers specifically on Offsite Ads but that was one of the contributors to take rate increase, because we now have full quarter of it. And so, that was -- I mean. I think, the other metric we gave for Offsite Ads is that we've continued to see less than 2% opt out rate from the sellers that are able to opt out of it. So it's a very strong product and performing with return on ad spend that we think is very attractive for our sellers. Top of funnel, we said that we -- 18% of our consolidated marketing spend was in upper funnel initiatives, which is about $23 million in Q3. And that we said marketing overall on a consolidated basis was up 153%. So we are spending significantly more on marketing and a big chunk of that is on upper funnel. As always, we have a very strict ROI methodology, not only for performance marketing, but for all of our above-the-line marketing as well where we analyze it pretty stringently, just to prove out that every marginal dollar of spend is incrementally ROI positive as well. It's a little trickier with above-the-line marketing. We use, I think, over nine different statistical models, some that we get from our media buyers, some from our internal models and then we use external iSpot data that's panel data that tells us how is this dollar of spend performing? And is it achieving the internal ROI thresholds that we have. And so, we feel pretty comfortable that our marketing spend has a nice positive return. The one caveat that we talked about is that upper funnel marketing tends to have a lot longer yield curve and particularly with a brand-focused campaign that yield -- some of that yield is going to come out of the quarter a little bit more than performance marketing does.

And I would only add that Etsy has suddenly and so powerfully becoming the zeitgeist right now. Suddenly you're hearing Etsy mentioned in the same breath as Amazon, eBay and Target. And that would have been something that would have been surprising to people, even two or three years ago. And if you look at our relative size, relative to those four companies, it's a pretty good company to be in. And so, this is a moment to be really leading in, we believe, to marketing. If you look at the reawakening of the lapsed buyers, again, they don't think of themselves as lapsed. They love Etsy. They think of themselves as loyal Etsy shoppers. They just didn't know when to think of us. There are so many great purchase occasions you could use on Etsy and they just didn't think of us. And so, the ability to be front-of-mind and use this time to really form habits and deepen our differentiation and reinforce our differentiation, we think is really powerful. And there's still a huge opportunity with 70 million people out there or 80 million people out there who have shopped on Etsy in the past and haven't shopped on Etsy in the past 12 months. That's a lot of lapsed buyers to go and reawaken. And in addition to that, there are so many people who still have never shopped on Etsy, people who we might not have thought of as our core demographic a short time ago who's suddenly now maybe. Steve Martin is one of my favorite comedian and if you go check his Twitter feed he just posted "I just discovered Etsy. Goodbye." And then he falls into the Etsy vortex and is throwing up all sorts of great things he's finding on Etsy. And so, I think, we're broadening our appeal to more and more types of people and more and more demographics and we love it.

Speaking of getting lost in the Etsy vortex or rabbit hole. This one comes from Rick Patel at Needham & Company.

GMS per buyer up 50% year-over-year in Q3, which categories are getting the most GMS boost? And what's your confidence that this can continue on the other side of the pandemic? That's for Josh, I think.

Yes. I mean, so we shared some category data. And I'd say it's very consistent with Q2. So home furnishings continues to be up over 120% year-over-year, but we're seeing different kinds of items. I gave a little bit of color in the prepared remarks, but what we're seeing even in October now, is things that are good for outdoor gatherings, blankets or fire pits. Fire pits sell out everywhere else you can go, but there's going to be a steady supply of really cool made-just-for-you fire pits on Etsy. And so, individual items in each of these categories, our choosing really looked weak. But the categories are pretty largely consistent. Craft supplies continues to explode. Jewelry and accessories is doing great. When we go to the future, I would say, in the near term of 2021 it's very difficult to predict. We're not even giving annual guidance these days. We're only giving quarterly guidance. 2020 has been an -- certainly, the most unusual year since World War II in the western economies. And I think it's likely that 2021 is also going to be one of the most unusual years in modern history. So trying to predict from this time to that time is very difficult. And -- but I would say though that every interaction we have with customers, every additional purchase we have with them, every additional visit gives us a chance to deepen our relationship with them gives us a chance to form habits, gives us a chance to reinforce our point of difference and all of our signs and signals suggest that customers are having a very good experience on Etsy right now. And frankly we have additional investment capacity and we are using that. We are doing things like investing in TV right now. We're expanding that to Germany and the U.K. in the fourth quarter so that we can really lean into this moment and try to build as much sustainable momentum not just now but into the future as we possibly can.

Okay. Great. I'm going to go into some margin questions from Shweta Khajuria with RBC, so it's going to probably be for you Rachel.

Could you please talk about your Q4 EBITDA margin guide and the puts and takes there? Etsy has a highly variable cost structure and Q2 and Q3 margins were healthy, partially due to upside in revenue. What are some of the most important factors you have taken into account for your Q4 EBITDA margin guide? Could you talk about your expectations on marketing and product spend and also lastly Reverb's impact on the margins?

Thanks for the question Shweta. Yes. So, for starters, I want to start with masks. So we've talked about a steady deceleration in masks and we even gave the amount that masks decelerated in September versus August. So that went down to 34% month-over-month I believe is the number that we gave. And so, we would expect masks to continue to decelerate in Q4. And in fact we gave some cautionary guidance about thinking about your 2021 models as well. In fact; you could think of we gave the year-to-date mask number, but when you think about the full year something upwards of $700 million is pretty much going to need to be taken out of 2021 when you think about 2020. And that will come to play in Q4. So you ask specifically not Q4 you would assume masks decelerate. The second thing I want to point out is that we did our best to give guidance for top and bottom line for Q3. And when we spend on marketing we had better-than-expected impact from our marketing and product initiatives in Q3 and lower-than-expected impact from headwinds in Q3. So we have a lot of unknowns in Q4. And so we're giving our best to give you top line guidance if our marketing, if the headwinds are again as we saw in Q3 if the headwinds are lower and the impact of marketing product is higher, you would expect to see additional flow-through to bottom line. But we're doing our best to manage through an unpredictable environment, particularly with elections coming up and the continued headwinds of the pandemic. The last thing I think, we broke this out very specifically, when we talked about Q4 margins the biggest thing impacting our Q4 margins is our increase in marketing spend.…

Okay. Great. We are at 6:01 so I'm going to squeeze in one more here. I think this one will be for you to end with Josh. This is from Tom Forte of D.A. Davidson.

Can you please discuss the structural competitive advantages, your sellers provide you versus other e-commerce platforms, when it comes to making products at times when large-scale manufacturers are having a hard time keeping up with demand such as masks, desks, during back-to-school gifts for the upcoming holiday?

Got it. I'll answer the question Tom. I appreciate it.

Okay.

So first I'd say that there are more and more places coming online to sell you the exact same thing. And if it's the exact same product you can find in 10 or 100 other places, they can only compete on who can sell it to you cheaper or ship it to you faster. And Etsy is the one place you can go, where you're going to find things that are truly unique and different than what you're finding everywhere else and made just for you. And by the way there are millions and millions and millions of them. So for each person, there is some form of beautiful that's just for you. And we're doing a better and better job of surfacing that and helping you to find that. But some of the strengths that our sellers bring are that a they're able to personalize it for you. They're able to customize it for you. So if you need a desk they're going to make it for the dimensions of your room. If you need some clothing, they can actually change the color or the length or the fit to be designed just for you. If you're gifting you can gift like you mean it. But our sellers have also demonstrated tremendous agility. They respond to trends within days. They can literally look at what keywords are really getting a lot of traction, where is the search volume happening and start making product within hours or days of the trends that they're seeing. And last, but certainly not least, they're not reliant on one supply chain concentrated around very few factories and fulfilled from a very few fulfillment centers. And that allows for the dynamism of the marketplace to meet the buyers where they are and to be able to do that in times when other people are meeting constraints. So we think that the individualization, the personalization and frankly the humanity of the Etsy marketplace at a time when you're being pulled apart and distant from people the opportunity to connect to create connections and meaningful connections, we think is super important now, but we think it's enduring too. We think that that kind of thing is something people are going to discover in this time fall in love with and I believe continue to want for years and decades into the future.

All right. Well thank you Josh and Rachel. Thank you all for your questions. I know we didn't get to everyone. So you know where to find us. We will talk to you during the quarter. Thank you all so much and go out roll. Take care.