Hi, everyone, and welcome to Etsy's Fourth Quarter and Full Year 2020 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Gabe Ratcliff, our Director of Investor Relations. Today's prepared remarks have been prerecorded. The slide deck has also been posted to 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 future performance, including our financial guidance and key drivers thereof, the impact of COVID-19 on our communities business and strategy and the potential impact of our marketing and product initiatives. Words such as anticipate, continue, expect and will, as well as similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from these forward-looking statements. Forward-looking statements involve risks and uncertainties, some of which are mentioned in today's earnings release and which are more fully described in our quarterly report filed with the SEC on October 29, 2020, and in 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 undertake no 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 a replay of this call. With that, I'll turn it over to Josh.

Thanks a lot, Deb, and hello and welcome, everyone. 2020 was, no doubt, a transformative year for Etsy, a time when circumstance met preparedness, highlighting the agility of our model, the dynamism of our team and the power of our differentiated strategy. Etsy emerges transformed a larger and stronger marketplace as a result. We understand that the stakes are high. Millions count on us now more so than ever and I'm proud of our impact. We help to create economic opportunity for our sellers and led from the front on many important social issues. As a marketplace that gets better as it gets bigger, we believe that Etsy is now even better positioned to lead into the future. When we look at our 2020 results, they were spectacular. Consolidated GMS was $10.3 billion, up 106% on a currency-neutral basis. Consolidated revenue was $1.7 billion, up 111% with an EBITDA margin of approximately 32%. Said differently, we roughly achieved our 2023 aspirations in 2020. Rachel will provide more insights on Q4 in just a moment. But we're proud of our inclusion in the S&P 500 as yet another signal of the importance that the Etsy marketplace is playing in the global economy. And, in fact, speaking of the global economy, 2020 was an extraordinary year for e-commerce overall, as the growth rate of e-commerce roughly doubled, as much of the offline world shutdown. And as fast as e-commerce grew, Etsy grew much, much faster. In fact, Etsy grew almost 2.5 times as fast as e-commerce. We had to change the y-axis of the graph just to accommodate it. Etsy is gaining meaningful share versus e-commerce, because where the world is racing to offer the same thing priced maybe a little cheaper or shipping just a little faster, Etsy offers something truly…

Thanks, Josh and thank you everyone for joining us for our Q4 earnings call. My commentary today will cover consolidated results key drivers of performance. And Etsy's stand-alone results where appropriate. On a consolidated basis, Etsy's fourth quarter GMS grew 118% to $3.6 billion. Revenue grew 129% to $617 million. And we delivered adjusted EBITDA of nearly $192 million capping off a strong year where we achieved industry-leading growth and record profitability. Etsy's stand-alone Q4 GMS grew 127% to $3.4 billion. Our disciplined investment strategy and strong execution drove more adjusted EBITDA in the fourth quarter than in all of 2019. Top line growth exceeded our Q4 guidance which had projected a steeper decelerating GMS trend due primarily to two factors. First, masks contracting as a percent of overall GMS. And second, the uncertainty of consumer spending patterns and global economies related to the pandemic. As Josh mentioned earlier, international growth was robust in 2020. In Q4, consolidated international GMS expanded 500 basis points sequentially to 40% of overall GMS. International GMS was up 140% on a constant currency basis and was driven in part by strong trends in the U.K. and Germany. Our fastest growing trade route in the fourth quarter was once again our domestic sales between buyers and sellers within the same country. It's also worth noting that we are disclosing U.K. revenue, which is based on the location of the seller for the first time as it was more than 10% for 2020 at $196 million. We're adding India as a core market, bringing our total focus markets to seven, given heightened investments we've been making to build the foundation of incredible inventory from creative entrepreneurs in that country. Etsy had an exceptional holiday as the shopping season started earlier and growth rates exceeded prior years…

Hi, everyone. Good to see you. We are ready to go. We have a lot of questions in the chat box. So I'll just dive right in. If you have any additional questions, feel free to add them in as well. The first question is from Rick Patel at Needham & Company.

Can you update us on where you are in the personalization journey? What did you learn in 2020? And what can we look forward to in 2021? At what point will you have enough data and analytics to go beyond search and use personalization as a predictive tool? Josh, I think we should start with you on that one.

Great. Thanks for the question. Yes, I mean 2020 is really the first time that Etsy has started to be personalized in a meaningful way. And you're right that we started with search. I think we're in very early innings. And you can think about personalization very narrowly as knowing, for example, how we've started, what things have you searched for in the past, what things have you favorited in the past, what have you bought in the past and using that to inform your search results. But taking the aperture out further having a deeper understanding of what that might imply of your sense of style and understanding things like what style are all of these 80-plus million items, what are other people who bought these also been interested in, what might complete the look of this. It might not be that item at all, but it might be other things that match with that item. These are all areas of personalization where we have not really even begun. And so I think we have a tremendous amount of opportunity still to go. What we have learned, which is not surprising to us or anyone is that, it is actually valuable. Even in our first launches in personalization, it makes the experience better. It makes conversion rate go up. We're very optimistic about what it can do. So if I think about personalization to your point of where else can you go search and discovery, which I would think of as a lean and you type in a query at Etsy and we give you a more personalized set of results is where we've started. Lean back is another opportunity for personalization. So think what kinds of recommendations can we present to you, what kinds of things can we show you that would inspire you that you didn't even think to ask for, but we happen to know that other people like you are interested. And the other bucket that I think is very exciting is Offsite. When we are marketing to you being on Facebook or Google or elsewhere, the ability to know more about you and be even more personalized in terms of how we reach out to you is an opportunity that I think is large and will continue to get better and better overtime.

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

GMS growth in the international business has been lagging modestly behind the U.S. until this most recent quarter. What were some of the key drivers of the acceleration in the international business during Q4? And what are some of the key learnings from that success that you can use as part of the broader framework to take advantage of the big opportunity outside of the U.S. in the years to come? Let's start with that and then maybe we can have Rachel chime in a little bit, too.

Perfect. Okay, great. One of the wonderful things about a two-sided marketplace like Etsy is that it gets better as it gets bigger. There's a virtuous cycle that's turning. And so the growth in Etsy in our core international markets has been strong in the past, but was truly extraordinary in 2020. And if I look at the UK, in particular, which really had a breakout year; it does feel like that virtuous cycle just turned more and more. So, it appears to us that going from a top 20 e-commerce brand to a top 10 e-commerce brand appears to have a really positive impact on our business and going from top 10 to top five, has a really positive impact in terms of brand awareness in the market. And it makes sense because what's happening is we're bringing vibrancy. We're bringing more sellers with more items, so you can shop domestically more. And we're getting more buyers, which brings more sellers. So, part of what we're learning is what might be mechanisms where we can accelerate that brand awareness. How can we invest? There's a natural growth curve, which we ride, but how can we invest to make that happen even faster? You are seeing us do things like brand marketing in both the UK and in Germany. And as we always do with Etsy, we're very data-driven. We're very experiment-driven. And we're looking at what's that doing to our flywheel on both the demand and the supply side and how can we extrapolate that to think about ways to accelerate our growth even further in international.

I don't have time to add. That was a perfect answer. I'd only add that with our -- we did invest more heavily in both the UK and Germany in the fourth quarter of this year not only in brand, but also in mid-funnel. So, we used – actually, the entire funnel we used a lot of our performance spend and some of that middle piece where we did social and we were able to capture more of the audience specific to those markets with a personalized message for them in those markets.

Thanks for mentioning that, Rachel. I'm going to build on that because we've talked about the opportunity in Martech and how our Martech capabilities can continue to get better and better. We weren't using the most up-to-date APIs and data feeds with partners like Google and Facebook in some of our international markets. And so part of what we did in the latter half of 2020 is really update those data feeds, which allowed us to be even more precise in our performance marketing and get better ROI. So, a lot of things came together through 2020 that allowed us to really accelerate growth at a time when it really mattered, but there continues to be a really good pipeline of opportunity for us to get better in Martech for sure.

Okay, great. I'm going to move to one from Ed Yruma from KeyBanc.

Can you provide a way to dimensionalize how broadly the consumer is shopping the assortment on Etsy? And are new and reactivated consumers shopping multiple categories? That's a little bit of tag team one I think.

I'll start. And I think Rachel has given data and I think she can give some more. But we're really pleased by the fact that we are seeing cross-category purchase. And I think that's really encouraging. What we know is that almost anything you want to buy, you can buy on Etsy. Not consumer electronics. I mean there's a couple of -- not travel. There's a few things categories out there. But for the most part, things you need to buy and use you can find them on Etsy. And our consumers are learning that more and more. One data point that Rachel shared is that 50% of people who were mask-only buyers in the third quarter came back and bought a non-mask item in the fourth quarter, which we think is really encouraging. So, we do like what we see. And honestly, during this time of COVID, people have had fewer options. So, they've turned to Etsy more often and they're generally delighted by what they see in almost every category. They're going to find a really broad assortment of products. They're going to find that they're priced well. And getting something made just for you with a handwritten note is just a better way to shop.

So, I'll add just a couple of additional data points there. One that I really like is that two or more purchases -- the percentage of buyers that had two or more purchases in 2020 was 48%, that's up from 41% a year ago. And when you look at those -- that category of buyers that have two or more purchases, the average was five purchases. That was the first time we crossed five. So, they're coming back much more frequently. And then we've been - we talked about this last time as well, but the number of buyers that cross - make cross-category purchases was 17% in 2020. So, that's buyers that came four -- four or more purchases across two or more categories. And so we're really seeing people exploring. I love the metric that Josh just threw out there too about the non-mask buyers coming back another time. And that really shows that the new buyers that we've obtained and the ones that we've reactivated are really exploring Etsy and understand the breadth of product that we have.

Thanks both of you. This one -- next one I think connects the dots on some of that. It's from Ygal Arounian from Wedbush.

It's a two-part question. Etsy is now one of the few marketplaces growing volume in triple-digits and seeing growth accelerate in Q1. What is Etsy doing differently that is allowing you to keep buyer growth and volume so strong? And then the second piece of the question is really specifically to the different categories. Can you talk about specific category strength? How sustainable do you think the home goods category is for you? What are our expectations for weddings and bridal showers this year which are typically important for you in Q2 to Q3? That's the many pieces. Maybe Josh, you want to start and then -- yes.

Sure. And let me see if I can remember it all. First in terms of what we're doing differently? It's hard for me to say because I have a lot more access to information about what Etsy does than what our competitors do. So I can talk about what we're doing. And honestly, I think, a big part of it is we stand for something different. There's a bunch of places you can go where you can buy the exact same thing as somewhere else. And maybe it's $0.02 cheaper and will arrive an hour faster. And that's not always what people are solving for. And so I think the fact that we own a space in e-commerce that I think is both different and important is meaningful. And, I think, that that means we have a real opportunity to grow share and continue to grow share over time. We're not following everyone else's playbook. And people are realizing more and more that Etsy is a different way to shop and I think a better way to shop very often. So that I think is the most important thing. We are firing on all cylinders as best we can. So I think our performance marketing team is doing great job. I think our brand marketing team is doing a great job. I think our product team has really been doing a lot of great work to ship great product improvements that make the customer experience better. One of the things -- one of the questions I get often is, sort of, in what inning are you or how much good stuff is left at Etsy. One of the things that I mentioned in my prepared remarks is that hit rate went up. That's a fancy way of saying that a higher percentage of things we shipped in the fourth quarter had a really positive impact on the customer experience than in prior quarters. That would not suggest that we are running out of runway rather that we're getting better and better at unpacking new opportunities as we go. So I think the team is executing really well against the business that's differentiated. That's strong. When -- there was another part of your question around category mix.

Yes.

Largely the same in the fourth quarter. Not -- I don't think a lot to report there. In terms of home furnishings, let's talk about that one for a minute. Yes. Etsy is growing much faster than most players in home furnishings. And yet if you look at our total home furnishing sales versus the market for home furnishings, we are still a tiny part of the home furnishings market. And so I think there's an enormous amount of opportunity for Etsy to grow in home furnishings as with other categories. Your question about weddings. Weddings grew about -- is growing about 30% year-over-year, which I think is a testament to the perseverance and creativity of the human spirit. In this moment in time, if you're finding a way to get married and get your community together virtually or whatnot that's great. And so the fact that we're actually seeing weddings back to growing is a testament to our customers. But I hope that when people can get back together in person again we might see weddings and events grow even faster and that might be a tailwind for the business.

I was just going to add an anecdote that, if people were watching the inauguration Bernie Sanders was featured wearing some mittens. And those mittens forgetting the exact amount were a blowout sale for that day or the day surrounding that on Etsy site. So people are -- and we saw the same, sort of, thing with the unfortunate passing of Ruth Bader Ginsburg where all of a sudden we were selling out of Ruth Bader Ginsburg merchandise. People are beginning to know that you can come to Etsy for anything and everything not just the cushion on the couch, but the couch itself and you're seeing that in the category growth that we -- the numbers that we put out in our prepared remarks.

$1.9 million.

$1.9 million for mittens and Bernie Sanders-related merchandise in the days following the inauguration.

Yes. Okay. Next one, I think I'll give these to you Rachel, from Laura Champine at Loop.

I'm hoping to get your target or expectations for two metrics, success-based GMS 9% in Q4 and I assume we're talking about off-site ads there; and GMS from paid channels 20% in -- 21% in Q4, excuse me.

So, you correctly cited those metrics, but the question was, what is our -- what are the aspirational targets for that. So, of course, we've only given you guidance for Q1 and we didn't guide on either of those metrics in particular. One thing I'll point out is that, we're growing the entire pie, so not just our paid marketing. We still have a lot of heart for investment in our organic traffic. So we invest in SEO. We invest in brand marketing. We're really investing in top-of-mind awareness. So if I give you an aspiration for percentage that is chargeable or a percentage that is paid, you would be forgetting the denominator, because we're growing. It's not a zero-sum game. We're growing both of those metrics considerably. We are opening up new channels for our Offsite Ads. We just announced, I think, yesterday that we have opened up some of our affiliate channels. So our sellers will now be able to have their products listed on many, many more sites than just the big ones Google and Facebook. And so, that's exciting for them and we want to help them put their marketing dollars to work in the highest ROI positive ways that we can, so that we'll continue to optimize those channels. But we're just working the full funnel at all times.

Okay, great. The next one I'm going to take is from Dillon Heslin at ROTH Capital.

Can you talk about the impact initiatives like -- the impact that initiatives are having, such as broader marketing efforts, Offsite Ads, retargeting and how that is having -- driving the growth in habitual buyers and repeat buyers? And I think this is the part of the question that's a little bit nuanced and different from what we've already answered. Are you able to identify certain characteristics of a new buyer that increases the likelihood that they can actually become a repeat buyer, or a habitual buyer?

Great question. I mean, on the first part, I think all parts of the funnel are playing a role in getting people to come back more often and become habitual buyers and we're learning more about how they all work in conjunction. So three years ago and four years ago, we really only were deep in the bottom of the funnel in things like performance marketing, which matters. If you've gone to Google and you searched for a mug and you see Etsy mugs, it reminds you, oh, yes, of course, I can go to Etsy. But we're learning more how TV and then mid-funnel things like video and other ads in social can really all work collectively to get us top of mind and have you start on Etsy and not start somewhere else, which I think is really helpful. The second more nuance part of the question, Deb, can you remind me what that was?

It was, in terms of how we're learning about what's likely to make someone become a habitual or a repeat buyer. Are we learning more about that?

We are learning more about that. And we're learning more about how do we anticipate. So, for example, you can bid differently on -- if you see a brand-new buyer who you've not seen before, or someone who's maybe bought two times, but not for three years. We're starting to get much more nuanced about, particularly in performance marketing, how to bid differently for different customers that might have a different lifetime value. But we're also learning more about what it is that drives loyalty. And part of what a habitual buyers figured out is she sort of figured out the hacks of Etsy to get the most out of Etsy. For example, she's really good at knowing what keywords to type into a search engine to get the kinds of satisfying results that she wants. She might know for example how to describe her sense of style in the way that a merchandiser would speak. And a lot of people don't have that kind of vocabulary; don't have that kind of language. And so, when we talk about a big focus for 2021 and beyond being -- getting great search results when you don't know the words to describe it, I think, a lot of that is how do we create the kind of experience a habitual buyer has for other kinds of buyers, so they can see the wonder of Etsy in the way that habitual buyers do as well. I think there's a tremendous opportunity for us to make Etsy more accessible to more people, so they become habitual.

Right. And I would just only add, so search is certainly a super important part of getting the repeat frequency and the confidence and the trust in Etsy that you're going to be able to easily find wonderful things. The other one has been what we've been talking about with our post-purchase experience that you have trust that you're going to get your item in time for the purpose of buying the item and you'll get it -- you'll be able to -- you'll know what to do if you need to return it. And you're going to get it at a cost that is not egregious. And all of those things we've been working on with considerable effort. And we -- Josh talked about them as a big focus area for 2021, but the investments and the progress we've made even in 2020 had a real impact on sort of the trust factor that we have with our buyers coming back to Etsy again and again.

Okay. Great. Next one is from Maria Ripps at Canaccord.

You haven't done that many acquisitions in the past and the Reverb acquisition was fairly successful for you. Did it change your view on selectively leveraging M&A for future growth? And are there any assets or capabilities that you would like to add or would be nice to add to the Etsy platform? Josh, you'll take that one?

I mean, I do feel good about our stewards of shareholder capital. I do feel good about the M&A that we've done in the past. If I look at Blackbird, which was a capabilities acquisition that made our machine learning -- search machine learning a lot better; if I look at the DaWanda relationship and deal that we did in Germany that made Germany stronger; and certainly Reverb, which is off to a great start and we're really pleased with how that team executed in 2020 and how that business is evolving. I think our track record is good on M&A. I also think we've been patient and picky. Our core business we think is at the early stages of having -- unpacking its growth potential and we want to make sure that we keep our eye on the prize. But I do think that as -- if we come across an acquisition that we think builds capability brings us into a new market or expands us into other categories, we think it's a great business and we think we can buy it at a fair price and then we can add value I think we'd be open minded.

Okay. Next one is from Naved Khan at Truist.

If we have to think about the drivers behind the growth and repeat usage, how much of that is due to marketing effectiveness of your marketing programs versus the numerous product improvements that you've been making? So product versus marketing.

Well, the good news is that they really work together. I get where you're coming from. And I would say they have both driven substantial value. I don't know if we've put enough tea leaves out there yet for you guys to like quantify it. But they have both been very meaningful drivers. And when we improve the product the most common thing that happens is conversion rate goes up. You can also drive AOV up. You can drive frequency up. There's a lot of ways that making the product better is visible to us and the metrics. One of the most -- the fastest-moving metric is usually conversion rate. And so when the product team does something to make conversion rate higher suddenly the marketing team can spend more for a visit, right? The lifetime value effectively of every visit has gone up. When the product experience gets better customer loyalty gets better. And that also allows us to market more. So there really is a virtuous circle to the two. But broadly speaking, I would say, they have both been very meaningful. It's not really lopsided where one is way bigger than the other. I will mention again something Rachel said in her prepared remarks, which is if you think about a squad one product squad focusing on a customer problem the traffic that that squad is working on now has suddenly doubled. So if they were able to get an increase in conversion rate of x, the value of that is now twice what it was in 2019. And so the leverage we're getting out of our product organization is extraordinary. And it speaks to the fact that we really want to be hiring, because I think there's a long road map of great initiatives and there's frankly too many things on the cutting room floor right now. So, it is a focus of ours to scale the team to keep up with the opportunity ahead of ours.

And I would just add just one or two more comments on. Just a reminder on the way that we forecast and build our plans for our business is that we start with our baseline. So what would happen if we all just went home? And so there is some number there that our cohorts -- our older cohorts are very strong. They come -- and they're very reliable. They come back year after year after year and that's the baseline. And then from there we build on what is going to come to us incrementally through marketing and what we expect might come to us incrementally through product. So you're asking the exact right question, how much is each of those incremental buckets? And I agree with Josh 100% that they work together. But the things that we're working on also are to bring back new buyers. So we added a significant number of new buyers, which doubled in the year. We are reactivating those older cohorts. So maybe cohorts that don't come even once a year. We've reactivated those. And then we're working on the frequency of all of those groups to how often they come back. So we've been able to move the levers on all of those things through the one, two punch of both product and marketing. Once they come to the site, we want to convert them and the product really does the heavy lifting of converting them and having them repeat that experience again.

Okay. I know we're out of time, but I want to squeeze in one more. This one from Kunal Madhukar from Deutsche Bank.

It's two-part question. First one is related to the U.K. So how did U.K. growth trend during the year versus mobility? So as people were moving around less, how did our growth move up? Or is it inversely correlated like that? Or is there some other thing going on with the U.K. growth? And then the second piece is about marketing spend, are we looking to ramp up spend further in the U.K. and Germany this year?

Yes. I would say that the growth rate in the U.K. was definitely impacted by lockdowns. The U.K. had some pretty strong lockdowns early in the spring and then again late in the year, and we definitely saw that on our site pretty strongly and pretty immediately. But the growth rate in the middle of 2020 in the U.K. was pretty good too when they eased lockdown. So the growth rate throughout the year was really good. But it was even stronger during lockdowns. I think that's a fair point. We did invest more in the U.K. and Germany. Frankly across our core European markets we invested more. Part of that was just building better Martech capabilities, as I mentioned getting those feeds to be better allowed us to invest more. We didn't change our discipline around ROI threshold. We just got better capabilities that allowed us to invest more and the timing was good, because it was a very moment when demand was skyrocketing throughout Europe. We are excited about the returns we're seeing in the higher funnel investments we're making in the U.K. and Germany. So you should expect us to continue to be investing in TV, for example, in the U.K. and Germany. And we're experimenting like we did with the U.S. we're experimenting with wow while spending that amount worked what if we spend more. How does that work? And what's that marginal return curve look like? And so you'll see us experiment with that quarter-to-quarter in both the U.K. and Germany I would expect in 2021.

Okay, great. With that, I think we're going to call it and we look forward to talking to everybody in the next weeks. Thank you all for your time and your attention and your interest in Etsy. Thank you so much.

Thank you.