Hi, everyone, and welcome to Etsy's Fourth Quarter and Full-Year 2022 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been prerecorded. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&A chat window displayed on your screen. I'll be reading your questions, and I'll 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, our business and our operating results as noted in the slide deck posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-Q and which will be updated in future periodic 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 disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release posted to our IR website, along with the replay of this call. With that, I'll turn it over to Josh.

Thanks, Deb. We're happy to speak with you this evening to share our latest performance and our outlook for the business. Once again, in 2022, our team was able to significantly improve the Etsy customer experience and do so in ways that had a meaningful and demonstratively positive impact on our financial metrics. We believe it's no accident that Etsy's performance has remained healthy in a volatile environment. We're also proud of the continued focus we've had over the past five years on profitable growth and cost discipline, which we believe serves us especially well today. Our ability to retain pandemic gains supports our belief in the relevancy of our Right to Win strategy, the focus and discipline of our investment strategy and the resiliency of our business model. The Etsy marketplace ended the year on a high note with strong holiday performance and accelerating year over three-year GMS in the fourth quarter. Etsy and our sellers helped make the season bright. GMS grew year-over-year on a currency neutral basis during Cyber 5. We had particularly strong days on Small Business Saturday and Giving Tuesday, supporting our belief that buyers associate Etsy with shopping small and making a positive impact. We pulled out all the stops to help our sellers have the best season possible, which included holiday ad campaigns in the U.S., U.K., and Germany, spotlighting well-crafted items for all budgets, types of people, and giftable moments, out-of-home campaigns in the U.K. and Germany; increased seller participation in our annual cyber sales event, educational moments, and optimized selling tools. And last, but certainly not least, our new Etsy purchase protection program, which enhances peace of mind for buyers and sellers. This strong fourth quarter enabled us to finish 2022, having delivered consolidated GMS of $13.3 billion, down slightly from…

Thanks, Josh. And thank you, everyone, for joining us. My commentary today will cover consolidated results for our House of Brands, key drivers of performance, and Etsy marketplace stand-alone results where appropriate. Fourth quarter consolidated GMS declined 4% year-over-year to $4 billion, nearly flat on a currency-neutral basis. Revenue increased 12.6% year-over-year to $807 million. And we delivered adjusted EBITDA of $227 million, representing a very healthy 28% margin. Foreign exchange headwinds moderated in the fourth quarter to 330 basis points, down from 400 basis points in the third quarter. We're pleased that the Etsy marketplace successfully anniversaried the incredibly strong prior year period, which included pandemic lockdowns and supply chain issues. In addition, we saw some acceleration in Etsy marketplace GMS growth on a year-over three-year basis, which I'll discuss more in a few minutes. Our three subsidiary marketplaces had a tougher time than Etsy with some weakness in the quarter that weighed on consolidated results. Drilling into fourth quarter revenue growth. Marketplace revenue increased 11% year-over-year, primarily driven by the Etsy marketplace transaction fee increase from 5% to 6.5%. Services revenue outpaced marketplace growth up 17.7% year-over-year with consolidated ads revenue increasing 20% year-over-year. While we had expected to see normal seasonal headwinds for Etsy Ads on higher organic traffic during the fourth quarter, continued product enhancements drove better-than-anticipated performance. This included utilization of neural network embeddings, a type of machine learning advancement to increase ad relevance, which drove more clicks and purchases. We also launched a more visually engaging ad experience with videos on the homepage that increase conversion and return on ad spend for sellers. We delivered another quarter of strong profitability in the fourth quarter, with adjusted EBITDA increasing year-over-year from $219 million to $227 million driven by the higher revenue. As you can see…

Hi, everyone. Nice to see you all again. Thank you for joining us. I'm going to kick it off right away with some questions. We've got quite a few in the queue. Start with Maria Ripps from Canaccord. This one is going to be for Josh. Investing in search functionality has consistently been a pillar of the Etsy growth strategy. Looking out over the next two to three years, what are your top investment priorities as it relates to search? With all the recent momentum in AI and large language models, could we see some type of chat-based search functionality integrated into Etsy at some point? And then briefly, how has your image search feature been trending?

Great questions. Thanks very much. So as you said, investing in search and discovery is a very, very core part of Etsy's present and our future with over 120 million or about 120 million live listings. Getting you to the good stuff is really important. Looking back at just 2022, the search team launched about 120 developments that were ramped up, meaning experiments that worked that we ramped up. And the -- some examples of those included Etsy Lens, as you referenced; better neural models; XWalk. And when we think about what those did, Etsy Lens is an example of something that allows you to talk with pictures instead of talking with words. So how do you tell the search engine what you want in really new and novel ways? XWalk helps you to process massive amounts of information, and neuro models help you to make sense of what people mean not what they say. And in fact, the neuro models we're using use the same kind of underlying algorithms that ChatGPT uses. So we're already using some of the underlying technologies that you're seeing from great innovators like Open AI, and it's having great impact. By the way, the search team is also doing more prosaic things that are having a lot of impact. For example, search results are now getting good enough that we could put a Buy button right on search results and allow people to buy directly from search results without having to go all the way to listing page, and that's been a great collaboration of our team to figure out exactly what information you need on the search results page in order to give someone the confidence to buy. So we made a ton of progress in 2022 in ways that improve the customer…

Great. Thanks, Josh. The next one is for you as well as from Jason Helfstein at Oppenheimer. There was a report out about items on your marketplace violating IP. It's probably something we've never paid much attention to since it's not why buyers go to Etsy, but a quick search looks like there could be some counterfeit items. Could you talk about what you were doing about IP violation? Most of us probably don't understand what a violation is. For example, if someone is selling a knit beanie with a Swiss logo or the word Nike, is that an IP violation?

Thanks a lot for the question. I appreciate it. First, let me say that Etsy is about special. It's about things that are made by hand or vintage items, and so you're absolutely right that it is not what buyers think of for mass-produced items. I also want to state very definitively that trust is the bedrock of our marketplace, and there's no place for counterfeit items in our marketplace. And we work very hard and invest very hard to make sure that we have a clean and safe marketplace. I think we have more skin in the game than most in terms of having trust as the bedrock of our brand because our sellers are five million independent largely unbranded sellers. And so they rely on Etsy to be a trusted brand to lift them up, which is why we invest so much in this space. Branded items make up a very small and not growing portion of Etsy's traffic and sales. So let me be even more specific about that. When we look at -- we looked at over 800 of the most popular brands in our ecosystem, and we saw that those brands were referenced in low single-digit numbers of our search queries and our sales. I also want to be clear about the fact that the fact that they were referenced in a search by no means, means that they're IP violations. There are many legitimate reasons why a brand might be referenced in a search. It may be a vintage item. It may be fair use, and the questions you were asking were all questions about fair use. If you use a logo on a beanie, is that legit or not? The answer is it's complicated, and it comes to something called fair use, that's…

Thanks, Josh. The next one, I'm going to start with Rachel, and I think Josh might want to add on to this one a little bit. It's from Laura Champine of Loop Capital. What was the margin impact in Q4 of Etsy Purchase Protection? And then how do you expect it to impact the first quarter? And then maybe, Josh, we can have come back to you, and you can talk about Etsy Purchase Protection a little bit. Rachel?

Hi, Laura, thank you for the question. So, we've said in the past that we expected Etsy Purchase Protection to be about a $25 million expense on an annualized basis. We launched Etsy Purchase Protection in early August. So Q4 was our first full quarter of that $25 million that is -- so it's a small portion of the $25 million. We're trending well within that envelope that we had previously quoted. The -- it's really early days yet to see how much GMS lift this might ultimately have, how much increase in trust that this initiative might have. We're not promoting it separately to a large extent. We're promoting it is on checkout. There is a reference there, and that comes to us at no extra cost. So, I feel -- we feel good about the cost. We didn't break out any margin impact, specifically, but I'm giving you a range of magnitude on the impact to our P&L.

Josh, did you want to add anything else on Etsy Purchase Protection?

Yes. Just that when we look at the opportunity in frequency, when we ask people, do you intend to come back soon, and for the people who say they don't intend to come back soon, why not? Etsy has my back is a leading indicator, where they aren't confident that Etsy will have their back. And so that's why we think that leaning into trust is so important. We're really proud of the fact that, as Rachel said, Etsy Purchase Protection is coming in right around our cost estimates, maybe even a little less. And that suggests that our sellers are doing a great job. They are shipping on time. The item is as described. It is arriving not damaged to the vast majority of the time. So we don't have as many chances to prove that we have your back because of the fact that sellers are generally doing a great job. But the fact that the time to fix an issue has gone down so dramatically just in the past few months as a result of the Etsy Purchase Protection Program, we think is really powerful. We've gone from days to hours in terms of how long it takes to resolve an issue. And as a customer, that's a great experience. You have an issue, you contact customer support. And in the first contact, it's resolved, we give you a refund, and you move on. We think that over time, it's not like that's a light switch that flips and suddenly your brand is perceived differently. But the next day, you go to coffee with your friends and you say, "Look, what happened to me, it was a great experience on Etsy." And over time, you build that brand. So, we're very excited about the early performance of the purchase protection and want to keep investing in having our customers back, both buyers and sellers because we think it's really important.

Great. Thanks, both of you. I'm going to start this next one with Rachel, just to give us some stats, and then I'll turn it to Josh a little bit as well. From Lee Horowitz at Deutsche Bank. Now that we are through what is presumably the last COVID comp, should the expectation be that habitual buyers can grow from here? And what do you see as the key areas of product improvement in 2023 that you expect to drive cross-category shopping in habitual buyer growth? Maybe, Rachel, you want to start by just kind of reiterating what we said about habitual buyers.

Yes, so what we said on the call was that habitual buyers is about 8% of our total buyers represents 40% of our GMS. Actually, for the full-year of 2022, it represented 44% of our GMS. And just as a reminder, habitual buyers are those buyers that come six or more times a year and spend $200 or more in a year. It was a little bit of a step-down, but those buyers are not churning out. They're actually becoming repeat buyers, and I think they follow the same trend line as all of the other headwinds we might experience during reopening, during recession, periods of time where consumers have less discretionary spend. And so it's very reasonable that we'd see some step-down from that. These numbers are significantly higher than they were pre-pandemic when habituals represented only about 5% of our total GMS.

Josh, do you want to talk a little bit about initiatives focused on habituals and cross-category and all that?

Work. Yes, it's a big focus of ours, and so the team is working on it in a couple of ways. Let me start with the product experience, and then I can talk about the marketing experience. In the product experience, we want to make it easy for you to pick up a thread when you're in the middle of a mission and then easy to start a new mission when you're done with the mission that you're on. And so starting to understand an intuit, are you trying to complete a mission or start a new one is one path of work the team is working on. And then when we think about completing a mission, some of the work we talked about in the call about collections is a good example, where when you're on Etsy, you're thinking, well, maybe I want this or maybe I want that. Maybe you're planning a wedding, what are different ways I could set the table? So, you might put all of those into one collection. What are some bridal gowns I might use? You might put that into a different collection. That, by the way, tells us a lot about you that's very interesting. And now you've curated collections that some other buyer might also find very useful. So you've laid breadcrumbs to make it easy for you to come back and you've made it easier for us to get to know you better and in getting to know you better to become more personalized and to serve other customers as well. And then picking up the next mission is where things like recommendation algorithms get very important and where our better understanding of things like style and taste concepts that were very difficult to understand, even using just technology five…

Okay. Great, Josh. Thanks. Planning a wedding for my daughter, so all the collections are happening right now. I'm going to go to Rachel. We got a question from Kunal Madhukar from Deutsche -- UBS, sorry. I want to make sure we clarify something we said on our prerecorded remarks, so this is going to be for Rachel. As you look for teams GMS growth in the second half, how much of that will come from growth in buyer count versus growth and spend per buyer. So I think we want to clarify what we actually said about the second half.

Yes, so first of all, we didn't give guidance for the full-year. So we always -- we've been very cautiously, during unpredictable times, giving one quarter at a time. but we do like to give some sort of tea leaves or some suggestions of what -- how to think about in the second half. And so this time, what we said was -- I'm going to quote another CFO, who said on a call last quarter or the quarter before that, time heals all the lapping. And you would expect that time would heal all the lapping, if not for what we're seeing is pretty volatile headwinds right now from reopening, from constrained consumer balance sheets from inflationary pressures and that what we're seeing is some what I call characterized as choppy waters. And so that volatility or headwind may actually negate what we would say could be growth in the teens if not -- just because of the lapping, if not for this headwind that we're getting from the sort of exogenous factors.

Okay. Great. Thanks, Rachel. The next one I'm going to get to Josh to talk about a question we got from Ed Yruma at PSC. Can you talk about the drivers of new buyer growth in the Q4. Obviously, that was a good number. How can you lean into the strengths and drive strong new buyer growth again in 2023?

Yes. Thanks for the question. So we're proud of our marketing efforts, and we think bringing new buyers to the site, the team did a really good job in the fourth quarter, both in the U.S. and in international. We continue to make gains in the U.S. And we talked about, for example, increasing male buyer penetration and investing more in different channels to do that. We talked about NFL ads in a recent call. We're also doing a better and better job in our marketing on Google and Facebook to be able to speak to male audiences in a more personalized way, and we're seeing that really pay off. And then internationally, we've been fertilizing some of those fields, and we're starting to see really great results from that. So we've talked about the U.K. a lot. Germany was a great performer in 2022. And in both of those markets now, we have greater than 70% of purchases come from sellers in the same market. So we've got a really vibrant two-sided marketplace. And now in both the U.K. and Germany, we're a top 10 e-commerce site. That's the result of investing for a number of years to lay that foundation. So we're really excited in some of the other core markets we have now and how we can see growth there to continue to bring new buyers onto Etsy as we also continue to invest in the U.S.

Great. Thanks, Josh. I'm going to move to a question from Rick Patel at Raymond James, concerning our subsidiaries starting with Josh and then Rachel will come back to you afterwards. Can you expand on the most recent developments, Josh, for Reverb and Depop? And though Elo7, he didn't ask about it, and maybe touch on some new initiatives there. And then, Rachel, circle back with the profit question.

Sure. So let's see, starting with Reverb. Reverb appears to be gaining share versus the musical instrument market, broadly speaking, over time. We feel really good about that. They have a brand that's highly differentiated in the space. Some of the things that they've been working on recently that I think are really cool is partnering directly with brands, so that those brands are launching limited-edition exclusives on the Reverb site. That's really exciting. It can be a channel for the brands over time, and it gives you a reason to want to go to Reverb because there's a lot of only on Reverb kinds of things or opportunities for brands to move inventory that didn't sell at really deep discounts. So for those of you who are musicians, keep an eye on Reverb because there's a lot of cool stuff going on there. Another insight that they've had is that not all of the inventory is priced right because we saw so much inflation through 2021, and supply chain is backing up, and now prices have settled back down again for many items. And sellers may not have gotten the memo, and so they may have items that are priced for what looked like an attractive price nine months ago that looks very expensive today. And so they're doing a lot on value right now. How do we help coach sellers for what the current price looks like? That's the kind of thing that's really cool that's hard for Etsy to do because we don't have catalog of things for sale that all have SKU numbers. But at Reverb, they do, and they can do more of what is the current market price and help sellers make good decisions there. So that's very exciting. At Depop, first, Kruti and…

Rachel, do you want to just touch on the profitability question?

Yes. Just -- I think the second part of the question was just on getting profitability through those subsidiaries. And first, I just want to remind you that the subsidiaries are 12% or less of our total GMS. So they're very, very small. Reverb is just at about hovering around breakeven. Elo7 is not yet profitable, but they're also too tiny to matter or make any kind of material impact to our overall margins. And Depop, we're investing for growth. It would be really the wrong thing to do to starve them at this point. But I will also say, even if they were all three breakeven or better, they would still be dilutive to our margins at this point just because they're all subscale, and so their margins would be lower. And when you factor that into Etsy's very high margins, it just brings them down by a bit.

Thanks, Rachel. I know we're out of time, but we're going to squeeze in one more because we want to get to it. We got a question from Sean Dunlop at Morningstar, and it's really just about how -- what we're seeing in India. And can we talk about the early results and the road map from here, Josh, especially getting it to be going from a one-sided marketplace to two-sided?

Yes. We are really excited about the Indian market. It has a wonderful history of artisanship, craftsmanship, handmade, very aligned with the culture of India; and also the priorities of the government, which we think is great. Our ability to lift up and support Indian sellers in their own market, we think is something that we're very well aligned on, all of us together. We have about 120,000 sellers now in India with about five million live listings, so we think that's a really encouraging start. And the big asset we bring is the opportunity for the sellers to export to other markets in a very affordable way. For $0.20, you can open a store in India and sell to the world, and so that's how we've been able to get a good number of sellers and listings. Now we are building the belt-and-suspenders to allow for a buyer experience in India as well. And that requires shipping providers, that requires payments infrastructure. Making sure that we have all the right trust and safety, infrastructure for the Indian culture in the Indian market. And so that's the investment we've been making and the work that we've been doing. We're encouraged by the progress that we're making, and we're very excited about the future. I do want to say we want to invest in India in a sustainable way, and so making sure that we do it in a way that supports organic growth over time and doesn't just flood the market with a lot of investment that either succeeds or fails in a short amount of time. And then if it doesn't work, we pull out with our tail between our legs. How do we sort of bit by bit, step by step invest organically in the market in a way that is very sustainable over the long-term and builds a great market? So we're excited about that. We think we have a lot to offer to the Indian market and excited by the progress we've made.

Great. Thanks, Josh. And with that, I'm going to call it. We look forward to seeing everyone on the road back in real life out there soon. Thank you all for joining us.

Thank you.

Thanks, everyone.