Etsy, Inc. (NASDAQ:ETSY) NASDAQ 47th Investor Conference December 7, 2022 5:30 AM ET
Company Participants
Rachel Glaser – CFO
Conference Call Participants
Lauren Schenk – Morgan Stanley
Lauren Schenk
All right. I think we’ll get started. Good morning, everyone. Thank you for joining us. I’m Lauren Schenk, Morgan Stanley’s small and mid-cap Internet analyst. And I’m thrilled to be joined this morning by Rachel Glaser, Etsy’s Chief Financial Officer.
Before we begin, one disclosure on my end. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures. And Rachel, I know you have one as well.
Rachel Glaser
I’d just like to refer people to Etsy’s IR website where you can find our safe harbor and read it at your own leisure.
Lauren Schenk
All right. So with that out of the way, maybe for those in the audience that are less familiar with the Etsy business model, talk about Etsy’s market differentiation, the opportunity and sort of the strategy going forward.
Rachel Glaser
Yes, thank you. And thank you for having us. It’s nice to be here. Etsy is a 2-sided marketplace, meaning that there are sellers from all over the world, selling over 100 million items to buyers all over the world. There’s about 5 million sellers in our core Etsy marketplace and about 90 million buyers on the other side.
What differentiates us is that we are selling, for the most part, things that are handmade, customized or personalized especially for the buyer’s specification. And a certain percentage of our inventory is vintage items. So we consider ourselves squarely in the space of owning special. So you can buy things from lots of sellers on the Internet, on and off the Internet, but we feel like there’s no other — it’s hard to think of another competitor that’s exactly like Etsy where it’s 100 million items of things that are really special.
We’re in the whole long tail of almost every single category you can think of, maybe with the exception of electronics and things like that. But we have a good top 6 categories that are each one of them in significant addressable markets, each of their own. And we’ve identified in previous disclosures and conversations that we think all in, it’s a TAM that is in the trillions of dollars, not the billions of dollars. And so we have a significant room for future growth.
Lauren Schenk
Okay. Great. Maybe following up on that. I think one of the things that people like so much about your business is you don’t have a real formidable competitor, right? There’s Amazon Handmade, which hasn’t really scaled. And then the 2 that often people come to me with are sellers just having their own Shopify site or going directly to consumers through Instagram. So maybe talk about the competitive landscape and why those business models are not threats.
Rachel Glaser
So great questions. So Etsy sellers are not exclusive to Etsy. They can sell in lots of places. And many of them do, in fact, have their own websites, which may or may not be powered via Shopify. And — but we find that for the vast majority of our sellers, they make the vast majority of their revenue on Etsy.
So one thing that Etsy gives them that they can’t find on their own, it’s over 200 million unique visitors that come to their front door every month. We put a lot of our effort into helping to market on their behalf. And over 80% of our sales are actually coming to Etsy organically, typing in www.etsy.com. And so sometimes we call it putting — setting up a lemonade stand in the desert. If you were — if they were to go on their own without the support of Etsy, they are certainly free to do that, but they would have none of that traffic showing up. And so a Shopify provides lots of tools and services, but they’re not bringing a marketplace to them.
We invest significantly in the overall marketplace, not only in marketing, which I can talk more about, but in the entire member support and trust and safety organization where we handle a lot of the post-purchase experience both for buyers and for our sellers. Lots of things having to do with compliance. We have a very robust and secure payments platform that handles a lot of the transactions.
And in fact, very early on in my tenure and Josh Silverman’s tenure, we tried something, we call it 7 simple words, just by putting on the payments page as consumers were checking out, the seller never sees your credit card, improves conversion rates significantly because they know that there’s a large public company with a really stable and secure platform behind it that is going to keep all of their information safe. So one of our pillars for — core to our strategy is that we are a trusted brand.
So those investments are differentiated from a seller trying to sell on their own or sell through a Shopify account. When we do our research and then we do put a lot of seller census data annually in our 10-K, so you can go back and look at it, we see that for the most of them, Etsy is their #1 site. The second site, surprisingly, the second biggest place where they make sales, surprisingly, is things like craft fairs and flea markets and things like that. It’s the first — it’s well below that. It’s the next biggest Internet site where they’re making the greatest number of their sales.
Lauren Schenk
Very interesting. As we hindsight the third quarter earnings season, I think one of the key themes, not only in e-commerce, but consumer spending more broadly, is a lot of people thought October slowed relative to September. But Etsy actually said on a 3-year basis, October accelerated. So why do you think you’re bucking the trend?
Rachel Glaser
I get — I’m getting that question a lot. In fact, we’ve had great success maintaining the vast majority of our pandemic gains, even though our year-over-year GMS is a slight single-digit negative. That means we’ve maintained — we grew 2.5x since the start of the pandemic, and we’re maintaining over 95% of those gains.
And we saw — let me go back a little further in January of 2022, starting early on in Q1, we started to see a steeper decel, and that decel continued through April when we started to see a leveling off of our sales, May, June, July. And in fact, what we said about Q3 was that we had pretty much stabilized. And in fact, in October, we had slightly accelerated versus Q3 because we did our earnings call, I think, on — that was November 1, November 3 or something like that. And so we had just — we give as much data as we can. We could see what October was, and we saw a slight acceleration.
The why, why have we maintained so much of our gains when other companies have kind of reverted back to their pre-pandemic levels? What’s different about Etsy? It sort of goes back to your first question is that it’s hard to think of anything that’s quite like us. I mean there are some things similar. There are some mono-category companies that are similar to some of our categories.
But when we think about the — sorry, did I just — when you think about the breadth of categories that we’re in and that in every one of them, we’re offering something that’s unique, it’s probably customized or personalized for you in some way. It’s handcrafted. Over 80% of our sellers are female. The vast majority of them are businesses of one working from their homes. So you’re — when you’re shopping on Etsy, you’re actually shopping to help support a small, micro-creative entrepreneur.
You’re buying something from a sustainable — a business that cares about sustainability and environment and diversity. So you’re not only buying something that’s handcrafted and special, but you’re doing something good for the world. I think there’s a lot there in that package. And particularly in today’s environment where inflation is very high, there’s a lot of uncertainty geopolitically, macro-economically, you can buy a relatively affordable, somewhat luxurious item that still has meaning.
It’s holiday time, it’s your mom’s birthday, you’re still — even when inflation is high and your budget is constrained, you’re still going to throw your child a birthday party, why not? Buy it at a place where it’s going to be really special and meaningful and unique.
Lauren Schenk
Okay. Maybe talk a little bit about what you’re seeing from a cohort dynamic perspective such as high versus low end, and maybe you’ll touch on Europe as well as you have a sizable Europe business.
Rachel Glaser
You asked about cohorts and geographies?
Lauren Schenk
Yes. Yes.
Rachel Glaser
Okay. I just want to make sure I got the question right. So one of the things we’ve said about our pandemic-era cohorts is that they’re at least as valuable as the pre-pandemic cohorts. In fact, for a while there, we were seeing them slightly more valuable than the earlier pandemic cohorts. From an overall buyer perspective, we — for the first couple of quarters of 2022, we were seeing a net churn of about 1 million buyers, but that was — and that in the last quarter, that has leveled off, and we’ve actually reactivated more buyers in the last quarter than we had before.
One thing that’s interesting about Etsy’s cohorts is that they — let’s say, let me back up a minute. The vast majority of our buyers, for a very long time, were buying only once a year, and 40% were buying 2 or more times a year. We call those repeat buyers. Post pandemic, we’ve shifted so that 50% of our buyers are now buying 2 or more times a year, and the average for them is 5 times a year. So we’ve made this shift, and that seems to be maintaining.
The — in the repeat — in that repeat, 2 or more times a year segment of buyers — we have another category we call habitual buyers who come to us 6 or more times a year, and that has been the fastest-growing piece of our buyer growth. Habitual buyers have grown faster. That’s about 9% of our buyers, but over 40% of our total. So that sort of lays out the composition of the existing active buyers. We’ve actually — because we’ve had such a surge in buyers during the pandemic, when you go back historically, these buyers that come only 1 time a year, what’s interesting about them is that they come 1 time a year almost in perpetuity. A lot of companies will see 1 time a year a trip to 0 eventually. And our buyers come 1 time a year in perpetuity.
And because we had such a surge in buyers as they lapse out and their year has passed, we’ve had a greater and greater pool of what we call our lapsed buyers, ripe for reactivation. In fact, that lapse pool is generally newer than they have been in the past because we had so many people come in during the pandemic period of time. So we’ve had — we have a really rich pool of lapse buyers to go out and reactivate.
Geographically, on the new buyers, attracting new buyers to come in, we’ve seen more significant growth internationally. And that seems reasonable to us because we’ve only been able to, in the past year or 2, get to what we call 2-sided equilibrium in both the U.K. and Germany. That means there’s as much buyer demand as there is supply. And that turns on a lot of goodness in that when you get to that 2-sided equilibrium where we’re able to turn on performance marketing quite effectively in those markets, we’re able to do things with our search algorithm so that the local sellers are more prominent in the search results. So if you’re a buyer, you’re seeing purchases, items to buy in your local area, meaning you can get them quickly. You have maybe a higher trust factor with a local seller that the item is going to arrive in time.
And so we’ve seen that growth in the U.K. and Germany. We’ve been able to turn on brand marketing campaigns in each of those markets. I don’t know if anyone here has seen the ads that are running on television in the U.K. or Germany. Show of hands? Yes? No? Yes, some of you. And that brand marketing campaign is the thing that not only introduces new buyers to what Etsy is, like what are we, but also it’s the tap on the shoulder to remind people, oh, yes, remember that Halloween costume you bought for your dog last year, come back because you can also buy all this stuff for holiday.
And it’s really in those European markets that are relatively new to the Etsy story, it seems like it’s a brand-new exciting thing for them to find. So it’s reasonable to us that a lot of the new buyers are coming to us internationally. We see a lot of opportunity for continued growth in those markets not yet penetrated. In fact, the U.S., we feel, is a relatively immature market. And we have our sights on other key European markets. And we’ve started to lay down some foundational track in India to sort of invest in that as both an export market and a domestic 2-sided marketplace.
Lauren Schenk
Okay. Great. Maybe let’s double-click on a few things in there. So you mentioned habitual buyers going from 5% to 9% of the buyer base during COVID. I think in ’22, that sort of stabilized. So what are you doing to reaccelerate habitual buyer growth? And then on the lapsed buyer side, you’ve done a nice job of driving reactivated buyers. Maybe just talk about some of the strategies there.
Rachel Glaser
Yes. So we have an overarching sort of what we call our Right to Win, a strategy for the company that has 4 pillars that involve being best in — world-class in search, which I want to talk about a little bit. The human connection, which is really unique to Etsy in that there’s a seller on the other end of every transaction that you can actually have a conversation with when you’re making your purchase. Your item usually arrives with a handwritten note. You can see the process by which your seller is making the product.
A trusted brand. I talked about the 7 simple words that — and there’s a lot in there that we’ve done with the whole post-purchase experience and feeling confident that you’re going to get your item when you think you’re going to get it, it’s going to arrive safe and undamaged. And then the platform they all — those 3 sit on is this breadth of unique items, 100 million items.
Best-in-class search is one of the key factors that I think has helped us grow our audience and continue to grow frequency. Like I said, our repeat buyers are only about 50% of the audience. The other 100 — the other half of our buyers are coming only once a year. And growing — and that 50% that come twice — more than twice a year is average of 5x. I buy things every single month, probably twice a month. So it seems reasonable to us that growing frequency is a very possible and reasonable thing to do. I can think of a holiday, an occasion, a season that comes at least once a month. I’m sure you can all imagine, you’re already thinking in your heads of things that happen every month for which Etsy would be a great place to buy.
And getting that frequency number up is, I think, one huge factor, and doing that is the search opportunity. Because when you come to a site where there’s 100 million items and you type in, I need a gift, you’re probably going to get a search result of 100 million items. In fact, we gave an anecdote on our last call about a buyer who’s — we did some surveys and the buyer had searched for lamps. And his answer was, “I got 400,000 lamps. That’s a hard pass.” That was his exact quote because who wants to search for 400,000 lamps. Who has time to do that?
So getting search right, and we’ve done a lot of work really honing in on various — 3 different search models to really get closer and closer to, you want lamps, we know a lot about you. We know a lot about what you last bought, what your style and taste might be, what your price — your best price point might be, what your geography is. And we know a lot about the lamps. We know this one is nautical and this one is Boho. We know a lot about the sellers and their return policy and their reliability and shipping.
And we can amalgamate all that information together to get a much better search result. And we use an internal metric to measure our progress there by how often people click on the first page of results, click through to a purchase on the first page of results. And we’ve gotten better and better at that. So that’s one, the whole concept of search and using machine learning to give a better and better experience for the buyers, one huge element in improving on frequency.
The other is that the journey we’ve been on, on the post-purchase experience. So starting with when you — when the consumer is expecting to place an order today and get it tomorrow and have it shipped for free and have the return be free. Etsy, 3 years ago, was very far from that, and we’re still pretty far from delivering on that. But it isn’t our aspiration actually to ever get there because when you’re shopping on Etsy, any item that can be in a warehouse with a 1,000 dozen of the item is not an Etsy item.
These are people hand-knitting the sweater where they might have gone outback to shear the sheep to be able to get the wool to handknit the sweater and it’s going to be made. It probably doesn’t exist yet when you’re making your order. Many items don’t exist yet when you’re making your order. And so we want to get closer to a great buyer experience, but it’s not necessarily going to be next-day delivery. And for us, the things we’ve worked on is making the shipping price fair or free. So we eliminated the vast majority of what we considered egregious shipping prices.
We want to be able to display when are you going to get this item so that you know when you order it, when is the expected delivery date. We want to get it there on time. We want to get it there when we say we’re going to get it there. We want buyers to be able to search on what things are ready to ship tomorrow and what things will arrive in the next day or 2. And we want people to understand what the seller’s return policy is. So we’ve systematically, and I think the chart — we have a chart in our last earnings deck that shows many of the initiatives we’ve put in place to make that post-purchase experience a lot more compelling to a buyer.
Lauren Schenk
Okay. Let’s move to take rate for a moment. You increased your transactional take rate earlier this year, bringing sort of the blended take rate on core Etsy to about 19.5%. Maybe talk about what levers do you think are remaining on the take rate side? And how we should think about sort of the medium-term take rate in aggregate?
Rachel Glaser
So I wanted to first differentiate between take rate and transaction fee increase. So since we’ve been a management team, I think pretty much every year, we’ve been able to increase take rate, but we’ve only done a change to our transaction fee 2 times in the company’s entire history. Both of them increased — have the effect of increasing take rate.
But here’s an example of something that increases take rate without changing pricing for sellers, and that’s Etsy Ads. So we have a product, it’s an optional product for sellers, that allows sellers to spend some of their own budget to make themselves more prominent in a search result as the old paid inclusion model. And we manage both the bid and the ask and sort of guarantee or we self-police ourselves to give our sellers a very acceptable, attractive minimum return on ad spend.
And they give us a lot of budget. In fact, we have more budget than we can spend because we won’t spend it if we can’t give them that minimum amount of ad spend. But as our traffic has increased, that increases more page views, increases more clicks. And we’ve been able to put more of their dollars to work. And that Etsy Ads has grown significantly over time. It creates additional revenue, and that brings take rate up, and that’s a completely optional item.
Another example is Etsy Payments. We’ve expanded where Etsy Payments is available to use, that’s Etsy’s internal payments platform. We know that buyers that transact through Etsy’s payment platform, there’s a much higher conversion rate. We now have about 93% of our GMS running through Etsy Payments, and that has also grown take rate.
And the last example I’ll give that isn’t a straight transaction fee increase is Offsite Ads. So about 2 years ago, Etsy spends a lot of its P&L on performance marketing. And we changed that program so that it’s a cooperative spend with our sellers when we place performance listing at on a site like Google. When the seller has a successful sale from a listing — one of their listings, we charge a slightly higher transaction fee on that transaction that effectively was about a 1% take rate increase. It offsets about 40% of our performance marketing budget. And it’s a win-win. It’s basically a success fee-based ad product like a CPA model, and that was another way that we brought our take rate up. We also have twice done 2 transaction fee increases.
Your question was, what’s the opportunity to continue to do that? We are not dogmatic in that we say we’ll do something every year and we’re not dogmatic in saying, we’ll never do any kind of take rate increase again. The divining rod for us is, is there a fair exchange of value? Is there a service we can introduce that we feel the seller should pay for, but we’re giving them value back? And I think there’s lots of growth ahead, we think, through things like our Etsy Ads product, through further expansion of Etsy Payments from 93% coverage of our GMS to 100% coverage of our GMS. There are more services that we can offer to sellers that are going to be win-win for seller, buyer and Etsy.
I’ll give one example. It’s a live product, so it’s not a disclosure. But we talked about, I think, on our last call, we are currently testing with 2 partners the concept of digital download. So if you go on to Etsy and you want to download a piece of art that maybe you’re going to take to your printer and have framed, we now have partners that will actually do the printing for you. And that’s also a revenue increase, which brings take rate up. Just — I mean this may be obvious, but take rate is just revenue divided by our GMS. And the higher the revenue is as a factor of GMS, the higher the take rate is.
Lauren Schenk
Okay. I know you haven’t given official guidance, but is there any sort of initial high-level commentary you can give us on how to think about 2023?
Rachel Glaser
I think we gave notes on our last call that these are more modeling notes. But when you think about 2022, we still had a pretty big Q1 of 2022. We were still seeing the effects of Omicron. People were still staying home, which causes people to spend more online. We were still seeing some stimulus benefits hitting people’s wallets. The conflict in Eastern Europe hadn’t yet begun.
So there’s — we talked about in the notes for modeling, but there is still one more big comp coming out there in 2023. I love another CFO I heard on her earnings call used the quote, “time heals all the lapping,” meaning once we get past some of these quotes and we — as we’ve talked about, where we’ve maintained our rate of being at 2 to 2.5x bigger than we were pre-pandemic, we’ve hung on to all of that. And we have really good initiatives in the bank that we think we’re going to start to return to some growth in 2023. And then if you map out, once we get past those big comps, you should start to see that growth be positive year-over-year, particularly as we head into the back half of the year and we get our seasonally biggest quarters in Q3 and Q4.
Lauren Schenk
Okay. We have a few more minutes. I wanted to maybe wrap up on capital allocation. You generate close to $600 million in free cash flow per year. You’ve repurchased stock in the past. You’ve obviously made several acquisitions. How should we think about uses of cash going forward? And if acquisitions is a piece of that, what are you looking for?
Rachel Glaser
So we have $1 billion in cash today. We have a revolver that’s undrawn on. We do have $600 million of share repurchase authorization authorized by our Board. I think we repurchased about $151 million. Last quarter, we consider that to be not only ROI positive because the stock price has been a little bit bumpy, but we’re offsetting dilution that’s created by equity we grant to our employees as a form of compensation, and that equity allows us to be very competitive with the largest tech companies in the world to get the very best talent. So that share repurchase is a form of return of capital. So that’s one way that we use our cash.
You have seen us use cash to do some acquisitions in the past. We’re still digesting and getting those acquisitions integrated and off to — they are immature in their markets in getting them situated into a position for growth. And then the last bucket would be organic investments. We don’t use our balance sheet to fund our organic investments, but effectively our choice to invest in marketing, to invest in people, to invest in our cloud infrastructure is a use of capital in and of itself. So those are the 3 legs of the stool on capital resource allocation.
Lauren Schenk
Okay. We have 2 minutes left. What are you most excited about for Etsy’s future?
Rachel Glaser
We talk about being in this $2 trillion TAM. We’re barely scratching the surface of it. I think the number we said is that 40 — 30% of women in the U.S. and the U.K., only 30% of women have bought on Etsy in the past year. 10% of men and the — all the other geographies outside the U.S. and U.K. combined are like an enormous opportunity that are completely untapped.
So I am very excited about the future growth of new buyers, the future growth of all of the reactivated buyers that we can have and the increase in frequency. It’s almost holiday time, and you all still have time to go shop on Etsy for your holiday presents. So choose wisely, there’s lots out there.
Lauren Schenk
Great. Thank you so much.
Rachel Glaser
Thank you.
Lauren Schenk
And thanks, everyone, for listening in.
Question-and-Answer Session
End of Q&A
Be the first to comment