Etsy, Inc. (NASDAQ:ETSY) Q1 2024 Earnings Call Transcript

Etsy, Inc. (NASDAQ:ETSY) Q1 2024 Earnings Call Transcript May 1, 2024

Etsy, Inc. misses on earnings expectations. Reported EPS is $0.48 EPS, expectations were $0.49. Etsy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Deb Wasser: Hi, everyone, and welcome to Etsy’s First Quarter 2024 Earnings Conference Call. I’m Deb Wasser, VP of Investor Relations. Today’s prepared remarks have been prerecorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO. Once we are finished with the presentation, we will take questions from our publishing sell-side analysts on video. 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 on 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-K 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 or slide deck posted on our IR website, along with the replay of this call. With that, I’ll turn it over to Josh.

Josh Silverman: Thanks, Deb, and good afternoon, everyone. Etsy’s consolidated results, while within our guidance range, were not where we wanted them to be. GMS was just shy of $3 billion, down 3.7% from last year. Revenue grew a bit up 0.8% to $646 million, and we delivered $168 million in adjusted EBITDA, a very healthy adjusted EBITDA margin of approximately 26%. Etsy marketplace GMS was down 5.3% year-over-year, a bit of a disappointment as March GMS trends did not improve as we had anticipated. That said, I’m encouraged that the Etsy marketplace’s record-high level of 92 million active buyers held up very well in another challenging quarter for our type of goods, signaling to us that while buyers shopped a bit less with us than they did in the prior year period, we have some comfort that these trends are cyclical rather than structural.

To that point, while U.S. unemployment is low and inflation data is mixed, consumer sentiment remains depressed, which some speculate can be attributed to the very high cost of money. Consumer wallets remain squeezed so there’s often a little left after paying for food, gas, rent and child care. And there’s significant data indicating that the largest e-commerce platforms have primarily been able to grow by selling everyday essentials at very low prices. Macroeconomic conditions also continue to be quite challenging in our other top markets, the U.K. and Germany. These headwinds are real, do not appear to be abating and are impacting our sales. Stiff headwinds mean that our product and marketing initiatives have to work even harder to drive growth.

In the first quarter, we shipped meaningful improvements to the customer experience, positively impacting GMS. Just not enough to offset the headwinds to our baseline business performance. I’m particularly pleased that our leaner and more nimble Etsy marketplace product development organization was off to the races. We had double-digit growth in the number of experiments per product engineer that utilize machine learning as well as in our annualized gross GMS from experiments. And the total number of experiments run per engineer increased 20%. Some of this progress can be directly tied to what we told you about last year to democratize ML. These metrics give me confidence that the bold moves to improve customer experience can build over time and play a key role to get Etsy growing again.

Our marketing team also kicked into high gear, in-sourcing Etsy paid search efforts and scaling mid-funnel channels. Expanding our product feed testing across PLA and paid social to improve the quality of inventory we’re showing users and developing engaging and creative full-funnel activations across channels. Our key focus for 2024 is to continue to build consideration for Etsy, to help buyers think of us more often by making it easier to find the best stuff, driving association that there are great deals on Etsy and making shopping on Etsy more convenient. We believe that changing buyer perceptions is eminently achievable, making us more of a go-to shopping destination and we’ve made excellent progress kicking off bold initiatives to do just that.

Thanks to the great work our product team did on the initial launch of Gift Mode, combined with creative and engaging marketing campaigns to raise awareness of Etsy as a key gifting destination, we’re off to a good start evolving Etsy from being one of the places you can go to find a gift toward being the indispensable partner for all of your gifting missions. Gift Mode is by far the most unique and varied subset of inventory we’ve ever curated and shown on Etsy. Organized around a set of gift ideas and not just items in order to help you feel like you’re shopping for a person and not a thing. We’re pleased to report that Etsy’s total site-wide gifting GMS in the first quarter grew in the low-single-digits year-over-year, significantly outpacing our site-wide performance and data we’re tracking for select U.S. online gifting-focused peers, who all saw year-over-year declines.

We’re seeing quarter-over-quarter increases in U.S. consumer perceptions that Etsy is making it easy to find great gifts, a key Gift Mode value problem. And importantly, our research tells you that Gift Mode expands buyer understanding of the breadth of our offering, very helpful as, of course, we’re about so much more than just gifts. We utilized full final marketing strategies to tell the world there was something new at Etsy, such as securing the most visible advertising position in football’s big game, making an estimated 100 million plus impressions. Gift Mode’s launch generated over 4 times as many news articles as any of our prior consumer PR campaigns, and we had an over 200% increase in conversation volume around Etsy and gifting in our social channels, compared to this time last year.

As we’ve said before, this was a kick off, not the mic drop, and we’re in the early days of driving brand awareness to make Etsy more top of mind for gifts. We’ve got a robust road map for Gift mode to improve the experience and get more buyers into the funnel, from recently optimized gift teasers to additional gifty profiles, reminders, video and audio message capabilities, and new occasion pages and much more. Turning to our quality-focused initiatives, which we believe represent a tremendous unlock to drive buyer consideration. We stand for keeping commerce human. And believe that doing this in a way that no one else can is our most important competitive advantage. We’re focused on creating cleaner shopping aisles for buyers. All too often, when you visit Etsy, your search is cluttered, showing you too many items that feel very similar, increasing cognitive load while failing to highlight the incredible diversity that is a towering strength for Etsy.

In addition, you might not be clear as to why each of these items belong on Etsy. For example, which are handmade by the seller themselves, which are designed by the seller, but produced in close collaboration with the production partner and/or which are personalized and customized by the seller. While there’s demand on Etsy for each of these categories of items, it depends a great deal on the buyer’s shopping mission. With the tremendous growth in sellers and inventory we’ve experienced over the last few years, this challenge has gotten all the more real and complex. The great news about this challenge is that large language models and gen AI techniques provide so much opportunity for Etsy to better understand both the shopping mission you’re on as well as our inventory.

And show you the best stuff in ways we couldn’t have imagined just a few years ago. This year, we’re going on the offense in an even bigger way to make sure Etsy lives up to our promise from an inventory and quality perspective along these four key focus areas: first, we’re doing more than ever to suppress and remove listings that violate our policies. And advances in ML have been particularly powerful as enablers here. In the first quarter, we removed about 115% more listings for violating our handmade policy than in the prior year. And you’ve heard us talk about the violative view rate. Buyer views of listings that violate our handmade policy are now just a few percentage points of total listing views. Our improved enforcement capabilities have resulted in the cumulative removal of millions of listings and tens of thousands of active sellers.

While there’s a strong replacement factor to fill in for any removal of seller listings on our marketplace, we estimate that the heightened level of takedowns we’ve initiated over the last six to nine months has represented about a 50 basis point headwind to our annualized GMS. We see this as a very important investment in our future with significant progress made but still more to do to keep making Etsy different and special and even more Etsy. Second, we need to elevate listings that represent the best of Etsy. Over the past several years, we’ve dramatically improved our search relevance, ensuring that buyers can more easily find what they’re looking for. We believe there’s a huge opportunity to build on this work by factoring attributes such as the quality of the listing and photography, shipping price and reliability and customer reviews into our organic search algorithms.

All of this will help buyers find something that’s not only relevant but will also lead to a purchase experience they’re likely to love. We also want to empower sellers through transparency and education so they know exactly what actions they can take to improve their visibility creating opportunity for more sales on Etsy. And the third and fourth items on this slide, curation and organization, work together to do an even better job showing the newest and best merchandise available from sellers on Etsy, whether through home and landing page experiences, category shopping, initiatives like Gift Mode, our Deals tab and more. While we’ve made incredible strides in directed search on Etsy, we have a very significant opportunity to focus more on window shopping.

Creating engaging buyer experiences to spark your imagination, capture impulse buys, get to know your tastes and preferences better and expand your understanding of the breadth of products available on Etsy. This is an area where we intend to fight much harder, making Etsy more fun, engaging, inspiring, surprising. We want you to come to Etsy when you have five minutes to spare just to be entertained, so you’ll come back to us again and again. And I’m confident that with our sellers’ incredible merchandise, our large buyer base, brand strength and our team’s creativity, we can make this happen. It’s imperative that we continue to widen the gap between Etsy’s offering and that of the competition so that our site always feels inherently different, fresh, special and even more human.

Better organizing our diverse listings into cleaner aisles will declutter our site enable buyers to find something they love with less friction and keep them coming back. We believe that supporting small business and shopping unique goods are our strongest levers to get buyers to think of Etsy more often. We’re planning to be quite loud with this message, reestablishing our point of differentiation in clear and compelling ways. We’re also making great progress in our other key focus areas to drive by our consideration, highlighting great value and reliability. In keeping with the times, during the first quarter, we promoted special and hot deals from our sellers with discount-related signals continuing to drive significant GMS impact. We also introduced new functionality for sellers, such as a growth page with customer insights they can use to inform actions to grow their business such as a new earnings calculator to assist sellers in understanding the various inputs that go into their profitability.

In terms of shipping timeliness, I’m pleased to report that our initiative to tighten estimated delivery dates, which we believe are an important effort to improve buyer perceptions of our reliability, as well as to grow GMS are already paying off. Our fulfillment team recently launched a new machine learning model, which reduced our estimate of USPS transit times by greater than one day, resulting in a nearly tripling of the percentage of eligible orders for which Etsy is now able to show an estimated delivery date of seven days or less. Driving consideration is all about inflecting the curve, to capture more new buyers and to help browsers convert to sales, to engage our existing active buyers, half of whom still only shop on Etsy one time per year.

and to retain and reactivate more buyers every year, working to get another bite at the apple with our more than 100 million lapsed buyers. Within this framework sits a very compelling opportunity to further expand usage of our Buy on Etsy app. Since purchasing days per app user are 75% higher than our non-app users. And only 45% of active buyers use our app, we’ve set some ambitious goals for 2024 to increase user penetration of our app and drive incremental downloads, including strategies to improve how and where we show the app download prompts, increasing the reach and effectiveness of our push messages and improving the experience for first-time app users. We have massive pools of buyers to fuel these strategies and are excited about the road ahead.

Owning our own destiny, particularly as some top search engines have lost a bit of their potency to drive traffic for e-commerce players, is an important priority for us. In closing, while so far, 2024 is still proving to be a cyclically challenging period for us. Rest assured that we are clear-eyed about what we need to accomplish to set Etsy back on a growth path. We’re confident we’re working on areas that will positively impact Etsy in the months and years ahead. We’re leaning in more than ever to what makes Etsy, Etsy. We are not deterred. And as I’ve said to some of you, proving doubters wrong is frankly quite energizing for us. Even as I celebrate my seventh Etsyversary this month, I remain encouraged that we still have so many opportunities to grow.

I’ll now turn the call over to Rachel.

Rachel Glaser: Thanks, Josh, and thank you, everyone, for joining our first quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace stand-alone results where appropriate. As a reminder, we divested Elo7 on August 10, 2023. So please take that into consideration when you compare year-over-year consolidated results. Etsy’s first quarter 2024 consolidated GMS was $3 billion, down approximately 3.7% year-over-year with 40 basis points FX benefit. Revenue increased a bit year-over-year to $646 million, and our adjusted EBITDA of $168 million was in line with expectations and roughly similar to last year. Note that Elo7’s divestiture resulted in small headwinds to GMS and revenue growth in the quarter, but was modestly accretive to our consolidated adjusted EBITDA margin.

While strong external headwinds pressured Etsy marketplace GMS trends throughout the first quarter, solid year-over-year GMS growth at our subsidiaries provided a tailwind to consolidated results. Our $2.6 billion in Etsy marketplace GMS represented a 5.3% decline on a year-over-year basis. I’ll cover this in more detail later. Within our consolidated year-over-year revenue growth of 0.8%, consolidated marketplace revenue was flat, with growth in payments and offsite ads revenue, offset by declines in transaction fees given lower GMS this quarter. We had a nominal benefit related to our new seller setup fee experiment launched in late February, part of our efforts to keep Etsy safe and secure. This fee is meant to introduce healthy friction into our process, facilitating enhanced security checks and continued support for new shops.

Tests indicated it resulted in an expected decrease in new shop openings and a significant decline in fraud attempts. Based on this successful outcome, we rolled it out in all eligible countries in early April. Consolidated services revenue increased 3% with our ad platforms being the primary contributor. During the quarter, we continued to enhance Etsy Ads, including refinements to our data retrieval engines that improved conversion predictions and a pace of spend for sellers’ ad budgets throughout the day. First quarter 2024 consolidated take rate was 21.6%, slightly ahead of guidance and above the 20.7% reported in the first quarter of last year. Our first quarter consolidated adjusted EBITDA margin was 26%, in line with our guidance, down 60 basis points from last year.

We gained leverage year-over-year on employee costs and variable cost of revenue offset by higher marketing expense, primarily from our big game advertising. Our subsidiaries represented an approximately 300 basis point headwind to our consolidated adjusted EBITDA margin. We’re encouraged that our efforts to effectively manage our cost structure and look for efficiencies are helping us to make important investments while also delivering very healthy profitability through this challenging environment for our discretionary goods. During the first quarter, consolidated product development spend decreased 5% year-over-year to $110 million, primarily as a result of our December Etsy marketplace restructuring. So we are, in fact, gaining leverage on this P&L line, as you can see from this slide.

Our first quarter consolidated head count was approximately 2,400, down 15% on a year-over-year basis. For the Etsy marketplace, head count was down approximately 9% year-over-year to a bit under 1,800, with revenue per head count increasing about 2% year-over-year. We continue to make deliberate and judicious decisions related to our hiring, focused on selective skills and the very best talent for our significant opportunity ahead. First quarter consolidated marketing spend increased 12% year-over-year to $192 million, largely driven by a 59% year-over-year increase in our consolidated brand spend primarily related to our above-the-line big game campaign in support of the Etsy marketplace’s launch of Gift Mode. Our consolidated performance marketing spend increased 2% year-over-year.

Performance marketing was a headwind for January as we conducted core channel optimizations and it then became a tailwind in both February and March as we expanded Etsy marketplace product feeds testing across PLA and paid social. And scaled up push notifications and mid-funnel investments to diversify our marketing portfolio mix. Etsy marketplace paid GMS was about 20% of our total, similar to our normal trend line. Moving to Etsy marketplace GMS and buyer metrics. Etsy marketplace GMS declined 5.3% in the first quarter, with the negative trends we experienced in January and February continuing through March. While we saw positive GMS impact from our product and marketing initiatives in the quarter, and we were really pleased with the performance here, our baseline GMS levels continued to be pressured by macro factors specifically related to consumer discretionary product spending that made it harder than we expected to bend the curve, which was disappointing.

More on that in a moment. Further, we saw greater-than-expected volatility around the timing shift of Easter from April to March. Well, this was a headwind to March. It has also provided a helpful tailwind for April, which I’ll cover in our Q2 guidance. Diving in a bit further on the consumer discretionary headwinds we are seeing, particularly in our categories, these two charts are probably the most informative to help us explain the overall GMS pressure we’ve been experiencing. On the left, you can see the steady decline in U.S. consumer discretionary spending as a percentage of total personal consumption expenditures, including through the first quarter of 2024, which supports our belief that much of our deceleration in the quarter was in line with the larger trend for discretionary goods.

And on the right, you can see that Consumer Edge’s pure-play peer sales data for our top 6 categories in Q1, and with low to mid-single-digit declines in every category except for craft supplies, which had a slightly positive result. These headwinds were stiffer than we had been anticipating when we set guidance for the quarter. Here, you can see that Etsy marketplace GMS was down across the board in our top categories. When we map our performance to the Consumer Edge data on the prior slide, we believe that we performed similarly, if not better, than peers in four of our six categories: home and living, apparel, paper and party supplies and toys and games, and we underperformed a bit in jewelry and craft supplies. But overall, we see this as a tale of broad weakness in the types of merchandise we sell.

We’d encourage you to remember that this comparison is a bit of apples to oranges and that Etsy sellers generally have not taken up prices in keeping with inflation as per retailers do. Consistent with the macro pressure we experienced in the U.S., Etsy marketplace GMS, excluding U.S. domestic, declined 1.5% from the prior year with particular weakness on a year-over-year basis in our top markets of the U.K. and Germany. We did see growth in Switzerland, Austria and the Netherlands. While our U.S. domestic GMS continues to decline on a year-over-year basis, we are seeing healthier performance in our U.S. import trade route with high percentage share of imports from sellers in the U.K., Canada and Turkey. It’s quite encouraging that Etsy marketplace active buyers grew 2% on a year-over-year basis, roughly flat to the fourth quarter and about 92 million active buyers.

U.S. active buyers have grown a bit now on a year-over-year basis for three consecutive quarters, and we continue to see healthy additions outside the U.S. We reactivated over 6 million lapse buyers, up 6% year-over-year. And we added nearly 6 million new buyers in the first quarter, down year-over-year, but still a very healthy proof point in this type of macro climate, well above pre-pandemic levels. Habitual buyers decreased by 3% year-over-year. We continue to observe a trend where some habitual buyers purchased slightly fewer items or spent slightly less, no longer meeting our habitual buyer definition and moving to the repeat buyer category. We also retained slightly more habitual buyers in the first quarter versus our retention of habituals in the fourth quarter and the prior year period.

Lastly, GMS per active buyer was down 3.5% in the quarter. Additional Etsy marketplace metrics and trend charts can be found in the appendix of this presentation, which is posted on our IR website. Our subsidiaries both had encouraging momentum to start the year. Both businesses delivered year-over-year GMS growth with Reverb continuing to outpace the musical instruments industry and Depop growing faster in the U.S. than their comparable resale players. They are providing good lift to consolidated results, affording exposure to different categories and buyer purchase behavior than our core marketplace. Both Reverb and Depop appeal to value-oriented shoppers with great deals, with Reverb highlighting news and outlet merchandise establishing itself as a destination for affordable and discounted music gear.

And Depop continuing to be a home for discovering affordable fashion, with success helping users to set fair prices and more easily negotiate. As of March 31, we had $1.1 billion in cash, cash equivalents and short- and long-term investments. During the first quarter, we repurchased a total of $158 million in stock under our $1 billion June 2023 Board-authorized repurchase program, of which $566 million remains available as of March 31. Our capital-light business model allowed us to deliver strong free cash flow this quarter of approximately $59 million. We also continue to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis. Now turning to our outlook. As mentioned earlier, the larger-than-anticipated headwinds the Etsy marketplace experienced in March due to the shift in Easter and spring break timing had the inverse effect on our consolidated GMS for April, which was down about 2% year-over-year, pacing ahead of our consolidated Q1 results.

While we are certainly encouraged by this performance, and we have a lot of conviction about our product and marketing investments, which stack each quarter, we remain cautious given how challenging has been to predict the outlook for our business. We currently expect the year-over-year decline in consolidated GMS for the second quarter to be similar to our actual first quarter performance, with the downside being a mid-single-digit decline and the upside being the top end of a low single-digit decline. Reverb and Depop are again expected to provide a modest tailwind within the consolidated GMS performance. We anticipate consolidated take rate and adjusted EBITDA margin for the second quarter to be similar to our actual performance for the first quarter.

Our subsidiaries are expected to post about a 300 basis point headwind to adjusted EBITDA margins as their revenue continues to flow through at lower margins. With a range of potential outcomes for the full-year, our current view suggests a modest acceleration in year-over-year consolidated GMS in the second half. You know we’d like to call it like we see it, and it’s just really tough for us to call it right now. As you can see on this slide, we are reiterating our prior commentary about full year take rate revenue and adjusted EBITDA margin. Built into the take rate expectation for 2024, our Etsy Payments expansion plans, including recent addition of China and the seller setup we described earlier. As we continue to build exciting initiatives, we will look for opportunities to deliver a fair exchange of value, which enable us to invest in growth.

Our team is highly engaged and energized, and we will continue to keep our eye on the prize. Thank you all for your time today. I will now turn the call over to the operator to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Maria Ripps with Canaccord. You may now unmute your audio and video and ask your question.

Maria Ripps: Thanks so much for taking my questions. It seems like my camera is not working. So yes, first, kind of understanding that we’re sort of in a tough environment right now for consumer spending, I just wanted to ask about the competitive environment. So it seems like the Chinese sort of competitors started becoming a little bit more aggressive around Q2 of last year. So as we start to lapping that, do you anticipate maybe a more favorable or maybe a little bit more stable competitive backdrop kind of — is that becoming less of a headwind as we move through the second-half of the year?

Josh Silverman: It’s possible. I think what we’ve been saying all along is that we think that the Chinese competitors are more symptoms than a root cause. I think what we’re observing again and again, both at Etsy and what we read in the commentary from so many others in our space, is that consumers feel really pressured in spite of what we’re seeing about a generally healthy economy, consumers feel really pressured and so they are seeking value in deep discounts and deep promotions. And so yes, the Chinese competitors are offering that, but Amazon and Walmart are, too. And it looks like the people that are driving most of the growth in e-commerce are people that are able to offer everyday essentials at very low prices. And there’s probably some trip consolidation that’s happening there, too.

While you go into Walmart to buy your groceries at a cheaper price, you may pick up some other items as well while you’re there. So I think that the Chinese competitors are a competitive headwind, no doubt. They’ve been a headwind to us and to everyone else in e-commerce. It would be great to see them not investing so aggressively in marketing. But I think the root cause of consumers feeling a ton of pressure and, therefore, seeking deep discounts will remain regardless of what the Chinese players do. Our focus in that is not to chase them to the bottom, is not to try to be the very cheapest place to buy things. It’s to make Etsy more Etsy. It’s to lean into what makes Etsy different and special. And we talked a lot about that on the call. I’m incredibly excited about the — all the initiatives we have going to really elevate the very best of Etsy, suppress the things that are not the best of Etsy and make the aisles easier to shop so people can see the wonderful products that we have on offer and the more that they find really, really cheap and really disposable things.

I think the more they will crave an alternative to that and we’re bound and determined to use this moment to get even stronger as that alternative.

Maria Ripps: Great. Thank you. And then for my follow-up, I just wanted to ask you about your kind of product road map. Is there any sort of additional color you can share with regards to the expected sort of structure and timing of your loyalty program? And then sort of what — which cohort of customers do you think sort of this loyalty program will have the most sort of tangible impact on driving sort of increased frequency? Is it onetime buyers kind of turning into repeat buyers or sort of maybe repeat buyers turning into habituals?

Josh Silverman: Yes, great questions. The team is making really good progress. I don’t have any specifics to announce, but we are on track to launch in beta form in the second half of the year. And the focus is going to be on occasional shoppers and how do we take people that shop on Etsy occasionally and turn those people into more loyal buyers.

Maria Ripps: Thanks so much for the call.

Josh Silverman: Thanks for asking questions.

Operator: Our next question comes from Nick Jones with JMP Securities. My apologies, I’m waiting for him.

Debra Wasser: I think he was having some issues before. So if you can’t get him, we can go to the next.

Operator: Our next question comes from Laura Champine with Loop. Please unmute your audio and video and ask your question.

Laura Champine: Oh, hi. That was — got it. And I think we’re working now. So the question is about the implication that GMS improves as you move through the year? And I know that’s not what you’re saying for Q2. But upon what kind of macro changes that predicated, if any?

Josh Silverman: I am very excited about the initiatives the team is working on this year. I think the things we’ve talked about with gifting, getting even more known as the place for gifting. The things we’ve talked about with quality really leaning into the differentiation of Etsy. There’s a lot of really good work going and that work stacks. So it is our current expectation that more likely not, we would grow in the second half of the year as a result of that. Headwinds to that would be if the consumer discretionary environment gets even more challenged. And it’s just hard. Things have been pretty volatile even week-to-week right now. So it’s pretty hard to know how that’s going to shape up.

Laura Champine: So just to make sure I’m understanding that correct, sort of a similar macro to what we’re experiencing right now, but starting to see the impact of your own initiatives. Is that fair?

Josh Silverman: That’s fair. And I am very excited about what we’re doing this year. I think it’s really very relevant. I think it’s going to be very impactful. And the team did great work last year. The product and engineering teams alone generated an incremental $1.5 billion of GMS from the work they did last year. So we’re lapping that. And I think the work we’re doing this year is going to be even more impactful. I believe that. I think we’re on track for that. And so we believe that can lead to accelerated growth in the second half. That’s our hope and we think it will happen.

Laura Champine: Got it. A quick follow-on, something that Rachel called out was positive friction with sellers with this incremental fee. And it’s been, I think, 12 quarters in a row that your sellers have been outgrowing your buyers. Is that making it tougher for search to improve? And would you rather see a narrowing of that gap?

Josh Silverman: Yes, that’s such a good question, Laura. So yes, we have been saying for quite some time that we have quite a lot of sellers and quite a lot of inventory, and we want to make sure that we have enough demand to match supply. And so particularly seeing low effort, sellers come on the platform, sellers that may not have the skill or the will is more data we have to process, more handholding we’ve got to give to folks. And so having a group of sellers that have higher skill and higher will, these are the sellers that I think are most likely to succeed on the platform anyway. We think that’s very helpful. So the early results from having just a small fee of $15 to set up a shop on Etsy, if you’re not prepared to invest $15 to get your shop going on Etsy, you may not have the skill or the will to really succeed. So we’re seeing that a little bit of a speed bump be helpful.

Rachel Glaser: Josh talked about a few things about our quality and curation and really getting better at finding the good stuff, elevating that to the things you see first and then suppressing or not uploading the stuff that’s lower quality. So there’s a lot of initiatives going on at the same time that’s all about keeping — not only keeping the marketplace safe and secure, but really a focus on quality and being able to find the good stuff. So we also talk about actively removing things that don’t comply with our handmade policy. So some of these things that we do on the upfront help us with the downstream efforts that we want to invest in to really focus on quality and organization of the best of sites.

Josh Silverman: And I can’t help but pile on because I’m really passionate about this. We’ve talked about the abundance of supply on Etsy a lot, but what does that look like in real life? When you search for something, we usually have thousands and in fact, often tens of thousands of relevant results. And the first page of search results might be 30 things that look very, very similar. And to a buyer, that’s just a lot of cognitive load. If these 30 things are virtually identical, can’t you just tell me, which one is the best or what are the three, and what are the trade-offs between them? And that’s harder for us where we don’t map to a catalog. But I think with the latest machine learning and GenAI techniques, it’s easier and easier for us to start to understand what the stuff is, what’s very substantially similar and really try to give you fewer choices of just the best.

And in doing that, offer a lot more diversity as well, instead of 30 really similar versions, we can offer much more different things. And that can also help buyers to understand the breadth of offerings that we have on Etsy. So not only might they have a more satisfying purchase experience this time, but they’ll come back more often because they realize the breadth of offer that we have.

Deb Wasser: Thank you. Next question. Thanks Laura.

Josh Silverman: Thank you. Thanks, Laura.

Operator: Our next question comes from Michael Morton with MoffettNathanson. Please unmute your audio and video and ask your question.

Michael Morton: Perfect. Thank you. Two questions, if I could. Josh, you spoke to seller removal, I think, being a bit of a gross margin headwind. It was our interpretation looking at some of the comments last year that some of the fraud that was created in poor behavior from like noncompliant merchants could be actually like a gross margin headwind last year. So just curious, as you work through this process. If this could be a tailwind to gross margins as you get some of the noncompliant sellers off to like maybe elevated levels of returns like outside of Etsy’s protection program.

Josh Silverman: Yes. So in terms of gross margins, possibly, yes. And in particular, it may not be noncompliant, meaning sellers that are not handmade, but just sellers that have higher levels of refund or consistently ship late. So within the quality initiative, when we say we don’t want to just get you to a product you’re going to buy, but to a purchase experience you’re going to love. How do we have the search engine explicitly favor sellers that consistently ship on time, that consistently get 5-star reviews, that very rarely get returns, our search engine has been very focused on relevance. Is this item very closely related to what we think the person is likely to buy. In addition to relevance, we really want the quality of the purchase experience to be very important.

And that, I think, is going to lead to more satisfied buyers who come back more often and should be lower cost of revenue through lower refunds. Separately, what I was specifically referring to in my comments was doing an even better job taking not handmade items off the site. And I know you’ve been talking about that with us, and we couldn’t agree more that it’s really important that Etsy be Etsy. And there’s new technologies out there that make it easier and easier to spot. For example, does this same item exist also on AliExpress. And we assume right now, if that item exists on AliExpress, we assume it’s mass produced and we take it down. You as a seller can appeal that, you can tell us how you made it yourself, and it still ended up on AliExpress.

And by the way, that’s true sometimes. You can appeal that, but our default now is we take that down. And that’s just one example. Gen AI is actually going to be, I think, more and more helpful at understanding how much value did this particular seller truly add to the product. And we’re looking to prioritize items that are really original where the seller really added value and then be able to explain to the buyer exactly where the seller did add value. Did the seller make it themselves, did they design it and produce it with a production partner, did they personalize it, I think that buyers are interested in knowing that. And I think we can make that a lot more explicit. And that also, I think, is going to make the Etsy buying experience a lot more satisfying.

Rachel Glaser: And I just wanted to comment real quickly on. We’ve been doing takedowns, I don’t know exactly how many quarters now, but was really leaning into it for at least the last two or three weeks. So we’ve gotten successively better at it. We’ve often talked about the substitution effect. So we take things down, it does not necessarily mean a one-to-one loss of GMS when we do that because we have so many listings on the site, but there’s often very similar items that customers can substitute for that, but it does hopefully mean we’re taking down low-quality GMS. So GMS that doesn’t need — that doesn’t come with a high amount of chargeback or fraud or unpaid charges, as we call it here. And the second thing I was going to say is that the — sorry, the gross margin impact may therefore be offset by improvements in the cost of revenue hits we’re getting from some of the lower quality sellers on our own site.

Michael Morton: That’s great. And is it safe to assume that the removal of these merchants is having any type of impact on on-site revenue just due to like the auction dynamic that there’s a merchant sitting right underneath that?

Josh Silverman: Most of the time, when we remove an item, there’s another seller ready, willing and able to take that sale instead. And so when we talked about that 50 basis point hit, we’ve been really leading in to — and we’ve always taken down items for not complying, with not handmade. That’s always been a focus. But we’ve been getting better technology and investing a lot in that. And as we’ve taken down, as we said in the call, millions of listings and tens of thousands of sellers, it has had about a 50 bp impact to, we think, our site, meaning sometimes, it is not replaced, but most of the time it is. And frankly that 50 basis points of headwind, we are happy to bear. We think it’s a great investment in making sure that Etsy is different than — and Etsy is Etsy.

Michael Morton: Thank you so much.

Rachel Glaser: I just want to mention real quick, we are publishing a transparency report next week, so keep an eye out for that. Mike, I’m sure you’ll be all over it. All right, next question.

Operator: Our next question comes from Naved Khan with B. Riley Securities. Please unmute your audio and video and ask your question.

Naved Khan: Hi, can you hear me?

Josh Silverman: Hey, Naved. Yes.

Naved Khan: Okay. So two questions. Maybe just to kind of tease out some of the noise. So Q1, you also have some impact potentially from tax refunds. I heard that tax refunds were up 6% this year. And then you also had an extra day. So if you’re talking about as a baseline, GM has been similar in terms of year-on-year growth, does it mean it actually is improving trend-wise? How should we interpret that?

Rachel Glaser: There’s things that went both ways that were beneficial to Q1 that won’t repeat in Q2 and things that are beneficial to Q2 like Mother’s Day, that didn’t happen in Q1. Leap Day was — we say one of the 90 — of an additional amount. So it’s a pretty small de minimis, let’s say, less than point of benefit to Q1. Tax refunds were up a bit. It came later in the quarter, so it could actually potentially be — goes in the bank accounting and actually replenish people’s balance sheets that could be a longer-term benefit. So I don’t think we thought about it the way you’re thinking about it, that granularly on what’s in Q1 that doesn’t repeat in Q2 and vice versa. But we said, similar to the guide that we gave in Q1 — that’s our current expectation.

Josh Silverman: You point out some fair things. It is also true, as I think many of you know that the comps get a little harder each month this quarter. So May is a little — last year, May was a little stronger than April and June is a little stronger than May. So we also consider that. And we’re doing a lot of good things to make the business better, make the customer experience better. And we think that’s important as well. So net-net, what we said is we think it will be roughly similar could be as high as the top end of low single digits or could be mid-single digits, particularly if discretionary gets even more pressured.