Hi, everyone, and welcome to Etsy's third Quarter 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. And joining me today are Josh Silverman, Chief Executive Officer, Rachel Blazer, Chief Financial Officer, and Jessica Schmidt, Senior Director of Investor Relations. Today's prepared remarks have been prerecorded.

This slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. I'll be reading questions from covering self-side analysts and Jessica will help me get -- try to get to as many as we can.

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 measures and non-GAAP financial measures, which are reconciled to GAAP financial measures when available in the appendix to today's slide deck posted on our IR website, along with a replay of this call. With that, I'll turn it over to Josh..

Thanks Deb, and good afternoon everyone. Before we begin, the last few weeks of conflict in the Middle East have been devastating for impacted communities and beyond.

Etsy has taken actions that can most directly and immediately help our sellers, who live in the impacted region, including covering their existing balances as of October 31st, which represents a contribution of about $1 million, and we're providing additional resources to help sellers manage their shops during this incredibly difficult time.

Turning to our results, Etsy performed in line with expectations for modest to top-line growth and strong profitability continued. Consolidated GMS was $3 billion, up 1.2%, compared to last year. Revenue grew 7% to $636 million, and our adjusted EBITDA margin was again very strong at 28.6%.

As you all know, there's been significant pressure on consumer discretionary product spending, as high inflation, elevated interest in mortgage rates, splurges on [Zola] (ph) experiences, and declining savings balances have meant that there's little leftover for many consumers after paying for food, gas, rent, and child care.

These issues are magnified for lower-income buyers, and we feel the impact on the Etsy marketplace. We're also experiencing an increasingly competitive retail environment with a very heavy emphasis on deep discounting and in some cases competitors investing it potentially unsustainable levels in marketing and promotions.

While the headwinds we're facing at this moment in the cycle are undeniable, I'm pleased that once again performance green shoots for the Etsy marketplace were evident in the third quarter. GMS grew about 1% versus the prior year and the prior quarter. We had another new record in active buyers, now at $92 million, with slight growth in U.S.

active buyers as well. And buyer additions were up over 6% year-over-year. On a sequential basis, we reported accelerated international growth and improving trend in GMS per buyer and flat performance in habitual buyers.

In this very challenging environment, it's more important than ever that we bring our A-game competing hard to win our share of consumers' wallets. And we are. We believe that overall, we're at least holding our market share gains and that our product and marketing investments are making a difference for buyers and sellers.

We've been laser focused all year on knocking down barriers that stop buyers from shopping or shopping more often on Etsy.

We know that buyers turn to Etsy most often for low-risk items, but we believe our opportunity is so much larger than that, because we know that Etsy can offer high-quality merchandise at a great value in a way that is both reliable and convenient.

We've been hard at work to break down brand barriers, so that buyers will think to shop with us even more often across a wider range of purchase occasions, leading to significantly improved consideration beyond just those low-risk items and ultimately market share gains.

Throughout 2023, we've moved boldly and with great urgency to address these areas, making strong progress in order to deliver a significantly better experience we can shout from the rooftops this holiday season. I'll explain each area further.

With over 120 million items for sale, we've got millions of beautifully crafted items we believe are perfect for almost any person or occasion. Our opportunity is to organize and curate the experience to help get you to the very best of Etsy quickly and easily.

We're moving beyond relevance to the next frontier of search, focused on better identifying the quality of each Etsy listing, utilizing humans and ML technology, so that from a highly relevant result set, we bring the very best of Etsy to the top, personalized to what we understand of your tastes and preferences.

For example, from the start of the year, we're tracking to a nine-fold increase in the number of human-curated listings on Etsy, to over 1.5 million listings by year-end. We're also utilizing ML models designed to determine the visual appeal of items and incorporating that information into our search algorithms.

Frankly, our timing on this work is important, with more competition than ever offering low quality, same as everyone else, mass-manufactured merchandise. There's also a huge opportunity to evolve the Etsy experience, so that we show buyers a more diverse set of options when they search for open-ended head query items, such as back-to-school.

On the left of this slide, you can see an example of how a search for back-to-school items looks on Etsy. We generally show multiple very similar versions of customized pencils, stickers, lawn signs and so on, all mixed together.

This is suboptimal as it offers buyers only a few main ideas on the first page of search and requires a ton of cognitive load to distinguish between virtually identical items. We've recently launched a variety of experiments with the help of Gen AI to evolve these types of head query searches.

As we move into 2024, when a buyer searches for broad queries, we expect to be able to show a far more diverse and compelling set of ideas, all beautifully curated by organizing search results into a number of ideas for you that are truly different and helping to elevate the very best items within each of these ideas, we can take a lot of the hard work out of finding exactly the perfect item.

And help build frequency as we highlight the wide range of merchandise available on Etsy. Another critical part of highlighting the good stuff and leading into our competitive differentiation is doing a better job than ever to enforce our Etsy seller house rules.

In the race to the bottom of commoditized commerce, it's never been more important that Etsy stands apart showcasing items that meet our policies and stand for keeping commerce human. Handmade policy takedowns are up over 120% for the third quarter.

I'm also pleased to say that in just a few months of work, we've nearly cut in half the percentage of visits where a buyer comes across a violating listing based on our constant sampling of the marketplace. So while buyers don't come to Etsy looking for mass manufactured merchandise.

It's critical we do an ever better job elevating the best of Etsy to keep Etsy special in the minds of our buyers and sellers. We're all aware of what an incredibly promotional environment this is. We pivoted our road map this year to invest significant resources into highlighting the great value Etsy sellers can offer.

Many consumers don't realize how cost effective it can be to buy directly from the maker even when buying something produced just for you or in very small lots. Because there are not layers of distributors and middlemen taking markups along the way.

But our sellers don't have pricing departments, giving them insights into things like how best to price each item and how or when to use promotions. So we need to be the ones to provide those insights and be their advocates.

We're helping sellers by providing information, so that they can set their own appropriate and sustainable prices and offer promotions that make sense.

During the quarter, we began initial limited testing of new features such as a pricing optimizer that provides real-time information on market prices for similar items and a cost recovery insight feature for heavy users of sales and offers.

We've also improved the way that sellers can put items on sale, and provided insights that will help them understand how to use those sales in a way that can drive GMS. We continue to elevate seller funded sales using a series of evergreen promotional content throughout the quarter. Such as our best of home at 40% off sale.

Five Star gifts under $30, back-to-school basics under $50 and so on. Seller sales, coupons and urgency signals drove well over $100 million in incremental GMS during the quarter. We told you on our last call that we would pull out all the stops to help Etsy sellers compete and win.

And in September, we ran an Etsy-funded 48-hour promotion in North America and Europe. The sale impacted GMS had a positive ROI and created a nice bump in reactivation of lapsed buyers. Buyers loved our Get 5 promotion.

In fact, we saw an increase in average order value during the sale period as buyers spent more than the $25 minimum needed to use the coupon. We'll continue to test and optimize new marketing approaches, including Etsy-funded offers in a disciplined and ROI-focused way.

If buyers are unsure whether an item will arrive on time, if they lack confidence in the fit or quality or if they're unsure if someone will have their back when something goes wrong, it provides a lot of friction, causing shoppers to buy on Etsy less often. The good news is we've made so much progress against these metrics in the recent past.

As you can see on this slide, which represents our greatest hits in improving reliability and convenience. We've driven a tremendous increase in coverage for estimated delivery dates, better tracking of packages, big improvements in on-time delivery and transparent return policies and information.

But perception is not kept pace with reality, and we need to close that gap. We know that generally, buyers have a great experience on Etsy. So in addition to doing this work, we need to disrupt buyer perceptions even further so that they can see Etsy as a convenient and trusted place to shop.

And we'll do that in a big way this holiday season, as I'll explain in a moment. Only 12% of buyers will name Etsy top of mind as the place to shop for gifts. And association levels are much lower for other major categories like home and living and style.

We believe our efforts to improve quality, value and reliability will significantly improve consideration for Etsy starting in these important categories and purchase occasions.

Our Etsy hazard campaign is an important component given direct messaging and call to action alongside a significant amount of on-site product work, such as our new wedding, baby and gift registries, new home and living category pages and more.

Building this type of brand association to help buyers and potential buyers understand the when and why of Etsy is a long-term play, and I'm confident that a powerful combination of better on-site experiences and off-site amplification build Etsy's consideration over time. It's game time for holiday.

And thanks to all the work I've just described, I think our offering is the most compelling we've ever had, and we're ready to win. Our message in this holiday season is that will make you a gifting hero, helping you find the exact right quality gift at a great value for the special people in your life. All while supporting independent makers.

No one has a better opportunity to own gifting than Etsy and what better time than the holiday season. So here are some of our new initiatives. First, we've launched a new and improved curated gift finder now available in our app and featured more prominently on mobile web.

Second, our new deals tab replaces our updates tab in our app, making it easier to find personalized deals and amazing gifts at an affordable price. And third, we'll continue to selectively test Etsy-funded offers with an optimizing our return on investment.

And last, but certainly not least, we couldn't be more excited about our holiday plans to market in the U.S. that Etsy gifts will be delivered on time or your money back. Our estimated delivery date performance and Etsy purchase protection program enable us to stand behind purchases and work to disrupt buyer perceptions.

Here is one of our new TV campaigns all of which aim to disrupt by our perceptions of Etsy this holiday season. [Video Presentation] Shifting to our subsidiaries. Depop had a great quarter. GMS and revenue both grew double digits on a year-over-year basis with growth in active buyers sparked by strong new buyer growth in the U.S.

Depop's success can be attributed to compelling product and marketing investments, which have accelerated growth alongside an increasing flywheel impact from higher transaction velocity and improved user experience.

We're continuing to broaden Depop's appeal to feel more accessible to a wider audience, emphasizing value even more in the buyer experience while further streamlining the seller experience.

While Reverb's GMS was down modestly in Q3, the business outperformed the musical instrument industry, while also improving take rate and growing revenue, compared to Q3 of 2022.

Reverb enhanced the buyer experience by expanding search and category filters, improved negotiation tools and increased the prominence of promotions and price drops to help buyers more easily find the perfect piece of gear for their budget.

There's no doubt that this is an incredibly challenging environment for spending on consumer discretionary items. It's therefore important to acknowledge that the volatile macro climate is going to make it challenging for us to grow this quarter. While there are many things we can't control, there's still a lot we can.

So we are obsessively focused on those. All of us at Etsy feel a great responsibility to deliver profitable growth. Growth for our millions of sellers for our shareholders and for all of our stakeholders. Our team is working passionately and with the highest level of urgency.

And I'm more excited about our current road map and the progress we've made this year than at any time in my tenure. We're confident we're working on areas that will positively impact Etsy in the months and years ahead. We believe our TAM is enormous. Our market share remains small.

Our value proposition is highly differentiated, and we're solving for something no one else is. keeping commerce human. We're keeping our eye on the prize and look forward to getting back to strong growth again as we move through this cycle. Thanks for your time. I'll now turn the call over to Rachel..

Thanks, Josh. And thank you, everyone, for joining our third quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy Marketplace stand-alone results where appropriate.

As a reminder, Reverb, Depop and ELo7 were all reflected in our consolidated financial results and KPIs for the third quarter 2022 with Elo7 divested on August 10, 2023. Etsy delivered $3 billion in consolidated GMS, which increased 1.2% year-over-year, our first positive GMS growth quarter since Q1 ‘22.

Revenue increased 7% year-over-year to $636 million, and adjusted EBITDA was $182 million, up nearly 9% from the third quarter of last year. Note that Elo7's mid-quarter divestiture resulted in small headwinds to both GMS and revenue and was modestly accretive to adjusted EBITDA margin.

Given the volatile macroeconomic landscape that continues to impact consumer discretionary product spending, we believe these results demonstrate the underlying strength of our brand and consumer relevance.

Our year-over-year consolidated GMS growth was positive each month of the quarter, driven by strong Etsy Marketplace growth in several of our top international markets and continued active buyer expansion, as well as meaningful acceleration at Depop that outpaced consolidated growth.

The FX headwinds that impacted our business in the prior seven quarters reversed in the third quarter providing a 130 basis point tailwind. GMS for our subsidiaries increased in the third quarter, driven by the strong growth at Depop I just mentioned and partially offset by softness at Reverb.

Within our consolidated year-over-year revenue growth of 7%, consolidated marketplace revenue grew 4%, due to an increase in the volume of GMS, including growth in payment speeds for Etsy, primarily driven by a mix shift to more international transactions that yield higher fees, growth in subsidiary payment fees, as well as growth in revenue from offsite ads.

Services revenue remained a standout contributor to growth, increasing 16% year-over-year. Etsy Ads was the primary driver of this strength as we optimized our XWalk functionality to better value potential listing conversion and pricing into our ad ranking system.

Allowing us to show more ads in our search results without negatively impacting our conversion rate. We delivered a consolidated take rate of 20.9% and in line with the prior quarter and modestly above the take rate implied at the midpoint of our quarterly guidance.

Even while continuing to invest in product and marketing, our consolidated EBITDA margin expanded 40 basis points year-over-year to a very strong 28.6% and above the high-end of our guidance and our highest level since the fourth quarter of 2021. This strength was driven in part by leverage in product development spend.

Our subsidiaries represented about a 300 basis point to 400 basis point headwind to our consolidated adjusted EBITDA margin in the third quarter. We are very pleased with our ability to continue to balance disciplined ROI-focused investments and strong profitability.

We are pleased with the excellent returns on our product development spend this quarter, Etsy Marketplace product initiatives delivered approximately 40% more product launches than in the prior year with very healthy win rates.

Looking at the quarter's product development spend, we reported a 5% year-over-year increase to $114 million in the third quarter, gaining 30 basis points of leverage year-over-year partially, due to lower employee comp and professional services costs.

Our consolidated head count declined year-over-year due to the Elo7 divestiture, although we increased our core Etsy head count a bit as we usually do this time of year to invest in important growth initiatives. Particularly those that highlight Etsy's offering of high-quality merchandise with great value and convenience for buyers.

On a trailing 12-month basis, Etsy Marketplace revenue per average full-time head count for the third quarter was about $1.3 million, well above the approximately $800,000 for the Etsy Marketplace in full-year 2019 and some of the highest amongst our peer group. Third quarter consolidated marketing spend increased 9% year-over-year to $161 million.

While the increased competitive environment drove CPCs up, we continue to execute against our disciplined ROI-focused strategy. Our consolidated performance marketing spend increased 16% year-over-year as we expanded Etsy marketplace spending in several channels.

We've also been making significant progress scaling paid social which, as a proportion of our total marketing mix is now approaching a similar level to our peers. Our consolidated brand spend decreased 4% year-over-year as we pulled back a bit to run incrementality tests in select Etsy markets.

During the quarter, we were on air in our top three core markets and tested TV advertising in Austria and Switzerland. Our site-wide promotional event drove incremental GMS and was funded with a small amount of marketing dollars delivering positive ROI.

During the quarter, revenue from off-site ads offset approximately 35% of our Etsy Marketplace performance marketing spend. Moving to our Etsy marketplace GMS and buyer metrics. During the third quarter, Etsy marketplace GMS increased 1% year-over-year to $2.7 billion.

This increase was driven by a higher number of orders in FX tailwind and healthy growth in select international markets. Q3 GMS was relatively stable with modest year-over-year growth in each month of the quarter. While our GMS trends began to soften in late August, our increased marketing investments supported our positive growth through September.

However, towards the end of September and through October, similar to overall U.S. e-commerce trends, our GMS growth turned slightly negative as the consumer discretionary product spending headwinds worsened.

While we are pleased that our business returned to modest growth, we experienced the following key headwinds, macroeconomic challenges that pressured consumer discretionary product spending, particularly for lower household incomes and a higher competitive retail environment focused on deep discounting. Using U.S.

census average household income data by ZIP Code, our estimates support continued GMS pressures from buyers with household incomes under $100,000 and whereas GMS from our buyers with household incomes over $100,000 increased. Further, while representing a small segment of our buyer base and U.S.

households in general, we estimate that GMS from our buyers in the top decile of household income increased over 20% year-over-year in the third quarter, a positive indicator that Etsy's overall growth can improve as macro conditions stabilize over time. International markets continue to represent a bright spot for Etsy with GMS, excluding U.S.

domestic, up 7% in the third quarter, led by a return to positive growth in the U.K. as well as healthy growth in Germany and France. We also saw strength in other noncore countries such as Switzerland and Austria.

In this economy, we are seeing that mass merchants who sell essentials and whose brands stand for low prices and deep discounts are generally gaining e-commerce share broadly at the expense of most others.

So in order to drill down to Etsy's performance on a category adjusted basis, on this slide, we compared Etsy marketplace GMS generated from our U.S. buyers versus consumer Edge's U.S. e-commerce retailer data for pure-play competitors in some of our largest categories.

Encouragingly, this data supports the notion that we are gaining share, compared to our pure-play competitors.

Further, external credit card data we have studied indicates that even when including the largest mass merchants, we are holding our share of e-commerce on a category adjusted basis, even in this incredibly pressured and discount-oriented moment in the cycle.

As we look ahead, we're confident that Etsy has a significant opportunity to gain meaningful share in all of our top categories and beyond as we expand buyer consideration for Etsy and macro factors improve.

Given our estimate that Etsy Marketplace's global GMS is only about 2.5% of the TAM for all of our relevant categories in aggregate, we continue to see a significant room to be a net share gainer in e-commerce over time.

It's also encouraging that Etsy Marketplace's active buyers grew year-over-year for the third consecutive quarter to a new all-time high of $92 million with growth accelerating sequentially to a 4% increase from 3% in Q2. U.S.

active buyer trends turned modestly positive for the first time in seven quarters, International active buyer growth remains strong, and we had a 9% increase in active buyers who identify as men.

We added 6 million Etsy Marketplace new buyers in the third quarter, which was over 40% above our pre-COVID average quarterly new buyer additions, yet down 4% year-over-year. We reactivated 6 million lapsed buyers, up 19% year-over-year, with the vast majority of these reactivated buyers in the U.S.

Our retention rates improved from the prior year and remain above pre-pandemic levels on a trailing 12-month basis, providing further evidence that our investments over the past few years have enhanced overall buyer engagement.

Our number of habitual buyers was largely unchanged on a sequential basis at $7 million, an encouraging sign of continued stabilization in this metric. These loyal buyers accounted for 44% of our third quarter GMS, which increased slightly from the prior quarter.

It's important to note that we retained a slightly larger portion of our prior year habitual buyers in the third quarter than in the second quarter. Our number of repeat buyers grew 3% year-over-year to nearly $37 million, also driven by the previously mentioned markets.

Encouragingly, we upgraded more prior year active and lapsed buyers to repeat buyers in the third quarter than in any of the last six quarters. GMS per active buyer on a trailing 12-month basis for the Etsy marketplace continued to stabilize sequentially, but declined 6% year-over-year to $127 in the third quarter.

Overall, our GMS per buyer is 25% higher than the third quarter of 2019. As of September 30, we had $1.1 billion in cash, cash equivalents and short- and long-term investments. During the third quarter, we repurchased a total of $297 million in stock under our 2 board authorized repurchase programs, which together totaled $1.6 billion.

So far, in all of 2023, we have repurchased $484 million of our stock or 5.5 million shares and our 2022 $600 million authorization is now complete. Our free cash flow this quarter was a strong $208 million.

We continued to convert approximately 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis as our marketplace operates with minimal capital requirements. Now turning to our outlook.

We are working vigorously to deliver growth this holiday season, yet we anticipate that it will be challenging to do so given a multitude of headwinds. These include many of those discussed today, such as pressure on consumer discretionary product spending, fairly cautious external forecast about the holiday season and Etsy's category mix.

In addition, we are seeing a highly competitive landscape for advertising with some competitors investing without an eye to ROI. To be clear, this is not a game we will play. Etsy's performance marketing spending models dynamically adjust pulling back when we reach marginal return thresholds.

So higher CPCs could naturally reduce our spend for paid traffic. And of course, the world is now unfortunately faced with yet another significant geopolitical conflict, which could have implications for consumer spending.

We believe some of these factors contributed to a deceleration in our Etsy Marketplace year-over-year trend line, particularly in the U.S., starting at the end of September and extending into a slightly negative trend line lasting through October.

Last, a reminder that our guidance no longer includes Elo7 and represents a slight decrease to the top line. So please factor that into your models.

With a month of negative year-over-year trends and limited visibility to help consumers will behave this upcoming holiday season, we're doing our best to land the plane with our guidance, which has always been our goal. Our current expectation is that consolidated Q4 GMS would decline in the low single-digit range on a year-over-year basis.

However, if trends worsen, that could become a mid-single-digit decline. And if trends improve, GMS could be flat or even slightly up year-over-year. Obviously, with two-third of the quarter left to go and the all-important holiday shopping season having barely begun, it's tough to call it right now.

We anticipate Q4 take rate to be approximately 20.8%, down slightly on a sequential basis due to normal seasonality. So you can use that to estimate our revenue range for the quarter. Recent expansion of Etsy Payments into new international markets is not expected to impact take rate in Q4 and will likely represent a modest increase for 2024.

We are guiding to a consolidated adjusted EBITDA margin of 26% to 27% with seasonally higher marketing spend being the primary driver of the sequential decline, although, of course, consolidated EBITDA dollars are expected to be up sequentially. We plan to increase investments in performance marketing both in the U.S.

and internationally, will run select Etsy-funded promotions and invest in a powerful combination of brand visibility that includes TV, digital video, out of home, audio and more.

I'm super excited for our new mission impossible themed holiday creative, which is a great gifting call to action turning in an impossible and stressful gifting mission into a Tom Cruise level heroic moment.

With our subsidiaries expected to represent about a 300 basis point headwind to adjusted EBITDA margin in the fourth quarter, the core Etsy Marketplace margin implied in our guidance, approaches our previously provided long-term target of 30%.

In fact, on a full year basis for the Etsy Marketplace, we expect to finish the year just a bit shy of being a Rule of 40 company, which many see as best-in-class performance. Thank you all for your time. I'll close by encouraging you all to check out our new gifting and deals features for your holiday shopping. Deb will now moderate our Q&A session..

Okay. Hi, everyone. Happy to be here this evening, and we're going to take your questions. We've got a bunch in queue, so I'm going to dive right in from Lee Horowitz at Deutsche Bank. Josh, you were able to impressively reaccelerate growth at Etsy when you landed the company back in 2017.

And the environment was much different than it is today, but what are the learnings from that initial time? And how can you apply that to getting Etsy growing from here?.

one, picking a few things and focusing on them, moving really fast and making sure that every single dollar we spent worked hard to drive growth. And I think we continue to get even better at those things.

When I look at the progress we've made this year, when I look at how much we've executed, over the course of this year and how good our shopping experience is going to be this fourth quarter versus what it was last fourth quarter. I'm incredibly proud of what this relatively small team has done. So we stay very focused.

We stay very urgent, and we work hard to make sure every dollar is working really hard. This is the toughest macro I've run this business in by far. And in spite of that, we think we have gained share against our pure plays. And even when you put mass discounters in we think we're at least holding share within our categories.

So even in this tough environment, I think we're more than holding our own. And I think that's because the team is executing with a ton of focus and with a ton of urgency, and we feel a huge responsibility to be driving growth for our sellers, for our shareholders, for everyone, and we're going to keep driving super hard to do that.

Appreciate the question..

Great. Thanks, Josh. From [Indiscernible] at Citi, and it's a connected question.

There remains growing concern from investors on the competitive environment in e-commerce you touched on it last quarter, but are you seeing anything different from here, particularly from the newer Chinese entrants?.

Now if I'd seen anything different, but there's no question that Temu and Sean are having an impact in the market. You don't get that big that fast without taking share from many people. And I think we and most players need and e-commerce have had some impact.

And the other thing that is happening is they're spending a large amount of money on marketing, not clear that they're using ROI thresholds to do that. And so I think those two players are almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta. We are the opposite of Temu.

If I had to think about what is the polar opposite of Etsy, I'd probably get pretty close to Temu.

And so continuing to focus on the incredible quality of the merchandise for sale on Etsy at affordable prices delivered really reliably I think the more people experience super cheap and super disposable, the more they crave something different and something better, and that's us.

And even as they invest a lot in certain marketing channels, we have other channels we can invest in. We are not going to drive a race to the bottom. We're not going to invest unprofitably. But we are, for example, shifting some spend to TV.

So if we can't invest as much in some paid marketing channels, there's other channels we can invest and we're going to keep competing, and I believe can keep winning over time..

I just had just a couple of notes just to what Josh said. And just to reemphasize, Etsy is a very differentiated marketplace where we have a human being on the other end of every transaction. This is a marketplace that is -- we're creating economic empowerment.

Most of them -- most of our sellers are women and they're handcrafting these items oftentimes customized or personalized to the buyer specification in a sustainable way. So to underscore Josh's point about being the opposite of some of the new mass merchant entrants, these are things that we really care about and matter to many of our buyers..

And the next question is also connected from Mike Morton at Moffett Nathanson. During the quarter, there were some announcements to Etsy sellers from the trust and safety team about keeping Etsy special through doubling down on enforcement, adding more human reviews. And improving the integrity.

We've observed a difference in recent weeks, and we were wondering if you could speak to any impacts it could have on GMS and how you would size the impact of the stepped-up enforcement. That Josh, that's for you..

Yes. So thanks for noticing. First, we're investing about $50 million in enforcement throughout our policies this year.

We've hired a lot of people, and we also have been investing a lot in machine learning and machine learning is really helping us to be able to identify among the 120 million listings on Etsy, those that may not conform with our policy. Takedowns are up 140% year-over-year.

And we've really been focusing on what percentage of buyers come across one listing or more that doesn't comply with our policies. So the fact that something exists on Etsy doesn't mean that it's seen. But what percentage of buyers will see a violating view we've cut that number in half in just the past four months.

So I'm glad you're noticing, I think it is very noticeable and we think there's even more we can do. I'm also proud to say that we are seeing no deleterious effect to GMS from that.

People don't come to Etsy wanting mass-produced product, and we're finding that as we do even more to suppress those listings on the site, the site experience only gets better. We only get more differentiated..

Great. Thank you. The next one I'm going to give to Rachel is from Anna Andreeva at Needham. Product development line item leveraged for the first time in several quarters.

What drove that? And how should we think about the growth in that line item in the fourth quarter and into 2024?.

Yes, I think that the top line is that we're adding product development people that are -- were investing in them for growth. They are actually driving more GMS and revenue than the cost to have them in our overall cost base. So the biggest driver of product development costs coming down was employee compensation.

A technical answer to it is also that we divested ourselves of Elo7. So there's a chunk of cost that came out of the product development line and because Elo7 was not profitable, you would have expected that cost to be higher than the amount of revenue they were generating.

And then just a reminder that we really -- we measure our product development investment with an eye on ROI just like we do with marketing, and we invest in areas where we believe they're going to drive incremental GMS and they are, and we talked about how product development velocity increased -- the product -- number of product launches actually increased 40% this last quarter.

So it's just a great demonstration of how we're getting return on the investment in product..

And then there's two questions that I would say are very connected, one from Shweta Khajuria at ISI Evercore and one from Maria Ripps at Canaccord.

Really asking for some initial thoughts on 2024 in terms of marketing and product spend, how we balance growth and profitability, could we expect to see any margin expansion? How are we thinking about next year's macro? It's sort of a loaded question around all of the things for 2024 from multiple analysts.

So I think I would start maybe with Josh and then Rachel, I think you'll have a lot to say or whichever one of you want to go first because I think there's probably both room for both of you here.

Josh?.

Well, we haven't given 2024 guidance yet. But what I would say is we are always thoughtful about balancing growth and profitability. You have never seen us be a growth at all cost company or throw discipline to the wind. You've never seen us try to buy market share indiscriminately.

So when -- I just was speaking about competition from some of the Chinese recent competitors. And if they drive costs up in the auction too much in performance marketing, let's say, we'll go to other channels. But we're not willing to bid higher than a keyword is worth.

We also measure, as you well know, our product development and what value have they created our team, each squad in terms of additional GMS, additional revenue or cost savings. And I'm really proud of the team and how they're delivering. We talked about launches being up 40% year-over-year, but productivity is very high.

We feel great urgency to be giving everything we can give right now to help our sellers grow at this time to deliver even more value to our buyers and even more value to our shareholders. And so the team is acting with great urgency and we are thoughtful and careful about hiring.

We are thoughtful and careful about the investment we make in R&D to make sure that it is delivering it is driving growth. And we're going to keep doing that. When we see opportunities to invest to grow, we'll take them, but we're always going to do it with discipline and care..

And I can just add just a couple of notes on -- first on the marketing point, we have been able to scale additional marketing channels. One of them is paid social.

So we've gotten a number of paid social campaigns to work, and we gradually increased our level of investment in paid social as a channel so that we're just about at the same level as many of our peers in that space. We've also been able to scale CRM, where we've got really effective targeted e-mails going to our buyers.

And we have also been able to scale internationally. So we're bringing in many new and reactivated buyers internationally. We talked about being in three markets, but also testing television in Austria and Switzerland in this last quarter. All of those are campaigns that reach our marginal ROI threshold.

On the product side, and Josh will probably talk about this more, but we have really been able to leverage machine learning to make all of our engineers more productive and more efficient so we can develop and produce faster, bringing -- decreasing the payback period on our product investment. So we're always -- we're never really done optimizing.

We've been able to work down cost on our Google Cloud investment considerably as we've leaned into that platform first for our cloud computing costs. And so that all gets baked into our ROI calculations on product development spend..

Great. And since we were on the topic of marketing, and you touched on this, but I'll just ask the specific question we got asked from Sharanjit Cheema. I hope I said that right, at D.A. Davidson. And I'll give this to Josh.

Can you give your current thoughts on advertising, including your efforts on linear TV, OTT and digital advertising, including TikTok. We touched on it, but I might as well ask that..

Yes. Great. Great question. So if you look at Etsy back since 2017, and 2017 and 2018 really we're focused on performance marketing. We've gotten a lot better at performance marketing. We've got a lot more sophisticated there. Then we started moving up the funnel, we moved into social, social video and then TV above the line.

We are getting a lot more sophisticated at TV, and we're now -- the affordability of OTT has been a bit of a challenge for us. The CPMs are just so much higher than linear that you've seen us mostly invest in linear are starting to crack the code on being able to pay for OTT and get enough value out of it to have the ROIs really work.

Obviously, with OTT, you get more targetability and some other benefits, trackability as well. So really excited there. But mid-funnel is also an area we're really working on using things like YouTube and paid social video to find people who are planning a wedding, let's say, or having a baby.

The opportunity to build consideration when you don't necessarily have a specific product that they're already looking for, but when you think that they're in the market generally for things is an area where I think there's a lot of opportunity for us to continue to get better. We are investing. We are seeing gains.

And we have started, for example, insourcing more creative there. So head count has grown a little bit, but actually, we're paying less agency fees. And when we in-source more of our creative, we can make content for mid-funnel really fast and really cheap, and that allows us to have more targeted content that's more of the moment.

So it's those kinds of capabilities and muscles we keep building that I think is getting us to be a better and better full funnel marketer. Another thing I'll just say about marketing and we're above the funnel that can help a lot is Etsy is now a brand many people are familiar with. If you walk around in the United States or U.K.

and say, have you heard of Etsy? Most people will say, yes. If you ask the next question, what do you think of Etsy, almost everyone you talk to is going to say the same three things. It's the same three words, I love Etsy. Great.

But they think they know us already and they have a set of opinions that we need to disrupt, for example, it must cost more because it's made just for me. And in this very highly promotional environment, when a lot of people are looking for deals, they don't necessarily associate Etsy with deals.

Now Etsy is never going to be a blue light special bargain basement place. That's not our brand. But with 120 million things for sale, we do have millions of items that our sellers want to put on sale at really attractive prices.

And so disrupting people's understanding of Etsy by saying actually not only is a beautiful product, but you can afford it, and it's priced well is disruptive. I'm really excited about arrives on time or your money back. That isn't a totally novel claim. But it's novel for Etsy. People don't realize how reliable Etsy sellers are at delivering on time.

And I think that kind of thing is actually disruptive to, oh, I didn't realize that Etsy could do that. And so those kinds of disruptive claims is how we're thinking a lot about how we're messaging above the line right now..

Okay. Great. Thanks, Josh. We have several questions about promotions, so I'm going to combine them.

One is from Eddie Yruma at Piper Sandler, and one is from Nathan Feather at Morgan Stanley, but it's basically getting at how do we think our Q3 promotions went the Etsy funded promotions? And how do we think about those more as a go-forward marketing strategy? I think we could start with Josh on that one..

Great. So the Q3 promotion was just $5 off of spend $25 or more and you get $5 off were great. We saw a nice little bump in GMS and buyers really like that sellers loved it and it was ROI-positive. It was a relatively small investment, and it worked terrific. Then in October, we ran $10 off 40 didn't work as well. It was not ROI positive.

It pulled forward sales as much as it increased sales, didn't drive as much incremental lift. I could go a lot deeper into how did it work in one market versus another in one category versus another with new buyers for laps buyers. But the point is we're learning. And this is a tool we'll have in our toolkit.

I would expect we'll do more in the fourth quarter as we continue to test and learn with an eye towards testing and learning. The investments are something we put an ROI threshold on like anything else we do. But the vast majority of promotions on Etsy are seller funded. It's when sellers put things on sale.

And the new deals tab in our app, for example, I'm really excited about. It just launched. It's very early days, but buyers seem excited that there is a deals tab. One place I can go to find deals just for me. and maybe something they didn't think of an associate with Etsy. So I think we have a lot of sellers who want to put things on sale.

We can do a better job and we really are focused right now in giving them insights on how, when and for how much should they put things on sale. And then us highlighting those things. That's going to be most of how promotions continue to work.

But if Etsy can be the icing on the cake with some Etsy funded things and make that a good investment, we're going to keep testing, and I'm optimistic that, that's going to be a lever in our toolkit..

Great. I like the icing on the cake. That's great. Rick -- next question comes from Rick Patel at Raymond James, Rachel. I'm going to give this one to you. Can you expand on new buyer ads? How much is coming from the U.S.

versus international? And anything around categories and how people are spending when the new buyers come in?.

Sure. So first of all, we love our growth internationally, and we said up 7%. And so we're seeing that we're opening up new markets, which is fantastic. We've certainly seen a lot of new buyer growth coming from international, but we've also seen a material amount of growth coming from -- for new buyers coming from the U.S.

So really in both places that we haven't disclosed the breakdown of new buyers by geography. So that's as much as I can say there. And no, we don't really see any category differences by geographic market. It's sort of a universal appetite for all of our major categories along tail of categories across all of the geographies..

Great. There are two questions about sort of areas of interest that we have for investment. One is from Ashley Owens at Key and the other one is from Nick Jones at JMP, and I'll basically read a version of the combined question, which is for Josh.

As you look out over the next couple of years, what are your priorities in terms of investments in mark-for-the-market place for buyers and sellers in search in other tools? And how do you see those types of investments inflecting frequency over time. I think that's really the net result of the question..

Great. So thank you for the questions. We think we are in the early days of unpacking Etsy's opportunity. We think that we can gain a lot of share in our categories and versus e-commerce and through both adding new buyers and frequency. And there's four things we're really focused on right now. It's quality, value, reliability and consideration.

Starting with quality, value and reliability. We've made a ton of progress on relevance. So whatever you enter in the search engine, we do a pretty good job of understanding what you meant in finding a set of results that are relevant to what you meant, maybe not what you said.

But giving you a diverse set of ideas, what are the five or 10 best ideas for that provided it's a relatively generic thing like gift for mom or whatnot. Giving you a really good, compelling diverse set of ideas and then picking the few best examples within each of those ideas is a big focus. I think we have a ton of opportunity to do better.

So we don't just match you with the product you're likely to buy. It's a product you're going to love. And in the process, we show you the breadth of the kinds of things that Etsy can do for you. I think there's a ton of opportunity. And as we do that, we will get a lot more frequency.

In terms of value, people assume that if it's mass produced somewhere and lots of hundred thousand, it's going to be cheap and it is. But it turns out that if somebody makes it just for you and there aren't three markups along the way, that also can be affordable and can be special.

And so highlighting the fact that you're getting great value on Etsy is something that is a big focus, helping our sellers price well, use promotions well. That's a big focus. And then on reliability, we've made so much progress on making sure items arrive on time.

making sure there's clear return policies, making sure it's easy to fix things on the rare occasion that something goes wrong. We now need buyers to understand all the progress we've made, and we can continue to do better, make delivery windows shorter without losing the special nature of Etsy. So a lot we think we can continue to do on reliability.

As we do better on quality, value and reliability we then need consumers to understand that we need to disrupt their consideration of Etsy so that we're in their consideration set a lot more of the time.

And again, with only 3% of people, if you say, name a place to shop for home furnishings, only 3% of people can name Etsy, you say, name a place to shop for gifts, only 12% of people are naming Etsy. We think there's enormous opportunity there..

Okay. Great. I'm going to jump to a question from Trevor Young and his team at Barclays. And it's related to our seller growth. So you've seen -- we've added over 1 million active sellers in the last three quarters. Can you talk about the levers that drive that strong growth? And Josh, I'll give that one to you..

I'd say that's the other side of a tough macro we candidly haven't done anything different to acquire 1 million sellers. Nothing. It's just -- I think it's a tougher time. A lot of people are learning -- are wanting to make some extra money, and Etsy is a fantastic place. If you make things and you want to sell them, there's no place like Etsy.

And so I think it's just a testament to the great value that we offer to our sellers..

Great. Thank you, Josh. And the next one is for Rachel from Anna Andreeva at Needham. Question on take rate. You mentioned there could be an opportunity to still raise some of the fee structure at more Etsy and the subsidiaries. What is the sensitivity towards additional raises from the seller community..

We strive hard to make sure that if there's any changes to fee structure that we are providing value back to sellers that they can actually feel and not just value to sellers, But good for the buyers too. There's really three or four ways to expand take rate. One of them would be to expand services we already offer.

So for instance, Etsy Ads is a service we provide that we've continued to improve the efficacy of that product, and it allows us to grow the revenue from that product. Etsy Payments is another example of that, where we just talked about launching more Etsy Payments markets and that expands fees from Etsy Payments.

Also benefit to the sellers in those markets. Another way to expand take rate would be to offer new services.

So you can -- we have nothing specific to announce on our call today, but I mean you can look at other marketplaces and you can see a lot of services that Etsy does not currently provide and those might be services that are beneficial to our sellers that we could consider investing in.

And then there's straight pricing increases, and you've seen us do that a couple of times.

And again, we would never just make a -- or we have never make just a wholesale change to our pricing, but we would do it in conjunction for -- to answer this question, what can -- why would we be -- how would we be investing that incremental revenue derived from a higher price? And we think hard about that.

So you've seen us, if you go back over time, you've seen us been able to increase our marketing investment because we've taken lifetime value up and we can continue to invest or dollars and still have a high -- achieve our marginal ROI thresholds. And in turn, you've seen as we've done that, not only has marketing increased, but so has GMS.

So it's been a virtuous circle that we've really appreciated. So we need to answer that question for ourselves. What way could we put those dollars to work that will be beneficial to the overall marketplace. And that's how we look at it..

Okay. Great. We had a question in from Eddie Yruma at Piper Sandler, and it's really about the financials of Depot, which I want to ask Rachel.

But I first want to ask Josh sort of what we're seeing in the business there, talk about the financial performance just in general of Depop and what do we think is attributing their growth? And then Rachel, maybe you can add on how we think about their EBITDA margin drag..

I mean Depop had a great quarter. Depop is doing great. And particularly in the U.S. Depop is doing fantastic in the U.S. right now. And again, I think this is the other side of a tough macro is Depop is a way to get very affordable close that doesn't have a negative impact on the environment. And that's very popular right now.

And so Depop is no question benefiting from that. I also think the management team we put in place and the specific programs they're executing are working, the marketing programs that are executing are working. .

So it is the benefit of a portfolio as we hoped when we bought that company, that having a portfolio allows you to benefit from different sectors of the economy at different times, and that's where we are seeing..

Yes, Rachel, did you want to add anything there on that?.

Yes. The only thing I'd add is that when we talked about our guidance, we said that we expect in the fourth quarter, our subsidiaries to be about a 300 basis point contraction to our overall margins. That's down from the 300 to 400 basis points that we have been talking about previously.

Due in part from the divestiture of Elo7 but also strong growth at Depop..

Okay. And then, Rachel, while I have you, a question from Laura Champine at Loop. Is the Q4 GMS outlook in line with the quarter-to-date trend. I assume what she means through October.

If so, what do you attribute a slowdown from the pace of Q3? And then she had asked us a connected question separately, which was, is it -- is it really coming from Etsy getting crowded out by other advertisers who may lack a hurdle rate to him their investments. that's one..

So I think that's a yes end. So with the -- just to reiterate the guidance we gave, we said that we grew every single month of Q3, but we started to see some softness towards the end of September, and that continued into October, where we started to see slightly negative trends.

The guidance we gave reflects that softness in October, and we said that would -- we would expect about low single-digit declines for the fourth quarter. If the macro were to worsen, and we have a long list of macro that I think everyone is familiar with, but we're seeing decrease in consumer discretionary product spending.

And I can double-click on that for a second. If it worsens, we would be -- maybe that would shift to mid-single-digit declines. But if it improves, we could be flat to even positive.

The double click on the decreases in consumer discretionary product spending is to just point out what we've seen, and I'm sure you've all seen the economic data is that we've seen actually growth in spending in services and we've seen stability and some growth in goods from durable goods.

But the non-durable goods, which is where Etsy primarily is and particularly nondurable discretionary goods is the piece that's really under pressure and is receiving a lot of the headwinds from the macro. The increases in spend in non-durable goods is primarily in essentials and items that are heavily discounted.

So we're really in the sweet spot of the eye of the storm, I would say. On top of that, we are seeing a lot of competitive pressure on advertising spend as the CPCs go up. Our model is dynamically pull back, and we just naturally spend less, which obviously would point to bringing in less -- acquiring less traffic less buyers..

The only thing I'd add there is everything Rachel talked about is GMS. So the GMS guide is down low-single-digits. Take rate is actually up year-over-year. You'll notice in our guide. And so a low-single-digit GMS would still be roughly flat, maybe even slightly positive revenue for the quarter..

With very healthy margins, so….

Yes..

That's a good way to end. We are out of time. So thank you, everybody, for your time, and we will be talking to you all as we go through the quarter and shop on Etsy for all your gifting needs..

Thank you..

Thank you..