Hi, everyone. And welcome to Etsy's Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been pre-recorded. Joining me today are Josh Silverman, CEO; and Rachel Glaser, our 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 to our website for your reference.

Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-Q and which will be updated in future periodic reports that we file with the SEC.

Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them.

Also, during the call, we'll present both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's earnings press release or the slide deck posted on our IR website, along with the replay of this call. With that, I'll turn it over to Josh..

missing a loved one, or sending a thoughtful item to a sick relative. Further, our data shows that U.S. consumers spend an average of $1,600 a year on gifts. We estimate that on average, Etsy's U.S. buyers spent about 2% of that, just $38, for gifts on Etsy.

There are literally millions of high-quality items on Etsy, made and designed by real people, that make great gifts for every occasion, budget and interest.

Yet, because we sell so many things for such a vast variety of purposes, it's difficult for people to know when to turn to us, and we often aren't the first place people think of or come to when they're on a gifting journey. Only about 10% of U.S. shoppers name Etsy top-of-mind as the place to shop for gifts.

And there is no single brand that really owns gifting. So we see this as an early-stage opportunity. Another way to look at this opportunity, we estimate that only 43 million of our global Etsy buyers bought a gift from our sellers last year, which means that over half of our active buyers didn't.

And that's not even counting the tens of millions of other shoppers for whom gifting can be a compelling reason to start shopping on Etsy. Gifting represents a huge TAM. We estimate the relevant opportunity to be about $200 billion in the U.S. alone. We believe our market share is about 1%.

So even moving up to 2% would be a $2 billion growth opportunity for us. Obviously, that $2 billion is already captured in the very large TAM mentioned earlier. But by defining this space and investing with focus in gifting, we believe we can move the needle on growth.

So what's Gift Mode? It's a whole new shopping experience where gifters simply enter a few quick details about the person they're shopping for, and we use the power of artificial intelligence and machine learning to match them with unique gifts from Etsy sellers.

Creating a separate experience helps us know immediately if you're shopping for yourself or someone else; hugely beneficial information to help our search engines solve for your needs. Within Gift Mode, we've identified more than 200 recipient personas, everything from rock climber, to the crossword genius, to the sandwich specialist.

I've already told my family that when shopping for me, go straight to the music lover, the adventurer, or the pet parent. We've incorporated some great new ways to help the procrastinator or alleviate the general concern that Etsy gifts won't arrive in time. Let's show you how it works.

[Video Presentation] Early indications are that Gift Mode is off to a good start, including positive sentiment from buyers and sellers in our social channels, very strong earned media coverage and nearly 6 million visits in the first two weeks. As you test and shop in Gift Mode, keep in mind that this is just the beginning.

We have an exciting roadmap planned for gifting discovery journeys, logistics and experiences to gift -- to make Gift Mode easier and more delightful for both the gifter and the giftee and to get both coming to us more often. Before closing, I'll comment on the solid recent contributions from our subsidiaries.

Depop's performance significantly improved in 2023, returning to healthy year-over-year GMS growth, with very strong double-digit growth in the U.S. and strong growth in revenue. The U.S. is a large opportunity for Depop, with the resale market forecasted to be over $40 billion by 2027, growing nine times faster than the broader retail clothing sector.

For the full year, Reverb significantly outperformed the musical instruments industry, and while GMS was about flat, revenue increased on a year-over-year basis. Reverb returned to GMS growth in the fourth quarter, primarily attributable to their focus on used and outlet inventory.

The Reverb team made some organizational changes late in the year, which we currently expect will help the business achieve adjusted EBITDA profitability this year. We believe the best is still ahead for Etsy.

Right now is the moment when many consumers are feeling stretched, with low confidence in the economy and less money to spend on discretionary items, but it's a moment that we believe will pass. Etsy's mission and compelling Right to Win remain relevant and sound.

I'd like to officially welcome Marc Steinberg to Etsy's Board of Directors, and believe he'll bring unique and valuable experience as an investor and Board member in the technology, digital media and e-commerce industries. And most importantly, he shares our passion for Etsy's mission and excitement about our future growth opportunities.

I want to thank the Etsy Reverb and Depop teams. You've all worked with incredible heart, creativity and determination to delight our buyers and help our sellers grow. We're going to lean in hard to our differentiation and believe we have the financial strength to do so in a sustainable way.

We've started the year off with a bang with Gift Mode, and that's just the beginning. I'm confident we can get back to the kind of growth that we and all of our stakeholders can be proud of. With that, I'll turn it over to Rachel..

Thanks, Josh. And thank you, everyone, for joining our fourth quarter call. My commentary today will cover consolidated results, key drivers of performance and Etsy marketplace standalone 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 and quarter-over-quarter consolidated results. Etsy delivered $4 billion in consolidated GMS, roughly flat to the fourth quarter of 2022. FX benefit moderated to 90 basis points in the fourth quarter, down from the 130-basis-point tailwind in the third quarter.

Revenue increased 4.3% year-over-year to a record $842 million. And adjusted EBITDA grew to an all-time quarterly high of $236 million, up nearly 4% from the prior year. Note that Elo7's divestiture resulted in small headwinds to both GMS and revenue for the quarter, and was modestly accretive to consolidated adjusted EBITDA margin.

Following a challenging October, Etsy's marketplace's year-over-year GMS trendline improved in November and December due to the solid holiday performance Josh described earlier.

We had a nice end to the quarter with better-than-expected GMS growth across all of our brands, enabling us to come in slightly above our mid-December revised guidance for GMS and revenue.

Within our consolidated year-over-year revenue growth of 4.3%, consolidated marketplace revenue grew 2.6% due to higher payments revenue related to a mixed shift of more international transactions that yield higher fees, growth in subsidiary payments fees and higher offsite ads revenue.

Services revenue was once again a key contributor to growth, increasing 9.4% year-over-year. Etsy Ads was the primary driver of this strength, with continued improvements to add relevance.

We delivered a consolidated take rate of 21%, largely flat to the prior quarter and slightly above the take rate implied at the midpoint of our quarterly guidance provided in mid-December.

For the full year, our consolidated take rate increased approximately 160 basis points due to strong growth in Etsy Ads, our April 2022 transaction fee increase that was incremental for most of the first half of 2023, as well as payment fee expansion.

Fourth quarter consolidated adjusted EBITDA margin was 28%, at the high end of our latest guidance, but down about 10 basis points from last year, partially due to a lower gross margin, primarily the result of an increase in the cost of refunds for orders not covered by Etsy Purchase Protection, as well as higher marketing spend.

Note that due to a discrete non-income tax benefit related to Depop, our subsidiaries represented only about a 200-basis-point margin headwind in Q4.

Overall, we are very proud that even with investments in important product and marketing initiatives to make Etsy a great holiday shopping destination, fourth quarter 2023 adjusted EBITDA of $236 million was higher than any quarterly period, including pandemic peaks.

During the fourth quarter, consolidated product development spend increased 4% year-over-year to $117 million. As a percent of revenue, we gained about 10 basis points of leverage from the prior year, largely due to the Elo7 divestiture.

On a full year basis, Etsy marketplace product development investments delivered approximately $1.5 billion in incremental annualized GMS, a significant increase from last year. Stiff headwinds pressuring our baseline GMS offset some of these excellent gains.

And we are also very pleased to report that product development launches increased approximately 30% from the prior year. Fourth quarter consolidated marketing spend increased 7% year-over-year to $261 million, which drove marketing spend as a percent of revenue to increase modestly from the prior year.

Given our focus on building Etsy's brand awareness for specific purchase occasions, our consolidated brand spending increased 24% year-over-year in the fourth quarter, with the vast majority of this increase coming from Etsy marketplace spend.

Our holiday campaigns, which highlighted Etsy as an indispensable partner for all gifting missions, resonated with buyers. Further, we significantly expanded Etsy's ROI on U.S. above-the-line spend during the quarter as our media efficiencies continued to improve.

Consolidated performance marketing spend decreased 4% year-over-year in the fourth quarter as we adjusted our strategy and improved ROI efficiencies. We dynamically pulled back on PLA spending as competitor spending pushed CPCs higher than the normal seasonality we see at this time of year.

Offsetting this, we were able to lean into new channels and geographies, increasing spending in certain geographies and ramping mid-funnel investments with several social media partners. Our site-wide 24-hour Cyber Monday promotion, funded with a small amount of Etsy marketing dollars, delivered solid incremental GMS and a strong ROI.

For the full year, consolidated marketing spend increased 7% year-over-year, and our consolidated marketing spend as a percent of revenue decreased modestly to 27.6%. Etsy standalone marketplace performance marketing spend delivered approximately $2.6 billion in incremental annualized GMS, up roughly 5% from 2022.

Moving now to our Etsy marketplace GMS and buyer metrics. During the fourth quarter, Etsy marketplace GMS decreased 1.4% year-over-year to $3.6 billion.

Overall, headwinds continued, including pressure on consumer discretionary product spending, softness in the Home & Living category, and a highly competitive retail environment focused on deep discounting.

Our year-over-year Etsy marketplace GMS trendline improved in November and December following the challenging October that we described on our November call, bringing results in ahead of our internal expectations. International markets were once again a bright spot, with Etsy marketplace GMS, excluding U.S.

domestic, up 4% year-over-year in the fourth quarter. The growth was led by positive trends in the UK, and strength in the Netherlands, Switzerland, and Austria, with largely flat trends in Germany. This slide shows full year 2023 Etsy marketplace GMS performance for our top six categories, which represented approximately 87% of GMS.

Positive year-over-year GMS trends in Apparel and Paper & Party were offset by softness in Home & Living, Jewelry & Accessories and Craft Supplies. We ended the year with a record 92 million active buyers, up 3% year-over-year, marking the fourth consecutive quarter of year-over-year growth. U.S. active buyer trends continue to improve.

International buyer growth remains strong. And we had 6% growth in buyers who identify as male. We added over 8 million Etsy marketplace new buyers in the fourth quarter, up over 40% from the fourth quarter of 2019. And we reactivated nearly 10 million lapsed buyers, a record number, up 13% year-over-year, and up 122% from 2019.

Lastly, habitual buyer trends remained stable in the quarter, with over 7 million of these loyal buyers at the end of the quarter, largely in line with the prior two quarters. Our number of repeat buyers continued to grow a healthy 4% year-over-year to 37 million.

GMS per active buyer on a trailing 12-month basis for the Etsy marketplace continued to stabilize sequentially, but declined 4% year-over-year to $126 in the fourth quarter, yet remains 22% higher than the fourth quarter of 2019. Additional Etsy marketplace metrics can be found in the appendix of this deck, as posted to our website.

Moving now to the balance sheet. As of December 31, we had $1.2 billion in cash, cash equivalents and short and long-term investments. During the fourth quarter, we repurchased a total of $93 million in stock under our $1 billion June 2023 Board-authorized repurchase program, of which approximately $724 million remained available as of December 31.

Our operational rigor and capital-light business model allowed us to deliver about $754 million in consolidated adjusted EBITDA in 2023 and a 27.4% margin, and to convert nearly 90% of that EBITDA to free cash flow. Our free cash flow in the fourth quarter was a healthy $283 million.

As we continue to focus on growing our EBITDA and cash flow, all else being equal, we would likely see our gross leverage ratio continue to trend down.

We also expect to retain a strong balance sheet with ample liquidity relative to our current leverage levels to manage the business across various macroeconomic cycles and support continued organic investments, as well as capital return to shareholders.

We remain committed to an active and disciplined capital allocation strategy that prioritizes opportunities we believe will generate the highest level of long-term shareholder value. In the past, we have communicated our philosophy to offset dilution from stock-based compensation by repurchasing our shares.

In 2023, capital return accounted for nearly 90% of our free cash flow, demonstrating a shift in our capital return strategy to more intentionally return a higher percentage of free cash flow, especially during times of volatility in our stock and when valuations are meaningfully below our view of fair value.

We continue to see attractive organic growth opportunities for Etsy, and we expect to balance capital return, appropriate leverage and liquidity and investments in our business to deliver a long-term shareholder value.

Before turning to our guidance, I'll discuss our recent workforce realignment, which brought core Etsy marketplace headcount to about 1,780 employees at the start of 2024.

As you know, we were lean even during the high-growth periods, consistently maintaining a disciplined approach to headcount and then pulling back our pace of hiring proactively as we experienced GMS headwinds in early 2022.

For 2024, we wanted to build a roadmap designed to reaccelerate growth while also delivering very strong levels of profitability.

We made some tough choices about how to organize our team from the top-down, focused on driving efficiencies to further speed product development, and creating more impactful marketing and customer experiences designed to build frequency and loyalty, as Josh described.

In addition to our focus on people costs, we've taken a number of actions intended to ensure margin holds stable or expands in 2024, including reducing certain benefits and continuing to optimize our cost base. All in all, we reduced our previous internal projections for total 2024 operating costs by over $90 million.

Most of these savings are being reinvested back into the all-important growth investments we plan to make this year, including the modest addition of critical hires. We are optimistic that the significant productivity and measurable value creation we see from our team can fuel Etsy's growth this year. Now turning to our outlook.

It remains a challenging macro environment, with consumer sentiment in the U.S. and international markets remaining low, making us cautious in our forecasting at the start of the year. Consolidated GMS for the first quarter of 2024 is currently estimated to decline in the low-single-digit range on a year-over-year basis.

This guidance reflects our slow start to the quarter, and our current expectation that GMS for the core Etsy marketplace improves as we move through the rest of the quarter as a result of our planned product and marketing investments. However, if our trends fail to improve as we currently expect, this could become a mid-single-digit decline.

Reverb and Depop are expected to provide a tailwind within the consolidated performance. We estimate Q1 2024 take rate to be between 21% and 21.5%. This can be used to estimate revenue range for the quarter.

Note that earlier today, we announced to our seller community that we are strengthening our new shop onboarding process to continuing to promote as trusted marketplace, including introducing a seller onboarding fee.

This initiative requires certain new technology investments, particularly for seller verification, so the net benefit to our margins will be nominal.

We currently anticipate that our consolidated adjusted EBITDA margin will be approximately 26%, reflecting a heightened level of investment in the launch of Gift Mode, particularly costs associated with our big-game advertising.

Our subsidiaries are expected to pose about a 300-basis-point headwind as their revenue flows through at lower margins, largely because of lower take rates.

We currently expect the first quarter to be our low point in year-over-year growth for both GMS and revenue as we begin to see the expected benefits of our product and marketing investments kick in starting in the second quarter.

We currently expect that consolidated revenue growth should outpace GMS growth in 2024, with full year take rate at or ahead of the Q1 level, with further expansion of Etsy Ads and the annualized impact of the recent Etsy Payments expansion into seven new markets being the primary drivers of improvement.

Beyond this, we'll continue to look for ways to drive a fair exchange of value for all three of our marketplaces. We currently expect to maintain very healthy margins, with consolidated adjusted EBITDA margin 2024 at least similar to the level we delivered in 2023.

We are energized by our portfolio of growth initiatives for 2024, which we believe can reignite our growth despite the continued challenging macro. Thank you all for your time today. I'll now turn the call over to the operator to take your questions..

[Operator Instructions] Thank you. Our first question will come from Nikhil Devnani with Bernstein. You may now unmute your audio and video and ask your question..

Hi there, thanks for taking the question. Appreciate it. And thanks for providing '24 commentary as well. I just wanted to ask about the GMS outlook a little bit more.

Can you talk about the kind of magnitude of improvement that you're expecting to see in GMS as the year goes on? Do you think that there is line-of-sight back to positive year-on-year growth as well at some point in the year? And then as a follow-on, could you provide some clarity around product and marketing initiatives that are kind of backing up this outlook for improvement in GMB? Thank you..

Okay, so in terms of the magnitude of the growth, we gave you what we're comfortable giving you right now. So anything more than that, if we could have been more specific, we would have in terms of when do we get back to positive growth and et cetera. It's certainly our aspiration.

We believe we have every right to be growing not just positive but faster than e-commerce. And we think, especially when our categories stop being under such pressure and when discretionary consumer product spend in particular stops being under so much pressure, that's going to be very helpful.

We do think we outgrew our categories yet again, our pure-play competitors in our categories yet again in the fourth quarter. In terms of the product and marketing initiatives that we expect to drive a lot of growth, we laid them out in the call. And so first on consideration, that is the biggest thing; people thinking to look on Etsy.

Because when they do think to look on Etsy, they usually find something really compelling. So Gift Mode is a great example of us giving you a moment in time when you should really think, I need to buy a gift, I want to go to Etsy. And gifting is an all-year kind of thing. It's not just Mother's Day and Christmas.

There's birthdays, anniversaries, back-to-school and on and on. And on other key elements in consideration, we've said we're in early stages of planning a loyalty program, which is designed to drive consideration among loyal users, more value, more on quality and more on reliability.

And I think that that portfolio of bold initiatives, I think can do a lot to continue to drive growth, combined with compelling marketing campaigns. We're going to continue to work through the funnel on really compelling marketing campaigns as well..

Thank you..

Our next question comes from Ygal Arounian with Citi. Please unmute your audio and video and ask your question..

There you go. Sorry there's a little delay there. Thank you. I'm going to follow up on that a little bit, maybe more narrowly focused, I guess, on the 1Q guidance. And, what -- it sounds like, sitting here today, were down mid-single-digits, but kind of the expectation is that over the course of the quarter, that starts to improve.

What happened so quickly, I guess, like between now and end of March or it's just a little bit over a month. And then again, also just to dig into the marketing a little bit more. So you're -- you've pulled back a little bit on performance marketing.

Some of that is efficiencies, some of that is coming from the competitive environment are spending more on brand. Typically, we think of the payback period for the brand marketing being a little bit longer where you're expecting that to drive incremental growth both in the quarter and throughout the year.

So are you starting to see the benefits of that? I know it's been investment over, multiple years here. Is that starting to pay back the way you like or, how else should we think about that? Thanks..

I can certainly jump on. I mean, so the way -- you're right that January was a little bumpy. And that's the -- sort of the baseline from which we are able to provide guidance for the rest of the quarter.

The way we do our planning is we estimate the incremental GMS that would be generated from each discrete product and each discrete marketing investment that we make. So they start to stack on top of each other.

And we do a pretty good estimation and testing before we build our forecast so that we have a pretty high confidence level in what we think those things will deliver. So what we're looking at that remains in the rest of the quarter, we feel good about being able to step incremental GMS from where we are today.

We have experimented with our marketing spend. I mean, looking back a little bit in the early part of the quarter on some of our PLA spend, we're now back to our normal levels. So we think we'll get some incremental benefit from just the regular business-as-usual marketing spend.

And you saw us do a very large, first time ever, big-game television ad that is -- that ad continues to run through the rest of quarters, winning some of the accolades and awards from the advertising world and starting to gain some traction. I think the - it takes - it's something like 7 to 11 views to actually create that stickiness of an ad.

So we're excited about what that brand - the repetition of that campaign and that brand can do for consideration with our customers. And there's a lot of things we wrapped around that Drew Barrymore, our Chief Gifting Officer. And a lot of our promotional campaigns that we also laid down to attract people.

So marketing and spend product, I think we expect to deliver GMS in the quarter..

Yes, and just to build on that. We have been very focused year after year on what is the value creation of every single squad and what is the value creation of every single dollar we spend in marketing. It has been a very big focus of ours and we think we're pretty good at it.

What obviously we can't predict with perfect accuracy is what's going to happen with the baseline, what's going to happen with the overall consumer discretionary spend in our categories. And so that's the unknown and, we'll wait and see. But we gave you the best guidance we know.

And we do -- we have reason to believe that we should see trends improve in the second half of the quarter based on the work we're doing..

Okay, great. So you might step back a little bit further into performance.

Has the environment there changed at all?.

Yes. So performance is dynamic on a, really, hour-to-hour basis depending on the ROI we're seeing on every dollar we're spending. And we've got pretty sophisticated algorithms that work on, is this bid -- is this click worth this much right now and how much should we bid.

And so to the extent that CPCs rise, we naturally pull back, or to the extent that CPCs lower, we naturally lean in. The other thing, by the way, it's not just CPCs, it's also conversion rates. So in times when people are really budget constrained, we see them actually -- we see conversion rate across the industry go down.

We see people comparison shop a lot more. And so we are looking at all of that. And not humans, but machines using AI are looking at a very sophisticated way of what's happening with conversion rate right now, what's happening with CPCs right now. And therefore, how much is each visit worth and how much should we be bidding. And it naturally titrates.

It's a little bit the reason why it's hard to pinpoint exactly what our margin is going to be in any given quarter because it's based on what's the ROI we're getting right now, and we'll naturally lean in or pull back. What we won't do is send them unprofitably. Not on purpose. So we work hard to try to understand what is the return we're getting.

And if the market we think is getting irrational or at least irrational for us, we pull back..

Thanks, Ygal.

Operator, next one?.

Our next question comes from Lee Horowitz with Deutsche Bank..

Great. Thanks for taking the question. Maybe two, if I could. Josh, you highlighted two charts in the deck, one that shows the Etsy's share gains versus pure-play comps. It seems to stand somewhat in contrast to the overall e-commerce market where Etsy is growing more slowly.

It seems that would suggest that big-box non-pure-play competitors are taking share of the overall.

I guess, why do you think consumers are leaning into these platforms that, as you say, compete on shorter speeds, perhaps a couple of bucks in price and not leaning into things like product quality or uniqueness? And maybe how do you think that may evolve in '24 and beyond? And one follow-up, if I could..

Great. Great question. So look, let's put aside travel, online dining. If you look at e-commerce very broadly, it picks up things that are totally unrelated to Etsy. When you put those aside and you really look at just product, it's very clear that the people gaining share are Amazon, Walmart, Temu, and SHEIN, and almost everyone else is losing share.

The number of other people that are growing quickly, you can count on one hand. Almost everyone is losing share to Amazon, Walmart, Temu, and SHEIN. And so, first of all, those are people, particularly if we look at Amazon and Walmart, and they're really the big winners.

So if you look at who is actually, in terms of volume, taking volume in e-commerce, they sell essentials. And when you read their earnings call scripts, what they say in their earnings call is what's driving their sales is essentials and their headwinds are discretionary products.

The second thing is all four of those brands stand for deep discounting. And the trends we see right now are people feel their wallet is under a lot of pressure. By the way, tax returns look like they're going to be lower this year than they were last year.

You still hear low consumer confidence and concerns about inflation on core things like food prices. And people, when they have discretionary dollars, want to spend them on travel and want to spend them on dining. And so in this moment, many people are looking for the cheapest way to buy something when they need to buy something that is discretionary.

Now in that environment, Etsy added 8 million new buyers. Etsy buyers spent $3.6 billion on the Etsy marketplace in the fourth quarter alone. So, tens of millions of people are -- 92 million people, in fact, are opening their wallet to come and buy something on Etsy even in this environment.

And in fact, the average buyer on Etsy is spending 20% more, more than 20% more today than they were pre-pandemic. But this is a time when I think products that are not the cheapest possible are out of favor. And I don't think that's forever.

When I imagine, going forward, does everyone always wants the cheapest version of any given product? No, absolutely not. I think that that trend, this is a cycle, we're in a moment in the cycle, and I think we'll move to better moments in the cycle, hopefully, soon..

Let me add just a couple of quick points about things that are happening that point specifically to January and Q1 activities that are happening in the macro world. One, at Christmas time, people get a lot of gift cards. And today, Etsy doesn't have a gift card program.

And they come into January and they spend -- they go into retail and they spend their gift cards at places like Walmart and Amazon. Second, they are doing a lot of returns when they're going physically into the stores and doing a lot of returns.

And the third is that big-box stores are doing all their clearance right now, so things are continuing to be at deep, deep discounts, as Josh just said. Those are three things that in, the early part of this year, Etsy really wasn't in the game on those three areas and, I think, affected our January's GMS to some extent..

Very helpful. And then maybe one follow-up on marketing.

How do you guys just think about, I guess, efficiently deploying performance marketing dollars in 2024? Obviously you talked about dynamic -- the models are dynamic, but do you feel like you need to perhaps lower the ROI thresholds, given you have a weaker consumer as you called out, but, rising auction costs from those competitors? I guess just help me understand, how you guys maybe are adjusting the way you guys think about marketing, given the challenging underlying dynamics of higher costs but tougher demand..

Well, the models automatically incorporate -- well, there's some lag. It takes a couple of weeks for them to experience the fact that conversion rates, for example, are down or up, for them to incorporate that. But things like weaker demand turning -- meaning, conversion rate goes down, the models all automatically incorporate that.

Where we're always refining our understanding is we run an incrementality test. For example, on PLAs twice a year, we hold part of the pantry dark. And we look at if we hadn't bought that click, would we still have gotten it anyway? And it turns out that often, the answer may be yes.

It also may be that if someone didn't click on Etsy, but they saw Etsy, it made them think, Etsy sells that, and they come without having clicked. And so you can over or under-attribute.

And so several times a year, we actually run a test to determine, what we call incrementality tests, how much of the final sale value should we attribute to the fact that someone clicked on that ad. And that changes over time as well based on competitive environments. So we are constantly adjusting based on that.

And another input that goes into the model is what do we think about things like future take rate.

What you're paying today, would that impact the LTV of a buyer if you think your take rate might go up over time, or if you think you might get more or less frequency over time? So there's some amount of judgment you make, but the models do most of the work.

And we really do try to let the models do the work so that we aren't tempted to irrationally over or under-invest in any given quarter..

That was a great point on the LTV -- we're constantly updating the model to increase LTV with every new product launch that we have. As the LTV goes up, that's incorporated in the attribution model. So that's happening.

The other thing is you talk about performance ads, specifically, but we've been able to start to spend more money in new channels, like so paid social and in new geographies. And we've experimented with other kinds of marketing, like we use Etsy's P&L to do some Etsy-funded promotional campaigns.

So we're constantly -- it would be great to get another Google PLA channel, for instance, that works as hard for us. So that's where we do more of our experimental marketing spend to see how we can optimize to get those channels to be ROI positive as well. Less likely would be to just drop the ROI threshold and accept a negative return..

Right..

All right, great. Thanks, Lee.

Next question?.

Our next question comes from Shweta Khajuria with Evercore ISI..

Thanks for taking my questions. Let me try two, please.

On the GMS growth for this year, has the visibility for you changed, and I guess what gives you the confidence in improving GMS growth? If you could please lay out the key drivers, is it consideration and the gifting initiative primarily driving it and/or quality, value, reliability drivers? If you want to point to any of those.

And then the second question is on the $90 million in savings that will largely be reinvested, could you please provide a little bit more color on biggest buckets of investments? Thank you..

Yes, I'm happy to take the first, if you want to add. So, yes. So we laid out, - first, Shweta, thanks for the questions. And, that slide that had consideration and quality, value and reliability with key initiatives under each, that's a pretty good roadmap for some of the bigger levers of the year.

There are a lot of other things we're constantly doing to just incrementally get better in ways that drive real measurable value. But the way we run this business is we task every squad in the company with a value-creation goal.

So if you're working on shortening expected delivery date or surfacing higher-quality items higher in search, there's a customer metric, but there's also a, how much extra GMS does that need to produce? And the sum total of that for last year is we think the team produced about $1.5 billion of incremental GMS.

We've tasked the team with more, even more efficiency than that this year. We continue to find ways to get more efficient, leveraging new tools and techniques, leveraging new processes. We're pretty agile and we work on getting even more agile and even more focused.

And then with performance marketing and above-the-line marketing, we're also always working to get more efficient. And I'm realizing now is when I talked about how the algorithms are doing the work, I don't want you to think it's static. We also have multiple squads working on MarTech.

And they're constantly focused on things like, how can we make our landing pages more efficient? How can we perform better in SEO? How can we make our bids, you know, even more sophisticated, segment our audience even more? So we're constantly driving efficiency gains from each of our teams and each of our dollar spend.

And so what we've done is we've looked at our plan for the year, what we think it's going to deliver in terms of incremental GMS. The assumption on that, again, is what's going to happen with the baseline, and that is the part that's hard for us to know.

So the risk in this plan is, you know, I think we're going to execute on the plan and I think we're going to drive a lot of value. And what's going to happen with the baseline and to what extent is that a tailwind or a headwind to us for the year is still yet to be known..

On the $90 million, a couple of things that I want to point out. We reduced our workforce by about 12%, and we cut various operating expenses where we thought that there was room to cut them without losing any productivity or efficiency in operating our business. Of the workforce reduction that we made, we also reduced future open hires.

So the -- we not only saved current dollars, but we're saving some future dollars. We -- our main focus is always on the Vital Few. So what we -- the guiding principle of what we are about was to reprioritize and realign our teams to be working on the fewest possible things that are driving the highest possible impact.

That does not mean that we've stopped hiring and that we've stopped investing. We see so much room for growth. We talked about our $500 billion TAM, we're in less than 2% of it today. We just have so many ideas. Josh laid out a bunch of them that we're currently working on, on the call. So we're continuing to invest for growth.

We are at the top of the pack in terms of revenue per headcount in the company. We're very lean. Etsy alone, just Etsy, is only about 1,800 people. And the revenue per head, it's hard to find companies of our size and shape that have revenue per head, you know, higher than that. We're really winning there.

And if we cut too far back, we're going to, you know, get in the way of our own ability to invest for growth.

So we feel very comfortable with finding -- constantly looking for, you know, operational efficiencies, very comfortable with the way that we've reprioritized our expense buckets and very comfortable with the level of investment we're making going forward..

And I just would add that I find the whole commentary on the year of efficiency interesting because every year is a year of efficiency for us, every quarter is a quarter of efficiency. There hasn't been a quarter or a year when we've said, screw it, let's just, you know, invest and hope for the best.

We've been obsessed with efficiency and value creation per dollar invested for the seven-plus years that Rachel and I have been here.

And so every quarter we are looking at, is there a way to squeeze more efficiency? Is there a way to cut more cost? And when we find an opportunity to cut costs, the first thing we look at is can we invest that -- reinvest that profitably to drive growth.

What's going to really move the stock price is getting growth, getting GMS growth up again so that we're driving the multiple. That's what's going to drive growth, but we have to do with cost discipline. So what we're not going to do is invest irrationally, invest a dollar to get a dollar or less back.

So when we see an opportunity to put that money back into something that's going to drive growth, we're going to do it. The result of that is a business where at the core marketplace on Etsy generates EBITDA margin right now over 30%. It's hard to find a marketplace of our size and scale generating EBITDA margins anywhere close to that.

And we're very focused on also reinvesting for driving growth. And we're going to continue to make sure we balance those two with an emphasis on investing in growth when we think there's a good opportunity to do so..

Thanks, Shweta. Because you got two in there, we're going to go to the next question..

Thanks..

Thanks, Shweta..

Our next question comes from Steven Forbes with Guggenheim Partners. Please unmute your audio and your video and ask your question..

Good evening, everybody..

Hi, good evening..

I mean, maybe just to expand on some of the initiatives, you know, like Gift Mode and loyalty, you mentioned the investment in the Big Game advertising.

You know, anytime you sort of hear loyalty, you know, it helps if you can maybe contextualize what you're thinking of doing with loyalty as we, you know, potentially have like timing disconnects with the benefits and, you know, maybe some market implications. So, you know, just any sort of expansion on what you mean by loyalty..

Sure. I would say we don't have anything to announce yet.

And I know that's not going to be very satisfying, but we pay a lot of attention to loyalty economics in a lot of places, having cited Amex, where not only does Amex run really big loyalty programs and things like membership rewards, but we partnered with when I was at Amex Delta and Starwood and a lot of other places.

Had a chance to study a lot of loyalty programs. And thinking hard about, which are the ones that truly drive more return and truly drive more consideration, is a big focus for us. It's got to have both rational and emotional benefits. It can't be just rational. There's got to be some yearn to it.

And the goal is to get people to consider Etsy more often. People love Etsy. Talk to buyers and they're all going to say, I love Etsy. Why didn't you shop in Etsy more often? I didn't think of it.

So committing to some form of loyalty program, we think can get them to prioritize Etsy and say I'm in this loyalty program, I should stop by Etsy and see if they have something to offer. If we can just get them to stop by, and see if we have something to offer, the answer is going to be yes, a whole lot of the time..

And then maybe just a quick follow-up, right. A lot of noise out there in terms of AOVs or ticket-related challenges, across the discretionary landscape, or just where deflation is, right, within the respective categories. You mentioned sort of this optimism around stabilization in GMS per active buyer.

Curious if you could maybe expand on what's giving you the optimism, and what you're seeing with price behavior across the product categories you serve..

It has stabilized a bit. If you look at the last four quarters, GMS per active buyer have been relatively stable at $126. So that's good news. And by the way, that's up from about $100 before the pandemic.

So in spite of all the headwinds, and everything we've talked about with the macro, still spending 20% more, more than 20% more than they were pre-pandemic. In the headwinds for the beginning of this quarter, when we said we were off to a slower start, AOVs are down slightly.

So when we talk about starting from a low - down mid-single digit and guiding to - we think we will get back to low single digit, by the end of the quarter. One of the headwinds we're seeing is AOVs are down. The good news on that is, it means transaction volumes are actually holding up better than, what those numbers would suggest.

Buyers are still coming and buying on Etsy. They're just even more price sensitive in this moment. And that, I think, is pretty consistent with what we hear with a lot of others..

Thank you..

Our next question comes from Anna Andreeva with Needham & Company..

Great. Thanks so much. Thanks for the color guys. We had one question on take rate. Came in a little bit better than expectations in the fourth quarter. What's driving that expectation for the year to be at or higher than Q4 levels? I think you mentioned some of the seller onboarding fees.

And then secondly, the number of churn buyers, I think, increased a little bit in 4Q. Can you further elaborate on that? Thanks so much..

I'll take the first, you take the second. Okay. So the - we rolled out Etsy Payments to nine more markets. So that helps us a lot with incremental transaction fees that we just weren't getting before.

And today, we launched the seller fee, which not only has the benefit of incremental take rate, which, by the way, completely is reinvested back in safety of the marketplace.

But it creates - did you call it friendly friction earlier? Friendly friction so that we create a little speed bump, for not just any seller can create a listing for $0.20 and some kind of product. It's a moment to think about, well, I'm going to have to make payments fee.

And that helps us with bad actors on the site, so that we get both the benefits of that..

Yes. And that, by the way, is not a big take rate driver. I think the revenue in that is going to be relatively small, but it's going to be good value exchange, making sure it's really secure to become a seller on Etsy. And I think that's good for all of the sellers and the buyers on Etsy, and the fee we're charging is nominal.

If it's not worth $15 to create a shop on Etsy, then maybe you're not committed enough to likely succeed on Etsy. But that's not a huge revenue driver. We'll continue to see payments coverage expand in other markets and other areas where we think there's fair value exchange, and we think we'll achieve the take rate that we guide into..

Let me add a quick one to that. Just also when we see international business increase, we get a slightly higher take rate on Etsy Payments where the buyer and the seller are two different currencies, because we have a premium that we charge for that currency exchange. So that's another thing affecting take rate.

And lastly, we did see nice lift from Etsy ads again, and we'll continue to see Etsy ads improvement, as we continue to make investments in the better - and better the search broad relevancy is for Etsy ads higher the conversion rate..

And on active buyers, we ended the quarter - ended the year with about 92 million active buyers on a trailing 12-month basis. So at an all-time high. Roughly stable. I don't want to crow too much about it, roughly stable from the prior quarter. But I'm not sure where the comment about more churn was, but I'd say active buyers have been stable..

Okay. Thanks so much guys..

Thanks, Anna..

Again and I think last one is going to be from Jason, right? Operator?.

Jason Helfstein with Oppenheimer is our next question..

Hi Jason..

Hi Jason..

Hi, thank you. So two questions, really one is a question everyone's going to ask.

How are you thinking about helping sellers correct - use correct pricing and not just undercut each other and just be more sophisticated with optimum listing prices? And the second, really, to ask, a common investor concern we hear is really around the ability to grow cohorts.

Is it something you would provide in the future, perhaps like annual GMV, by cohort on the year of acquisition, I think would help people better understand...?.

We have that in our 10-K. We have GMS retention in our 10-K, which will be filed tonight, tomorrow morning..

Yes, you'll have it very soon. So it will be a stack bar every year. The class you joined in 2017, what have they delivered to the class in 2018 all that stuff. And what I think you'll see in those cohorts, just to start with that, is I'm used to, in a lot of e-commerce business, is seeing that ask until down over time.

And what you see with Etsy is that it's been more of a smile curve. And we think that's really healthy. Obviously, the inflection drove just like a massive uptick and then a little bit of a settling back down, which makes everything a little messy, a little harder to make sense of.

But the fact that the cohorts, do generally stack on each other really nicely, we think, is a pretty powerful part of what makes Etsy really compelling.

And we've still just been experiencing a bit, of when you look at the stacking of those cohorts, dealing with the post-pandemic, slight compression coming out of the post-pandemic has -- just provides a bit of a headwind. On your first point….

Seller pricing..

Yes. Helping with seller pricing. Great. Great question. So a couple of things. One, we've had a very big focus on not hand made. And we've shared in the past that the percentage of views that encounter an item that's not handmade is - I think the last time we gave an update, it was cut in half. We've made even more progress since then.

So it's a very big focus of our, to make sure that mass-produced items are not visible on the site. It's bad for the brand. And it's not helpful for our sellers in terms of price competition. But another thing I talked about very briefly in the call, let me unpack that a little bit more, is really elevating quality even more in search results.

And what I mean by that is our search algorithm today, is designed to pick items you're likely to buy, right? So the search algorithm using cutting-edge machine learning is saying, what's Jason likely to purchase. What we wanted to do is say, what's Jason likely to love, purchase and loved.

And so forming more of a point of view around does the seller give consistently good quality service, is the item consistently delightful and that leading to frequent - more frequent purchases.

Gaining that kind of fidelity and filling a point of view, what's the quality of photography here, what's the quality of the return policies? Does the seller consistently ship on time? And using that to create an explainable AI model, to rank who should be on top in search, we think can unlock a ton of value, especially as you then start to expose that to sellers, and say to sellers in order to rank higher, the way to do that is to get better on one of the following metrics.

Here's how you're currently doing. And the better you do on these metrics, the better you will rank in search. That creates a race to the top. And I think that's an incredibly exciting thing that, we're going to do that we're very focused on right now.

It's one of the initiatives I talked about this year, and I think that over the kind of next couple of years can have a very big impact. So Etsy does far, because our unexplainable machine learning model is incredibly sophisticated at picking the thing you're likely to convert most at.

And so, we've got to come up with an explainable version of the model that doesn't do any damage at least, right, that can largely match our black box model. And then get better from there. And there's some R&D that needs to happen, and that's the kind of R&D that's happening right now..

All right, great. All right. Thanks, Jason. I think we went over time, so operator, I think we're going to cut it here..

Thank you. That concludes the call for today. We appreciate your participation. Have a great evening..

Thanks, everyone. Thank you very much..

Thank you..