Ready to go? All right. Thanks everyone for joining us. I'm Lauren Schenk, Morgan Stanley Small in Midcap Internet Analyst. I'm excited to be joined today by Rachel Glaser, Etsy's CFO. Thank you so much for being here. Before we begin, just one disclosure on my end. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website. We're at morganstanley.com\researchdisclosures, or at the registration desk. Maybe let's start bigger picture. For those in the audience that may be less familiar with Etsy, could you start off by speaking about Etsy's differentiation, the market opportunity, and strategy? Yes. Before I do, as I promised my legal team and my AR team, Etsy's disclosures can be found on Etsy's IR website. I'm not gonna read them out to you. Etsy is a fairly unique marketplace. We have about 7 million sellers across all of our House of Brands, 5 million on the Etsy marketplace, 100 million listings. All of those listings are handcrafted, artisanal, or vintage in some way. With most of our sellers, they're predominantly women. Most of them are businesses of one. A lot of them work from their homes. We really differentiate on the what we call our four rights to win. That is being best in class search because when you have 100 million items, it's darn hard to find things. It's like going through a flea market, but with 100 million items. Having a really trusted brand that you can trust that Etsy's behind the purchase of every item you find there, even if you've never heard of the small individual seller. That there's a human connection. Every item that you have will generally come with a handwritten note. There's a human being. You're helping support a small business from somebody around the world, and that all sits on a platform of the 100 million unique items. It's hard to think of another site exactly like Etsy where that has personalized, customized, unique items at scale. We think we're in about a $2 trillion total addressable market, and we're under 5% penetrated six large categories, including home and living, apparel, jewelry, party, and craft supplies, and toys and games. A lot of other categories beyond that. We've grown since the pandemic. We have about 90 million buyers. That's roughly double what it was since 2019. Our sales have also grown significantly. Since we're now in a reopening post-pandemic period of time, we've held on to almost all of those gains we've made in buyers and in global merchandise sales. Really pleased that people are now much more aware of the Etsy brand. Okay. Great. Before we dive into the micro, I did wanna touch on macro a bit. Could you talk about what you're seeing from a consumer trend perspective in the fourth quarter and the first quarter to date, and how are you factoring the macro uncertainty into your one Q guide and your sort of investment plans for the year? Great question. Interesting times. We had a great fourth quarter, as we reported, and we had a very frothy beginning of Q1 into the first couple of weeks of January. Then when we did our call in February, we reported that we had started to see some, what we would consider significant volatility or unusual pattern going on in the early parts of February. When we look. You know, we use third-party data a lot to try to understand what's going on, and what we could see was a couple things. We were seeing a shift in consumer spending towards what you might think of as household essentials. Things like, you know, get milk and diapers at traditional retailers, and a large shift to services like airfares. It feels a little bit like the cross-section of a second reopening. We thought we had a reopening last year, but it seems to be a real true reopening now. Constrained consumer spending, so with people having fewer dollars to spend, they're using their money to do things that they haven't been able to do in quite a long time. Also, remember that last year, at this time, we started to see a pretty steep deceleration as we hit February and started to go through the first quarter and into the second quarter. What we, that has two effects. One is we're starting to lap lower comps. Secondly, it makes us think or one theory we have is that as we get to be larger, we might be a more seasonal business than we've been before because the decel from Q4 into Q1 is a bigger step down than it has been before. That kind of shows you the benefit of people are aware that Etsy is the place to go to buy unique items during a special holiday time. It shows that we've made progress in being able to get... You know, we used to have our holiday season stop in early December because it takes longer to get Etsy products, Now they're able to continue shopping further into the month. It shows the effect of our promotional and marketing to really have show up like other retailers with a strong Cyber Five prominence. There is some seasonality that we're starting to see. The guide we gave on the call was that we'd be at about negative 6% growth at the midpoint, and that assumes that we'd continue on this headwind trend we've been seeing in February through the end of March. We did not give a full year guide, but we did caution that there's a lot of unpredictability in the rest of the year. Recession, maybe, we don't know if there will be a recession, and if there is, what impact that would have on Etsy. We talked about, you know, mathematically because we had that decel last year in lower comps, mathematically and sell side and buy side might be tempted to model in growth even in the teens in the back half of the year. We were cautioning that all of that growth may be wiped away by headwinds that we can't control during this macro environment. Okay. Maybe just putting a finer point on the 1Q guide, you said at the high end, it sort of improves an improvement to the remainder of the quarter versus when you gave guidance. Is that on a one-year basis or on a three or four-year basis? On a one-year basis. On a one-year basis. Yeah. Okay. I know you haven't given explicit guidance for 2023. You just gave us some points there. Are you able to talk about sort of high-level commentary about how you would expect sequential trends for the year and the possibility of return to GMS growth? Yeah. You know, we're super excited about many opportunities that we see in our marketplace. One of my favorite data points was that, or this'll be two. In the fourth quarter, we saw new buyer growth, 51% in Q4 versus Q3 sequentially. We saw a significant spike in reactivations. That means buyers that had not been to the site or purchased anything in 366 days or more. Overall, throughout 2022, we had 24 million reactivated buyers. That was an all-time record for us. What's interesting about the reactivated buyers is that they're 30%-40% higher lifetime value in the first year after reactivation than a brand-new buyer. They're engageable, meaning they had a good experience on Etsy. We got them back, and they're more likely to spend more over that the prospective lifetime. We have 100 million lapsed buyers. We had so much growth during the pandemic period, so there's a huge pool of prospective reactivations that are yet to come. On the comment on the new buyer growth is that we, you know, we see that only 30% of U.S. women have purchased anything in the last 12 months, and only 10% of U.S. men. If you put all 15 markets outside the U.S. and the U.K. together, they're less than 80% penetrated versus the U.S. There's tons of opportunity in geographies and demographics that we haven't scratched the surface yet of. How do we do that? We are, you know, go back to the rights to win that I talked about. We've continued to chip away and make advancements on search. Using search as an example, now 90% of purchases occur in the first page of search results. We've significantly increased conversion rate from the original search query. We have less than 2%. It's about 1%-2% have a dead end result, meaning you type something, we didn't have any relevant answer for you. We're really making progress being able to navigate and sort through the 100 million items. We're doing a lot of work on how to not just search with a query, but to be able to have a discovery. Like, I instead of knowing exactly what I want, I type in "red cashmere scarf," I type in, "I need a gift for my mother," and being able to put together a more curated result through editors' picks and through collections and other ways that cull down the 100 million items into things that you're more likely to convert on. We've also Etsy has an app, we call it Buy on Etsy internally, and we see that we have a higher percentage of habitual buyers. Those are buyers that shop 6 or more times in a year and spend $200 or more in a year. A significant, the disproportionate number of habitual buyers on the app. The app is the highest converting channel, and we've put features on the app that you can only find on the app that make the app much more sticky and therefore, you get a virtuous flywheel that continues to bear fruit. On the marketing side, when you ask buyers, you know, "Why didn't you shop on Etsy?" Very often one of the most cited answers to that is, "I just didn't think of it." It's the tap on the shoulder, the reminder of, "You remember you got your mother a great Mother's Day present last year. Don't forget, you know, remember that you can buy lots of gifts on Etsy for mothers, daughters, fathers, whatever." You know, Halloween, "Oh, I didn't think of it. What a better place to shop than on Etsy for the, like, a really unique Halloween costume." It's that reminder. Marketing really serves that purpose of doing the tap on the shoulder, the reminder why Etsy and when Etsy. We've continued to invest in marketing, with a sort of ROI-focused lens and do it pretty profitably. Okay, great. Maybe digging into the buyer cohorts. The habitual buyer cohort grew very impressively during COVID from about 5% of the buyer base to 9%, they have been declining for the past three quarters. Maybe touch on what's driving that. Would you expect habitual buyers to resume growing in the second quarter? The biggest thing is also a math problem. It's like what we're doing is because it's a trailing 12-month metric. When we had such a peak in growth from the pandemic period, we're churning out those older cohorts. The other good news and sort of top-line statement I can answer is that habitual buyers are not churning out of Etsy. The vast majority of them are turning into repeat buyers. This is looking at Q4 versus Q3, and then a very small percentage of them are either churning out altogether or just becoming active, meaning just 1 time a year. They are still a significantly larger cohort than they were pre-pandemic. It's, I think pre-pandemic it was something in the 5%-6% of our GMS range, and now it's in the 8%-9% of our GMS range. They're very valuable, even though they're the minority of our total buyers. It's sort of very logical to us that there's something to buy on Etsy once a month, not once a year. By the way, habitual shop on average 13 times a year, and that really hasn't changed. The decrease in that number has decreased very minutely. Our focus will be on really getting people to think, moving people into the to be thinking about... 50% of our buyers are what we call repeats. They come 2 times a year. Moving that 2 times more to 4 times, like gradually getting people from where they're sitting now, where on average they're shopping 2 times a year to bringing them up to 4 times a year and using marketing as one of the levers to do that tap on the shoulder. Okay. Maybe let's move to frequency. Frequency declined in 2022 as we came off COVID. What initiatives are you doing in 2023 to reaccelerate frequency growth, particularly as you think about recent advancements in large language models and Natural Language Processing? As I was just talking about with frequency a bit, first of all, repeat buyers are what we define as 2 times a year. They on average shopped 5.2 times a year across that whole category of repeat and decreased ever so slightly to 5.1. It's a very small decline. There's so much more room to go on frequency when we have so many initiatives. I think that the 2 biggest on the product side have a lot to do with search, and let me put a pin in that for a second, and a lot to do with the post-purchase experience where we've made a lot of investments in that. Once you've purchased, what is your experience like with shipping and re-return? On search, a lot of you have heard of GPT-3.5, also known as the, you know, large language models, and we've been really investing in all of those things for quite some time. We're pretty heavily invested in machine learning, and those things have been able to give us AI type of experiences like XWalk, and we talk about image search where you can take a picture of an item and find all of the items on Etsy that are I could take a picture of you, Lauren, and it would show me a bunch of things that are similar to Lauren. You know, we'll continue to make investments in there. Large language models are also really good for things like search assist, like type ahead and spelling correction and query classification. It's the gift that'll keep on giving for a while because we have so much more to do there. We will invest in the new models that are out there or test them like we do with everything. We experiment with everything. We don't necessarily believe we have to reinvent the wheel there. There's companies that have spent billions of dollars developing those models, and we think we can really leverage what's been built. We also always use the lens of ROI positive, we wouldn't be investing heavily in something that we didn't believe the return was there for. The last thing I'll say is we always invest in the vital few. We separate the worthwhile many from the vital few, and we would potentially be investing incrementally in those areas by you know, redirecting some of our resources to those things, not necessarily layering on more and more incremental resources to really invest there. Long story short, we do believe that some of the latest technology and advances in AI are very, very beneficial. Huge opportunity for Etsy, we'll do that with, you know, we'll invest forward there with the same ROI lens we have on other things. On still on product, on the post-purchase experience, we have invested a lot in making shipping fair or free. We've worked with our sellers. We can't require them to make things free, but we've worked with sellers, and now well over 70% of our listings are free shipping eligible. We've worked a lot on the timeliness of shipping. We'll probably never be a site where you can just push the button and you'll have your item same day or next day. To be able to make it clear what items are available to ship is much, much clearer on the site. We have much improved expected delivery date so that an item that you purchased and you bought it for your child's birthday is actually going to arrive in time for your child's birthday. The percentage of on-time delivery has significantly improved. We've recently invested in Etsy Purchase Protection to have our sellers and our buyers back when something doesn't go right in the shipping. Maybe it gets damaged on the way or gets stolen off the porch. That's nobody's fault, but we don't want our buyers to be left holding the bag. I mention these things because this entire post-purchase experience is one of the friction points in the Etsy purchase journey and is one of the things cited by buyers when we ask them, "Why didn't you buy on Etsy?" You know, the shipping was too expensive, or I was afraid it wasn't gonna get there on time. Those kinds of things we've been gradually chipping away at to improve. Lots more to be done, both on search and the post-purchase experience. There's marketing, which we've talked a lot about. We invest in marketing in the full funnel all the way from at the bottom, where it's performance marketing to the top, where we use above-the-line marketing. We have pretty sophisticated quantitative models that help us live by our philosophy that we will only spend until the last marginal dollar of spend is not hitting our ROI threshold. We've been able to lean into performance marketing in some of the international markets, which is why we've really seen some real growth in some of those markets, and we expect to be able to do that more going forward. Okay. Take rate has stepped up meaningfully over the past couple of years. What do you think is the right long-term take rate for Etsy? Are there any clear opportunities to increase maybe over the next 12 months? We didn't give any further guidance on take rate for the year other than what we guided to in Q1. We didn't give any reason for that to be modeled higher this year. Looking backwards, I think pretty much every year we've taken take rate up one way or another. Sometimes that's through a transaction fee increase, which we did in April of this last year. We went from 5% transaction fee to 6.5%. We've also been able to get growth in the take rate through expanding Etsy Payments into more markets through introduction of Offsite Ads, which was effectively a 1% take rate increase, through expansion of Etsy Ads, which has continued to expand our take rate. We feel good about getting growth and take rate in a way that benefits both the sellers and the marketplace and Etsy. We're not dogmatic about we will never do another transaction fee increase, or we will always do one every year. We're always looking for what we call the fair exchange of value, where there's this, an additional service or benefit we can provide to the sellers for which we will extract our fair share. Every time we've done one of these transaction fee increases, we've reinvested it in the marketplace, meaning when your take rate goes up, you can invest more in marketing because the LTV increases and still deliver the same ROI. That actually drives more sales for our sellers. It really benefits sellers and it benefits Etsy, and we'll always use that as the guideline for how we think about that. I mean, we can all think of services that Etsy doesn't offer today that other companies do. I think there is more room for Etsy to add services and you know, have a fair exchange of value if we add those services, but we haven't announced any of that for 2023. Okay. Maybe moving over to expenses and circling back on your previous comments on marketing. How should we think about marketing spend this year and balancing LTV to CAC, especially given the uncertain top-line outlook? Have you considered expanding the percentage of GMS that's going through Offsite Ads? Yeah. Those are great questions. Let me take the first one, and then I'll talk about Offsite Ads second. First, on the first one, last year on the Etsy marketplace, so excluding our House of Brands, we spent approximately the same amount on performance marketing year-over-year and had a slight increase in the GMS from paid. That just implies that there's pretty stable efficiency. We're very rational about this, and we'll just keep on spending. It dynamically will, our models will let us spend more or less, depending on the demand side and the CPM side of the equation. When you try to calculate a CAC from what we spend and how many buyers we got, there's always a few important things to remember. One is that we are not just buying buyers in period. We're buying buyers for a lifetime, and there's a tail on that spend. A second important thing to remember is that we, some of the marketing that we spend in session comes back to us as direct, meaning it's not, it's helping support the sort of brand awareness, top of mind awareness, and that the buyer will come back later in a session where they're just typing in www.Etsy.com, and we don't count that as paid GMS. Another thing to remember is for about 35% of our performance marketing spend is offset by the Offsite Ads, which I will define and talk about in just a moment. Some of the spend is, comes back to us as revenue, not as GMS through things like Etsy Ads. It's a little bit hard to come back to a definitive CAC. I think we've done the math for you before, and we're getting something like somewhere in the range of $5-$7 per dollar of GMS per dollar spent on performance marketing. We feel really good about that. Offsite Ads, just briefly define, is when Etsy spends its P&L on the PLA ads, primarily on Google, but in a number of other channels. If there's a successful sale on that specific listing, the seller will pay a slightly higher transaction fee, so we get more revenue for that sale. Sometimes there's a successful sale, but it wasn't on that seller's listing. Somebody will click on brown shoes, they don't like the brown shoes for that listing, but they find something else while they're at Etsy, and in that case, nobody is paying that extra fee. We don't collect it on every single sale, but we do offset about 35%. We've been able to make improvements in Offsite Ads by adding more channels. We've gradually started to add some affiliate channels in there and then improving the feeds themselves. Today, if you look for brown shoe, you know, you see a PLA for brown shoes. Tomorrow, you might see the listing for the brown shoes, the seller's star rating status, something about their reviews, and that the item is on sale or has a discount. We'll start to add more, and that improvement will improve the click and the conversion rate on that PLA. Your other big expense bucket is headcount. You slowed hiring in the back half of 2022, and you talked about being more tempered or sort of taking that same slower pace in 2023. How With a lot of other tech firms doing layoffs, how do you think about balancing cost discipline with the increase in available tech talent out there? Yeah. Well, I think Etsy's been pretty disciplined throughout. We started to slow hiring over 1 year ago, when we saw that top line was starting to dance around a little bit, and we said, "Let's just hire at the rate that's commensurate with our top line growth." I've always said that the easiest layoff you can do is to just not hire the people that you haven't hired yet. You know, the way we operate is to try to be sort of careful and judicious at, with the rate of hiring, so that we don't end up in a situation where we have to lay off any of our team. I think we've been successful there. Early in this year, we just continued with our sort of slower pace of hiring. That forces... I love it. What is it? Necessity is the mother of invention. I love the forcing function of having us to really think about what are the fewest possible things that are gonna drive the highest possible yield. That has been working really effectively at Etsy. The supply-demand function helps us in another way. Last year or, and the year before, resources were really constrained. We, every year, go do a market assessment to make sure that we are paying competitive competitively, and sometimes that results in a market adjustment. We might have to increase our base compensation. In last year, as an example, we also increased the use of equity to bring in and retain the talent that we needed to actually produce the greatest product. When it goes the other way on us, we don't reduce anybody's wages, but we don't have to pay as much to bring in the next batch of talent through the door. In that way, I think we are always staying at the right percentile for competitiveness and pay, but it also helps us manage compensation costs. The last thing I'll say about it is we've diversified. We have a very successful, robust development organization in Mexico City, so we've been able to diversify our talent pipeline, and we also have development going on in Dublin and the pay grades vary a little bit by those in those markets. Conversely, Etsy pays everybody to a New York wage, regardless of where they're located in the U.S., and that makes us very competitive in terms of an attractive place to work and a place to hire great talent. Great. We should touch on the House of Brands, Reverb.com, Depop, Elo7. I think you invested roughly $50 million across those businesses in 2022. What's the roadmap to get those to profitability and return the brands to growth? Reverb is already hovers around break even. Just putting a point in that still then becomes dilutive to our margins because it's lower margin revenue coming into the portfolio. Elo7 is not mature enough to be profitable. We wanna keep investing there, but they're so small, it's not worth belaboring that point. Depop's a little larger. They're also very small. We wanna be investing there. They have a brand-new CEO of that business that actually is an Etsy veteran. Kruti Patel Goyal was our head of product at Etsy for a long time. Super brilliant, really strategic, and she's made some great progress in her way she's refocused the team there. They've been able to significantly accelerate product development velocity, which is fantastic. The focus right now is on product. Once the product feels a little bit more robust, we can turn on more of the marketing there. We've introduced things like Make an Offer. We've introduced Depop Payments. There's lots going on there. She's forming her team. We're really super excited about what she's been able to do so far. Okay. All right, we got a little over two minutes left. Let's wrap up on capital allocation. You generate more than $600 million of free cash flow per year. How should we think about capital allocation between additional M&A buybacks and reinvestment? Well, first of all, on the M&A point, I think we're still in a digestion period. Our focus right now is reinvesting in the subsidiaries we've already acquired. We're constantly looking at what's going on in the markets. We keep our thumb on the pulse of what opportunities are out there, but right now, our focus is on the House of Brands we already have. We convert the majority of our EBITDA into free cash flow. You're right, it's a big number. We have a balance sheet philosophy where we wanna maintain the right leverage ratio to at any point in time, we could go out and get raise capital at a nice rating if we wanted to go that route. Then we take some of the capital, and we buy back our own stock because we do use equity as a form of compensation, and that isn't free. So we wanna offset the dilution that that equity creates by giving equity to our employees. So right now, we're operating under a $600 million share repurchase authorization from our board. Actually, when you go back over time, you can look at our shares outstanding have stayed flat for the last five years, and our free cash flow has continued to increase. So the ratio of the free cash flow to the shares outstanding is pretty nice. We see a very high return on investment from that share buybacks that we've been doing. Okay. Excellent. I think we can wrap up there. Thank you so much for your time. Thank you. Thank you, everyone, for joining us today. Thank you