Etsy, Inc. (NASDAQ:ETSY) Q3 2023 Earnings Call Transcript

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.