2023-05-31 22:04:09 ET
Etsy, Inc. (ETSY)
Bernstein's 39th Annual Strategic Decisions Conference 2023
May 31, 2023, 11:00 AM ET
Company Participants
Josh Silverman - CEO
Conference Call Participants
Nikhil Devnani - Bernstein
Presentation
Nikhil Devnani
All right. Good morning, everyone. Thank you so much for joining today. That's -- my name is Nikhil Devnani. I'm Bernstein's U.S. mid-cap Internet analyst. And it's my pleasure today to have Etsy CEO, Josh Silverman, with me on stage. Josh stepped into the CEO seat in May 2017. So congrats on the six-year anniversary.
Josh Silverman
Thank you.
Nikhil Devnani
Since then, the company has gone from about $3 billion or so in GMV to a little over $13 billion in GMS last year. So it's been quite the journey, and I'm sure we'll get into all of that. Josh, welcome to SDC, and thank you for being here.
Josh Silverman
Thanks for having me. I appreciate being here.
Nikhil Devnani
Just a couple of quick programming notes. Please refer to the Etsy website for the safe harbor. And if you would like to submit questions, you can do so via the QR code that I believe is on your agenda, and we'll be checking that as well. And you can also kind of vote on questions that have been submitted.
Question-and-Answer Session
Q - Nikhil Devnani
So with that, let's get started. Josh, a lot has changed in the last six years, both at Etsy and also broadly in the e-commerce landscape. Can you just talk a little bit about the evolution of the marketplace today and in the product innovations as well that you're most proud of when you look back?
JoshSilverman
Yes. I mean, I think we've come a long way. First, in terms of the customer experience on Etsy, I think is dramatically better than it was six years ago. One of the big challenges on Etsy has always been back when I started, I think we -- I forget, 30 million items, 40 million items, something like that. And we've got to pick 30 to put on the first page of search results. And search on Etsy was pretty rudimentary then. It's vastly more sophisticated now.
And so we do a much better job of helping you find what you want, not what you said, things like generative AI, and I bet we'll talk about that. But we've been using that kind of neural network technology for 18 or 24 months now to help understand that when you search for, let's say, cocktail attire for men, we should show you sports coat, even though the word sport and coat wasn't in what you wrote.
So that kind of sort of understanding of what you actually want is the kind of thing we can now do with search that we couldn't have done years ago. And on Etsy, it's a particularly difficult problem. We now have 115 million things for sale on Etsy, and none of them mapped to a catalog. We don't get any structured data. So even understanding what is this thing, what style does it represent? What's your taste and style? We've made very significant gains in getting the good stuff in front of you sooner, and we've made Etsy a more clean, valid and trusted marketplace.
So things like a couple of years ago, a high percentage of items wouldn't even have an expected delivery date. Far too often, things arrived late. You didn't know if you could trust that if something went wrong, Etsy would have your back. Last year, we launched Etsy Purchase Protection. Most items on Etsy now have an expected delivery date. Our sellers do a great job actually of meeting those delivery dates. The vast majority of packages arrive on time. And the vast majority of buyers are delighted by the items once they arrive in the mail.
And some of the proof in that is that during the pandemic, when people had very, very few other places to shop, you couldn't shop off-line. And even when you wanted to shop online, Amazon was kind of only shipping Lysol. If it was anything other than that, it would have to wait. Supply chains were backed up, nothing could come across the ocean. Etsy was one of the only places where everything was basically happening just as normal. And so millions and millions of people had to come and try Etsy.
For many of them, it was the first time. For many others, it was the first time in a long time. And what they discovered was Etsy works a lot better than what I thought it would or than what I remembered that it had. It works a lot better. And as a result of that, in a world where people now can go almost anywhere to buy almost anything and the competition for wallet share is dramatically, dramatically higher than it was before, we have kept the vast majority of those gains.
And those customers who came are still spending almost as much with us today as they were when they had almost no other choice in terms of where to go. I think that's a testament to the quality of the experience relative to what they thought and the differentiation of Etsy, and yet there is still so much better we can do.
The opportunity to be better in search, we are still in the early days of understanding the context of what you're looking for and being able to serve you in that mission, understanding what's next for you based on the fact that you bought this, here's five other things we have that are going to help you in that event you're planning and that mission that you're undertaking. We have so much more opportunity there. We have so much more opportunity to help you gain the trust to go to Etsy for the high stakes purchases, not just the low stakes purchases. We know our sellers do a great job delivering.
We've got to instill that trust now with the consumer and then building consumer consideration. Etsy is now a brand that's largely known and widely loved in places like the United States and the U.K., and yet consumers still don't know when to think of us. And there's tremendous opportunity to do a better job helping customers understand all of the different purchase occasions where we can serve them.
Nikhil Devnani
So a lot of focus on search and trust, and we'll talk about that. Is that still the strategic priority and where you're spending most of your time and energy today? Or have things kind of changed in terms of your focus of this?
JoshSilverman
Yes. Our focus area for this year is being more organized, being more curated and being even more trustworthy. And what do we mean by that? We do a great job now when you have a very clear idea of exactly what you're looking for. And so you've decorated the entire living room, and there's one throw pillow that you need to be a triangle, not a square, and you want it to be zebra-shaped. I don't know, I just made that up, but I bet if you look for triangle-shaped throw pillows, it will probably be on Etsy.
So when you come and you look for something very, very specific, chances are 115 million things for sale in Etsy, we have that very specific thing. Where we don't do a very good job is I'm generally looking to decorate this room. I want the following style. I really like boho, but actually, I'm kind of a little bit more of a mid-century modern kind of person, too. What do you have for me? Etsy, in those -- today does not do a great job.
And what we tend to do is throw a bunch of listings at you. What about this? What about that? There's a big opportunity to become more curated in that. Let me show you a collection of items that are in this taste and style.
Let me show you here's a coffee table you already own. Here's rugs that will match with that. Here's a lamp that would look great right over that coffee table. That kind of organization, we are barely scratching the surface of. Curation is also a big opportunity for Etsy.
When we have humans curate and look at items and pick the items that are well-photographed, well-priced, interesting, unique with a seller that has a great track record of delivering, when a human has actually gone and vetted that, when our merchandising team has vetted it, we know that the conversion rate of that item is substantially higher than what our search engines can do today just using technology.
So investing in getting the very best of Etsy to the top so customers can see it, we think, is very fruitful. We can do a lot more there. We think it can yield very big gains, both in driving conversion rate in visit but also driving more repeat purchase because we're showing you just the best of Etsy. And that makes the experience more satisfying to get you to come back.
And then we take those learnings and we give that back to the -- all of the sellers and tell them, here's what the best of Etsy looks like. Here's what you could do to be one of the best of Etsy, and that then starts to raise all boats. And last, trust. We now have expected delivery dates for almost every item on Etsy. We have tracking for most items on Etsy so you can tell where your package is. But there's so much more we could do to have the perception of speed get shorter without sacrificing the specialness of Etsy.
For example, very often, we have many, many items on Etsy that meet your need. Maybe we could put the ones that are closer to you higher in search so that they're going to get there a day or two faster because they only have to travel 300 miles instead of 3,000 miles, for example. We have a big opportunity to do more there. We launched Etsy Purchase Protection last year. That says that if something goes wrong, if the item is lost in mail, if it's damaged or if it's not as described, we will -- Etsy will refund your money, no questions asked. And that program is really streamlining things in a very rare case that something goes wrong.
By the way, very affordable, $25 million we said that program was going to cost on a $13 billion GMS base that tells you our sellers are doing a great job delivering. We need to help now communicate that to buyers. Etsy Purchase Protection still not that well understood, still a lot more to do to communicate that. So being more organized, being more curated and being more trustworthy are very big focuses. The other big opportunity for Etsy now is consideration. As I said, walk the streets, you ask people about Etsy. Chances are most people are going to have heard of Etsy.
And if you ask them, what do you think of Etsy? They're going to say, I love Etsy. Most common adjective associated with Etsy, I think, is love. I love Etsy. I don't like Etsy, I love Etsy. When is the last time you shopped on Etsy? I don't know, it's been a little while. I bet that most of the people you talk to say they love Etsy, haven't shopped on us in more than a year even if they think they have. Top-of-mind consideration associated with specific purchase occasions is a huge opportunity for us.
If you ask people, name places to go to shop for gifts, only 11% of people in the United States will name Etsy, only 11%. We kill it for gifts. We're amazing for gifts. If you've ever bought a gift on Etsy, you know that. There's no place better for gifts. Only one in 10 Americans, roughly 11% of Americans will unaided associate us with gifts. And that is by far the highest score we get of any category or occasion.
If you ask people about home furnishings, only 3% of people in the United States, if you ask them the open-ended question, name places you can shop for home furnishings, 3% of Americans will name Etsy. Home furnishings is by far our biggest category. Our sellers sold billions of dollars of home furnishings, and yet only 3% of Americans will say Etsy for home furnishings. Ask them about style and accessories, 3% will also for style accessories, jewelry, 3%. So we have enormous opportunities to associate the Etsy brand with very specific purchase occasions.
And there are so many purchase occasions for which Etsy is relevant, when you're decorating your home, when you're giving a gift, of course, when you've had a new baby, when you're decorating the house for Thanksgiving, when you're -- obviously, Christmas, birthdays, but when you're traveling, if you need a wallet, every day, I can name every single week of your life, something on Etsy for which we have something really relevant. You just don't necessarily think about it. And that's only in the United States that the scores are 11% and 3%. When you go to Europe, we have obviously even more opportunity where our brand is even less well understood.
Nikhil Devnani
And I think those -- that brand awareness is probably a good segue to just hear your thoughts on the competitive landscape within e-commerce. I think, we've seen the omnichannel retailers flip the switch, and they had to because of COVID. You've got new marketplaces springing up coming out of China. How do you think about the competitive landscape, where it's going and kind of where Etsy fits in as you look out, say, five to 10 years?
JoshSilverman
We're -- so the competitive world, it's always been a competitive world. And there have been tens of thousands of places that want your money and compete hard for your money before, and there will be in the future. And Etsy is one of them, and we've got to compete super hard. I do not believe that there is a market for handmade.
I don't think anyone wakes up in the morning and says, I want something handmade and anything will do. I'm looking for a gift for my mother. And does Etsy have something really compelling and really special that's better than if I went to sales in a mall, if I ordered something online with the florist? We compete with all of that. In every purchase occasion, we compete online and offline.
And in fact, when you talk to customers, online and offline is not really a distinction most of them make. They're thinking about calling the florist, which is a phone call. They're thinking about going the mall to sales. They're thinking about going to Etsy. And we are all competing for the same dollar. What I take heart in is most people are competing in e-commerce for e-commerce dollars. They're competing against Amazon on Amazon's terms. They're trying to sell the same items that are available on Amazon, which means they've either got to sell it a little cheaper or ship a little faster.
Over time, e-commerce is going to consolidate. I believe there will be fewer and fewer places to buy things online. Why is that? Because our brains can only remember a few brands. For everything else, I've got to go to Google or Facebook. And if I'm going to Google or Facebook, the economics downstream, if you're a brand where most of your traffic is paid, you're never going to have the margins to truly compete. Etsy offers something truly different. It is a genuine alternative to Amazon.
The items on Etsy are made by sellers just for you. They don't have MSRPs. They don't have SKU numbers. And so everyone else is trying to compete with Amazon on their terms. We're trying to do something very different. And I think the more the world consolidates, the more people will crave an alternative to Amazon. And I think no one is better positioned than Etsy to be that true alternative.
Nikhil Devnani
Before we kind of dig into the long-term opportunity, I think it would be helpful to just touch on trends that you're seeing in the business at the moment or year-to-date. I think Etsy obviously is much bigger than it was in 2019, but in recent quarters, we have seen some GMV pressure. So some investors are worried that kind of the best days of growth are behind you, and market share is now coming under pressure. What's your overall response to that? And how would you characterize current trends in the business?
JoshSilverman
So we believe that we're holding or gaining share in each of our categories, but some of our categories face some headwinds. So home furnishings, for example, is our largest category. And after years of people renovating and redecorating their homes, they're taking a break from redecorating to their homes, maybe traveling. Other categories are doing better for us, apparel, for example. People are leaving the house more and going out, and that's a better category. But on a category-adjusted basis, we think we're holding share. It's also true that our sellers have not taken price in the past five years.
And so well, other people's GMS numbers are inflated by the fact that they're raising prices by 6%, 8% often to keep up with inflation, our sellers haven't done that. So if you look at share of transaction volume, we think we're holding. And we think we're holding at a time when consumer discretionary is tough. There's some -- I don't need to go through the list of difficulties for all of you. You know it very well. You've got to pay your student loans back. You're not getting rent abatement anymore. Government stimulus is a lot lower than it was.
And of course, there's very high inflation. And you can travel, and you can do other things with your money besides just buy things. And you've spent the last few years stocking up. So there's pent-up demand to do other things other than e-commerce. And in light of that, what we said for -- what we guided to for this quarter was that GMS would be roughly flat.
Revenue would grow in the low single digits. And the EBITDA margins in our core business would be about 30%. So if you look back over the past few years, we know in times of stress and difficulty when the rest of the world has been very challenged, Etsy has been remarkably resilient, right? When supply chains lock up overseas, when there's a pandemic, when there's other things, Etsy's business model is very resilient to those kinds of stresses. And we've had every kind of tailwind in turbocharging.
Now we're in a much tougher environment. For a business like Etsy that's -- that does have quite a lot of discretionary spend on it, we're in a much tougher environment. And in that much tougher environment, we're saying we're still going to hold roughly all of the GMS we had last year with single-digit revenue gains and 30% margins in the quarter. If that's what bad looks like, when good can look as good as it looks, that to me feels like a pretty good business to own for the long term.
Nikhil Devnani
And I'd love to dig into kind of the active buyer component, which is one of the underlying drivers of that GMS growth. You've doubled your buyer base. You're about 45 million, 46 million a few years ago, now closer to 90 million. And then underneath that, I think there's a bit more nuance to it with buyers that are new to the platform, buyers coming back. Maybe just starting with new buyers. Again, there's some concern that Etsy maybe is running out of TAM or long-term opportunity. I don't think you see it that way. But the new buyer growth has been pretty strong. I think you added 50%, 55% more last year than you did in 2019. So can you just talk a little bit about where these new shoppers are still coming from? And I'm curious to hear the extent to which it's your core demographic of, say, women in the U.S. versus now newer cohorts, be it men or newer markets like Germany that are starting to kick in and really move the needle on this?
JoshSilverman
Yes. So we added about 6 million, 6.5 million new buyers in the first quarter. That's up 55% from what we did in that quarter pre-pandemic. So yes, we pulled forward tens of millions of buyers during the pandemic. And yet we're still adding new buyers at a much faster rate than we were before the pandemic. Some of those are coming from the United States. And it's true that we're growing men a little faster than we're growing women. We're also growing overseas, particularly in Europe, in very nice rates where we think we have tremendous opportunity. We've also been reactivating lapsed buyers.
As I said, there's about 100 million lapsed buyers out there. These are people who shopped on Etsy before, generally had a very good experience, really like us, but don't necessarily know when to think of us. And so when we say new buyer, we mean new ever, has never shopped on Etsy. The opportunity to activate someone who's lapsed, we think, is very significant.
And we added -- we reactivated about as many lapsed buyers as we added new buyers in the first quarter. A reactivated buyer spends about 35% more in their first 12 months than a brand-new buyer does. So we think that is a very meaningful opportunity. But really to copter up, I would say in the United States, which is the market we're best known for, it's the market we have the most penetration, only one out of every three women has shopped on Etsy in the last 12 months. In the United States, only one out of every three women have shopped in the -- on Etsy in the last 12 months.
And if we've got something for one out of every three women, we've got something for the other 2/3 as well. I'm darn sure of it. And only one out of every 10 men has shopped on Etsy in the last 12 months. And for the men in the audience, if you haven't shopped on Etsy, I promise the next things you're going to look to buy, go check out Etsy. We've got remarkably good selection at a really fair price. We went the first kind of 14 years or so of Etsy not even thinking about the male audience as an audience that we would focus on.
We have tremendous stuff for men and a big opportunity there. And I think the other 9/10 of the U.S. population has a big opportunity. That's just the U.S., and that's just talking about active buyers. In the U.K., we've seen dramatic gains. We're about 3x bigger in the U.K. than we were before the pandemic in the U.K. We're 5x bigger in Germany than we were before the pandemic, and we're still barely a top 10 site in Germany. We have tons of opportunity to grow and then throughout the rest of Europe.
So we're really learning a playbook for how to take the Etsy model and make that model work as a vibrant two-sided marketplace. By the way, in Germany, where we're 5x bigger than we were before the pandemic, 80% of purchases in Germany are local, meaning it's a German buyer buying from a German seller. So we're seeing domestic two-sided vibrancy now in different markets in Europe, where we think we've got a pretty good playbook for how we can roll that out through the rest of Europe. And that's just active buyers. We also see real opportunity to drive a lot more frequency.
Nikhil Devnani
And just on that point of kind of the U.K. and Germany, I mean, would have been some of the lessons learned there. I mean, how should investors think about the investment required or the time it takes to get some of these markets hitting their stride? And I think everyone's thinking about where else can Etsy appeal to shoppers because it does feel like this market for special, if you will, is a bit underpenetrated globally as a general kind of use case.
JoshSilverman
Yes. So as you know, as a marketplace expert, the near impossible thing with building a marketplace is to get supply and demand to meet. Sellers show up, there's no buyers, so they leave. Buyers show up, there's nothing for sale so they leave. And while that problem sounds really basic, 99.9% of two-sided marketplaces never cracked that nut.
And that's why these businesses at scale are so darn valuable. They grow really well, and they're really capital-light. And they have great margin structures because they're really, really hard to build. Our opportunity is in the early days of a market to be an export market for sellers. So sellers joined the platform because for $0.20, you can sell to the whole world. And that turns out to be really great value.
And as we acquire sellers typically relatively organically at very low cost because they want to sell into the U.S., the U.K. or the German markets, for example, we build more and more abundance. At some point, we have enough abundance that we can start to spend to buy demand in that market. And we can spend generally profitably almost from the start. So doing things like buying Google PLAs. Now that there's a lot of German sellers exporting, why don't we buy marketing spend -- invest in marketing in Germany to bring buyers who can start buying from that platform?
So we saw a lot of growth in the U.K. through the early days of the pandemic. We said, what if we lean into Germany? And what if we spend on television in Germany even though we're barely a top 20 market? Normally, we'd wait until we're a top 10 e-commerce site to do that. What if we lean earlier, invest earlier to build brand awareness in Germany? What if we maybe lean into PLAs more aggressively than we normally would? And what we've seen is the growth in Germany has been tremendous, and we think that those investments have paid off. So we think that's a model that we now understand better and can replicate through the rest of Europe.
Nikhil Devnani
And is Europe kind of the focus area we should think about?
JoshSilverman
We've also been making some investments in India. India typically is a bit more of a unique market, but we think that India's deep experience in artisanal products and crafts, what we've seen with Indian sellers is when Indian sellers sell to an American buyer, the lifetime value of that American buyer goes up. So we know that the Indian sellers are offering something really unique and special, which I don't take lightly because with 6 million sellers and 115 million things already for sale on the platform to be additive, you've really got to be doing something different.
But we know that the Indian sellers have brought something special to our global marketplace. There's also a passion for craft. And unlike so many e-commerce companies that are coming into India and trying to import from other countries, supporting and lifting up the crafts people in India to sell to other Indians, we think is very aligned with where the government is interested and where the culture is interested. And we think there's an opportunity there. So we've been leaning in a bit in India.
But in my experience with marketplaces, Western Europe typically acts as a global marketplace. And that's where we have the -- between the U.S., Canada Western Europe and Australia, those are the markets that tend to act as a relatively fluid global market, and that's where we have probably the easiest opportunity.
Nikhil Devnani
I can attest to the Indian expansion maybe a useful one. We see -- you mentioned reactivated buyers as well. That's been a fairly healthy driver for you. Like how durable is that reactivation because we get that question a lot. And when you think about how you bring buyers back, what are the levers that you can pull to get them to come back?
JoshSilverman
Yes. So levers to get them to come back are largely through our full funnel marketing, so television advertising all the way through to performance marketing. And we have seen real success with television advertising delivery. I've seen some analysis that takes our total marketing spend and divides it only by the number of new buyers, and then it comes up with an LTV to CAC that doesn't make sense. Well, that's not how we think about our marketing at all. Our marketing works to bring new buyers in. Our marketing works to reactivate lapsed buyers, and our marketing works to drive more frequency from our existing active buyer base. And we assigned a value to each of those, and we test the incrementality.
So we look at had we not bought this keyword, would we've reactivated that lapsed buyer anyway? And so we're relatively sophisticated at attributing value to each of our marketing channels across each of those bases. But we're getting better, and I think there's still opportunity, we're getting better at identifying this is a community of lapsed buyers. Here's how we can target them. Here's how we can find them on be it Google or YouTube or other places and give very specific marketing messages to them.
Over time, where I think the market is going is here's someone who loved us for weddings and hasn't been back since. They're probably refurnishing -- they're probably furnishing a home or maybe having a baby, and how do we have home and baby messaging going to that customer, right? Here's someone who shows up for Mother's Day but doesn't shop on Etsy for Christmas.
How do we go after that customer in a much more targeted way? Here's someone who buys vintage clothing on Etsy but hasn't thought about us for home furnishings. How do we find them and target them with creative that's very specific? And I think as the world moves from linear cable to OTT, we're going to have a big opportunity to be much more targeted in terms of finding our audience and delivering a message to them that's much more tailored.
Nikhil Devnani
You mentioned marketing there. I mean, can you just talk broadly about the overall marketing philosophy, how you manage kind of return on investment there and how rigorous you are about that process? And is that an area where we should continue to expect investment as you try and appeal to a broader audience of people as well?
JoshSilverman
Yes. Our philosophy is, look, if the first dollar of marketing you spend, usually it's against your best-performing asset, and it delivers a very high ROI. And every dollar thereafter, the marginal return goes down. And so what we're looking at is if we spend $1 more, what would the return have been that if we spend $1 less, what would the return have been, and what's the return on that last marginal dollar?
We set a threshold for our marketing team, obviously, north of our cost of capital to say, what is the return on the dollar? And we want the last marginal dollar to be at least at this threshold and then we go the marketing team by the area under the curve. How can you be constantly pushing up the efficient frontier so that we can spend more at the same ROI or get higher ROI within the same amount of spend?
And there's a lot of opportunity in terms of our bidding technology, in terms of our targeting technology, in terms of our landing page, in terms of our personalization, where our martech teams are constantly getting more sophisticated at how can we drive up that marginal return curve. We've never been a growth-at-all-cost company. We have always focused on that marginal return of the last dollar. And the reason is having been around for a couple of decades now, most of the companies I've seen and been part of thought about the return on their spend in total.
What is the average ROI of the full portfolio of spend? And when you unpack it, you're making a lot of high returns here, and you're actually losing money there, but because you're only looking at the average, you're losing that subtlety. And the challenge is if you spent money unprofitably last year, you've got to lap it this year. And how on earth are you going to do that? The only way to drive growth if you spent money unprofitably last year is to spend money even more unprofitably this year. And that's a do-loop that I've seen other companies get into and never want Etsy to be part of.
So we've been, for six years now, very focused on make sure that each of the dollars we spend we feel good about, so that we're not in that issue of lapping last year. I will say for our performance marketing spend, we believe the ROI of our performance marketing spend last quarter was 40% higher than it was in the same quarter pre-pandemic, 40% higher. Why is that? Well, our take rate is higher. Our customer lifetime value is higher. The average GMS of a buyer is significantly higher than it was. And we have a lot more advertising revenue on the site right now.
So things like off-site advertising, our sellers actually subsidize about 30% of the cost of our performance marketing program, and we have on-site ads. So when a seller lands and clicks on a listing, we might earn some advertising revenue from that as well. We think about all of that as we think about what is the rational and profitable level of investment.
Nikhil Devnani
And there's been also a shift to more upper funnel marketing and brand building. I guess how do you think about the payback on that pocket of spend? And kind of how does that complement the strategy as well?
JoshSilverman
So first, we're very focused on ROI in each of our marketing channels, including above the line. So we definitely measure what we think the return on investment is from TV in terms of GMS, both in period and what we predict it will be over the next 18 months based on customer acquisition or reactivation. We want to see that top-of-funnel investment have a real ROI in terms of GMS. We also do look at what has it done to brand consideration. And so for example, right now, we're very focused on associating Etsy very specifically with home furnishings, style and gifting.
So if you look at the Etsy TV campaigns right now, our TV campaign is called Etsy Has It. And you will see Etsy being -- saying Etsy Has It for home, Etsy Has It for style, Etsy Has It for gifting. We need to make these very clear associations so you know when to think of us. So we're measuring very much the GMS that these TV campaigns are generating over an 18-month period. We're also measuring whether we've made gains in this unaided awareness. And when you ask someone where do I go to shop for home furnishings that Etsy moves from 3% to something, over time, much higher than that.
Nikhil Devnani
We talked about buyers. The other side of the equation is frequency or how often people are ordering or engaged. Can you talk a little bit about that? You've done a good job improving that. I think now people shop around three times a year on average. But it has started to flatten out a bit. So what gives you the confidence that, that can go higher over time? And how do you migrate buyers up that engagement curve?
JoshSilverman
So what gives me the confidence it can go higher is if you look at the number of purchases -- when we look at the number of purchase occasions for which Etsy is very relevant, we have hundreds of purchase occasions. We have hundreds of thousands of people who love us for hundreds of different purchase occasions: craft supplies, pet products, baking, gardening, home furnishings, gifts for -- gifts of every kind, style and on and on.
So we do not lack for purchase occasions for which Etsy does a fantastic job. We need to do a better job of bringing those front of mind to avoid the -- I should have had a VA problem or after you realized I could have found something cooler. I showed up with the same Halloween costume as three other people at that Halloween party. And if I've gone to Etsy, I would have had something way cooler and more interesting. We've got to do a better job.
So what gives me confidence is that we don't need to invent any new purchase occasions. We have more than enough. We just need to do a better job of communicating those. Three purchase days per year leaves us, I think, a tremendous amount of opportunity. And I think the trends are very much going in our favor in several ways.
One, I think the technology trends are going to be very helpful. The big opportunity for Etsy is how do we help you understand in this visit what we have for you next. And understanding, you bought that coffee table, here are a lamp and a rug and other things that are in the same style, and that would match well with it. That is a problem that was impossible for computer science to solve five years ago that is very possible today.
How do I understand the context of the mission that you're in? Someone today comes to Etsy and types in a few keywords, pants, blue, bell bottoms. You don't walk into a store and yell at the sales agent, pants, blue, bell bottoms. You say, I'm going to an '80s party tonight, and I need something that looks '80s party. And the person says, Oh, here's some bell bottom pants, but here's a cool shirt. Here's a wig you might wear.
And here's -- if you imagine everything we have for Etsy, if we knew that, that's what you were doing, you can just imagine what we could do with that. As opposed to, I'm looking to refresh my closet for the spring. And I kind of like a retro vibe, and I like things that are loose fitting. That's an entirely different mission. And if you talked to Etsy in that way, holy cow, could we curate incredible collections for you. Technology is very much going to be a tailwind for us. I also think consumers are becoming more intentional.
They're becoming more conscious. And I think the idea that people want to support other small sellers, I think the idea that they want more individualization, I get asked a lot of questions about what do you think about team 01 and other -- I think the idea that there's really cheap stuff that's been mass produced and is going to arrive, you're going to break it and throw it in a landfill within two minutes, that's been around for a long time. It's going to continue to be around for a long time. And I think people are going to more and more want to maybe buy fewer things that matter more. I think that's a trend that's very much in Etsy's favor as well.
Nikhil Devnani
Is there a good framework to think about kind of where that order frequency can go over the long run? Like what can it get to? How should we think about the dream -- dream the dream, if you will, on that?
JoshSilverman
Well, I mean, I don't like to shop. And I buy 50 things a year from Etsy. Once a week, something arrives for me at Etsy. I'm not a big shopper. It's just that I think to start on Etsy. Of course, I think to start on Etsy, I'm in my job. Like I'd be crazy if I didn't. And I'm not expecting everyone to be -- have Etsy as front of mind as me. But those purchase occasions exist. A couple of days ago, I needed a new wallet, and this is a beautiful weather wallet. It arrived in six days. It cost $35. It's got my initials on it.
It's exactly the size I needed, and it took me two minutes to find and buy on Etsy. It was on the first page of search results. I bought it. I'm delighted with it. I had a nice handwritten note from the seller that was lovely. These socks, I bought 1.5 weeks ago, Etsy colored, I think they're kind of cool. Every week, I know I've got purchase occasions for Etsy. So three is an incredibly low bar for Etsy. And if you look at GMS per active buyer on Etsy, it is a fraction of what you would see even at a place like eBay, and I don't think eBay is the aspiration for where we should go.
But just to pick one place to compare, our GMS per active buyer is still far lower. So I think there's tremendous runway for Etsy over time. I think we've gained a lot more trust. I think 2019 and before, people thought maybe Etsy, if you knew of Etsy at all, it was this kind of T.Brooklyn kind of thing. I think people have a lot more confidence in Etsy, but there's still so much more room for us to go to, to be front of mind and to give you the confidence to go to Etsy for the couch, not just the cushion. That's another -- we haven't talked of AOV yet.
But mostly people buy lower AOV items on Etsy. We have gorgeous couches, not just cushions. We have gorgeous fine jewelry, not just costume jewelry on Etsy. And we know our sellers deliver. They do a great job. Giving customers the confidence to buy those items and surfacing those items in the right way, the way they deserve to be surfaced on the site I think is also a very big opportunity for us.
Nikhil Devnani
I don't think either of us would be allowed off the stage if I didn't ask you about AI. So with this wave of kind of generative AI, how are you thinking about what that does to your business? Do you see as overwhelmingly positive? Or are there risks that you also kind of worry about and think about? Just what's your perspective on the -- on what we're seeing right now?
JoshSilverman
For Etsy -- I don't want to get into societal discussion around generative AI because there's plenty to be concerned about there. But for Etsy, I think we have more to gain than most in this. Let me just start by saying that Etsy has been -- is pretty at the cutting edge of where search is now. And so we've been using neural network translators for about 18 months on Etsy. So I think I gave the example at the beginning of this session to say that when you type in cocktail attire for men, we know that, that means sport coats.
That's the neural network translator technology taking what you said and turning it into what you meant, right? And that's been true on Etsy for a little while. That's the same underlying technology that powers generative AI. But that's not generative AI, it's just AI. Generative understands context and can speak to you in a normal way. And if Etsy had that context, I think there is so much more that we can do. So training our buyers, the hard part is not now going to be the technology because that technology problem is a problem that's quickly getting solved.
And we're going to be able to partner with the people that are solving it in a way to incorporate that on the Etsy pretty easily. We have the data infrastructure. We have the scientists. That's not going to be the hard part. The hard part is going to be teaching our buyers to speak to us in full sentences and give us the full context. But the value that's going to unlock is remarkable. And to be able to do things like say I like that carpet, but I'd like it if the pattern was more geometric and less organic.
And by the way, can you make the colors a little more pastel? Generative AI can handle that question. On Etsy, we've got carpets that will blow your mind, that are a little more geometric. So oh, let me curate a collection of those for you. You can imagine having that dialogue. And if you could have that dialogue with Etsy, where there's 115 million things for sale that don't map to a catalog, the value that, that adds is absolutely tremendous and I think even more valuable than what it would add in many other places.
Nikhil Devnani
We've talked a lot about buyers, maybe switching gears to sellers for a moment. Investors pay a lot of attention to the take rate, which has gone up over time, but you've also seen sellers grow, listings grow. So it seems to be a value exchange that sellers are happy with. But can you just talk a little bit about that exchange of value, how you think about managing the take rate and the opportunity you have still to increase it over time as well?
JoshSilverman
You used the right words. I mean, you know us. Fair exchange of value is always our guiding star. So fair exchange of value, we have seen the take rate go up quite a bit over the past few years, but it's because we drive a lot more value for our sellers. Our sellers have hired us to bring them buyers. They don't want to shop, they want sales. They've hired us to bring them buyers. And the more we can bring them buyers and help them to run their business more efficiently and more effectively, the better they do. And when they do well, we do well.
So we did raise the take rate last year. And we said we were going to reinvest the substantial majority of that back into them and their success. And we did, and it worked. And they grew better last year than many of their competitors. And we offered better customer support. And we offered the Etsy Purchase Protection and a lot of other things that supported the marketplace and built sales. So I think we've got a good track record of having a fair exchange of value where we all grow together and where we're all well aligned. And I think there continue to be tremendous opportunities for us to do more to add value for our sellers and for our buyers.
And so giving our sellers better insight about how they can be more successful, giving our sellers better insight about what sustainable pricing should look like for them. Where are they underpriced and where are they overpriced and help them make better decisions there, helping them with fulfillment to get really -- we help them already get great rates and great service. We can continue to do more. Etsy Payments does a lot for our sellers. We can continue to do more there. So I think there's a big opportunity in just continuing to add more services to support both our sellers and buyers and charge a fair rate for it.
Nikhil Devnani
I think unlike a lot of other companies in tech, you've been kind of hiring through this dynamic period. How do you think about investment in headcount from here? And how are you managing talent in this sort of odd remote work world that we're in?
JoshSilverman
Well, first, we have always -- just like we measure the marginal return on the next dollar, we've always measured value creation per squad at Etsy. We're very focused on value creation per squad. So the unit of work at Etsy is a squad. It's a team of roughly 10. It's going to have six or seven engineers, a designer or a product manager and an analyst. And those squads are going to be given a customer problem and a financial metric.
So make recommendations more contextual in a way that helps people understand the next mission they can solve on Etsy or make the expected delivery date shorter on Etsy or give more confidence that we'll have your back if something goes wrong. And for each of those missions, do it in a way that unlocks X million dollars of extra GMS. And every squad has both one singular customer mission they're focused on and one single financial target that they're trying to achieve. And then we measure every single month their progress to goal.
And based on that, we will be able to get across the portfolio of squads, how much extra revenue did they generate or extra GMS did they generate or cost savings did they generate. Different squads have different financial targets, but each has a financial target. How do they do versus that? And what did the portfolio of investments delivered to our shareholders and to our customers? And because we've been measuring that all along, we have a lot of conviction in what the value creation looks like.
We did not hire like drunken sailors during the pandemic. We did not think that the pandemic gains would always last. In fact, if you listen to our earnings call in 2020 and 2021, what we kept saying is we think some of this is going to go away. It must be that when stores reopen and people can travel again, customers are going to avail themselves of that. And we are going to lose some share. I'm delighted by the fact that, that largely didn't come to pass. And we've held effectively all of -- very close to all of the gains we had. That was not what we expected. But we've hired at a cadence that we thought we could absorb talent, put them productively to use and then measure the results.
I'm delighted to say that it looks like the marginal return of the squads we've hired most recently are every bit as high as the squads we hired years ago or said differently, even as our team has scaled, we are seeing as much value creation per squad as we did years ago when we were much smaller. So we're going to keep focusing on that.
Our revenue per headcount is very, very high. Revenue per headcount's about $1.4 million in our core marketplace. That is much higher than many of our peers of similar size. That looks a lot more like what you see of companies that are many, many multiples of our size. So we think we're a very highly leveraged team.
But the metric we really want to look at is, what's the value creation? Not how many hours did someone spend fingers on keyboard or how many lines of code did they write, like how much incremental sales did our sellers make based on this squad showing up and working this year? And when we feel like we're getting good returns there, we'll lean in. But we're careful because that's -- unlike marketing spend, which you can turn on and off on a dime, headcount is a much bigger commitment. So we want to make sure we're thoughtful.
Nikhil Devnani
And maybe to ask a related question. As we kind of operate in this uneven environment, is there like a margin threshold that you think about holding the business to? Or really, is it more about kind of maximizing profit dollars or free cash flow dollars back to the ROI framework?
JoshSilverman
Not to be boring, but marginal return on the next dollar, like do we feel like when we're investing money, we're getting good returns? I believe that over time, e-commerce is going to consolidate. I think it's going to consolidate meaningfully. There will be very few brands you can actually remember. And in order to be one of the very few brands you remember, we've got to do something important enough, different enough, often enough that someone is going to commit your brand to one of the precious few spaces in their brain. The vast majority of sales on Etsy come to us through free traffic.
We do spend money on performance marketing. We do spend some money on brand. Most traffic on Etsy is organic. Most sales on Etsy is organic. We've earned one of those precious few spaces in your brain. Those precious few spaces in your brain, the value of that real estate is going to go up dramatically in the years to come.
There's going to be only a few places to shop, and those places are going to be really valuable. I think we're well positioned. So we think there's a very big prize, but we've got to earn it, and we've got to prove it every day. So we have a lot of discipline around and the investment dollars we're making today showing us tangible proof that it's paying off and worth spending the next dollar. So we don't have an arbitrary threshold. We said -- in 2018, we had an Investor Day, and we said, we think at scale, this business can deliver 30% EBITDA margins.
Well, during the pandemic, we got well above 30%. We didn't just try to spend down to 30% because that would have wasted your money. We don't want to do that. Some people try to manage their margins and like, let's do everything we can to get the margin lower. So we don't -- that would have been a waste of your money. My money, I'm a shareholder, too. I don't want to waste anybody's money.
So we didn't do that. Our margins got pretty darn high. Here we are, margins are already at 30%. We said that's a long-term someday margin. They're already at 30%. I don't want to pick an arbitrary margin. I do feel like we have a very big opportunity ahead of us. We're in the early days of unpacking that. We want to invest smartly to achieve that growth.
Nikhil Devnani
As a closing question, just one from the audience here on kind of when Etsy plans to pay dividends, but maybe I'll just tack on a broader question as well of your free cash flow generative. How do you think of allocating that capital? What are the kind of the best uses of that capital today?
JoshSilverman
Well, we've been buying back shares, and we've done that throughout our whole history. And our philosophy there has been not trying to time the market, just we buy back the number of shares we issued to our employees as for stock-based comp because stock-based comp is not free. We've never thought it was free.
And so we -- to have just to instill discipline, we buy back the number of shares that we issued to our employees. And we thought that's a thoughtful way to think about returning or at least maintaining. So the share count today is, I think, roughly the same as it was when I joined the company six years ago. We think that we've got a big opportunity ahead. I don't know, it feels pretty early days to me to be talking about dividends, but that feels pretty early days to me.
But what I will say is we care about your money, and we want to make sure that we're allocating our capital thoughtfully and carefully so you're getting a good return on your investments. We will make strategic M&A if and when that makes sense. When we think there's a great asset at a good price that can grow our market and deliver good returns for you, we can return capital to shareholders through share buybacks. And we can invest organically to grow.
Fortunately, we are in a marketplace that has very high margins. We are a very capital-light model. Unlike almost all of our competitors, I don't see a day where we're spending billions of dollars to build warehouses. This is a business that's very free cash flow generative. And even in the worst of times, it's hard for me to imagine a situation where this business isn't generating free cash flow. That's a nice thing. And it gives me a lot of comfort and excitement for the future.
Nikhil Devnani
All right. And with that, we're right out of time. So Josh, thank you so much, and thanks, everyone, for tuning in.
Josh Silverman
Thank you.
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Etsy, Inc. (ETSY) Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)