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Edited Transcript of ETSY earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Etsy Inc Earnings Call

Brooklyn May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Etsy Inc earnings conference call or presentation Wednesday, May 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Debra Wasser

Etsy, Inc. - VP of IR

* Joshua G. Silverman

Etsy, Inc. - President, CEO & Director

* Rachel C. Glaser

Etsy, Inc. - CFO

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Conference Call Participants

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* Brian Thomas Nowak

Morgan Stanley, Research Division - Research Analyst

* Dillon Griffin Heslin

Roth Capital Partners, LLC, Research Division - Research Associate

* Edward James Yruma

KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

* Heath Patrick Terry

Goldman Sachs Group Inc., Research Division - MD

* Kunal Madhukar

Deutsche Bank AG, Research Division - Research Associate

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Maria Ripps

Canaccord Genuity Limited, Research Division - Analyst

* Marvin Milton Fong

BTIG, LLC, Research Division - Analyst

* Nicholas Freeman Jones

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* Shweta R. Khajuria

RBC Capital Markets, LLC, Research Division - Assistant VP

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Ygal Arounian

Wedbush Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q1 2019 Etsy, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

It is now my pleasure to hand the conference over to Deb Wasser, Vice President of Investor Relations. Ma'am, you may begin.

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Debra Wasser, Etsy, Inc. - VP of IR [2]

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Thank you. Good afternoon, and welcome to Etsy's First Quarter 2019 Earnings Conference Call. Joining me today are Josh Silverman, our CEO; and Rachel Glaser, our CFO.

Before we get started, just a reminder that our remarks today includes forward-looking statements relating to our market opportunity, our financial guidance and key drivers thereof, anticipated marketing spend and other planned investments and their anticipated impact on our future financial results, anticipated product launches and impact of experiments, including on conversion rates, anticipated growth in active buyers and investments and timing of our migration to the cloud and its impact on -- and anticipated impact on our future financial results. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in our press release, our 10-K filed with the SEC on February 28, 2019, and our 10-Q that we expect to file with the SEC in the coming days. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we don't have any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures. The reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our IR website. A link to the replay of this call will also be available there, and if you prefer to access the replay via phone, you can find that information in the press release as well. We've created a short slide presentation to accompany today's opening remarks and recommend you follow along.

With that, I'll turn the call over the Josh.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [3]

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Thanks, Deb, and good afternoon, everyone. I'll start by touching on Etsy's Q1 results, which you can see on Slide 4. Currency-neutral GMS growth was 21% and approximately 19% on an as-reported basis. Revenue growth was 40%, and adjusted EBITDA margins expanded to 29%. Etsy had a solid 2018 and 2019 is off to a similarly strong start, with currency-neutral GMS growth accelerating year-over-year. We're particularly pleased with these results given the softness we experienced at the beginning of the quarter and our decision to pause some marketing channels, which we reviewed with you on our last call.

At our Investor Day in March, we outlined 4 strategic imperatives that together define Etsy's right to win, and what we believe form the foundation to unlocking our large market opportunity, which we sized at about $250 billion. As a reminder, those are, first, creating a best-in-class search and discovery experience; second, enabling meaningful human connections; and third, building a trusted brand all while; fourth, leveraging our vast global collection of unique items.

Over the last few months, we've reorganized our product teams to align with these 4 areas, and we're very pleased with the impact we're already seeing from this change. We also reduced our marketing investments in certain channels in order to test their incrementality. We learned a great deal from these tests, which strengthened our confidence in the investments we plan to make for the remainder of 2019, all of which is consistent with our philosophy to stay very disciplined in our investment approach, while aggressively pursuing the areas that we believe can deliver profitable growth.

We continue to focus on growing the Etsy marketplace in the U.S., and our top 5 other core geographies, a strategy that resulted in domestic vibrancy and particularly strong performance in both the U.K. and Germany.

Let's dive a bit deeper into some of the areas that impacted our Q1 results, starting with our product initiatives. Etsy's product development teams are oriented around solving our biggest customer challenges, with cross-functional teams, we call them squads, each assigned to a specific customer mission and business goal. We track experiment velocity, hit rate and win size across our entire portfolio, and we're continuously learning and iterating. After spending December and January, reorganizing to align with our rights to win, our product teams experiment velocity surged to an all-time high in Q1, largely due to work in February and March, which drove healthy GMS wins. Search and discovery continues to represent a key focus area for Etsy. With over 60 million items, simple searches on the site often yield an overwhelmingly large set of search results. In fact, 1/3 of all searches generate over 10,000 items each and we know that over 80% of purchases via search come from the first page of search results, making it critical that we surface the very best items higher in search. Our goal is to take Etsy's vast sea of listings and make it feel more manageable and curated for buyers.

One way we're doing that in 2019 is to form a stronger point of view around quality and give more prominence to items that represent the best of Etsy. Historically, our search engine has optimized for conversion rate, giving prominence to lower-priced items that convert more often. For example, favoring wedding dress hangers over wedding dresses. By incorporating price, we can train our algorithms to solve for GMS, and as a result, display a wider range of items, giving more appropriate prominence to higher-quality items. In the first quarter, we ran our first test incorporating price into our search ranking algorithm, which resulted in a positive impact on GMS. We're encouraged by this early success and believe we are at the very beginning of what will be a fruitful journey to elevate our best value items and sellers. As a result, improving conversion rate, AOV and most importantly, customer loyalty. An important foundation to this work has been our cloud migration, which is enabling us to leverage more sophisticated algorithms via our access to Elastic Compute power. We're also developing a more localized experience that welcomes buyers and sellers from around the globe. And in Q1, we saw some nice wins for international buyers, searching for products in their own market. It's amazing how small modifications can punch above their weight. For example, one of many localization changes we made in the quarter was a change in the U.K. from the word shipping to delivery to be consistent with the local lexicon. This simple change drove a meaningful increase in conversion. On a larger scale, we're embarking on a major initiative to reevaluate how we index our inventory in French and German, which we expect to dramatically improve non-English search in those core geographies. This is another example of a critical growth initiative, which wouldn't be practical without our cloud migration. Another area of focus during the quarter was to improve conversion rate by delivering recommendations that better reflect our buyers' style and taste. Previously, we relied only on a subset of our available data and linear models to inform our recommendations. With our cloud capacity kicking in, we're now beginning to enrich recommendations on listing and landing pages by incorporating more information and leveraging more detail about buyers' previous purchases, item views and items they've added to their carts. Over time, this can be expanded to personalize further, incorporating things like repeat purchase prediction, image aesthetics, occasions and a vast array of metadata. We think there's a lot of runway to optimize recommendations in order to yield a richer and more personalized experience, positively impacting conversion rates and customer loyalty.

We also have significant runway to increase one of the most special parts of Etsy, the human connection. Transactions that feature a conversation between an Etsy buyer and seller converted 13x the normal rate and a 200% of the typical price. So in the first quarter, we made several improvements to our convo tool, making it easier for buyers to message sellers directly from shop and listing pages, and helping sellers to answer more efficiently. During the first quarter, we also continued to educate our sellers about the importance of shipping prices and practices. Our overarching goal for 2019 is to reset buyers' perception of shipping on Etsy in order to remove friction and encourage buyers to shop on our marketplace more frequently.

Etsy's transition to the cloud has played a role in nearly every product development example I've mentioned. The migration is a complex technical undertaking, but I'm happy to report that we are ahead of schedule and the transition has gone smoothly. We're also exploring ways to optimize use -- optimize usage to leverage all the possibilities of efficiency. I'm especially pleased about the growth that is just beginning to be enabled by our more powerful infrastructure.

Now let's turn to marketing. We used Q1 to recalibrate our marketing spend, pulling back from less mature channels, like digital video and television, in order to more closely examine the incrementality of returns from those investments and to refine our attribution models. We ran no television advertising in the first quarter, we reduced our non-brand SEM spend and we paused some of our affiliate marketing. These tests yielded important insights. Many of those channels were returning greater ROI than we were previously attributing, and some were returning less. In the quarter, we've incorporated those learnings into our attribution model, and have resumed some but not all of these less mature channels in the second quarter. Going forward, you can expect to see our marketing levels elevate again, given the confidence and insights we've gained.

In spite of the pullback in marketing spend, Etsy's active buyer count hit 41 million in the first quarter, demonstrating strong growth. I believe that Etsy has a significant opportunity to build greater awareness and relevance through higher funnel advertising. Our buyer NPS scores are high, and buyers report that they feel strong advocacy and loyalty towards Etsy. They just don't know when to think of us.

Last week, we launched a new TV campaign, which is airing on national cable and some targeted prime time television networks and on selected digital channels. Our new moat messaging focuses on buying things that matter to you, highlighting our great merchandise in a way that shows more relevance more often. We believe TV, cable and digital video are all potentially great channels for Etsy to reach broad audiences, further enhancing loyalty to our brand and without a dependency on referral sources, like Google or Facebook. Our campaign centers on showing buyers examples of many different relevant purchase occasions, along with the kinds of beautiful high-quality merchandise they can find across a wide range of categories and occasions. As I've said many times, Etsy is committed to being both a great business and a great citizen. We believe we can drive strong financial results and improve our impact on the world simultaneously. And that in fact, these 2 objectives are mutually reinforcing.

During the quarter, Etsy became the first global e-commerce company to offset 100% of carbon emissions generated by shipping. We're proud to lead from the front and mobilize the e-commerce industry on behalf of our sellers. Not only is this good for the planet, it's also good for business, with 90% of our buyers saying that environmental sustainability matters to them. In fact, conversion rate increased on our checkout page and we included messaging about our carbon neutrality initiatives.

In closing, last week marked my 2-year anniversary since joining Etsy, or as we say around here, my etsyversary, and what a journey it's been. I'm so incredibly proud of this team and all of the progress we've made in such a short amount of time. And of course, this was only possible because the underlying business has so much potential with such a strong community of amazing artists and creative entrepreneurs offering something so relevant in today's world of bland and commoditized commerce. And with our clear technology, product and marketing roadmaps, a deep bench of talent, our engaged community and solid financial footing, I firmly believe we can execute on our long-term strategy and deliver sustained growth. We're just getting started, capturing the opportunities within our unique two-sided marketplace. In short, I've never felt more optimistic about the potential for Etsy than I do today.

And with that, I'll turn the call over to Rachel.

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Rachel C. Glaser, Etsy, Inc. - CFO [4]

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Thanks, Josh. We're pleased with our Q1 performance and delivery of both top and bottom line results. First quarter GMS growth was 18.9%. Despite some initial headwinds cited on our last earnings call, strong product launches in the latter half of the quarter contributed to meaningful GMS wins, and we were pleased to see very healthy growth overall for the quarter. Revenue grew 40% year-over-year to $169.3 million, with growth in both marketplace and services. Adjusted EBITDA margin expanded 750 basis points to 29% in Q1 as we gained leverage across each of our operating expense lines compared to last year. We had a 19% increase in headcount year-over-year. But this increase in resources helped to drive new product wins, which in turn helped GMS growth. Our high EBITDA margin in the quarter was also helped by our intentional pullback in marketing spend.

We successfully improved many of our operational metrics as well. Q1 active buyers increased 18% to $41 million. GMS per active buyer on a trailing 12-month basis was up nearly 2%, and has generated growth of 2% or higher for 3 consecutive quarters, evidence that we are continuing to make progress improving frequency. Active sellers increased 13%, driven in large part by growth in international sellers. International GMS was 38% of overall GMS in the quarter. And at 33%, international GMS growth was the highest we have reported since early 2015.

While we won't review the P&L in detail shown on Slide 12, I'd like to add a bit more color in 2 areas. First, on marketing spend. In Q1, we pulled back across certain of our channels to digest our learnings from the Q4 spending increase, particularly on less mature channels. Despite our pullback in marketing, organic GMS grew in line with overall GMS growth in Q1 and accelerating compared to Q4. GMS from paid channels conversely contracted 500 basis points to 15% of overall GMS compared to last quarter. This demonstrates that our marketing investments in prior periods have a multi-quarter impact on growth. Now with more data on the incremental return by channel, we have rebalanced our marketing portfolio, investing across many channels where we have even more confidence, and pulling back on lower-performing channels. We will continue to test and optimize our channel spend while also leveraging new insights to better target our audience, segmenting buyers by customer type, such as habitual versus repeat, as well as by products category. One of the less mature channels that shows promise is television and digital video. As Josh mentioned, we have developed a creative campaign that highlights the breadth and depth of products we offer and helps tell an Etsy story. How many special and meaningful moments there are in life, and when to think of Etsy for so many of those moments. All of the creative costs for this campaign will be expensed in Q2, and media will be running through most of May and June, so we expect significantly higher marketing expenses in the quarter versus last year and last quarter. The television campaign is structured to maximize both reach and frequency, and we expect the impact from the campaign will build over time, as a large audience is exposed to the ads many times over a 2-month period. We will continue to invest in this channel into the second half of the year.

The second area to discuss is our spend on Google Cloud, which includes implementation costs and costs related to cloud usage for growth initiatives. We believe this is an investment that will have a positive impact on GMS growth in future years as we leverage the benefit of the Elastic Compute enabled by our cloud infrastructure. We are pleased with the progress of the cloud migration and are ahead of schedule. This has resulted in higher spend than we previously -- than we expected in Q1, primarily due to investments in machine learning growth initiatives, and we are now expecting our full year cloud expenses to be higher than we cited on our last call. These costs are included in our current guidance. I'll dive a bit deeper into why our cloud costs are running a bit hot for us. First, based on the fantastic work of our engineering team, we are ahead of schedule in migrating our site to the cloud, and expect the migration to be complete in early 2020. Our migration strategy is to lift and shift, meaning that all our capabilities are being transitioned, yet optimization has not yet begun. Second, and most importantly, now that we are in the cloud, we have seen how much pent-up demand and opportunity there is to improve our machine learning capabilities. We see this as a growth investment and have made a conscious choice to invest more into this opportunity. We evaluate these cloud costs much like we do our marketing investments with a disciplined ROI lens and the usage is higher than planned, we see the potential for strong returns from these investments. Importantly, we will offset these higher-than-planned investments with trade-offs from within our portfolio and as a result, our outlook on EBITDA margins remains unchanged. I'll talk more about our guidance for the year in just a few moments.

I have a few quick accounting notes for your models. As of January 1, 2019, Etsy has adopted the new lease standard and we expect to recognize an additional $8.5 million of depreciation annually, partially offset by decreased interest of approximately $7 million, primarily related to our Brooklyn headquarters. The impact of this new accounting standard is noncash. Two items related to our balance sheet, which you can find in the appendix of our slide deck. First, we repurchased $27.5 million of our stock in Q1, or approximately 530,000 shares. Also, you will see a significant reduction in accounts receivable as a direct result of our implementation of simplified shop finances, also known as single ledger, for our sellers, which nets Etsy fees against their sales.

Turning to our 2019 outlook. We are raising GMS guidance to 18% to 21% growth, driven by product development efforts, which have been delivering incremental GMS wins, as well as confidence in the portfolio of investments we are making in marketing, including our new television campaign. We are also raising our revenue guidance to 30% to 32%. As a reminder, we had a onetime benefit of $2.8 million related to Etsy Shipping Label revenue in the second quarter of 2018 that will not recur in 2019. This may be distorting some of your Q2 2019 models. We are maintaining our EBITDA guidance in the range of 23% to 25%. This reflects our confidence in the value of investments we're making in marketing and cloud computing, which we expect to contribute to our strong book growth this year, and also have longer-term benefit for the fiscal year. As we look at the margin cadence for the rest of the year, we currently expect Q2 and Q3 2019 margins to be significantly lower than Q1 and Q4 margins. We also want to reiterate our long-term goal to achieve adjusted EBITDA margins of 30% or higher within a 5-year time horizon.

In summary, we're very pleased with our strong start to the year. We are excited about our ability to grow our marketplace, while simultaneously driving profit margin expansion. We are rigorous in allocating resources to those that will produce the highest value. With a balanced portfolio of strategic investments across product, marketing and optimized infrastructure, we believe we will continue to deliver strong and sustained growth. Thank you for all your time today. We will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will come from the line of Kunal Madhukar with Deutsche Bank.

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Kunal Madhukar, Deutsche Bank AG, Research Division - Research Associate [2]

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One on the marketing side of things. What is the -- what was the specific learning from the TV spend that you guys did last year? And how does that translate into the spend -- or the strategy to spend this year? And as a follow-up to that, it would be great to kind of understand, are there specific KPIs that we should be tracking or that you would be disclosing, that can help us understand or better understand the ROI from that spend?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [3]

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Yes. So I'd say we look at 2 things: we look at leading metrics, which are really brand health metrics; and then we look at performance in the nearer-term. So starting with the leading metrics, we -- in measuring brand health, so things like unaided awareness, but also intent to purchase loyalty and advocacy. And what we've seen is that audiences exposed to the TV campaign see meaningful increases in brand health metric. So things like Etsy is relevant to me, Etsy is a place I'd intend to buy, Etsy is a brand that I would recommend to friends. So we think that those are important leading indicators, and we're encouraged with the progress we are seeing. We also try to track the results on -- in terms of actual purchase behavior. When we ran the geographic tests at the beginning of 2018, those were really designed to be able to measure more precisely growth in quarter. The challenge of doing a test like that is that it's much more expensive to test locally, so you've got to sort of extrapolate what that ROI would have been had you been benefiting from a national buy. So in the latter part of 2018, we did national buys. And the benefit is, we get a lot more cost leveraged. The ROI looked good as best we could measure it. We felt encouraged by what we saw. It's obviously harder to measure -- we had a strong year last year, including a strong end to the year last year, and we felt really good about that, we think many of you did as well. Parsing out exactly how much of that was due to TV versus other things that were also going well is a combination of art and science. Our combination of art and science resulted in us feeling good enough about it to want to keep going in 2019. So we're encouraged by TV. We think it can be a great channel, particularly given the position Etsy is in, with a lot of people saying that they really have affection for Etsy, they believe in Etsy, but they're not sure when to think of Etsy. That's the kind of challenge that higher funnel advertising like TV and digital video can be very well designed to address. I'll say one last thing before I stop, which is just we also like the fact that building the core destination of Etsy, with a brand that is not reliant on referral streams, like Google and Facebook and others. We think it's great. And -- so TV is a channel that can scale very well and continue to build loyalty to us as a destination, and we think that's a worthy objective.

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Rachel C. Glaser, Etsy, Inc. - CFO [4]

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And then specifically to your question about what KPI should we be looking for, I think the top one is GMS, so we're striving to grow GMS by using as efficiently we can every part in the funnel. And then we, over time, are trying to also grow frequency, so those are the -- and do this profitably. So you can also look to EBITDA as we go.

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Operator [5]

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And our next question will come from the line of Maria Ripps with Canaccord Genuity.

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Maria Ripps, Canaccord Genuity Limited, Research Division - Analyst [6]

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Josh, I wanted to ask you about your international strategy, particularly given a strong buyer and seller additions in the quarter. Are there any markets outside of the core 6 and besides India, where you have sufficient buyer and seller liquidity on the platform and -- that may warrant additional investment in the near term to strengthen your operations in those markets?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [7]

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Yes, great question. So I'd start by saying, we're really encouraged by what we're seeing in the U.K. and now Germany as well, where both of those markets are now more than 50% domestic trade. So buyers buying in the U.K., more than 50% of their purchases come from sellers in the U.K., and we think that's a really encouraging sign. We'd love to see that repeated in France and Australia and Canada and -- we're growing our presence in India. Although India, I want to point out, we're really focused on an export strategy in India. Those are the core markets we're focused on, and I want to be careful about not spreading ourselves too thin with our investment dollars, particularly around the buy side, around things like performance marketing to drive buying activity. I do want to take a minute to highlight that a global marketplace is a wonderful thing, and we see a lot of benefits from being global, and there's a great amount of activity happening outside of those core markets that is terrific. So for example, we're seeing wonderful sellers in Lithuania and the Ukraine that are selling clothing, linen and apparel and bedding among many other kinds of products, but in those categories in particular, we're seeing real vibrancy, and it makes the e-commerce experience much richer to be able to buy these great products at great value all around the world. Israel, we're seeing wonderful things in a bunch of different categories, including shoes, leather shoes coming out of Israel are really interesting, and I could go on and on. Lots of different countries that have specialties in different craft that make the market better. Many times those are export or stronger as an export in those longer-term markets, because it's a great chance to reach a buyer market in big markets like the U.S., the U.K. and Germany.

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Rachel C. Glaser, Etsy, Inc. - CFO [8]

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I'll just add that the -- that trade route, we call it the international domestic trade route, which is an international buyer and seller within the same country, is the fastest-growing trade route. So we're actually seeing real progress on that sort of a local search. The -- next fastest is actually the U.S. import, meaning that we've got a lot of buyers that are -- that have a high demand for all of that rich product that's coming from all over the world, as Josh described, these fantastic wins coming out of Eastern Europe and so on. So building markets like India that'll be a great export market, is very beneficial to the marketplace as well.

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Operator [9]

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And our next question will come from the line of Heath Terry with Goldman Sachs.

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Heath Patrick Terry, Goldman Sachs Group Inc., Research Division - MD [10]

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I was wondering if you can give us a sense, to the extent that you've continued to make the investments that you have in both technology and marketing. Where are you seeing strength, particularly in customer engagement but also in new customer addition, is there a way to disaggregate the drivers behind those 2 things? What you would attribute to the investments that you're making in marketing, and maybe separately, marketing efficiencies, but also sort of where you're seeing the benefits from the technology spend that you put behind, better search, better personalization. Just really trying to get a sense of the 2 drivers there? And to the extent that you're seeing this improvement in marketing ROI, does that -- did you -- any real desire to want to step up the level of marketing spend that you're seeing or change the weight in which of those 2 things you're prioritizing?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [11]

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Yes, sure. So in terms of where we are seeing the benefit, let me start with the product side. Most of the gains we've seen on the product side in the near term have been in conversion rate. We're doing a better job of converting visits into purchases, and that's spread across both new buyers and existing buyers. So that's where we put most of our energy and that's where we're seeing most of the benefit. Now if you visit and you find something you like and you actually buy it, that's a pretty good experience. So I think the gains we're seeing in frequency in no small measure, comes from the fact that we're actually delivering a more -- a better experience on the site, which has people coming back more often. In terms of our making more progress on getting new people or engaging existing people, I'd say it's been relatively evenly spread. And one of the things that I find very interesting about Etsy is that people, when we talk to buyers who haven't shopped with us for a while, they actually think they have shopped with us for a while, more recently than what our data suggests. So what they say, they love Etsy. And yes, absolutely, I use you guys. And you're like, oh, really, your data says you haven't been there in a while. I'm like, really? I guess, I just haven't thought of it, like, wow, I guess it has been a year, I guess, it has been 2 years. How time flies. And that's where that shoulder tap of, they like us, they just need that trigger to remind them when to come to us. That I think is a really big opportunity, and that's why I'm excited for TV to do some of that reach. We've also talked to you about improvements in our e-mail systems, which I think is helpful. Driving more people to the app I think can drive more reengagements. And then using things like retargeting, so that we can remind people that maybe they have a favorited item or left something in their cart. Those are all opportunities that we have to drive more reengagement from people that may be we feel are lapsed, even if they don't feel that they're lapsed. And then I think your -- second part of your question was around, do we plan to take up marketing spend because we have more -- we're more encouraged. And yes, we do. So you will see marketing spend elevate in the second and third quarters and fourth quarters of this year.

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Rachel C. Glaser, Etsy, Inc. - CFO [12]

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And I think you are also starting to ask like can we parse apart how much growth is from certain products versus marketing. So first point I want to make, we measure those things quite granularly in-house. At least on certain calls, we've talked about how much our -- collectively our search wins generated in GMS. We don't disclose those metrics every quarter. But one thing we do talk about every quarter is the percentage of GMS that's coming to us organically. So this quarter, with our pullback, we are now 85% of our total GMS wins organic, which is a reduction from both the last quarter. And so that is to give you a sense, and we grew GMS 18.9%, and 20.4% on a constant-currency basis, that gives you a sense of growth that's coming partly from investments we made in marketing in the prior quarter but also partly from the product wins that we had in the quarter, because we sort of paused a lot of our marketing spend this quarter, to give you just a feeling for how much GMS is driving our -- how much GMS is coming from our product development efforts.

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Operator [13]

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Our next question comes from the line of Nick Jones with Citi.

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Nicholas Freeman Jones, Citigroup Inc, Research Division - Assistant VP & Senior Associate [14]

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With Amazon moving more towards one-day shipping and shipping kind of wherever you want, and realizing that the products at Etsy are custom and take more time, how is that changing your conversations you're having with your sellers on maybe getting their ship speeds at least closer to what consumers are looking for?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [15]

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Yes. Given the nature of products on Etsy, the idea that they all are available, sitting in a warehouse and waiting to ship is not necessarily a realistic expectation for us. And so being great at what we're great at and owning and leaning into that, talking about the customization and the personalization and it just being made for you. And sometimes special takes a little bit of time. And we're not shy about that. We're not trying to be exactly like Amazon, we're trying to be great at what we are. Now we can do better and so we can do a better job of being clear when buyers can expect items. So we call it estimated delivery date and getting sellers to set very accurate estimated delivery dates and then exposing those on the site is something that is an area that you'll see us do more and more on in time, and then things like filter. So I only want to see things that are available to arrive by X date is something that, over time, you should expect us to see -- you should expect to see from us. And well, many things on Etsy are made to order and made just for you. That still means, look, there's 62 million things for sale on Etsy right now. There are still millions of things that can be shipped right away. And in fact, Dayna Isom Johnson, our style expert, was on The View just today talking about Mother's Day. And she was asked a question about Mother's Day gifts, and she pointed to a whole set of print-at-home products we have available for sale. So you can, for example, buy a custom calligraphy card or a custom calligraphy family tree, which will be sent to you on a digital file within minutes or hours, and then you actually print it in your own home and give it. So those kinds of products can be available in minutes without even requiring shipping. So it's a wide range of products, and we want to make sure that what we do is set buyers' expectations so we can show them just the selection of things that are available to arrive within their timelines.

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Operator [16]

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And our next question will come from the line of Shweta Khajuria with RBC Capital Markets.

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Shweta R. Khajuria, RBC Capital Markets, LLC, Research Division - Assistant VP [17]

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Two questions, please. One is, what are some of the initiatives that you are taking to drive domestic business? In international markets, you've called out U.K. and Germany over 50%, and perhaps localizing the French website may help. But in English-speaking countries like Australia, could you talk about some of these initiatives you are taking to drive that? And then second, on targeting market segments. So during your Analyst Day you talked about habitual buyers and frequent buyers. Could you talk about the strategy that you're implementing now or you plan to implement through the year to drive conversion through your frequent buyers to habitual, or targeting look-alike audiences to drive new customer growth?

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Rachel C. Glaser, Etsy, Inc. - CFO [18]

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I'll take the second one first, and then Josh will talk about international. So our habitual buyers were, again, the fastest-growing segment of buyers that we've talked about in the quarter. So we gave the metric about the GMS per trailing 12 months buyer on the call, but that again accelerates -- that was the third quarter of over 2% growth. So those to us are both indicators of improvements in frequency. And we'll continue to refine some of these metrics that we want to disclose that show you how we're making progress on frequency. But we feel that we're getting positive signs that both the product efforts that we're making and the marketing efforts that we're investing in are driving those numbers.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [19]

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And on building demand within local markets. The majority of our marketing investments are in performance marketing channels like Google PLAs, and that scales really nicely internationally. So we use the same technology and capabilities to buy PLAs in international markets that we do in U.S. or in our core international markets as we do in the U.S. And we've elevated our investment levels, and have been able to do that in part based on our changing pricing that we did last year, so we were able to invest even more and drive healthy growth. We also have corporate communications, PR teams, in these markets and are able to generate a meaningful amount of earned media, which is also really helpful. And then the other thing I never want us to lose sight of is our sellers themselves who are highly motivated to market themselves and their shop and, along with that, Etsy. And they do that in informal channels, but they also host things like craft fairs on the weekends, where the Etsy brand is quite prominent. And so we have thousands of seller teams all around the world organizing fairs on weekends and really doing guerrilla marketing that scales really nicely to support themselves and, along with that, Etsy.

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Operator [20]

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And our next question will come from the line of Thomas Forte with D.A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [21]

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So with the strong dollar, I had a couple of questions on strong dollar and FX-neutral growth. So I think Rachel pointed out that the disparity between reported GMS growth and FX-neutral was 510 basis points. Is that the biggest it's ever been? And then can you remind us what percent of your listings are U.S. dollar-denominated? And then to what extent, if at all, does the strong dollar have any negative impact on your operating performance? Or is it just translation as far as translating international currency to U.S. dollars?

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Rachel C. Glaser, Etsy, Inc. - CFO [22]

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First, I want to clarify, it was 170 basis points of headwind for the difference between our as-reported numbers and our constant currency numbers in the quarter. I don't know where -- I'm not sure where you picked up the 500, but it's 170 is the number.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [23]

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I thought you said 24% versus 18.9% for GMS growth?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [24]

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It's 18.9% is as reported and 20.4% (sic) [20.6%]. Sorry, sorry. Yes, sorry, about that.

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Rachel C. Glaser, Etsy, Inc. - CFO [25]

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Great, I'm glad you asked the question so we clarify if I wasn't articulate on the call. Yes, 20.4% (sic) [20.6%].

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [26]

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Sorry about that. Yes. Which probably gives you some indication then that -- so to the rest of your question, obviously, there's just a conversion factor that's just math to convert euros or pounds to dollars. But you're right that there is some level of price elasticity as well. So when the dollar goes up, purchasing power from the U.S. -- and the largest trade route internationally is U.S. buyers buying from abroad. So when the dollar goes up, U.S. buyers have more purchasing power, when the dollar goes [up], they have less purchasing power. So there is a little bit of price elasticity. It obviously goes the other way for international markets. And that plays a small role, but the biggest role by far is just the math exercise of converting different currencies back to U.S. dollars as we bring it back. And the other question was what percent of listings are listed in USD, and I think that's over 80%...

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Rachel C. Glaser, Etsy, Inc. - CFO [27]

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85%.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [28]

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85%, yes.

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Rachel C. Glaser, Etsy, Inc. - CFO [29]

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Just another clarification, it was 20.6%, not 20.4% on a constant currency basis. So I just want to make sure we get the right numbers.

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Operator [30]

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And our next question will come from the line of Laura Champine with Loop.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [31]

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First, just a housekeeping thing. I missed your headcount, so if you got that number, that would be great. And then secondly, in your slide deck, you show GMS broken out between new and repeat customers. What's your goal for that mix? Would you like to see a greater percentage of your -- a meaningfully greater percentage coming from new customers because that would optimize your GMS? Or is the focus really just on frequency from repeat customers?

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Rachel C. Glaser, Etsy, Inc. - CFO [32]

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Laura, so first of all, what I cited was we had a 19% increase in headcount year-over-year, but I didn't get the number. But I believe it's in our Q, it's 914 at the end of Q1. And then on the new versus repeat, we haven't given a goal, but I do want to clarify one thing about those metrics that I believe I said in the past. Repeat is people that have ever shopped at Etsy from the beginning of all time. So I think that might be a little bit different than other companies report, meaning some of those customers may not have come to us for several years and others would consider them lapsed. So one thing we've talked about in our Investor Day presentation was to start to create that -- break out that segment of lapsed versus repeat versus new, and that may be a metric that we want to talk to you about going forward because I think those lapsed customers are -- should be marketed too as if they're new. And so we're starting to get our attribution models and our targeting set up that we can tell the difference between something that we're calling new versus repeat.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [33]

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But then the crux of the question is, what's your goal? Where would you like those numbers to be? Or are you satisfied with that? I think it's an 83/17 mix, or would you like to see it tilt more new or repeat?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [34]

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The nice thing is, I don't think they're mutually exclusive at all. So we definitely think there's an opportunity for existing buyers to buy more from us, and we're excited about that and investing behind that. And we think that a relatively small portion of the available customers out there have shopped on Etsy, and so we want to grow them both.

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Rachel C. Glaser, Etsy, Inc. - CFO [35]

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And I guess just a clarification there, I think that those splits that you're citing is a percentage of GMS coming from new versus repeat, not customer count.

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Operator [36]

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And our next question will come from the line of Edward Yruma with KeyBanc Capital Markets.

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Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [37]

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I guess first, and I'm sorry if I missed this earlier, but the GMS growth ended up a little bit better than you would've expected. I know both when you reported 4Q earnings as well as at Analyst Day, there were kind of a litany of potential reasons why GMS might have started off a little softer. I guess, any hindsighting now on why that may have happened? And any color on kind of exit trajectory? And then second, kind of a bigger picture question, obviously, international continues to be a pretty strong success story. Maybe help us understand kind of the level of investment needed going forward in the DaWanda area and kind of how that growth profile should shake out longer term?

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Rachel C. Glaser, Etsy, Inc. - CFO [38]

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I can start with the Q1 GMS. When we got on the call in February, we had seen, as we've said, some sluggishness in January. We weren't exactly sure why. We had -- the reasons we cited were potentially some macro headwinds. We had paused some of our marketing spend and we had kind of reset a new product roadmap that was just sort of getting into gear. At the time we did the call, we felt it was prudent at that time to be as conservative with what we were seeing and transparent with what we were seeing as we could, and so we laid out for you and we reiterated that at our Investor Day. And then we were happy to report that, as we've turned our marketing channels back on with our test complete and they've been, we believe, effective, and we've had some really good product wins in the quarter, that started to take shape in midway through the quarter and as we entered into March, that are delivering incremental GMS, so we [with weren't]. Those hadn't happened yet when we did the last call, so we're pleased with the progress and how we've entered the year.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [39]

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Yes, the only, yes, color I'd add, first, we intentionally took our foot off the gas with marketing to tune our attribution models, we feel great about that, that's the right decision, and we didn't want anyone to be surprised by that, and that was something we knew. The second thing I would say about January and February, it was sort of -- I would use the word volatile. We had generally pretty good weeks, and then all of a sudden, there would be a really weak week, and then generally pretty good weeks, Particularly in February, I think, and I don't know that we'll ever know with certainty, but I think the tax return thing showed up. And so it was just a little volatile and given that we had an earnings call, we wanted to make sure that we were as transparent as we could with you. We're pleased with how the quarter closed. And as a result, we're able to take our GMS guidance up and we feel good about that.

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Rachel C. Glaser, Etsy, Inc. - CFO [40]

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And with regard to DaWanda investment, there really is not a huge amount of incremental investment. We've completely absorbed the DaWanda seller base, as many of them as wanted to be absorbed, and the buyers into Etsy.com, and we treat the German market much as we do any other of our top international markets. So there's no integration costs or anything that is related to DaWanda investment what to lever.

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Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [41]

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Got it. And just that one last piece. From an exit trajectory perspective, I guess, kind of, did the momentum that you saw at the end of the first quarter carry into what you've seen thus far in the second quarter?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [42]

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I'd say we've given guidance for the year. We don't give quarterly guidance. So one thing I would say about March is that Easter moves. And so looking at kind of the last few weeks of March, there's a lot of inherent volatility based on the date of Easter, so I wouldn't encourage people to focus too much on that. But we've given updated guidance for the rest of the year.

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Operator [43]

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And our next question will come from the line of Darren Aftahi from Roth Capital.

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Dillon Griffin Heslin, Roth Capital Partners, LLC, Research Division - Research Associate [44]

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This is Dillon on for Darren. Firstly, you talked about some of the improvements you've made that have seen better conversion on the search and discovery aspect. Could you talk a little about anything you might have done during the quarter or year-to-date as far as personalization goes? And then as a quick follow-up, the GMS per trailing 12-month active buyer has been pretty steady at 2%, but it looks to sort of have been stable at around $99.8. Is there anything in particular you think that could reaccelerate that actual dollar figure going forward?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [45]

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Sure. So on the personalization, we're launching more tools to allow sellers to announce and promote the fact that their items are available to be personalized. And then to streamline that process so that it's easier for the buyers to say what they want the personalization to be and the seller to incorporate that. And so we're excited about the roadmap for that. I think many buyers are not aware of the opportunity to personalize and customize on Etsy. And in fact, because you're buying from a person who's making the product, many, many things are actually available to be personalized and customized, and I don't think that -- there's a lot more we can do to make that prominent. So look for that in the coming -- in the years to come. The second question was around frequency and GMS per active buyer. I think that that's about helping our buyers understand all of the opportunities that there are to shop on Etsy again. Net Promoter Scores are high, and particularly, if you look at the Net Promoter Score right after the item arrives, which is really kind of the moment of truth, they're really high. So the chances are that they had a good experience last time they bought on Etsy. So we think the key now is to just let them know some of the other opportunities that are available, and I think TV is a good opportunity to do that.

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Rachel C. Glaser, Etsy, Inc. - CFO [46]

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I was just going to add that basically all of the initiatives we have are focused on improving GMS and improving GMS through repeat frequency. Television is one of the large investments we're making that is very much trying to tell the Etsy story, rather than when we're spending on Google, it's really selling a product or a listing and people come in and they buy one thing and they're gone. This is a story that is saying, you come to Etsy for all these meaningful moments in your life. So that's one area. And then we talked about a lot of the product initiatives. An example we gave on the call was really focusing on quality and using -- because of our cloud investment, we're able to run much more sophisticated algorithms to surface -- putting more factors that would surface things of higher quality, and then have those be a lot more -- using a lot more cues and data about what we know about that buyer, and that hopefully that brings people a better experience and gives them -- matches them to a product they want to convert on much faster and much more of the time. Those are just a couple of examples where we think we're really going to start to move the needle on frequency.

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Operator [47]

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And our next question will come from the line of Brian Nowak with Morgan Stanley.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [48]

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I have 2. Just to kind of go back, so you mentioned a couple nice GMS and product wins throughout the quarter. Can you just sort of help us understand a little more on what those wins were, sort of what you've changed on the platform and what happened to consumer behavior, whether it's conversion, et cetera? And how much of the guidance raise sort of linked to those changes? And then second one, really strong 18% to 19% organic GMS growth. The question is, as you sort of think about the year, and then sort of your long-term guidance you laid out at the Analyst Day, how do you think about sort of the durability of high-teens organic growth, and then sort of paid potentially driving you to sustainably low 20s growth?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [49]

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Yes, so let me start with the first. So we feel good about the product work that was done in the quarter, and I want to pause for 1 second, because I have one other factor heading into Q1 is that we did a fairly big reorganization of our product team to align with our rights to win. We do believe that strategy needs to drive organization which drives execution. And so we've aligned our product squads around the very same rights to win that we talked to you about in Investor Day. And so it took a little bit of time for those teams to reform and [start a norm]. But they hit the ground running and we saw really good wins, particularly in February and March, around those. So a few of those that I would highlight, Rachel talked about quality and our push on quality. Let me click one level deeper and talk about that for a second.

Our search engine has historically used conversion rate as its objective function, meaning, when you type in the search query, it's trying to show you the top 50 things that it thinks you are most likely to buy. There's an inherent bias to low-priced items then because you're much more likely to buy a $20 item than a $200 item. So if you were to use GMS as the objective function instead of conversion rate, you might buy fewer things but of higher value, resulting in higher GMS. We talked about this as the cushion-to-couch strategy inside the company. People right now buy cushions; how do we get them to not only buy cushions but also buy the couch at a higher stakes? And there was actually some inherent bias built into our search algorithms driving them to the lower priced items. That also has implications for the brand. So as we want to elevate the brand and show a broader variety of purchases and purchase occasions, changing the search algorithms to show a wider variety of items we think is helpful. But it's new and it's big, so you test one way and then another. So we've begun to incorporate price into the search algorithm, and we're very encouraged by what we saw from that, showing a wider variety of items, including more higher-priced categories. And then the net of that was some GMS wins that we think are great. I would say that that's a journey that we'll be on for quite some time. Understanding quality and how to determine quality and then surface quality and show signals of quality to the buyers. That's going to be great for buyers. It's also going to be great for sellers. And our best sellers having sustainability for them, I think it's going to be good for everybody.

We did other things around highlighting quality, like image. We did some work on showing higher quality, higher resolution images, which worked -- some other wins were around localization in our international markets to make the U.K. site feel more U.K. and the French site feel more French. The recommendations algorithms got better, and that made a difference, and we've made it easier for people to send convos, buyers to send convos to sellers and we're making it easier for sellers to respond efficiently to those. Those were I think some of the biggest things we did to move the product in the quarter. It's not everything, but it's some of the bigger things.

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Rachel C. Glaser, Etsy, Inc. - CFO [50]

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Let me add a point. One thing is obviously when we have a product win in Q1, then that has an annual [base] effect, so that product win will keep on winning for us for the rest of the year. So we're just beginning, and those things build on each other, so there's a product roadmap with many things prospectively that will continue to build. The ones that launch towards the end of the year have fewer weeks with which to contribute, but the ones that win now, which we think there was some significant ones in Q1, have opportunity to keep -- be the gift that keeps on giving, and that's baked into our GMS guidance. And you didn't talk about shipping, we talked about shipping on our last call. We have started to put initiatives in place to educate and communicate with our sellers about the value of treating shipping cost just like it's cost of goods sold rather than breaking it out as a separate cost to -- that their pricing strategy include and contemplate that there's going to be the cost of getting the item from them to the buyer, and we've given them tools that make it very simple for them to be able to calculate what their pricing could change to, to modify how they're displaying that total, the total transaction value. And we're starting to see some headway in those initiatives that we've introduced to them.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [51]

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And I think the last part of your question was around sort of sustainable growth rates. And we laid out in Investor Day, 16% to 20% is a long-term sustainable growth rate over the next 5 years. We feel good about that, so we think continuing to grow at rates substantially faster than what we think the e-commerce market is going to grow at, is what we laid out there. We feel good about that. And we think our opportunity to improve the product experience and to find new marketing channels and invest more on our existing marketing channels, we see significant runway in both of those. And we think the 2 of those underpinned the growth that we've seen. Now the other factor is obviously macro, and we're in a good macro environment right now, and you're seeing us guide you to the very top end of that range that we put out there. Someday, we will be in not as good of a macro environment, and we might guide you lower in that range, we'll see. But I'd say that is the other factor that we're always keeping an eye on.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [52]

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Got it, that's very helpful. And let me just add one more, kind of just come back to begin. So as you lay out that long-term outlook, did you sort of embed annual product wins in that multiyear outlook? Or are the product wins as we go, are those sort of potential sources of upsides in the way you think about that outlook?

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Rachel C. Glaser, Etsy, Inc. - CFO [53]

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We gave guidance with the best visibility we have to what's on our roadmap. What we iteratively put testing things all the time and we operate in a continuous deployment, sort of not a waterfall environment, we talked a bit about this in our Investor Day that we've changed the way we -- the throughput with which we develop products. They are constantly being tested and we don't know it's going to win. In fact, sometimes we ourselves will think that something will win and it's not. So our guidance contemplates what we think we can reasonably count on for growth coming from product development and the growth that we can get from our marketing investments.

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Operator [54]

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And our next question will come from the line of Ygal Arounian with Wedbush Securities.

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Ygal Arounian, Wedbush Securities Inc., Research Division - Research Analyst [55]

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So I've been jumping around, so I may have missed some of this, but it sounds like on the marketing kind of step back up in the investment, it's going to be very focused on TV more than anything else. Is it only TV or are there other things in it as well? Just thinking about the payback period and ROI for TV, how much of it drives, how much of the incremental spend in TV or the renewed ad campaigns you think drive this growth in 2019 versus 2020 or longer? And then if it's successful, would you think about continuing that acceleration in 2020 and beyond? Or should we think about it more as kind of a 2019 type of event?

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [56]

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Thanks for the opportunity to clarify. So when we talked about pausing some channels, TV was not the only channel we paused. We paused many different channels, some for a few weeks, some for longer, depending on how long it took to test the incrementality of that particular channel. So other channels we paused, for example, were Search Engine Marketing, particularly things that didn't involve the keyword Etsy. We paused investments in social channels would be another example. We paused investments in affiliate marketing. So we paused many different investments across many different channels to tune our attribution models, because what you can measure pretty well is, did they click on this ad and then did they show up on your site and then did they buy. What you can't measure is sort of the halo effect of did they come later or did viewing it have an impact, and sometimes you overattribute or underattribute to that. So these on/off tests help us to measure that. And sometimes, by the way, those effects can be quite significant. They can be quite material to your understanding of the return on investment. So we've learned a lot. It was good.

Something we did not pause was the PLA program. So Google Product Listing Ads, which is a mature channel that worked pretty well and we feel like we've got a pretty good understanding of the incrementality there, and so that was -- we invested in that in a pretty sustained way throughout Q1. So now you'll see us keep going with PLAs. And by the way, we think we can continue to get more efficient as we build better technology and capabilities, even in the PLA program, and then turn on some of those less mature channels that we paused where we gained more confidence, and then there's TV. And depending on how the results go through 2019, we're very openminded to continuing to invest in 2020 and beyond, provided we continue to see encouraging results. We're not wedded to anything. But what I like about TV is, it seems like it has the potential to be a good fit with the brand positioning that we have today or the brand -- our brand opportunities. And it scales really nicely. If it works well, you can imagine us scaling our spend on that and being able to put even more money to work cost-effectively if we find the return is there.

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Ygal Arounian, Wedbush Securities Inc., Research Division - Research Analyst [57]

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Great, really helpful. We're past 1 hour, so I would sneak one last quick one. I was going to ask about AOV, and you kind of started to answer it. So on this cushion-to-couch content and how that relates to the GMS proactives buyer growth that you've seen consistently over the past 3 quarters, how much of that increased AOV is in that number? Or is it mostly frequency right now? How should we think about the balance between those 2 things you've always seen in the past couple of quarters and going forward?

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Rachel C. Glaser, Etsy, Inc. - CFO [58]

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So I think, prospectively, some of the things we're doing with quality that Josh talked about on the calls will have some impact on AOV. Right now, it's really the frequency that is impacting the growth that you're seeing.

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Operator [59]

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And our last question will come from Marvin Fong with BTIG.

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Marvin Milton Fong, BTIG, LLC, Research Division - Analyst [60]

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Just 2 quick ones, and I apologize that I also came in late, so if this was asked before. But the 13% growth in the active sellers, that seems to have been quite a bit of acceleration compared to recent quarters? Could you maybe add some color on where -- what geographies that might be driving that? Is it international or the U.S.? And then secondly, I have actually observed some outside data that suggested maybe your organic search traffic has been doing well, and I was just wondering if you guys actually have been seeing that, and if so, if that's factoring at all into your guidance or your thinking for the rest of the year.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [61]

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Great. Great questions. So on the sellers, we were pleased by the growth in sellers. As we said, we're largely demand-constrained more than supply-constrained business, particularly in the U.S. That's less true in international markets, where building more supply across more categories is indeed very helpful. And that is disproportionate where the seller growth came from last quarter. We are definitely adding sellers in the U.S. and we feel great about that, we welcome them into the platform, but disproportionately the growth came in international markets.

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Rachel C. Glaser, Etsy, Inc. - CFO [62]

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And on the organic search. So one of the channels that we experimented with for marketing in the first quarter was splitting our SEM buys into what we call brand versus nonbrand. And because we suspected that truly some of that SEM that we've been buying is cannibalizing traffic that would've come to us anyway, because they're just clicking on the top links. And so we've gotten some good learnings from that bifurcation of that spend, that some of that nonbrand spend is still very valuable to us, but I think we also realized that we were able to parse out what was truly incremental from what's not. And during that time where it was paused, we were perhaps seeing higher click-throughs on an SEO result that were previously going to a SEM placement. Also, just to remind you that our organic -- we have a -- we benefit from a huge amount of organic traffic. So 85% of our GMS comes to us organically, and about half of that is direct traffic that just types in www.etsy.com. And so that continues to be when we pulled back on our spend, we saw actually the percentage that was coming to us that way went up just by nature of the fact that we were spending less on marketing, so that's the dynamic that we're seeing in the quarter.

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Operator [63]

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This concludes our question-and-answer session for today. I would now hand the conference back over to Josh Silverman, Chief Executive Officer, for any closing comments or remarks.

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Joshua G. Silverman, Etsy, Inc. - President, CEO & Director [64]

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Thank you all very much. We feel great about the first quarter, and I look forward to following up in the months and years to come.

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Operator [65]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.