Etsy, Inc. (ETSY) Earnings Call Transcript

Well, good afternoon, everyone. Thanks again for joining us here for KeyBanc's Future of Technology summit. Hopefully, you have got something for lunch. If we were in person, you'd have a delicious boxed lunch to enjoy right now. But look, I think we're really excited about our next speaker. To us, Etsy has been certainly one of the beneficiaries of COVID, but probably more importantly, one of the real leaders in connecting people, in helping small communities, small businesses innovate and bring what we think are very, very compelling merchandise offerings to their customer base. And more specifically, I've known Josh since he joined Etsy. And Josh has been really instrumental in driving a turnaround in the business and really, in our opinion, positioning it for growth. So Josh, thank you very much for joining us today.

Thanks for having me.

So look, no surprise, right? E-commerce, I think it's one of the biggest secular trends that we'll ever see in our lifetimes. But I think one kind of sub-trend that we've been watching that maybe doesn't get as much play is what we're calling kind of [ one of one ], right? And we think this is driven by changes in manufacturing, more data and AI. And we think that we're on the cusp of seeing items that are designed and created just for you. And I think Etsy is kind of really well positioned along that trend, but I would love to hear your thoughts on the topic.

Yes. I mean I agree with the general thesis, certainly that, that's going to be a bigger and bigger share of e-commerce. If we pull back our lens a little bit, coming out of World War II, the industrialized nations got really good at mass production. And suddenly, you could have things that were very affordable because of economies of scale. And even things we take for granted right now, like clothing. My father grew up in a world where his father made his clothing for him because clothing wasn't that affordable. And now it is, right? But part of what happened with that is we entered a sea of sameness. Now everyone can afford to wear mass-produced clothes but everyone kind of looks like everyone else. And so as economies developed, we started to rise in Maslow's hierarchy of needs, and so then you want to express yourself and not look like everyone else. So what's happened there is fast fashion. So now fashion cycles change every month or every 2 months. So now we're all wearing the same thing but only for a month or 2, and those products are made to be particularly disposable. You buy them, you wear them for 2 months and then you throw them in a landfill. And I think where all of this heads is people really want a way to express themselves, to have things that truly are unique to them. And you're seeing fashion, as an example, try to do that by attaching little add-ons. And if you look at where fashion is going, it's about taking something and sticking something on it for a minute to make it look different than everyone else. But really where I think all of this goes is people want things that are made just for them, that do express their sense of identity, that do tell a story. And I think that's what Etsy is all about. I can imagine a world, if we're looking forward, this conference of the future of commerce, where we each have a personal avatar that is our body shape. And when we're buying clothes, we literally are buying forms that are fit exactly to us, not on some sort of theoretical model. And I think it's going to be more environmentally conscious, which I also think is something people are going to be paying more and more attention to. And in that world, economies of scale, abilities to produce 100,000 of something cheaply becomes a lot less important. And how do we create something that's made just for you, that has a story to it and that you want to own and you want to use over time? That's what Etsy is all about and mobilizing cottage industry, having millions of makers who are there and prepared to make just for you, powered by technology, that is what Etsy is about.

We talk a lot about search and I know there's been a lot of innovation within your business around it. And look, I think it generally works pretty well when I kind of know what I want, buying stuff from my patio, buying stuff for a party. But it feels like just as a bigger picture, one of the things that e-commerce has failed to replicate is that kind of a spontaneous moment where I'm walking through the store, walking through a mall and saying, "I didn't know I needed that but like I need it right now," right? And that kind of spontaneous moment. Now how can you create Etsy or how can you position Etsy so that you can create those spontaneous moments? How is your tech stack driving some of those changes?

Yes. So it's a great point. About half of our traffic shows up just wanting to be inspired, wanting to dive into the treasure chest that is Etsy. And about half the traffic shows up with a very specific product in mind. And for people that are very articulate in Etsy speak, they can do a great job of navigating. So Melissa McCarthy was on Jimmy Kimmel pre-COVID, just before COVID, talking about her Etsy blackouts, and how she goes on Etsy, like 1 in the morning, and she wakes up the next day and it's like 12 packages are arriving. And it's all kinds of stuff. She's -- we love Melissa McCarthy. She's really fluent in Etsy. And so she knows how to navigate Etsy and go from 1 category to the other and buy all kinds of stuff. But you need to be really articulate. You need to know the same keywords our seller would use to put into a search engine in order to really be able to have that great experience. So where we've made a lot of progress in search, we need to do a much better job now in browse. And that turns out to be very different sets of capabilities and technologies. We tend to say search and recommendations together. We -- you hear those 2 words put together a lot in the industry. But in fact, the technology to do recommendations is really different than the technology to do search. And in order to do that discovery process really well, we need to do 2 things. We need to understand what the item is really well and we need to understand you really well. And so understanding the item sounds obvious but it's less obvious than it seems. And particularly when you're Etsy, our items are all one of a kind. They don't map to a catalog with a lot of structured data. So we need to start to understand and interpret, what is this item and what else is it related to? So this item is a piece of jewelry and it has the following gemstone. And by the way, that gemstone is the birthstone for the month of May. And so anyone looking for a gift in the month of May would be interested in this. And all of those kinds of associations, we now are getting much better, and machine learning is getting much better at being able to understand how different types of items associate with each other. They share a common style, they share a common theme or material or whatnot. And then our ability to understand each individual person and what their taste and style is. Are they shopping for themselves? Are they shopping for someone else? What else have they been interested in, in the past? We're getting much, much better at that. And it's those 2 pillars that I think together make for a really amazing discovery experience. We are investing significantly in that now at Etsy. I think that's a relatively new track of investment for us, and I think it's going to yield tremendous gains. But the last thing I'll say about that is that the treasure chest of Etsy is uniquely diverse and interesting and different and that's great. It also is different technology to succeed at Etsy because we don't deal with structured data. And so as we get better and better at it, I think that our right to win, our moat gets deeper and deeper relative to the competition.

One of the things that we like to do is we kind of look around when we visit your campus. I've had the opportunity to meet with you and your senior leadership team a number of times, and we're always kind of eyes wide open. And 1 thing I did notice was really the diversity of your team, particularly relative to a lot of other firms in technology. It just felt a little bit different. First, is that perception correct? And then second, how do you ensure that your workforce, your leadership team represent your sellers and your customers? And I guess the final piece, I'd be remiss if I didn't ask, with all these issues in society today, how can Etsy help?

So great questions. Yes. I mean in terms of gender diversity, we are far above the industry and the tech and e-commerce average from top to bottom. So the Board -- half of our Board are women. More than half of our executive team are women. 37% of the engineering team is non-male, which is dramatically different than what you'd see at even best-in-class other technology companies. And I think success breeds success there. Because we've been focused on it for a long time, women know that Etsy is a place that they can come and succeed. And it's absolutely been part of our success because well over half, in fact, more like 85% of our customers are women. And so it's really important that women have a really strong voice in every part of Etsy. But I also think we just make better decisions because we have a lot of diverse perspectives. We have people coming from different backgrounds with different points of view. And I think we have really embraced a culture where we bring different points of view into the room. We have a very candid and open conversation in the room and then we make decisions and we move on. Where -- we are doing okay, but we need to continue to do a lot better is on other forms of diversity, for example, underrepresented minorities, black and Hispanic employees, where Etsy is at the technology industry average but hadn't been better, so we set some pretty ambitious goals to double the percentage of employees that are black or Hispanic over the next few years. We set those goals several years ago and we've been making really great progress. And like anything, when you set goals and you measure progress and you hold yourself accountable, you do really well. We published in our annual integrated report our stats on diversity, and we are making strong progress and we're pleased by that. We think we continue to need to do better. And I think that will make us a much better business. In fact, I know it will, A, because, again, we're bringing more and different points of view into the room and challenging ourselves to think differently about things and that always leads to better outcomes and because we have more empathy for a wider range of customers. And that always leads to, I think, being a more open door and getting more customers in and treating all customers really well. So it's a really important part of what we do. Your last part of the question is, what can Etsy do to help? And I think we all know we're in the most divisive time in the United States since the Civil War. And Etsy is about building community. And commerce is something I think we can all agree on and it cuts across every kind of barrier. And our mission is keeping commerce human. At this time, when we are isolated from each other, when we're having to be separate from each other and when we're dealing with so many divisions in society, the idea that a seller and buyer can meet and have a really warm and human interaction and do something positive together that they both walk away feeling great about is, I think, really important for us as a society. And it's great for our brand. And I think it's something that I hope and expect will really endure.

So I -- we talked a little bit about in the pre-meeting, but my 8-year-old daughter is an Etsy seller. She donates the proceeds to charity so shameless plug there. But I was really impressed, it's helped me as an analyst because you sent out an e-mail in April 3 telling your seller committee to make masks. How can you use data, AI and maybe even just traditional merchant skills to help your sellers identify trends and pivot to areas of opportunity?

Yes. The first thing I would say on that is that, that was a very unique e-mail because we had such an unbelievable surge. And within 2 weeks, we had 20,000 sellers making and selling masks, and now we have many, many more than that. It's provided a really good income for tens of thousands of people this year when they've otherwise been so hard hit with the economy. But in general, our seller community is so agile, they're paying so much attention to sales in their category that they typically pivot within hours or days to meet demand. And an example I would give is bread and bread-making in the month of May. I never would have guessed that bread and bread-making products would be a big category on Etsy. Never in a million years would it have occurred to me. But in the month of May, we started to see bread shortages in stores, and a lot of people stuck at home decided to take up bread-making as a hobby. And so they turned to Etsy, and we started to see a surge in keywords, in demand, and literally within hours, bakers are coming on Etsy and starting to meet that demand. And supply and demand met effortlessly and almost instantaneously because the communities are paying enough attention and bakers started to talk to bakers and word just got out. So we actually didn't need to do anything in that case, and we had enough supply. But I do think we can do more, and in particular, helping sellers to see what's happening to competition in their category? And when might it be time for them to start to diversify and change their product assortment and innovate the next because what we'll see is a seller will integrate a product and they'll have a great 6 months, and then other sellers will start to come and see that and create similar products, and the right thing for that seller to do is innovate the next product. And sometimes they wait too long, they raise their prices instead of coming up with new product assortment. And so thinking about ways to give sellers good feedback on what are the right next few actions to take to continue to succeed is an area that we're really investing in.

We spent a lot of time during this virtual conference talking about kind of what the next epoch in commerce will be. Do we move to a post-mobile world, which is voice, AR/VR? Do you think that there's a technology that will supplant the mobile phone for commerce? How important will voice, AR/VR be for Etsy?

Supplanting the mobile phone, maybe, but over a probably decade time frame, not over a year or 2. If we think about the shift from the DOS prompt to the GUI, that was truly revolutionary. It made computers speak human instead of humans have to speak computers. And that unlocked the ability to interact with computers for absolutely everyone. Will voice and AR be as big a shift? I'm not so sure. But I do think it will be a big shift because now computers speak human. And by the way, humans, generally, we talk in pictures, not words. Words are not like our native operating system, pictures are. And that's where we're getting more and more graphical. Like our conversation about going to browse instead of just search is so important. So that's been very helpful. But we still have to enter the computer's realm. We have to go to their space, which is 2-dimensional and fixed. And so the idea that we can actually have the computer interact with our environment through AR and voice is, I think, going to open up a lot of new possibilities to involve a partnership with our computers in every part of our life. Bringing it to e-commerce, where I think it might be relevant specifically to Etsy are the human brain and the eye is really good at sorting problems visually. And when you have to bring that down to a small screen on a computer in 2 dimensions, you lose most of that. So when you imagine walking into a department store, you scan the floor and within less than a second, you say, "A-ha, that's the department I'm interested in. I want clothing." You walk over to that department and you scan a lot of clothing. And within a second, you say, "That's the kind of clothing I'm interested in." And then you look at a rack that has 50 different items on it. And you, within a second, say, "A-ha that color looks most interesting or that style looks most interesting." If you imagine what that felt like on a computer screen, it took you 15 clicks and you abandoned long ago. And at Etsy, for example, where we have over 70 million things for sale, the ability to bring those things to life in 3 dimensions and allow someone to navigate that industry, you can almost imagine like Google Earth where you fly into Etsy and then you pick an apartment and you fly deeper. And then you look at -- I think the human eye and the human brain could solve those sort problems in seconds visually with what currently takes 100 clicks on current screens. So I'm really excited about that. The second piece I'm excited about in what AR and VR might bring for Etsy over time is how is this actually going to look in my room? How is it actually going to look on me? And that's where this idea that I might have a personal avatar of me or a personal avatar of my house. We launched the first version of that on Etsy just a few weeks ago. So you can take a painting -- and wall art, by the way, is a very big category on Etsy. And so how would that piece of art look on my wall? We've just recently launched and it's very popular, and I think it's going to be very beneficial. So I'm quite optimistic about how these technologies are going to be helpful, and I think they're going to be particularly helpful for Etsy, given the sort of huge assortment that we already offer.

It's -- maybe let's click down on that for just a second because it's kind of an interesting point. I mean any interesting statistics, anecdotes or otherwise about what happens when you're able to introduce a tool like that from a conversion perspective? Like do you see -- are you able to get consumers to buy more wall art because you're adding that tech to the offering?