ETSY Inc (ETSY) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Etsy, Inc.

Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Jennifer Beugelmans, Vice President.

Ms. Beugelmans, you may begin.

Thank you, and good afternoon, and welcome to Etsy's Second Quarter Earnings Conference Call.

Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO.

Before we get started, just to remind you that our remarks today include forward-looking statements relating to our financial performance and results of operations, business strategy, market size, cost-savings initiatives, guidance, mission, product roadmap and potential future growth.

Our actual results may differ materially.

Forward-looking statements involve risks and uncertainties, which is described in our press release today and in our 10-Q filed with the SEC on May 2, 2017, and subsequent reports that we file with the SEC.

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.

A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website.

A link to the replay of this call will also be available there, and if you'd prefer to access a replay via phone, you can find that information in the press release as well.

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

Josh?

Thanks, Jennifer, and good afternoon, everyone.

Since joining Etsy as CEO in May, I've had the opportunity to immerse myself in the business, review our strategy and operations and speak with employees, sellers, and buyers around the world, and I've come away even more enthusiastic about the opportunity ahead.

I'm also really encouraged by the strong progress we've made in only the past 3 months.

Etsy is highly differentiated from any other e-commerce platform.

We've built a 2-sided marketplace with one of the largest selections of unique goods, a brand that people around the world admire, and a passionate community of 1.8 million active sellers and nearly 31 million active buyers.

In short, we have an enviable foundation that's allowed us to consistently deliver double-digit GMS and revenue growth for the past several years.

Yet I believe we're still in the first inning when it comes to unlocking the full potential of Etsy.

There's been much speculation about the size of the market for Handmade.

But Handmade is not a purchase occasion nor is it representative of all of our 45 million listings.

Etsy is about so much more than Handmade.

Buyers come to us when they want something special, and being the destination for something special is powerful because special can't be commoditized.

In a world where mass e-tailers are taking an increasing share of everyday commerce, people search for an alternative to those mass e-tailers when they want to feel that their purchase was special.

That includes occasions when they're seeking self-expression, when they want to signal that they put a lot of thought and care into a purchase, and when they want to have fun and be inspired.

Etsy is uniquely well-positioned to win those occasions.

But how big is the market for special?

We believe the market for special is huge.

Etsy shines specifically in 3 types of purchase occasions: celebrations, gifting and style.

If you think about it, these types of occasions happen regularly throughout the year.

These occasions drive purchases across 6 primary categories: clothing and accessories, home and living, jewelry, craft supplies, art and collectibles and paper and party supplies.

Not surprisingly, these are also Etsy's top 6 categories based on GMS.

In fact, in the past 12 months, we've sold over $0.5 billion in GMS within each of our top 3 categories: clothing and accessories, home and living, and jewelry.

We estimate that these 6 categories in our 6 largest geographic markets represent a $155 billion online market opportunity.

This estimate grows to $1.3 trillion if you add in offline, which expands our opportunity as dollars continue to migrate from offline to online.

Today, we estimate that our share of the online opportunity is approximately 2%.

Based on this, we are confident we have substantial runway for growth.

So we believe we have a huge untapped opportunity, yet our GMS growth has decelerated sequentially in nearly every quarter for the past 2 years.

What became clear to me in my first 90 days as CEO is that we need to give the core Etsy.com market much more attention.

We need to take a more focused approach and prioritize fast, flawless execution.

To do that, we've set a simple, straightforward strategy.

First and foremost, we will focus on the core Etsy Marketplace in our 6 core geographic markets.

Next, we aim to win those occasions when one is looking for something special.

These are celebrations, gifting and style.

Finally, we will empower our passionate community of 1.8 million sellers to compete and win against mass retailers in those occasions.

To do that, we will focus on doing 4 things exceptionally well.

First, since our sellers have relatively unknown brands and unbranded items, we'll aim to ensure that the Etsy brand delivers trust and reliability throughout the buying experience.

Second, with 45 million items, we must deliver world-class search and discovery technology to surface exactly the right breadth and depth of inventory tailored to each buyer.

Third, we need outstanding marketing capabilities to amplify the voice and relevance of our sellers and to get buyers coming back more often.

And finally, many of our sellers lack time and some may lack business expertise.

We need to provide them with best-in-class tools and services so they can focus on delighting buyers.

We are already working with urgency towards executing against this strategy.

Upon arriving in May, one of my first tasks was to rationalize the road map to focus exclusively on the projects that have the highest probability of driving growth and delivering value.

We made tough choices.

In a very fast 3 months, we've doubled down on the initiatives that we believe will drive the most growth in visits and conversion.

We also worked to create a structure that allows for fast execution.

We reorganized our team to devote significantly more resources to creating the best shopping experience for buyers on Etsy.com and to build world-class tools and services that drives sellers' success.

In doing so, we streamlined our headcount by approximately 245 positions or 23% of our global workforce compared to year-end 2016 in order to create a more nimble organization and allow for faster decision-making.

We have an incredible amount of talent at Etsy and we've added to this at the leadership level.

This week, we completed the senior management bench with the announcement that Mike Fisher has joined Etsy as our new CTO.

Mike came on board as a consultant this quarter and he's already proven himself to be an incredibly strong partner.

His expertise and skill in global platforms will be a great asset as we continue to innovate and focus on meeting the needs of buyers and sellers.

We also placed an emphasis on rapid product experimentations.

The rate at which we're testing new enhancements, ideas and opportunities has significantly increased compared to prior quarters.

We've illustrated this improvement in the slides featured in our webcast.

There are many more product improvements in the pipeline.

Our progress makes us optimistic that we have stabilized GMS and we believe we are now poised to reaccelerate GMS growth.

Let's take a look at some of our work and the progress we're making, what I call evidence of the future today.

Our goal on the buyer side of the business is to drive more shopping on Etsy.com, both from existing and from new buyers.

To do this, our product roadmap focuses on improving conversion rate and increasing visits.

First, we're building trust and reliability throughout the buyer experience.

Trust is essential for any marketplace, but it's even more so for one that's built on original and unbranded goods.

Our goal is to bolster trust, not just from the item and in the seller, but in the Etsy brand.

We quickly identified opportunities to do this and then put initiatives in place that have already begun to show positive results.

In July, we added our branded Etsy purchase guarantee on our listing pages, and in late June, we boost buyer confidence around payment security with 7 simple words: sellers never see your credit card information.

Both led to improvements in conversion rates.

Reliability also means providing a world-class friction-free buying experience.

We had some key wins this quarter with the launch of Multi-Shop Checkout, Guest Checkout and Global Express Checkout.

The next area of focus is search and discovery.

With 45 million items, search is the primary tool for helping people to find what they want.

In June, we added a recently viewed reel at the bottom of the search results page that lets buyers more easily relocate items that they've browsed.

This was another conversion rate win.

As we look ahead, we believe some of the largest gains from search will come from more sophisticated algorithms that will allow us to deliver more personalized results.

The technology and talent we obtained through the acquisition of Blackbird is being leveraged extensively to advance our capabilities in search.

We recently deployed more engineering resources to search and began leveraging cloud capabilities, which have allowed us to move faster on initiatives that we believe will continue to lift conversion and GMS in the second half of the year.

We also know that about half of our visitors don't come to Etsy to search for a specific item.

They come simply to browse and be inspired.

So in order to inspire them, we've integrated our merchandising and our product teams so that we can create a more curated and guided experience.

We've enhanced our homepage and site navigation and began to more prominently highlight trending and complementary items.

All of this helps create a more destination feel, one that brings fun and discovery to the shopping experience.

Looking at our product roadmap and the industry's average conversion rates, we believe that we can grow conversion rate and meaningfully impact GMS and revenue.

Brand awareness and affinity for Etsy are high, as are our buyer NPS scores.

This gives us great strengths upon which to build.

But we believe that buyers aren't always sure when to think of us, so we need to be in front of buyers at the right moments in time.

Let me give you some examples.

As I stated earlier, we believe our core winnable locations center around celebrations, gifting and style.

We already excel in some of these areas, such as weddings, but we believe we can extend the customer life cycle.

For example, when someone comes to us for wedding merchandise, we want to do a better job encouraging her to come back when she's furnishing her home, celebrating a birthday or buying a purse for her first day at her new job.

We're also working to more effectively promote key holidays and offer curated collections of merchandise on our site throughout the year.

Our Mother's Day campaign had a positive lift to conversion rates.

We're currently running a similar campaign with back-to-school merchandise.

We're also working hard on retention and repeat visits.

We're in the midst of a migration to a new CRM system that will allow for e-mail communications and push notifications that are more personalized, dynamic and timely.

This will enable us to stay top-of-mind for buyers at the right moments so they always think of us when they need something special.

We also see opportunities to bring more buyers to Etsy through SEO optimization and more targeted digital acquisition marketing.

Finally, to be a world-class marketplace, we need to provide our sellers with the tools and services they need to start, manage and scale their businesses.

In addition to driving revenue, our Seller Services play a key role in reducing friction and driving velocity in our markets, which supports GMS growth.

So growth in Seller Services fuels the entire ecosystem.

Within Seller Services, one of our primary areas of focus is building world-class marketing tools.

We want to make it easier for our sellers to proactively acquire new buyers, both on and off Etsy, and to build relationships with buyers after they've made a purchase from one of their shops.

To do this, we will continue to invest in tools and services that enable sellers to achieve their goals.

This quarter, we've further optimized Promoted Listings and increased the amount of real estate displaying these listings on mobile web, which drove revenue growth.

Demand for Promoted Listings far exceeds supply, so with inventory expansion, we believe there is substantial room to grow our Promoted Listings revenue.

We also saw a strong demand for our Google Shopping product, which we believe indicates that Etsy sellers have a strong appetite to fund more marketing options, both on and off our network.

Earlier this week, we introduced a new tool that allows sellers to create sales and run promotions in their shops.

Feedback so far has been positive, and we're excited to iterate and expand testing in the coming weeks and months.

During the second quarter, we launched improvements to our Pattern websites that led to an increase in sign-ups for new trials and subscriptions to Pattern.

We want to be sure Etsy sellers never lose a sale because they aren't offering convenient payment options.

In May, we transitioned all sellers in eligible countries to Etsy Payments.

This seller service was the most significant driver of Seller Service revenue in the quarter.

We will continue to build our Seller Services offering into a differentiated business platform for creative entrepreneurs.

In conclusion, we're extremely encouraged by the progress we've made in the past 3 months and by the many more product improvements in the pipeline.

We believe that we are well-positioned to bend the GMS growth curve as we implement many of the new initiatives that we have on our roadmap.

In fact, we believe our third quarter GMS growth will accelerate versus the second quarter, which is an important milestone.

We're confident that our nimble, more cost-efficient structure can support the work we need to do to win and as a result, we expect to attack exciting growth opportunities while driving revenue growth at a faster pace than expense growth.

With that, I'll turn the call over to Rachel to discuss our second quarter results and financial outlook.

Thank you, Josh, and hello, everyone.

Before I dive into the financial results for the second quarter, I'd like to echo Josh's excitement about joining Etsy.

Not only do we have solid fundamentals, including growing GMS in revenue, strong growth profit, positive EBITDA, a large cash balance and no debt, but we also have a highly differentiated value proposition, a beloved brand and a huge market opportunity.

This gives us an incredible foundation to invest in our growth and make meaningful market share gains.

In the past 90 days, we have already gotten initiatives underway that are building momentum and delivering results.

I'm very excited to join the immensely talented team and be a part of Etsy's future.

My remarks today will cover 3 areas.

First, I will update you on our key operating metrics for the quarter.

Second, I will review the financial results, which we covered in our earnings release.

And finally, I will provide an update on our 2017 financial outlook.

Unless I say so, all numbers presented are rounded for ease of reference and the comparisons I'll be referring to are on a year-over-year basis unless specifically noted.

So let's start with the key operating metrics of GMS first.

During the second quarter of 2017, Etsy generated $748 million in GMS, up 12%, driven by growth in active sellers and active buyers.

GMS from pay channels continue to grow faster than overall GMS.

At the end of the second quarter, Etsy has 31 million active buyers, up 17%.

Also at the end of the second quarter, Etsy had over 1.8 million active sellers, up 11%.

Growth in both active buyers and active sellers demonstrate that our community of buyers and sellers continues to grow at a healthy rate.

Additionally, as Etsy sellers become more successful on our platform, our data show that they stay and sell more over time.

Roughly 65% of our visits came to us from a mobile device this quarter.

This was up about 100 basis points year-over-year and continued to outpace the rate of growth on desktop.

Mobile GMS represented 51% of our overall GMS, up 400 basis points, and has grown from approximately 28% in 2013.

Growth mobile GMS grew 20% year-over-year, demonstrating the impact of the ongoing improvements we have made to our mobile shopping experience.

We achieved year-over-year conversion rate improvements across every device from the beginning of 2016 through the first quarter of 2017.

This quarter, our mobile web and mobile Buy on Etsy app conversion rates increased about 10 basis points, but we saw softness in the desktop conversion and, therefore, our aggregate conversion rate declined slightly.

As we continue to make enhancements to the overall shopping experience through search and removing friction from the checkout process, we believe we can drive conversion rate improvements.

Etsy's international revenue grew 37% in the second quarter.

Percent international GMS was 32%, up 100 basis points compared to last year.

Net international GMS grew 18%, growing faster than overall GMS growth.

With those operational metrics in line, let me now turn to their impact on our financial results.

During the second quarter, total revenue was $102 million, up 19%, driven by growth in Seller Services as well as growth in markets revenue.

Seller Services revenue was up 25% and represented 58% of total revenue.

Markets revenue grew 12%, primarily due to growth in transaction fee revenue and, to a lesser extent, growth in listing fee revenue.

Seller Services growth was primarily driven by revenue growth in Etsy Payments.

The share of GMS processed through our Etsy Payments platform was 85% in the second quarter, up from 76% in the second quarter of 2016, primarily due to the transition of all sellers in eligible countries to the platform.

We see additional opportunities to expand the utility and geographic reach of Etsy Payments by adding currency and country.

Promoted Listings revenue growth accelerated this quarter, primarily due to optimizing our algorithms and introducing inventory on mobile web.

We believe both of these enhancements will enable us to continue to drive revenue growth in this seller service and we expect that Seller Services revenue will continue to grow faster than markets revenue and GMS during the second half of the year.

Gross profit for the second quarter was $66 million, up 17% and gross margin was 65%, down 100 basis points due to employee-related expenses and professional fees.

Turning now to operating expenses.

Etsy's second quarter operating expenses were $78 million, up 51%.

Total operating expenses as a percent of revenue grew to 76% in the second quarter compared with 60% in the second quarter of 2016 and 56% last quarter.

The increase in operating expense as a percent of revenue is primarily due to employee-related expenses, including approximately $11 million in restructuring and other exit costs related to the headcount reductions we made in May and June as well as digital acquisition marketing expenses.

Excluding these charges, total operating expenses would have grown 30% compared to the second quarter of last year and would have been 66% as a percent of revenue.

We expect to realize actual expense savings of $20 million in 2017 and $35 million annualized beginning in 2018 as a result of the headcount reductions and other cost-savings initiatives we've implemented to date.

Headcount has decreased to 877 people as of July 26, 2017 compared with 1,062 as of March 31, 2017.

Headcount levels at July 26, 2017, are similar to the first quarter of 2016.

We plan to continue to optimize our infrastructure and overhead expenses while not compromising investment in top line growth.

We're focused on productivity and are investing our resources in areas that we believe will drive the highest growth in the shortest amount of time.

And while we will continue to grow headcount, we will do so from a leaner base and a more focused roadmap.

Marketing expenses in the second quarter totaled $28 million, up 60%, representing 27% of total revenue versus 20% last year and 24% last quarter.

Excluding $2 million in employee-related expenses as a result of the restructuring, marketing as a percent of revenue would have been 25%.

We have decided to pause our investment in brand marketing for the remainder of 2017, and a portion of the spend earmarked for brand was reallocated to digital acquisition marketing, which we believe will drive greater returns.

Product development expenses totaled $22 million, up 84%, representing 21% of total revenue compared to 14% last year.

We prioritize investments in our core Etsy.com market and growth initiatives by eliminating low-priority projects and process and reducing the ratio of product managers to engineers.

Excluding employee-related expenses of $3 million as a result of the restructuring, product development as a percent of revenue would've been 18%.

G&A expenses totaled $28 million, up about 26%, driven by higher employee-related expenses, including expenses as a result of the restructuring.

G&A expense represented 28% of revenue in the second quarter, increasing 2% compared to last year.

Excluding $5 million in restructuring and other exit costs, G&A as a percent of revenue would have been 23%.

Second quarter net income was $12 million compared with a net loss of $7 million last year, and earnings per share was $0.10 compared with a net loss per share of $0.06 last year.

Etsy's net income includes a $60 million foreign exchange gain, an income tax benefit of $9 million and interest expense of $2 million related to our Brooklyn headquarters, all primarily noncash.

Non-GAAP adjusted EBITDA was $13 million.

This resulted in an adjusted EBITDA margin of 12% compared with 16% in the second quarter of 2016.

Headcount reductions initiated in May and June resulted in restructuring and other exit costs in the amount of $11 million, which was reflected in the second quarter.

As a reminder, restructuring and other exit costs are and an add-back to adjusted EBITDA.

During the quarter, we recorded net cash provided by operating activities of $12 million.

This compares to $17 million in the second quarter of 2016.

The year-over-year decline in net cash provided by operating activities for the quarter primarily relates to the restructuring and exit costs associated with the actions we took in the second quarter.

As of June 30, 2017, we had cash, marketable securities and short-term investments totaling approximately $287 million.

Lastly, let me turn to our updated guidance for 2017.

We expect GMS growth to be in the range of 12% to 14% year-over-year.

We expect revenue growth to be in the range of 18% to 20% year-over-year and we expect our 2017 adjusted EBITDA margin to be in the range of 16% to 18%.

The key factors impacting revenue and GMS growth in 2017 are accelerated testing and appointment of new features and products focused on Etsy.com, conversion rate gains across mobile and desktop, and growth in Seller Services revenue, which we expect will grow faster than both GMS and markets revenue and will be primarily driven by Promoted Listing and Etsy Payments.

In addition to the key factors impacting revenue and GMS, we anticipate that the key factor impacting adjusted EBITDA margin in 2017 is increased efficiencies in our operating structure, which are expected to reduce our expected operating expenses by $20 million in 2017, which is $35 million on an annualized basis.

As you update your models, please consider the implied guidance for the second half of this year.

Based on the midpoint of our 2017 GMS guidance, we do not expect GMS growth to decelerate as compared with the first half of the year.

Our guidance for revenue growth implies that we continue to expect revenue growth to outpace GMS' growth for the remainder of the year.

Also, based on the midpoint of our 2017 revenue guidance, revenue growth will accelerate compared to the first half of 2017.

Seller Services remains an increasingly important component of our total revenue.

As we add services and help sellers grow their businesses, they will also drive GMS growth.

Our guidance for adjusted EBITDA margin implies that we expect the second half of the year to be in the range of 20% to 24% compared to the adjusted EBITDA margin in the first half of the year of 11%.

That concludes our prepared remarks.

Thank you all for joining us today.

We look forward to speaking to you in the coming days and weeks.

I will now turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from the line of Mark Kelley of Citigroup.

First one is just walking through the moving pieces on the marketing initiatives a bit more.

You suspended the brand campaign for the moment, redeploying some of that capital elsewhere.

I think some of the older targets that you had were $1 of investment, needed to return to $1-plus over the next 2 years, even though I think you were hitting that earlier in like 5 quarters.

Is there a change to that thought process there?

And second, thanks for giving color on the -- what percent of GMS flows through Etsy Payments.

I'm just curious, did you see any attrition from sellers that didn't want to convert?

And is there a way to think about a normalized active seller growth rate since you had nice growth in the quarter, but curious if maybe that could have been a little bit better if some people churned away?

In terms of marketing, our philosophy is really straightforward, which is that when we invest money in marketing dollars, we expect to deliver a positive ROI for the shareholders.

I know that sounds obvious, but we work very hard to live that every single day.

So we do look at how do we make sure that we are doing that as effectively as possible.

So the first step in that was really to dive deep into our attribution models and make sure that Rachel and I were very comfortable with the methodology we use to determine ROI, and I think Rachel and I are comfortable with that methodology.

Second, we look at how can we further optimize our spend and get more return for the amount of money we spend or spend more money with a really good return, and that has to do with both improving our capabilities internally as well as driving better conversion rates from visits to purchase and getting buyers to come back and buy more often.

We're working on all parts of that.

In terms of the payments, we feel good about that transition, and I think the roadmap that we did to mandate at Etsy Payments is a roadmap that we would look to follow again and again.

First, we'd test it to make sure that by driving people through the Etsy Payments product, they actually have a better experience and buyers convert at a higher rate.

We began by testing that.

That works very well, and our data was very convincing that this is actually a better experience in the marketplace.

Once we had conviction from data, we then mandated it in the markets where Etsy Payments is available, and I'd say that, that transition has gone very, very well.

So our sellers have converted.

We have not seen material attrition and we think that it's a win for both buyers and sellers in the marketplace.

In terms of seller growth, I think the last piece of your question, we feel good about the seller growth we've had.

In particular, it's really about the breadth and depth of inventory that we have on the site and do we have the right inventory matching the demand, and I think we continue to be a great place for creative entrepreneurs to come and grow their business and we're going to keep focusing on that.

And our next question comes from the line of Sam Kemp of Piper Jaffray.

Great.

Maybe a second question on Etsy Payments.

Can you call out the benefit of Etsy Payments being mandated to Seller Services revenue during the quarter, specifically?

And then, Josh, when you think about Pattern, how do you think about that, longer term?

Where do you think that, that should go and how big an opportunity you think that could be, both to sellers and to shareholders?

Sure, the first part of your question, can you just give me a little more color, what specifically more would you like to know about payments?

Yes, the actual like revenue dollar or contribution you had appraising that and step-up in terms of Seller Services penetration as a percentage of GMS.

So just a little bit of color on how much of that was from the Etsy Payments coming through?

So this is Rachel, nice to meet you, Sam, and thank you for that question.

We don't -- we haven't been disclosing the amount -- the contribution from our Seller Services by line item.

But the primary driver is that -- it is a primary driver of Seller Services revenue and it's the largest component of that, we've said that in the past.

And I think part of your question was why -- how has that mandate gone, or why have we mandated it?

It's really -- the answer is because it's the best platform for our sellers.

We consistently see that they get more GMS when they're on Etsy Payments versus the ones that are off.

And if you look across our Seller Services, we've got shipping and payments of both services that we offer to our sellers, and they're win-win-wins because they remove friction for buyers, which drives more conversion, first and foremost, which creates a better experience for sellers, which then grows the marketplace, which is also good for us.

So those are both areas that are -- that we think have been very strong.

Another area that I would point to is Promoted Listings and then Google Product Ads, where the opportunity for sellers to invest in their own success by funding marketing to promote their ads, both on and off of Etsy, is something that we see a lot of appetite for, and we're very well positioned to help them do that.

And in fact, it's very synergistic with our -- with work we would do anyway to drive our own performance marketing tools.

And so this is really a great area for us to partner with our sellers to help them build their business, and I'm excited for us to continue to invest in that area.

The second part of your question, I'm sorry, can you ask it again?

I lost it.

Yes.

It's just when you think about Pattern, what's the opportunities there?

How do you want to see the product change, et cetera?

Thank you very much.

So Pattern is a great start.

And we have a large and passionate community, 1.8 million creative entrepreneurs, and we have the best platform to serve that particular community.

And in particular, we have something to offer them that no one else offers, which is the Etsy Marketplace, the #1 place to go for buying unique and special items.

And so we attract a large and growing set of sellers, but they want the opportunity to market themselves on Etsy and off Etsy as well, and Pattern is a great way for them to do that.

So we launched Pattern not long ago, and just this past quarter, we expanded Pattern by allowing them to include inventory that we allow on the Etsy Marketplace and now also inventory that may not be a fit for the Etsy Marketplace, but nonetheless is something our sellers sell.

So now they can really use Pattern as a true multichannel platform for all of their sales, and the feedback from our sellers has been really positive.

So we're going to continue to invest to make sure that we give our sellers what they need to help them grow their business.

(Operator Instructions) Our next question comes from the line of James Cakmak of Monness, Crespi, Hardt.

I guess, first question, can you just talk through the guidance -- the upper end of the guidance on the GMS side, 14%, can you -- what are the assumptions going into that?

And then secondly, on the gross margin, it was ticked down but at a slower rate than what we saw in the first quarter, but that happened at the same time that Etsy Payments wasn't mandated, just an offset.

So can you just help us understand what's going on with the gross margin, and I guess, how we should think about it going forward?

James, this is Rachel.

Nice to talk to you and thank you for your question.

So on GMS, we gave a range that we believe is appropriate for what we are seeing so far this year.

We're -- we've only -- Josh and I have both only been here in, I think, 10 weeks and 12 weeks, respectively, and Josh has a lot of activity in the early days of getting people focused on the right initiatives, stopping initiatives that we didn't believe were focused on the core Etsy Marketplace and then doing a number of experiments to see which ones were going to have the biggest impact on GMS.

And we'd like to say here that we win some and we learn some, so they -- a lot of them have been wins, but not all of them have been wins.

So it's really early days now, but we've started in June, and in July, have rolled some of these initiatives into the market and we're starting to see that we're getting some real impact.

But it's still early.

So we're comfortable with the guidance we've given for GMS.

If you take the top end of that GMS range, it would imply acceleration in the second half of the year and you can do the math there.

At the midpoint, it implies acceleration in the air.

We're feeling pretty comfortable with those numbers.

So I hope that answers your GMS question.

Remind me, what was your gross margin question?

Yes.

Basically, the compression in the gross margin slowed from the first quarter to the second quarter, and I was just trying -- but at the same time, you had Etsy Payments becoming mandated, which is a gross margin headwind.

So I was just trying to understand the sequential improvement there and then how to think about it as we progress through the year.

So gross margin, I think, was down 400 basis points -- oh, sorry, 100 basis points, and that was due primarily to employee-related expenses and professional fees.

It wasn't -- the Etsy Payments in the quarter did not have a headwind on gross margin.

And there's obviously multiple revenue lines that have different margin structures to them, so things like the transaction fees on GMS flow through at very high margins and Payments flows through at a much lower margin, and you've pointed to Payments.

But it's also true that things like Promoted Listings flow through at a very high-margin, and so there's obviously a mix going on there.

But with the EBITDA guidance that Rachel gave you, we're trying to give just what we expect in bottom line growth, which is that we can grow the business and do it profitably.

And I'll give you 2 other factors on the -- Etsy Payments has a higher margin on some of international transactions, and in addition, we have -- we were able to negotiate with our -- some of our payment centers that helps offset some of the margin compression that we typically see from Etsy Payments.

And at this time, I'm showing no further questions.

Ladies and gentlemen, this does conclude today's Q&A session and conference.

Thank you for your participation in today's conference.

You may all disconnect.

Everybody, have a great day.