ETSY Inc (ETSY) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Etsy's Second Quarter of 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to Deb Wasser, Vice President of Investor Relations. Please go ahead.

Thank you, operator. 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 a reminder that our remarks today include forward-looking statements relating to our business strategy, financial guidance and key drivers thereof, upcoming product launches, investments in marketing and international growth, and the impact of our 4 key initiatives and new pricing model on future GMS and revenue growth. Our actual results may differ materially from the statements made. Forward-looking statements involve risks and uncertainties, which are described in our press release today and in our 10-Q filed with the SEC on May 9, 2018, and subsequent reports that we file with the SEC. Any forward-looking statements that we make on this call are based upon our beliefs and assumptions today, and we don't have any obligations 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 will find on our Investor Relations website. A link to the replay of this call will also be available there. And if you prefer to access a replay via phone, you can find that information in the press release as well.

Finally, for your reference, we hope that you are following along with the presentation that we have created to highlight our second quarter progress. It accompanies our webcast, and it's posted separately on our IR website.

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

Thanks, Deb, and good afternoon, everyone. Q2 was an exciting quarter marked by strong business performance along with several major announcements and launches. Let's start by diving into the results, highlights of which are shown on Slide 4.

First, GMS growth was 20.4% year-over-year, a 60 basis point acceleration compared to Q1 and our fourth consecutive quarter of accelerating year-over-year GMS growth. On a constant-currency basis, GMS accelerated from 17.6% in Q1 to 19.3%. We grew revenue 30% year-over-year, and EBITDA margins remain strong at 21%. Excluding a onetime adjustment related to shipping, revenue growth would have been 27%, our fastest growth rate since the third quarter of 2016.

Active buyers grew 17% and active sellers grew 8%, indicating that we continue to deliver on our commitment to bring a growing base of buyers to our sellers. Our conversion rate increased for the third consecutive quarter, driven most notably by improvements in mobile web, which was our fastest-growing platform by number of visits and conversion rate. And while it's still early days, we continue to see promising signs that we're making progress improving buyer frequency. For example, trailing 12-month GMS per active buyer is up year-over-year for the first time since the fourth quarter of 2016. Furthermore, our 60-day repeat purchase rate continued to improve, and the number of buyers that made 4 or more purchases within the last 12 months grew at an accelerating rate.

Our most significant news of the second quarter was, of course, the changes we announced to Etsy's pricing model. Over the past 13 years, Etsy has built a vibrant, highly differentiated two-sided marketplace, giving our sellers access to nearly 36 million buyers who value the kind of unique special items that our sellers have to offer. In addition, we provide creative entrepreneurs with services and tools that make Etsy an easy place to start, manage and grow a business. We believe that Etsy's new pricing model, which went into effect in mid-July, will allow us to further expand our marketplace and support our seller community. We carefully analyzed a range of options for our revised pricing model and waited to demonstrate the strength and growth of our marketplace before making this important change.

As outlined on Slide 6, our pricing model changes include an increase to our transaction fees from 3.5% to 5% and applying the transaction fee to the cost of shipping in addition to the cost of the item. We believe that 5% is excellent value compared with other channels by which our sellers could acquire customers and sales. In addition to the fee changes, we rolled out new monthly seller subscription packages designed to help sellers succeed at each phase of their business life cycle, which we have begun to market to targeted groups of sellers.

We also began applying a transaction fee to shipping, a standard industry practice in e-commerce. We think this will have the added benefit of incentivizing sellers to appropriately and fairly price shipping relative to the cost of the item, improving the experience for buyers and helping drive conversion and frequency over time. I'd also like to point out that we chose to make the changes to the transaction fee and not the listing fee, which remains at $0.20, because the transaction fee is entirely aligned with the success of our sellers, getting paid only when a seller makes a sale. This shared success is key to our overall business model. When our sellers succeed, Etsy succeeds.

We will be increasing our performance marketing budget, testing new marketing channels such as TV advertising, making strategic investments in seller shipping promotions, and improving customer support. Some of these investments will be more speculative, and we will continue to take a highly disciplined look at each of our investments through a payback lens, evaluating them against the desired rate of return over time.

As shown on Slide 7, our higher transaction fee is expected to have a direct impact on our customer lifetime value, or LTV. As LTV increases, we're able to invest more to attract and retain customers while still maintaining a positive ROI. We believe that by increasing the transaction fee to 5%, we are better positioned to bring more buyers to Etsy, generating more sales and growing the pie for everyone. While early days, we are pleased with how the roll-out of the pricing changes has gone, and seller feedback has been in line with our expectations. There have been pockets of discontent regarding the fee increase, but sellers on the whole seem to understand the rationale for the change. And so far, there has been almost no perceptible change in seller behavior, such as churn rates or item pricing.

Turning to Slide 8. I'm also pleased to update you on the progress we made in the second quarter, executing on our 4 key growth initiatives. In search and discovery, we've been working on both personalization and curation. First, we're focused on curating diverse sets of high-quality items, especially for visitors coming to Etsy seeking inspiration and without a specific purchase occasion in mind. In Q2, we ran several experiments, surfacing user-generated curated collections which were featured on the home page and within search as well as in our e-mail and social channels. Early results are encouraging, and we've received positive buyer feedback. We've also been working to personalize the search experience, with results tailored to the individual desires and preferences of each buyer. We believe there's a great deal of opportunity to do better here and we are just beginning. For example, for the first time, we began to incorporate a buyer's location as one of the attributes in the machine learning algorithm used to categorize and rank search results. By serving localized content higher up in the ranking, we better satisfy our buyers' expectations of shipping speed and promote the look and feel of a local marketplace for buyers unfamiliar with Etsy. We also observed that tastes and trends are often regional, so location can be an important input for determining relevance. This launch had a positive impact on conversion rate, and we're excited to continue leveraging our machine learning capabilities to drive more relevant and personalized search results.

In our second key initiative, trust and reliability, we've begun to test ways that buyers can create user profiles to build an identity on Etsy, where they can express themselves and their taste. We believe user profiles will help connect the community through social interaction, allow for more personalization and give our buyers more reasons to come back. And in customer support, we followed our Zendesk help center implementation with expanded availability of live phone support. And in the coming months, we'll be testing live chat and applying machine learning to customer queries.

Regarding our third key initiative, we've continued to invest in marketing capabilities to drive new and existing buyers to Etsy. As you've heard us say, Etsy's buyer Net Promoter Scores are strong. We have an amazing selection of products appropriate for a wide of variety of purchase occasions. Our opportunity is to expand the brand's relevance, to be top-of-mind more of the time for current and prospective buyers. A clear call to action on a more frequent basis to a larger audience could drive both top-of-funnel visits and repeat frequency.

During the quarter, we made structural improvements to SEO and improved our ability to send more personalized and targeted e-mails to buyers to get them to return more frequently. We've continued to optimize our paid marketing efforts. And this optimization, coupled with increasing LTVs, allowed us to put more dollars to work while achieving our desired returns. We also will be testing a set of promotions in the second half of the year designed to influence seller behavior in key areas, such as shipping price.

Off-line marketing is a potentially large untapped opportunity for Etsy. Last week was the premiere of a new NBC prime time, 6-episode crafting competition called Making It, starring Amy Poehler and Nick Offerman. The show features Etsy's trend expert, Dayna Isom Johnson, and we have ads running in each episode. In the second half of the year, we'll also experiment with a television campaign. We've produced 2 different creative concepts, and each will be tested in 3 local markets. We will evaluate how these campaigns translate to etsy.com visits and purchase behavior and begin to learn whether above-the-line advertising could be a scalable, ROI-positive channel for accelerating growth.

Our fourth key initiative is providing best-in-class seller tools and services. We continue to design tools to help sellers deliver a better buyer experience, which can help increase their sales while saving them time and providing better support. We've also made additional improvements to our Sell on Etsy app, which facilitates a seller's ability to sell and fulfill product. For example, we enabled custom listings, allowing sellers to customize a listing to a particular buyer's request all with a few keystrokes from the seller's mobile device. Custom orders are a key differentiator for Etsy, and this update removed a significant amount of friction for sellers. We added a feature so sellers are able to view activity and stats related to Promoted Listings in Google Shopping, which we hope can become a gateway for further adoption of those marketing tools, which in turn can drive GMS.

As we've discussed, improving shipping is a big priority for us. During the quarter, we began testing an estimated delivery date feature, and we introduced an alert for sellers whose shipping price appeared to be above average, aimed at educating them about pricing strategies. We also made progress on our work to offer Shipping Labels in the U.K. and Australia later this year.

We continued to enhance and improve our marketing services, which allows sellers to invest to grow their own sales. This past quarter, we saw a steady increase in adoption of Targeted Offers. This product allows sellers to create sales promotions targeted to buyers based on their search history and shopping behavior. For instance, an item left in cart by a buyer becomes a prime promotional opportunity for a seller at a later date, enabling the seller to target that buyer with a promotional price. We also improved Promoted Listings by refining the bidding algorithm, enabling us to utilize more of a seller's budget.

Turning to Slide 9. Etsy is also continuing to focus on international growth. We recently announced a referral agreement with DaWanda, a privately held marketplace for gifts and handmade goods based in Germany with significant presence in Poland, Austria and Switzerland. As part of this agreement, DaWanda is encouraging its community of buyers and sellers to migrate to the Etsy platform. The DaWanda site will shut down at the end of August, and all traffic will be redirected to us. DaWanda sellers are able to easily import their shops and listings to Etsy free of charge, and we are investing in key areas to support a successful migration.

Beyond Germany, we've continued to invest in the growth of our core international markets, which include the U.K., Canada, France and Australia. In Q2, local search enhancements, advances in machine translation, targeted search engine marketing and other product launches all helped to fuel our growth. Additional international progress has been made exploring opportunities beyond our core markets, such as in India, where we have a small team on the ground to help expand and support our seller community.

To conclude, it's been a great first 6 months of 2018, and we're very proud of our team for delivering on our commitments and staying focused on our 4 strategic initiatives while also executing against priority initiatives, like the pricing change and GDPR. We've made steady and significant progress improving our conversion rates and making our extraordinary products easier to find and buy. But we're still in early innings, with much more opportunity in both of these areas. We're excited by the potential to become the habit for buyers when they seek something special. And there is meaningful opportunity in other areas as well, such as increasing our average order value through better cross-sell and upsell and improving our shipping experience. I'm confident we have the talent, energy and ideas to make it happen. Company morale is high, attrition in Q2 was low, and the team has a bounce in our step.

Before I close, I want to highlight our impact report, which will be released soon on our website. Staying true to Etsy's mission of keeping commerce human means that we set the bar high and hold ourselves accountable to all of our stakeholders. We realize that many are counting on us. For sellers, our marketplace serves as a source of economic opportunity and empowerment. For employees, we work to provide a diverse and inclusive workplace. And for the benefit of our planet, we want to be mindful of our carbon footprint. It is not a coincidence that while we have moved quickly to improve our business results, accelerating GMS and revenue growth, we simultaneously continued to make progress on our impact strategy. We've applied the same discipline and focus to each of these success metrics, financial and social, and they have reinforced each other and each contributed to our success. You will note in the report that women make up 50% of our Board of Directors, the majority of our executive team and nearly half of all leadership roles. The diversity within our technology and engineering teams is also far above most benchmarks and increasing. And we have made continued progress towards reducing our carbon footprint. We believe we can and should be both a great business and a great corporate citizen, and our results over the past 5 quarters demonstrate continued strong progress on both of these fronts.

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

Thank you, Josh, and hello, everyone. It was a fantastic quarter for Etsy, as our financial and operating results will show.

The second quarter was our highest quarter of GMS growth since Josh and I joined last year and the first quarter with a GMS growth rate above 20% since Q2 2016. We are excited that our team's focus on our 4 key initiatives is having a tangible impact, and our strategy to own special is taking shape.

Before diving into the financial highlights, let me touch on 2 developments that impacted the business and our resources during the quarter: GDPR and state sales tax. During the quarter, we had cross-functional team target work preparing for the EU General Data Protection Regulation, which went into effect on May 25. Overall, we are pleased with Etsy implementation. We saw a minor amount of GMS softness in Europe in Q2 as GDPR consumed engineering resources that would otherwise have been pushing forward on our product road map and also because of added friction to buyer experience, factors we expect to continue in the back half of the year.

The other event I will call out is the Supreme Court decision in the South Dakota versus Wayfair case, which overturned Quill, a decision that had kept states from taxing purchases made from online sellers who lack a physical presence in the state. It is worth noting that there is a 24-state consortium, including South Dakota, that has provided guidance on a small-business exemption threshold of $100,000 or 200 transactions. If the GMS and transaction thresholds were applied to every state, the majority of our GMS would be excluded from state sales tax.

I'm going to now move into our operating and financial performance, followed by providing our updated 2018 guidance. Unless I say otherwise, all numbers presented are rounded for ease of reference, and the comparisons I'll be referring to are on a year-over-year basis.

I'll start with a review of key operating metrics, some of which are shown on Slide 12. Etsy generated $902 million in GMS in Q2, up 20%. On a currency-neutral basis, GMS growth would have been approximately 19%. The direct impact of currency fluctuations was less of a tailwind this quarter, contributing 110 basis points to as-reported GMS growth compared to 220 basis points in Q1. At the end of the second quarter, Etsy had nearly 36 million active buyers, up 17%, and nearly 2 million active sellers, up 8%.

GMS from repeat buyers continues to grow and represented 83% of overall GMS, up 23%, accelerating 200 basis points compared to last quarter. Search initiatives, such as Context Specific Ranking and scarcity signals, have made things easier to find and heightened demand. These are having a clear impact on repeat purchases, and our 60-day repeat purchase rate continues to increase. This quarter, we anniversaried the introduction of both guest checkout and multi-shop checkout, initiatives aimed at reducing friction in the buying process. Over the past year, guest checkout was an important driver of new buyer growth, which we have seen decelerate slightly as we lapped this initiative. Multi-shop checkout, which enables buyers to purchase from multiple sellers in one transaction, was a driver of AOV this past year.

GMS from paid channels, which was roughly 16% of overall GMS, was up 47% and continued to grow much faster than overall GMS. In Q2, the majority of our marketing spend was related to paid marketing, primarily Google Product Listing Ads and SEM. In the second half of this year, we will apply a portion of our marketing budget to test off-line marketing on television in addition to other performance marketing channels outside of SEM and Google Product Listing Ads, such as retargeting Instagram and Facebook. Mobile GMS was 55% of overall GMS, up 400 basis points year-over-year. Mobile GMS grew 32% year-over-year, largely as a result of increased mobile traffic and continued improvements to our mobile shopping experience. Our product work to optimize the mobile web interface and remove friction from the purchase path has led us to continued improvement in mobile web conversion rate, which grew faster than both desktop conversion and mobile app conversion rates.

Turning to International. Percent International GMS was 34%, up 200 basis points compared to last year. International GMS growth was 28% or 24% growth on a currency-neutral basis. Our product teams diverted resources in the quarter to focus on GDPR and support the DaWanda migration, so International product development was somewhat lighter than usual.

With these operational metrics in mind, let me provide more details on our financial performance. All revenue comparisons that I'll be discussing reflect our new revenue presentation, which groups marketplace fees that are acquired as one revenue category, and fees from optional value-added services as the second category.

During the second quarter, we reached the anniversary of the mandated use of Etsy Payments for sellers in eligible countries, which has been a significant driver of revenue growth. We now expect year-over-year Etsy Payments revenue growth rates to trend more in line with GMS growth in future quarters.

As shown on Slide 13, total revenue was $132 million, up 30%, driven by growth in both marketplace and services revenue. Marketplace revenue grew 21%, primarily due to growth in Etsy Payments and, to a lesser extent, growth in transaction fee revenue and listing fee revenue. Services revenue was up 55% and represented 30% of total revenue. Services revenue growth was driven primarily by growth in Promoted Listings, which accelerated for the fifth consecutive quarter due to improved click-through rates. Services revenue growth was also driven by a onetime $2.8 million adjustment related to Etsy Shipping Labels revenue, representing approximately 11% of growth.

Highlights of our P&L are on Slide 14, the full details of which can be found in our second quarter 10-Q, which we plan to file shortly. There are a few noteworthy items in our operating expenses that I will highlight in my discussion here.

First, marketing expenses in the second quarter totaled $29 million, up 5%, representing 22% of total revenue compared to 27% last year. Second, G&A expense, which totaled $22 million in Q2, was down about 24% and represented 16% of total revenue compared to 28% last year. The changes to our organizational structure in 2017 have had a positive impact on G&A expenses. As previously stated, we expect G&A to grow slower than revenue for the foreseeable future. Headcount at the end of the quarter was 814, higher than overall headcount last quarter as new hires outpaced attrition, which was at the lowest point since 2016.

Second quarter net income was $3.4 million, with diluted earnings per share of $0.03, impacted by noncash foreign exchange losses of $4.5 million or $0.04 per share. Foreign exchange fluctuations on our P&L are primarily related to intercompany balances and, this quarter, drove a noncash loss. Last year, we recorded a tax benefit, primarily due to employee stock option exercises which were unusually high, related in large part to exiting employees following our restructuring. Both of these factors contributed to the year-over-year decline in net income and EPS.

Our revenue growth and increased operating efficiencies drove significant growth in adjusted EBITDA this quarter. Adjusted EBITDA was $27.7 million and grew 118% year-over-year. Adjusted EBITDA margin was 20.9%, up 840 basis points year-over-year.

The details of our balance sheet and cash flow are also in our filings, but I'd like to highlight a few points. We recorded net cash provided by operating activities at $67 million in the 6 months ended June 30, 2018, compared to $15 million in the 6 months ended June 30, 2017. The year-over-year increase in net cash provided by operating activities for the quarter was primarily driven by revenue growth and leverage in operating expenses. In Q2, we repurchased roughly $21 million of our common stock, or approximately 723,000 shares, completing the $100 million share repurchase authorization approved by our board in Q4 of 2017. Pursuant to the DaWanda referral agreement, we paid approximately $35 million in cash, which is reflected in our Q2 financial results. As of June 30, 2018, we had cash, marketable securities and short-term investments totaling approximately $568 million.

Turning to our outlook. I'll start by addressing how we are thinking about our new pricing model. When we decided to make this change, we focused on how it would support our sellers and enable further investments across the platform. Overall, we are reinvesting 80% of our incremental revenue, and the flow-through rate to EBITDA is approximately 20%. As long as we see that our investments are producing a rate of return that exceeds our hurdle, we expect to continue to invest for growth. If we aren't satisfied that these investments are delivering value over time, we will end them and deliver more to the bottom line. On a long-term basis, we expect a high flow-through of incremental revenue to EBITDA, but first, we have a lot of growth to lean into.

To give you a bit more color on our investment plans, on Slide 15, you can see some of the items we have already begun working on this quarter. We plan to increase performance marketing spend by at least 40% in 2018 to over $110 million, enabled by our new pricing structure and continued optimization of our acquisition model. We are testing off-line marketing and TV advertising to gauge the impact of brand marketing. The majority of the 2 creative campaigns we produce will be expensed in Q3. We are excited to see what this experiment will yield, but it is entirely new territory for Etsy and we will need to evaluate the results before determining whether it's appropriate to incorporate real upside in our projections.

Lastly, our significant improvements to customer support are achieved through an increased level of investment. Extending to a 24/7 phone support model, implementing live chat and expanding customer support in Dublin for our German and Polish sellers modestly increases our support cost, which we expect will impact gross margin in the short term. In addition, we are beta testing premium services, such as dedicated inbound phone support and consultative services, and this investment is factored into our second half cost base. Similar to television, these are experiments which we believe will have a positive return in the long term and which are being evaluated to determine if they are wins or not.

In addition to the increased marketing spend, starting this quarter, there are a few nuances that may not be factored into your Etsy models as follows: First, we had higher-than-expected attrition rates in the third quarter of 2017 and our headcount was lower than we planned. In the first half of 2018, we had lower attrition and have scaled our recruiting efforts. So our headcount is now back on track. In other words, your Q3 EBITDA assumptions should factor in our lower-than-planned headcount last year. Second, our engineering team has spent significant time and resources on the Google Cloud migration, which is progressing well and on plan. It is likely that we will come closer to the high end of our spending range of $10 million to $15 million for 2018, and our spend will be weighted more heavily to the back half of the year. As a reminder, during the migration, we will maintain our existing data centers for redundancy. Finally, as you may know, Q4 is a seasonally higher-margin quarter for us.

With that in mind, I'm pleased to report that we are raising our full year 2018 guidance for GMS to 18% to 20%, as shown on Slide 16. Revenue guidance also moves up to 33% to 35% year-over-year, and we expect our adjusted EBITDA margin to remain 21% to 23% as we are focused on growth investments. We continue to point to several headwinds that may offset the growth we expect in 2018, such as GDPR, potential churn from our new pricing model, foreign exchange, and various geopolitical events. For additional factors that may impact our guidance, please refer to our Q2 presentation on our Investor website.

We are pleased with the investments we have made in foundational initiatives and development of our products to drive GMS growth. We expect the changes to our pricing model to unlock significant future value as we reinvest in the seller community and amplify our message to buyers. We are excited about these changes and look forward to their impact on future quarters.

Thank you all for your time today. I will now turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from Heath Terry with Goldman Sachs.

As we look at the virtuous cycle that you guys have talked about related to the increase in intake rates, can you give us a sense of just sort of how quickly you expect to flow through the marketing line? I guess you've touched on it, Rachel, in your comments on sort of the marketing guidance. I guess, how quickly do you think that will impact GMS growth? I know you took numbers up slightly for the -- in your revised guidance, but just kind of curious how much of an impact or how quickly you think that, that impact actually shows up in numbers as we think about the impact of just performance advertising.

Thanks, Heath, for the question. Where it affects us -- the way we think about our performance marketing is for the next dollar we spend, what's the return on that next dollar? And so what this allows us to do is push further down that curve. There's a bunch of, let's say, keywords we were buying or GPLA ads we were investing in before that we're already profitable. So you're already getting those, right. It allows us to push a little deeper. So on the performance marketing side, the forward-looking guidance that Rachel provided already anticipates both the increased investment we'll be making in performance and its impact on GMS. What we have yet to see is whether these new LTVs make other marketing channels ROI-positive, which have not been the case in the past or which we haven't tested in the past. So that's going to be an interesting area for us, where they're speculative investments. And let me talk for a second about TV in particular, because it gives a bit of a view of how we do things here and how we think about things. We've never done TV advertising before. So we don't know how it's going to work. So we're doing R&D on that in the second half of the year. And the way we're going to do that is we created 2 separate TV campaigns that test 2 different concepts. Each of those campaigns will be tested in 3 local markets. So we'll pick 3 cities that are test cities, and we'll have 3 control cities. And we'll run the TV ads in the test cities, and then we'll be able to measure the impact on visits and purchases and GMS for people in those cities. Now if you buy a TV ad in a local region, it's about 5x more expensive than doing a national buy. So we wouldn't expect that, that particular campaign in those cities was necessarily ROI-positive, but we could extrapolate if it were a national buy, would it then be ROI-positive? So by structuring a test using only cities, we get much better data on efficacy, and then we would have to think about how that would scale in the future. That's how -- that's why we're describing these campaigns as R&D, so we can learn how to put that extra money to work in a way that really grows the pie for everybody.

And I just would add, that means that the guidance we gave just now for GMS really assumes almost no upside from the TV marketing spend that we'll be doing in the second half of the year. If we see that it -- what we extrapolate indicates that it is ROI-positive, has a potential to be ROI-positive, that would be something that we would do more of potentially, and we'd build that into our 2019 guidance. I'd say that we have a tolerance to let the payback periods be longer than what we see with SEM and the Google PLA ads, but we'd still be looking for an ROI-positive result, where it's not just pure brand marketing on face.

No, that's really helpful. And then as you -- realize that it's incredibly early, but curious how you found the seller reaction to the take rate increase relative to what you had expected and planned for.

With 2 million sellers, if you do a price increase, you would expect some vocal discontent, and we got some, very much in line with what we thought. We also had quite a number of sellers coming out and saying that they really supported it and that they've been wanting us to invest more aggressively in marketing for some time, to invest more in tools, to invest more in customer support. So I was delighted actually by the number of sellers that really came out and were supportive. But I think what really matters is what are they doing. And as you said, it's still very much early days, but we've been pleased by the behavior we're seeing, which is we do not see a difference right now in the data, in churn or in pricing as 2 important metrics that we're tracking.

Our next question comes from Edward Yruma from KeyBanc Capital Markets.

I guess, first on Promoted Listings, maybe talk a little bit more about the opportunity there. It seems like we've heard some sellers complaining that you're not completing their budgets. Sort kind of what inning are you in with implementing Promoted Listings or maybe offering inventory? And then second, you gave some interesting statistics around repeat buyers. I guess, you used to give the adage that the majority of customers only bought once a year. Kind of where are you on that continuum? And for your most frequent customers, how often are they buying?

Let me start with the Promoted Listings question. So it's -- you're correct that we will only -- we take a budget from our sellers and we will only spend it if we can get them to a return on ad spend that is in a reasonable range. And so to some extent, we only utilize a percentage of their budget. And we've increased our optimization of our bidding algorithm, and so we've been able to improve that utilization rate. So that's good news, number one, and we'll continue to build in more optimization. That click-through rate improves with things like including Context Specific Ranking in the results, because they serve up a much more relevant result even when it isn't a Promoted Listing ad. And so the click-through rate increases, which theoretically increases the demand for that. The conversion rate goes up, and we have a nice optimization of the bidding. The second thing I'll say is, just to point out, as long as you're asking about Promoted Listings, is that we just anniversaried an inventory -- we increased inventory 1 year ago. So that anniversary happened in this quarter. And so we've continued to see very nice growth rates in Promoted Listings, but we're hitting a place where it's -- on a same-store sales basis, it's going to be harder and harder to continue to get that growth, yet we have not -- the third point I'll make is we've not implemented Promoted Listings inventory everywhere. So right now, it's in a limited number of places. So for instance, we don't put a Promoted Listings ad on the seller's listing detail page. We don't put them -- they're in very few places today. So there is still opportunity for us to expand inventory on Promoted Listings going forward. Josh, you wanted to add?

Yes. So there's kind of 3 things you can do with Promoted Listings. You can get more sellers to adopt it and give you more budget. You can make it -- you can add inventory. You can put Promoted Listings in more places. And then you can improve the algorithms so that you show the right ad at the right time. I think that we've said about 15% of sellers have adopted Promoted Listings. They're disproportionately sellers who are high volume and likely to succeed. And so there is still some upward opportunity there for sure, but we've got a good number of sellers who are giving us quite a lot of budget. And so -- and to your point, yes, they're actually willing to give us a lot more budget than we're able to spend right now. But we want to make sure we're very responsible and we only spend the money in a way that delivers a good return for the sellers. We think that's critical. So we did expand a lot of inventory last year. We are now lapping that, as Rachel pointed out. There may be other opportunities to expand inventory. We'll have to step our way into that thoughtfully on the site. You could think about Google Shopping as sort of Promoted Listings off site, right. We don't need to limit ourselves only to inventory on Etsy. We give -- sellers have the opportunity to give us money to invest on their behalf. We can buy them visits on other sites. But the third area where I think we're still early is algorithm improvements. The better our search relevance algorithms get for Promoted Listings, the more we show the right ad at the right time, that really uses the inventory we have better. And just like I think we are in early days of improving our search algorithms, I think we are in similarly early days -- in fact, we're using very similar technology to power Promoted Listings. And over time, I'm optimistic about our ability to do better there.

And Ed...

Oh, frequency. Sorry, Ed. Frequency, so the -- we are seeing gains in frequency and we are very encouraged by that. On a base of 36 million buyers, very small improvements can have meaningful impact. So I don't think we have updated the sort of stat of 60% of people are shopping once a year. I don't think we've published something more recently on that. What I would say is that if you can move that 36 million number a small amount, it makes a pretty big difference for Etsy. And over time, we think we could move that number by a meaningful amount.

And we did say on this call that 83% of our GMS is coming from repeat buyers, which grew 23% year-over-year. So you could start to sort of infer from that, that we're starting to get not only more repeat purchase but some repeat frequency green shoots, we're calling them, that's starting to pick up.

Our next question comes from Mark Mahaney with RBC Capital Markets.

It's Shweta for Mark. A quick question. You were expecting $75 million of GMS impact from new initiatives that -- the 4 that you talked about. If you were to isolate that, like how much do those initiatives have had an impact on conversion rates?

So I think what we said last quarter was that we had $75 million of experiments that created, on an annualized basis, incremental GMS growth. And that was from last quarter's experiments. We didn't give you that number this quarter, but we have given you guidance for GMS, which implies growth in GMS. That comes from our baseline organic growth. So if we all went home and didn't do any more work at all, there'd be a certain amount of GMS we would continue to get. There's the initiatives that we've already implemented from 2017 and the first half of 2018 that continue to keep contributing to the GMS growth. And then there's initiatives that we're working on for the second half of the year that will contribute incremental GMS this year and, annualized, will continue to give GMS growth next year. But we didn't break those numbers out for you on this call.

Okay, that's helpful. But how would you sort of categorize the impact on conversion rates that you've seen with the improvement on the platform for seller tools as well as search experience and through the year so far?

So the experiments that we've talked about on search and discovery, and trust and reliability, are mainly pushing on the conversion rate metrics. Our initiative that -- when we talk about marketing services, that's mainly pushing on visit growth metrics. So those are 2 of the 3 metrics that drive GMS. And then we've done less on the moving of the needle on average order value, with the exception of the multi-shop checkout which we've talked about, and we've talked about just anniversarying that this quarter as well. And that allowed people to put more than one item in cart and check out just once instead of multiple times. And I think Josh even said in his prepared remarks that there's a lot more -- we've delivered on the things that we set out to deliver. So we really worked hard. We've been working hard, and we'll continue to work hard on growing conversion rate and visit growth. And we had less of a focus on that third one, which was average order value. But we see a lot of things on our road map that could impact that third metric. But primarily the search and discovery, and trust and reliability initiatives -- and we've given examples of those on our last 4 calls, those are the initiatives that are the things that are impacting conversion rate the most.

Our next question comes from Scott McConnell with D.A. Davidson.

So we think the team's done a really great job of refining Etsy's go-to-market strategy since taking over, including, more recently, the -- with the changing take rate. So you touched on some of the opportunity so far, but what remains for you to continue to refine the go-to-market strategy? And then how should we think about the potential of those efforts to drive sales growth from today's levels?

So we've talked in the past about our TAM, and we said that the -- just the online segments of our business in our top 6 categories, in our top 6 markets is $155 billion. So here's, I guess, how I would think about it. If you were to go shopping for home furnishings -- and we said home furnishings is one of our top 3 categories. Think of your favorite site and go shopping for home furnishings, then come to Etsy and see if you can find a product that is more interesting and better value. I think if you're willing to invest an hour, you will. But it takes an hour. It's too hard to find that product. But we actually have beautiful products. Go shopping for jewelry anywhere on any of your favorite sites, then come to Etsy and see if you can find a better, more interesting product that expresses yourself better and is great value. I think you're going to be delighted by what you find, but it takes a while. It's too hard. Same for clothing. If you look at our top categories, if we sold only home furnishings, nobody would be asking us, how big can you be if you're -- if we're only doing $3.5 billion-or-so of sales, right? So it's up to us to make it easier to expose that gorgeous product that already exists on our site in these categories that are each, in and of themselves, massive. And then when we do that better job, we've got to communicate that well to the world, starting with our existing buyers. Retraining habits on when to think of Etsy and how often to think of Etsy is hard and takes time. We've got to retrain 36 million people to think of us more often and understand the breadth and depth of our inventory. And then we've got to communicate it to the people who never shopped on Etsy and help them to understand that opportunity as well. So I think that there's a lot of opportunity ahead of us. I think we're going to have to unlock it kind of as we go. I don't know that it's always going to be the smooth, upward trajectory one could wish, but I wouldn't expect that, that will be the case forever into the future. But I think with patience and perseverance and focus, I think we can continue to see meaningful growth in this platform over time.

Okay, great. That's really good. So the second question is on Google's changing their algorithm earlier this year. That places more emphasis on mobile. That's always been a strong area for Etsy, and it sounds like it was really strong this quarter, but to what extent does the algorithm change positively or negatively affect your SEO effort?

So we gave you some mobile metrics on the call, that mobile's been extremely strong for us. It always has been, but mobile continues to grow significantly. Mobile was 55% of our overall GMS, which -- that's a 400 basis point improvement year-over-year and grew 32% year-over-year. And we've also focused a lot of our product work on mobile so that we see the mobile conversion rates continue to improve as well. And so it's -- for us, mobile's been a bright spot in a lot of our growth.

Our next question comes from Darren Aftahi with Roth Capital Markets.

Just 2, if I may. Can you talk a little bit more on the retargeting service you guys were offering to sellers and kind of what attach rates you're seeing? And then I guess, where are you in terms of marketing that to your base? And then the second question is just -- I know you formally kind of announced it, I think, at the end of the quarter, but just kind of the impact you're seeing 1.5 months in from the DaWanda kind of transition?

Sure. So the first one, we call that Targeted Offers. So the idea is how do we take people who've already interacted with the seller's shop and let that seller reach out to them with, say, a promotion or an offer to get them to come back and engage more. And it's early days in that. But I would say we're pleased and achieving the projections that we hoped. I don't think we've broken out or given any specific data. That's a brand-new product in its first couple of months of its life cycle. But over time, we think that one is interesting. And it's -- also, it's great for buyers. It's great for growing GMS, and it's a way for sellers to take their destiny into their own hands even more, which we think is important. The second question was on DaWanda and that -- DaWanda decided that they would be shutting down operations. And so that's just been announced to the market relatively recently. So we're -- what we're now doing is trying to make it easy for their sellers to get started on Etsy if they weren't already on Etsy, get their listings up and running. And so we've created tools for sellers to migrate listings and to make that smooth, and we're pleased with the adoption of those tools and the early results we're seeing in migrating listings over to Etsy. The next step would be for DaWanda to actually cease taking new orders and redirect the buyer traffic to Etsy. And until the buyer traffic were redirected, you really wouldn't expect a meaningful impact on GMS. And that's not expected until the end of August.

Our next question comes from Laura Champine with Loop Capital.

Josh, if we focus in on frequency, have you seen much progress in improving existing frequency? And what do you think has been the most effective tool so far in improving that metric?

We are -- again, it's early days, but we are seeing progress there. And what we are hearing more and more from buyers, it just feels like a cleaner, more well-organized buying experience. It's easier to find the stuff you like, and it's easier to buy it once you find it. And I know that sounds kind of basic, but basic is good. So we're delivering on the basics better. We're doing more things. One of the areas that I think there's a big opportunity, in addition to a lot of room to continue to do better on the basics, which I don't want to undersell because I think it's incredibly important, doing a better job on our CRM systems and e-mail, I think, is really important so that we can communicate better to our buyers and remind them of the great things that we have on offer and send them more personalized -- we're now sending much more personalized e-mails than we used to. Things like sales and promotions can be an excuse to come back and check us out during a time of the year when you might not have thought to come to us. Using retargeting technology, so in performance marketing, how can we find people that are lapsed buyers and speak to them when they're maybe on Google doing a product search, is an opportunity, an area that we don't do a lot of today and I think we can get better at and build traction. Another thing that we're seeing is there's a fair number of people who come to Etsy just to have fun without a particular buying occasion in mind. How do we allow them to have a great, fun experience and leave some breadcrumbs to come back to? And so really thinking about activities like favoriting and how do we make favoriting more prominent and more frequent as a way to build a look-book on Etsy, if you will, that you come back to, is something that we've been investing in and seeing some progress on.

I'm going to add just 2 more because we talked a lot about it on the call, so it fits right into your question, Laura, that marketing -- our investment in marketing, our investment in shipping, I think, are 2 larger sort of bets that we would make that say getting to be more of a habit and be more top of mind for our potential and existing buyers out there is one thesis that we want to prove out. We don't know yet if that kind of national brand campaign is going to be effective or not yet, but we -- the thesis is it will. And the second one is shipping, that we've got a lot of friction in the shipping, in the process right now with both shipping prices that are higher than people are accustomed to on other sites, so even some that range to the -- what we would call egregious, and then getting returns. So you're buying something on Etsy. You don't -- if you're buying clothing on another site, you know you can easily return it, oftentimes for free. So getting the return part of the process, if needed, to also be frictionless are areas where I think we'll improve, remove friction and improve the repeat frequency.

Our next question comes from Ronald Bookbinder with IFS Securities.

You touched on the sales tax new ruling. While it doesn't affect the majority of your sales, it does affect some. And I was wondering, is this an opportunity for you to create additional Seller Services for the merchants on your sites in handling the sales tax for them?

Yes. Thanks, Ron. Thanks for the question. I appreciate it. So we definitely have our sellers' back, and providing tools that make this easier for them and reducing the burden is something that we think is really important and something that we're investing in. I do want to take a sec. Let's take a look at this consortium of states, just as an example, where it's $100,000 in sales or 200 items sold in any 1 state. That includes online or off-line sales across any platform. So I would argue that it is impossible for any platform to know and be able to truly comply with precision to that law. That's why we think this is bad law. No one could apply -- could comply with this law perfectly all the time. So we will give our sellers tools and we will do the best of our ability to make this as low friction as we can, but really, we need to work with the federal legislature to try -- and state legislatures to try to get to better law that achieves the needs of the states to collect tax revenue and does it in a way that also encourages innovation and free commerce. And that's what we're going to work to do. What I would point out in the meantime is that this is not an existential threat to Etsy. It's friction. It's work. It's not ideal. But we're going to have our sellers' back and it's something of a headwind in the near term, and we'll get through it.

Okay. And secondly, on the television test in the 3 cities, will you be able to have those test results to be able to attack Good Friday/holiday in a meaningful way? Or will that still be in a testing period and that will be something that we can use next year in marketing?

So it's actually 6 cities. So it's 2 3-city tests, and we hope -- we're using a media buying firm that's very quantitative. So they -- we set ourselves up with them that we get very good performance metrics where there's only a very slight lag. But it takes a little bit of time. You have to let it run. We're trying to get enough reach and frequency within a period of time to get statistically significant results and be able to draw conclusions from them. It's possible that you see such an immediate result, favorable or unfavorable, but you get -- you can make a decision at that point on whether to do more of it on a national basis in time for holiday or not. But right now, we're very -- we're trying very much to emphasize that this is all experimental, and we're using it to learn and it really will guide our further investment into 2019.

Thank you. I show no further questions. So I'd like to thank everybody for joining today's conference. This does conclude the conference, and you may now disconnect. Have a wonderful day.

Thank you very much.

Thank you.