Etsy Inc. (ETSY) Q1 2021 Earnings Call Transcript

Etsy Inc. (NASDAQ: ETSY) Q1 2021 earnings call dated May. 05, 2021.

Corporate Participants:

Debra Wasser — Vice President of Investor Relations

Joshua Silverman — President and Chief Executive Officer

Rachel Glaser — Chief Financial Officer

Analysts:

Darren Aftahi — ROTH Capital Partners, LLC — Analyst

Maria Ripps — Canaccord Genuity Corp. — Analyst

Lauren Schenk — Morgan Stanley — Analyst

Ygal Arounian — Wedbush Securities Inc. — Analyst

John Colantuoni — Jefferies LLC — Analyst

Nicholas Jones — Citigroup Inc. — Analyst

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Laura Champine — Loop Capital Markets LLC — Analyst

Shweta Khajuria — Evercore ISI — Analyst

Presentation:

Debra Wasser — Vice President of Investor Relations

Hi, everyone, and welcome to Etsy’s First Quarter 2021 Earnings Conference Call. I’m Deb Wasser, Vice President of Investor Relations and ESG Engagement. Joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Gabe Ratcliff, our Director of Investor Relations. Today’s prepared remarks have been prerecorded. The slide deck has also been posted to our website for your reference. Once we are finished with Josh and Rachel’s presentations, we will transition to a live video webcast Q&A session. Question can be submitted by the Q&A window chat displayed on your screen. Feel free to use it at any time, as it will remain open throughout the entire conference call. I’ll be reading your questions, and Gabe will help me try to get to as many as we can.

Please keep in mind, that our remarks today include forward-looking statements related to our financial guidance and key drivers thereof, the impact of COVID-19 or its abatement may have on our communities, business, strategy or operating results. The potential benefits of our marketing and product initiatives and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in today’s earnings release and our 10-K filed with the SEC on February 26, 2021, and which will be updated in any future periodic reports 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 disclaim any obligation to update them. Also during the call, we’ll present 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, along with a replay of this call.

With that, I’ll turn it over to Josh.

Joshua Silverman — President and Chief Executive Officer

Thanks, Deb, and good evening, everyone. Q1 was another really strong quarter for Etsy in terms of its financial results and also in terms of its corporate citizenship. I’d like to start this evening by talking a little bit about some of those citizenship efforts. Etsy continues to speak out against racism and harassment. For example, in the first quarter, we donated $500,000 to support the AAPI community, and we continue to invest in highlighting the wonderful work of many different underrepresented sellers within our buyer community. For example, our partnership with the Gee’s Bend Quilters from Alabama. I am delighted to report that many of the Gee’s Bend shops sold-out within the first 24 hours of the launch of that initiative.

Etsy also launched Donate to Change where buyers can round up to support the Uplift Fund, which provides a path to entrepreneurship for many different communities. And we had over 1 million buyers round up to support the Uplift Fund in just the last six weeks of the quarter. Third, Etsy continues to deepen its commitment to environmental sustainability, announcing our goal to be Net Zero by 2030. This continues to pave our pathway as a trail-breaker with one of the most ambitious targets of any of our peer group.

As I said, our Q1 results were excellent. Consolidated GMS was $3.1 billion, up 128% year-over-year. And that’s really the result of strength in the core and continued positive momentum in frequency. You’ll also notice that we came in above the top of guidance, guidance that we gave in late February. Most of that overshoot relative to guidance was due to the impact of stimulus and Rachel is going to talk about that more in her section.

The core business did great in Q1. Our customer cohorts continue to show that we are driving increased frequency and engagement from all of our different buyer segments. Etsy added 16 million new or reactivated buyers in the quarter for a total of 90 million active buyers up 91% year-over-year. And I am particularly pleased that our fastest growing segment yet again, was habitual buyers, our most loyal and engaged buyers. We now have 8 million habitual buyers, and that was up 200% year-over-year.

Building on this expanded base. We are laser focused on driving frequency and of course, frequency can be driven in part by your marketing initiatives, things to make you more front-of-mind for customers. But it’s also critical that we have a customer experience that in and of itself is engaging and drives activity. And so we’ve been launching efforts across the spectrum and depict just a few quizzes [Phonetic] are something we launched recently and that allows a buyer to come and tell us more about their particular tastes and their particular interests in a light and fun way that not only makes that visit more engaging in session, but it gives us important information to help bring that buyer back more often to have more satisfying experiences in the future.

We’ve been working a lot on buyer triggers as well, things to notify people through app pushes, through emails and other things, that there is something new or interesting that’s happening. For example, that an item you’ve favored it in the past has gone on sale. And when they come back to the site, we’ve been investing in an updates tab in the app. Think of that as your daily feed for what’s changed since you’ve last been here. Maybe an item you’ve left in your cart has gone on sale or here is some new favorites that you might be interested in to add to your list. It’s very encouraging to see that now 13% of app visits include a visit to the updates tab and 27% of those visits have buyers clicking on one or more of the listings that we include in updates.

And the fourth pillar is strategic discounting where we’ve launched a tool that allows our team to rapidly test and then automate and scale different types of discounts to very finely tuned customer segments. So $5 off, for example, on your next purchase. I’ve never been more excited about our product roadmap. We continue to make investments that we believe are driving the long-term value, making the customer experience better.

I know we show you this slide a lot, but it really is how we drive focus and prioritization within our product organization focused on each of these four pillars. We start within each pillar by saying what customer experiences do we want to focus on to truly uplift? We then ask what are the fewest initiatives that could have the most impact in those customer experiences. And then we assign very specific goals. So it’s clear what success looks like, and here is what your constraints are to squads who are owned – who own the success of those different initiatives.

So, let me take a second now to show you the priorities within each of these four pillars for 2021. Within search, we have four focus areas. Personalization is about making Etsy feel more like it’s made just for you. Buyer pathways is about making it easier to find the things you want, whether or not you would actually put a search query into the search engine and making sure that we have few, and hopefully no dead ends. Closing the semantic gap is about taking what you happen to enter into a search engine and interpreting that for what you actually meant you wanted. And of course, all of this relies upon an infrastructure that is fast and reliable and scalable.

Double clicking on personalization, just to show you an example of that pillar, we launched the ability to personalize the search results recently, and we are seeing really encouraging gains from that, but we are still very much in the early innings, consuming more data to understand more about what that customer wants and then delivering through more sophisticated models, ever more personalized search results. But it doesn’t end with just the search results themselves. We actually believe that over time, we can customize the entire experience. So here you see an example of how the layout itself might be different for two different customer segments. And our ambition over time is to create evermore finely tuned customer segments that are built through multivariate models powered by machine learning, so that Etsy truly feels made just for you.

I’d also highlight on this slide a couple of the infrastructure improvements that have led to material gains in the past quarter. For example, the search infra team made the search results faster, which resulted in increases in click and conversion rate and we are able to expand the search results for long-tail queries, leading to more satisfying buying experiences there as well. What makes the Etsy marketplace truly special is that every item and every seller has a story and a story you’d actually be interested to hear. And there is nothing more powerful than video to help to tell that story.

We also encourage conversations directly between the buyer and seller, something you’ll see in few of any other marketplaces because those Convos help the buyer and seller to co-create, personalize or customize, or even just to form community. That’s one of the things most different and special about Etsy, and we think investing in this pillar is critically important. One example of where we are leading in is in video itself. Sellers have now uploaded about 5 million videos to the Etsy site. That’s up 36% quarter-over-quarter. And we are seeing very encouraging progress when a listing includes a video that buyers engage with it more click and even convert more. But the listing page is only the beginning of where we can be using video to tell the story of Etsy, tell the story of the item and to help people to engage even more often throughout the site. So expect to see more video in more places making the Etsy experience even more dynamic.

The third pillar is trust and we have four focus areas within trust. First is speed expectation. That’s making it very clear when you can expect the item to arrive. Second is delivery predictability. Where is this item in the fulfillment process being made or currently being shipped to you? Third is issue resolution, making it even easier to access support and know that we have you back on the rare instance that something goes wrong.

And fourth is seller reputation. This is around giving sellers even more visibility into how they are performing versus key customer satisfaction metrics, as well as setting the bar for what good looks like, so that we create more of a sense of agency among the sellers for how they can drive success in their business and create a race to the top where the buyer experience improves as a result for all of our buyers. Taking seller reputation as an example and showing how we can apply that to fulfillment.

On the left, you see a new dashboard we’ve launched within the seller dashboard. And here it shows the seller very clearly, which items are expected to ship today, which one ship tomorrow, which one ship next week. So they know exactly where they should be focusing their time and energy. We’ve also been focusing on dashboards that show how they are doing versus fulfillment expectations relative to our expectations of what good looks like. So that again, they focus their energy and we’ve set the standard together on how we can deliver a consistently great customer experience to our buyers. That feels predictable for all of our sellers.

The foundation of Etsy’s right to win is our sellers’ collection of unique items. I know I’ve told you in the past that 90% of buyers report that they come to Etsy for items that they can’t find anywhere else. And in fact, one of the most special parts of Etsy is that most things on Etsy can be personalized and customized. And in fact, we find that buyers are 20% more likely to make a purchase when they are looking for customized or personalized items. So a focus for this year is going to be even more specifically highlighting and showcasing items that can be personalized and customized as well as streamlining that process of co-creation between the buyer and the seller. But of course, what good is this great collection of unique items if we don’t tell the world about it. In fact, we launched a brand new campaign called Bye-Bye Boring, and I’d like to pause now to show you one of the spots in that new campaign. Given the performance that we’ve seen in the U.S. from our television campaigns, we are interested to see whether investments in television can actually accelerate our flywheel in some international markets and get us to scale even faster. So we are going to be experimenting, leaning in more in the UK and in Germany to see how above the line marketing can drive brand awareness and more visitation and get us spinning faster.

I’d like to show you now an example of a campaign we are going to run in Germany. Germany is a market that’s different than the U.S. and the UK. And then awareness there is substantially lower, although we are seeing very positive momentum. So there’s more work that needs to be done to introduce Etsy to the German market. This campaign is called [indecipherable] which translates to Etsy Has It.

Etsy also has the advantage of being beloved by many influencers. So we’ve created a scalable experience where influencers can curate or co-create their own set of items, and then market those items to their own communities that reinforces the desirability, the quality, the diversity, and the scarcity of items on Etsy, and allows Etsy to reach out to diverse communities in ways that feel highly personal, curated and crave-worthy. All in all, I couldn’t be more excited about what’s ahead for the Etsy marketplace. But speaking of couldn’t be more excited. I’d like to take a moment also to give you an update on how things are going with Reverb. Reverb also had an outstanding Q1. GMS grew about 50% or about 5x faster than the musical instrument industry and Reverb continues to deepen its moat, serving as the primary marketplace for many musicians.

Reverb’s four key focus areas for 2021 are going to be around personalization, around partnerships with brands like Fender to market new gear, deepening its investments in growth in international, and continuing to improve the customer experience. It’s now been about 18 months since Etsy acquired Reverb, and we couldn’t be happier with how that partnership has evolved.

As you’ll see on the left, Etsy has helped Reverb to expand its gross margins from 33% to about 53% and the purchasing power and scale of Etsy has played an important role in that. We’ve taken many of those gains and we’ve reinvested in marketing, and that investment in marketing has also helped to accelerate the growth of Reverb. But we are not just investing more, we are investing more efficiently, so you’ll see on the right that each dollar of marketing is driving more GMS through the incorporation of Etsy’s tools and techniques to help make the marketing funnel within Reverb even more efficient.

In closing, Q1 was another great quarter for Etsy. I couldn’t be prouder of the team or more grateful to the whole community.

And with that, I’ll turn it over to Rachel.

Rachel Glaser — Chief Financial Officer

Thanks, Josh, and thank you, everyone for joining us for our call. My commentary today will cover consolidated results, key drivers of performance and Etsy’s standalone results where appropriate. We saw continued momentum in Q1 as we delivered another strong quarter across the board, delivering higher than expected GMS and revenue and healthy adjusted EBITDA.

On a consolidated basis, Etsy’s first quarter GMS grew 132% to $3.1 billion. Revenue grew 141% to $551 million and adjusted EBITDA was $184 million with margins of about 33%. On a consolidated basis, international GMS expanded 200 basis points sequentially to 42% of overall GMS. International GMS grew faster than our overall growth, accelerating to 169%.

Our fastest-growing trade route in Q1 was once again, our domestic sales between buyers and sellers within the same non-U.S. country. International domestic delivered its highest ever growth in Q1 and grew more than 2x faster than our overall growth rate. While we continue to benefit from significant macro tailwinds in several core international markets, success can also be attributed to our focus strategy to build local marketplaces by supplementing global product launches with locally relevant optimizations that expand domestic vibrancy. In addition, we’ve been careful and measured in our marketing approach by efficiently using performance marketing dollars and now adding brand spend in the UK and Germany.

When we provided our outlook for Q1 in late February, we mentioned that unpredictable macro events beyond our control could create volatility in performance. And as you can see from the monthly cadence, January was up 130%, February was up 107% impacted by weather events as we had previously noted, and March was up 161% as we lapped the onset of the pandemic and saw positive impact from government stimulus checks.

U.S. government stimulus was only a very small part of our guidance for the quarter, but the timing and impact turned out to be much larger than we had anticipated, and we believe made up the majority of our guidance beat. In estimating the impact of stimulus checks, we bifurcated GMS growth trends between ZIP codes with household income higher and lower than $50,000. And as you can see from this slide after the distribution of stimulus checks, GMS growth from ZIP codes with income lower than $50,000 outpaced those at more than $50,000.

On an Etsy standalone basis, our category mix remained fairly stable with our top six categories representing over 80% of our GMS and growing 115% year-over-year. Weddings, a shopping occasion that was a headwind to our overall growth in 2020 was up 43% in Q1 and remains an opportunity as geographies reopened. As mobility restrictions ease and consumers shift their purchasing habits, reflected more social lifestyle, Etsy’s category mix could reflect that dynamic. For example, just recently in March, GMS growth was driven in part by gifting related to Easter and UK Mother’s Day, which were celebrated with more in-person family and outdoor events than in the prior year.

A great signal of the health of our core business can be seen on this chart. Non-mask GMS growth accelerated 20 percentage points quarter-over-quarter to 138%, the second consecutive quarter of sequential acceleration. As anticipated, mask sales continued to contract as a percentage of overall GMS to 2.5% down from 4% in Q4. Consolidated Q1 revenue was again driven by growth in both marketplace and services revenue with key drivers being GMS volume, Etsy Payments, Etsy Ads and Offsite Ads revenue.

Transaction revenue grew 144% year-over-year driven by higher GMS from visit growth and an expansion in conversion rate. Payments revenue was up 156% and we processed 92% of our Etsy standalone GMS through Etsy Payments in Q1 up from 89% in Q1 of 2020. Consolidated advertising revenue was up 93% year-over-year. You recall that in the first quarter of 2020, our Etsy Ads revenue model included a portion related to Google Shopping of about $11 million. Excluding this Google Shopping revenue from Q1 2020, consolidated on-site advertising growth was up 138% in Q1 2021. For Offsite Ads, Q1 was our final, fully incremental quarter of revenue for this service as we began to build sellers in early May of 2020.

We recently expanded our distribution channels for Offsite Ads to the Google Display Network, which provides access to over 1 million affiliate sites. While spend on this channel is relatively small today, sellers can now reach buyers on major publishing sites, such as Buzzfeed, Martha Stewart and Better Homes & Gardens. As a reminder of how the model works, Etsy places ads on behalf of our sellers, leveraging our marketing expertise in budget while only charging sellers if ads lead directly to sales within a 30-day attribution window. We continue to make strides in bolstering our advertising products and initiatives to help sellers drive velocity in the marketplace and take control of their success.

Etsy Payments, Etsy Ads, and Offsite Ads, all were drivers of the take rate expanding to 17.5% up 60 basis points compared to Q1 of last year and 40 basis points sequentially. Gross margin was 74% expanding 10 percentage points compared to last year and continuing to benefit from our shift to Offsite Ads, which delivers incremental revenue without an equal offset in the cost of revenue. Gross margins were also positively impacted by the leverage gain of the highly variable nature of our revenue base and Reverb’s higher transaction fee versus prior year.

We continue to leverage marketing and product investments to drive incremental growth on the platform. Prior to making an investment or launching a new initiative, we rigorously test and iterate to ensure we are delivering a positive ROI. In Q1, we launched a new TV campaign, expanded our performance marketing channels and continue to drive efficiencies. Q1 consolidated marketing spend was $151 million, up 212% year-over-year. There is never been a better time for us to lean into advertising and gain share.

There are three factors that help explain how marketing is generating momentum and driving profitable growth. First, we continue to benefit from buyer frequency as our cohorts are engaging with us more often, leading to material gains in lifetime value. For example, GMS per buyer is up 20% year-over-year and as we achieved growth in LTV, it enables us to spend more marketing dollars and a healthy ROI.

Second, as part of our Offsite Ads initiative, we generated an additional seller fee when we successfully place an ad that leads to a sale. This incremental revenue recoups approximately 30% of our performance marketing spend and increases lifetime value, and consequently allows us to reinvest to drive more growth for our sellers, a beautiful virtuous flywheel. And third, because we have continued to heighten awareness of the significant breadth of merchandise on the Etsy platform, there is higher demand for our long-tail of keywords, creating more ad inventory for us to bid on that meets our ROI hurdles.

Brand marketing spend, which includes television and digital video was 13% of our consolidated marketing spend in Q1. We intend to increase brand marketing as a percentage of total spend, which will continue to shift the LTV curve a bit further out and late in the payback period of the marketing portfolio overall. Our product development investments continue to deliver strong returns, driving higher conversion rates and frequency. This investment is reflected in our pace of hiring and has led to GMS growth.

We accelerated hiring in Q1, adding nearly 100 employees. We ended Q1 with 1,508 employees, an increase of 18% compared to Q1 of last year and at an accelerated pace versus the 14% increase we had in all of 2020. In addition to growth investments, we allocated a meaningful portion of our portfolio to foundational spend or infrastructure to serve the platform. For example, we invested in areas such as data infrastructure, member services and our developer experience to make our platform faster, more efficient and reliable.

Moving to our operating metrics for the Etsy standalone marketplace. We delivered the highest growth rates since we became a public company for active buyers, repeat buyers and habitual buyers in the first quarter. In Q1, active buyers grew 91% year-over-year to approximately $90 million and growth in new buyers grew 114%. Habitual buyers, our most loyal buyers grew over 205% for the quarter to $7.9 million, the fourth quarter of sequential acceleration.

Despite only accounting for 9% of active buyers, this segment contributes on average about 40% of GMS. So as we develop the product and marketing strategies that Josh discussed, we pay a lot of attention to these buyers, as well as those that could eventually become habitual in the future. In addition to our habitual buyers, repeat buyers, those who made purchases on two or more days in a 12-month period grew 114% to $36 million.

GMS per active buyer on a trailing 12-month basis grew 20% year-over-year, driven by repeat purchases and frequency. Our cohorts continue to show stable underlying trends as we invest to drive further stickiness and habit-forming behavior. Active sellers grew 70% year-over-year to 4.5 million for the Etsy marketplace, and we are focused on growing the pie for all our sellers. Trailing 12-month GMS per active seller was up 34% and listings on our marketplace grew to over 90 million items.

Moving to the balance sheet. As of 3/31, we had $1.7 billion in cash and cash equivalents and short-term investments in addition to a $200 million revolver that is currently undrawn. Our business model is capital light and our cost structure is highly variable to revenue, and we’ve continued to take measures to optimize and scale our marketplace.

Turning to our outlook. Given volatile global macroeconomic conditions that impact consumer spending broadly and external e-commerce forecasts, which continue to be in flux, we are only providing guidance for Q2 at this time. We currently estimate Q2 consolidated GMS to be approximately $2.8 billion to $3.1 billion of about 5% to 15% compared to Q2 of last year, revenue of $493 million to $536 million, up 15% to 25% versus last year, and adjusted EBITDA of $129 million to $144 million with a margin in the range of 25% to 28%.

Here are a few reminders as you update your models and think about the cadence of growth. In Q2 of 2020, we saw the beginnings of significant growth in face masks, which delivered $346 million of GMS in the quarter and 14% of Etsy’s standalone GMS. As we showed you in Q1 of 2021, face masks have declined to less than 3% of Etsy’s standalone GMS and have been declining sequentially each quarter since Q2 of last year. We are forecasting continued sequential decline in the remainder of 2021.

Leading macroeconomic indicators, such as TSA flight information, mall traffic and Google mobility data suggests that as states and countries reopened, activity and consumption in non-retail categories is picking up and this could imply increasing headwinds in the balance of the year. For example, we have started to see what we believe are some reopening headwinds in select core markets. We monitor third-party forecast, as do you, and data suggests that 2021 e-commerce growth will have been the highest in Q1.

Our estimate is that government stimulus drove approximately 8 percentage points of GMS growth in Q1 2021. We have already seen this benefit wane in April and early May and do not expect government stimulus to similarly impact our business in the second half of this year. Coupled with the continued decline in mask sales, we also currently expect new buyers to decelerate in 2021, given the record number of new buyers we acquired in 2020. That said, we are encouraged by the progress and frequency and are hyper-focused on delivering a better user experience for all of our buyers.

We expanded GMS substantially through 2020 with the highest GMS in Q4 2020. This means that year-over-year comps in 2021 are expected to get steeper as we go through the year. That fact combined with the other factors I just outlined, possible deceleration in e-commerce growth, absence of stimulus tailwinds and potential future impact from business reopenings implies that year-over-year growth rates may decelerate as we progressed from here.

Wrapping up guidance, you may also want to think about Q2 performance by modeling a two-year stack. Looking at 2021 versus 2019, which implies 170% growth for Q2 at the midpoint of the guidance range, a mild deceleration compared to 207% in Q1. To put a finer point on it, that is $3 billion of GMS in Q2 2021 compared with $1 billion two years ago, that’s an incremental $2 billion. Even if you forecast more deceleration in the second half, you’ll still see very strong full-year results on a two-year stack basis.

We believe this is a better representation of the stability and sustained momentum that we have seen in our growth trends. We remain very excited about the opportunity ahead and believe that now is the right time for us to invest for growth. These investments primarily are in the form of people and marketing dollars. Our growth has vastly outpaced our hiring and we are leaving far too many great ideas on the cutting room floor. We’ve already added 100 employees in Q1 and intend to keep hiring throughout the year. So we have ample resources in time to impact the holiday season and beyond.

We are establishing a new product development center in Mexico City, a great location for tech talent, and you will see us begin to hire there in addition to our existing locations. In addition, we continue to make important investments in infrastructure, marketplace safety, compliance and customer support, critical functions that support our growth.

And finally, we see great opportunities in marketing, especially internationally, where we are less penetrated in key channels relative to the U.S., and we are testing whether brand investments can further accelerate growth. In Q2, we intend to invest an incremental $15 million in brand marketing versus Q1, including more spend in Germany and the UK contracting our margins in the short-term. We believe these investments will be ROI positive and expect they will deliver a return over many quarters in the future.

In closing, I want to reiterate that as we navigate unprecedented times, we remain highly confident and encouraged about our long-term opportunities. We also believe that our brand is more relevant than ever before as we build top-of-mind awareness in the hearts and minds of consumers. Thank you all for your time today.

I’ll now turn the call over to Deb, so we can take your questions.

Questions and Answers:

Debra Wasser — Vice President of Investor Relations

Okay. Hi, everyone. We’re going to dive right in. We have quite a lot of questions in the queue. If we don’t get to your question in the next half an hour or so, please feel free to email us at our address. So I’ll start with a question from Darren Aftahi from ROTH.

Darren Aftahi — ROTH Capital Partners, LLC — Analyst

On your Search and Discovery goals specifically on a semantic gap, what are you working on that will improve this gap in 2021? And longer-term, how good can your search results mirror a shopper’s intent?

Debra Wasser — Vice President of Investor Relations

I think we’ll start with Josh for that one.

Joshua Silverman — President and Chief Executive Officer

Great. I love it. And thank you for that question. I can kick out on this stuff all day. So [indecipherable] out with me. So just to be clear, semantic gap is about translating what you meant with what you actually wrote. So for example, cocktail attire for men, a good search result for that might be a blue blazer. And yet the word cocktail nor attire might appear in the title of a blue blazer. So there’s a lot of work we’ve been doing to improve our models on that, and we’ve been making great progress.

Three things I talk about that are underway that we think are exciting. One is using neural or deep learning models to expand the number of candidates of a 100 million items picking the right small set that are actually appropriate from which you can then rank from one to 500 is actually a big part of that task, that first pass through the 100 million listings to find the right candidates. And we’re starting now to leverage deep learning models to do that.

A second thing I would say is what do you do for listings that are relatively new that haven’t been exposed to very many buyers where you have very few data points. So we’re starting now to interpolate with new listings where we think they might be relevant. And a third thing we’re doing in semantic bridge is language agnosticity. So you might’ve done your search in French, but we’re going to show you German, some German search results as well. Those are three examples, but I also don’t want to imply that when we launch a neural model that we are done and we move on, we might spend years optimizing that model. And so we are in the very early days of launching these models and experimenting and improving our results with these models.

So to the question of how good can we get, I don’t know, we’ll find out. I think, we’ll never be perfect. But we can get a lot better than we are. And we are already a lot better than we were even one-year ago. The other thing I’d say in this area is that we won’t always speak with words. And so one of the things we’re focused on now is how can we use pictures. Let us show you some things, you might not even know the words to express what you want. But we might be able to show you some ideas. And as you interact with those ideas that tells us what you want and we get better and better.

Darren Aftahi — ROTH Capital Partners, LLC — Analyst

Okay. Great. Thanks Josh.

Debra Wasser — Vice President of Investor Relations

Next one is from Maria Ripps from Canaccord.

Maria Ripps — Canaccord Genuity Corp. — Analyst

With growth in habitual buyers accelerating so strongly, can you talk about the key drivers there? In addition to multiple search and platform improvements as we just discussed, is there anything else you would highlight from the category engagement standpoint that’s driving the strong buyer engagement?

Debra Wasser — Vice President of Investor Relations

Josh, do you want to start there?

Joshua Silverman — President and Chief Executive Officer

Well, ultimately in my prerecorded remarks, we are very focused on building more hooks into the experience to engage you and have you come back wanting more. And importantly having the site be very rewarding in terms of what’s next. For those of you, and hopefully all of you use Etsy regularly, the Etsy homepage has been the rearview mirror for many years. You show up on Etsy, and it’s things you’ve recently viewed or things you’ve recently favorited, or it’s a bunch of things you’ve already done. We’re moving much more now to show you more recommendations, more leaning forward, things you might like, things you haven’t seen. Shops you’ve favorited. Here is three new items from those shops.

And so we’re both figuring out how to learn more about your tastes and preferences so we can provide better recommendations and then entice you with things that we think are going to be interesting to make you want to come back more and more. And part of that is of course the listing experience and recommendations. But part of that is things like video. And when we talk about videos, by the way, it’s not just shooting that item from multiple angles. Some of the videos that we’re finding are most mesmerizing are the making of videos.

Customers seem very interested in how did you actually make this product and they can watch those for hours sometimes, it’s fun and inspiring and that’s uniquely Etsy. You’re not going to find that on other platforms. And so finding ways to really engage customers in the platform is something we’re very focused on as well as all of the marketing efforts. And the television investment we’re doing and the performance marketing investment we’re doing also help to keep Etsy top of mind and really make us a place that people want to come back to.

And I’m particularly proud that when we ask customers now in both the U.S. and the UK a very generic question, which is just, what are your favorite places to shop online? Etsy is now top 10 in both of those two markets. And that’s the kind of thing we’re going for, that we’re top of mind and we’re not like what’s your favorite hand-made site, or what’s your favorite place to go for niche? Just what’s your favorite place to shop online? Etsy is now at top 10 site by our internal survey work in both the U.S. and the UK. And I think that’s really encouraging.

The second part of your question was about category mix. And I can guess like you can guess, what’s going to happen with home furnishings? What’s going to happen with events like weddings? What I would say is, one of the parts of the Etsy model that I like the most is that we can speculate a lot, but we don’t actually do anything differently at Etsy. We have a 100 million items for sale on Etsy today. So whatever is hot tomorrow, there’s an enormously high probability that we have it. And if we don’t have it, it will be on the site within hours.

And so our marketplace responds very dynamically to trends and our performance marketing system picks that up in largely real time. And boy, did we ever see that through COVID, right. We have an incredibly agile and dynamic marketplace. So unlike so many others, we’re not sitting around guessing what’s going to happen in June and buying inventory against that and putting marketing spend against that only to maybe be proven right, and maybe be proven wrong. We have a marketplace that naturally adapts. And we tend to work much more horizontally on making sure that the seller experience is really good, making sure that the buyer experience is really good and whatever they want to buy and sell in that particular moment is great by us.

Maria Ripps — Canaccord Genuity Corp. — Analyst

Okay. Great. Thanks Josh.

Debra Wasser — Vice President of Investor Relations

The next one, I think is for Rachel. This is from Lauren Schenk at Morgan Stanley.

Lauren Schenk — Morgan Stanley — Analyst

Last quarter, you mentioned Q1 take rate would likely be the high watermark for the year. Is that still the case? What are the puts and takes to thinking about regarding the take rate through the rest of the year?

Rachel Glaser — Chief Financial Officer

Hi, Lauren. Thank you for the question. So we did say that Q1 would likely be the high watermark and the guidance we just gave at the midpoint implies that we’re stable to the Q1 take rate, if not, just a little bit higher. Some of the things that are driving take rate improvement are Offsite Ads program, our Etsy Payments and our Etsy Ads, which are all stable and growing. And so we didn’t give guidance for the full-year. I can remind you, though, that usually in the fourth quarter, we see the take rates might hit their lowest point, just because revenue relative to the very, very high conversion rate we get on transactions, GMS will increase significantly and our – and the non – the elements of revenue that are not variable with GMS, like listing fees and Etsy Ads will be relatively lower. So Q4 relatively low point in the year, Q1 and Q2 are stable and strong as we’ve guided.

Lauren Schenk — Morgan Stanley — Analyst

Great. Thanks, Rachel. Perfect.

Debra Wasser — Vice President of Investor Relations

Next one is from Ygal Arounian from Wedbush.

Ygal Arounian — Wedbush Securities Inc. — Analyst

It’s actually a very multipart question, some of which we’ve done already. So I’m going to stick with the first part of it. Now that we’re through the COVID year, and we think about the opportunity to keep the significant surge of new buyers you’ve had potentially increasing their frequency. What are the main products that allow you to keep the new and reactivated buyers coming back to Etsy? I think by products, I think we mean product experiences, but we probably can interpret that in multiple ways?

Joshua Silverman — President and Chief Executive Officer

Yes. I mean, obviously with the 100 million items for sale or more on the site now, it’s likely we’ve got it with the exception of a few categories that really aren’t appropriate. So the main thing is keeping the main thing, the main thing, people need to have a great experience on Etsy. When they come, when they browse, when they shop. And I’ve talked a bit about some of the things we’re doing to drive more engagement and keep you coming back, personalization, recommendations, videos.

Let me talk a little bit about seller performance. I’m really quite excited about that as well. In addition, our sellers want agency, they want to know what they can do that will make them more successful. And we have the ability to do a better job telling them that. So the more we can provide them with, for example, a customer satisfaction scorecard, here are the five metrics that matter most to your buyers. And here’s how you rank relative to other sellers relative to what good looks like. That will be very helpful for sellers. And it will let them know where to invest their precious time and energy.

And in doing so, I have no doubt that the clearer we can be about what good looks like and where they are relative to that, the more they will rise to that opportunity and do a great job. And that creates a race to the top that makes the experience better for all of our buyers. And so some of the things we’ve already launched in that area are around fulfillment time. You as a buyer want to know when the item is going to come and then you want it to, it needs to arrive on time.

And so you’ve seen us now on the seller dashboard launch very clear to seller, here is what needs to ship today. Here’s what needs to ship tomorrow. And we’ve started to experiment with what’s the easiest way to explain to sellers how they’re doing on fulfillment, and what good looks like there. And you should see us do more and more of that.

And I think that’s going to be very helpful in terms of lifting all boats and making the buyer experience at Etsy better and better and better, combined with the marketing efforts that we’re doing that are keeping Etsy top of mind, so that as we have a fantastic experience that delivers so often, we’re there and we’re planting the seed and we’re building a habit. And us leaning into brand marketing right now is part of that. I think that’s a – this is a fantastic time for us to be reinforcing what is unique and special and different about Etsy and how often we’re relevant for buyers.

Debra Wasser — Vice President of Investor Relations

Okay. The next one comes from John Colantuoni from Jefferies.

John Colantuoni — Jefferies LLC — Analyst

Even after experiencing impressive growth and frequency and retention over the past year, average spend per buyer on Etsy is still less than the third of other key e-commerce players. I know it’s not a perfect comparison, but can you talk about what initiatives you’ve been implementing to continue driving spend higher even from today’s levels? And then assuming higher spending flows through to higher lifetime value over time, how should we think about the margin implications of spending to drive a more valuable buyer, particularly when a portion of those buyers are coming from the Offsite Ads program?

Debra Wasser — Vice President of Investor Relations

Rachel, do you want to maybe take that one?

Rachel Glaser — Chief Financial Officer

I can start, and I’d love just to weigh in. So I think one of the things that is really resonating with people through our marketing is why to come to Etsy and when to come to Etsy. And so we’ve talked before in the past about thinking about Etsy, not just for the cushions, but for the couch. And as we see more in the increase of habitual buyers and the significant increase in frequency, that’s an example of people coming and really understanding the breadth of product that Etsy has to offer.

I’ll also mention that the average order values are higher in Reverb, for instance. So as Reverb also grows, we get increase in higher spending items there as well. Higher average order values may imply that we have higher – some higher margin to invest there with our marketing. And so that works – the whole ecosystem will work positively in that regard. To date, though, the primary growth we’ve gotten from GMS has been more visits and higher conversion rates, and that’s where our efforts have really focused. And that’s where we’re getting a lot of the value creation from the marketing investment.

Joshua Silverman — President and Chief Executive Officer

I’ll only add that I agree with your thesis. If you look at something like SimilarWeb, it says that Etsy and Wayfair are pretty comparable in terms of visits per unique visitor per month or per quarter. But in eBay is 3x our level. And Wayfair is only home furnishings. Etsy is across many, many categories. So it stands to reason that we would look more like an eBay than we would like a Wayfair. So I agree that there is a lot of opportunity for us to do better. And that’s about really helping our buyers understand the breadth of offering that’s available on Etsy and all the different times that we can actually serve them.

And we’re doing more. So for example, and right now for brand new buyers, we’re using video to have a brief, like welcome to Etsy moment, where we start to explain to them all the different things that we have on offer. We’re doing some quizzes. Tell us the kinds of things you like, and you tend to buy, which by the way, also plants the seed for all the different things you can buy on Etsy. And then when I think about consumer sentiment, I think that over the next coming years, and we’re already starting to have this, there’s going to be some introspection around shopping your values and where you want to buy and who you want to support.

And I think Etsy is going to do very well as people think more and more about, do I want to spend all of my e-commerce dollars with one place or do I want to support small businesses? I think people are going to want to support small businesses a little more particularly when those small businesses deliver a great experience at a fair price. And I think we can do that. I think our sellers can do that.

John Colantuoni — Jefferies LLC — Analyst

Okay. Great.

Debra Wasser — Vice President of Investor Relations

I think I’ll go to one from Nick Jones at Citi.

Nicholas Jones — Citigroup Inc. — Analyst

In the press release, you noted that Offsite Ads has expanded to include more affiliate channels. Can you touch on the puts and takes of optimizing your current channels versus adding more affiliate channels?

Rachel Glaser — Chief Financial Officer

Shall I jump in on that one?

Debra Wasser — Vice President of Investor Relations

So, yes.

Rachel Glaser — Chief Financial Officer

Okay. So the first thing I’ll say is that the vast majority of Offsite Ads and all available ad inventory is on two sites and that’s Google and Facebook with their PLA programs. And that’s where – and we’re already there on those things. It’s great that we’ve been able to add Google Display Network and affiliates into the mix. But I would consider those to be as much smaller portion of where we see the growth coming from. Future growth will really come from continued increases in conversion rate on the site. And so that’s where we’re really focused.

I’ll put in one more, we gave a data point on this call also that I think is just worthy of mentioning that our Offsite Ads program gives us about a 30% offset in the quarter. It gave us about 30% offset to our entire performance marketing spend. And so when you think about Etsy’s profitability and marketing spend, it’s important to look at that piece of revenue that is offsetting what you see in our marketing line. So we’re really getting good – we have a lot of spending power. We can spend deeper as we make these LTV increases from things like Offsite Ads and product improvements.

Debra Wasser — Vice President of Investor Relations

Okay. The next one from Jason Helfstein at Oppenheimer.

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Can you talk about the quarter-over-quarter acceleration in seller services? And how you see that playing out for the rest of the year?

Debra Wasser — Vice President of Investor Relations

Rachel, you just want to start with that?

Rachel Glaser — Chief Financial Officer

Deb, do you mind repeating the question?

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Sure. Can you talk about the quarter-over-quarter acceleration in seller services? And how you see that playing out for the rest of the year?

Rachel Glaser — Chief Financial Officer

So we had about – over 90% increase in our Etsy Ads product. And we – again, that benefit from increased conversion rates and increased traffic to Etsy’s site. We didn’t give full-year guidance beyond Q2 and we didn’t give specifically services guidance to the services revenue. But we believe there’s a lot of strength in that product and increased demand for the site and increased conversion rates should support those – should support our services revenue there. The other services that we have, of course, our shipping and few other ancillary line items. And so the majority of our services growth is going to come from our Etsy Ads product.

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Great. Perfect. Thanks Rachel.

Debra Wasser — Vice President of Investor Relations

The next one is from Nick Jones at Citi. And I think this will be great one for Josh to take.

Nicholas Jones — Citigroup Inc. — Analyst

As Etsy laps tough comps over last year, and you take stock of Etsy brand recognition pre-COVID versus today, how would you quantify and qualify the improvement of brand recognition in terms of Etsy being top of mind for shoppers?

Joshua Silverman — President and Chief Executive Officer

I would say it’s better, but not best. We have a lot of opportunities still to go. By our internal survey work, we have made meaningful improvements throughout the funnel, so unaided awareness, visit intention and preference. And in fact, we continue to see a slightly concave curve and that more people say that they are passionate evangelists of us, then say have an immediate intent to come back and shop in the near-term. So that continues to be a gap around what are your needs and does Etsy have things for your needs. So reminding them that many things they want to buy, you could actually find on Etsy. But we’ve seen that entire brand awareness funnel go up. And we’re very pleased by that.

I’m sure it’s a combination of plenty of people actually visiting the site over the course of the prior months and quarters and being happy with what they’ve seen. It might’ve been their first time on Etsy, or they might not have been on Etsy in a while. And I think it’s a better Etsy than it was a few years ago. And I think people are seeing that and feeling that and experiencing that. And I think our marketing efforts are having a meaningful impact on that. Our above-the-line marketing efforts, our below-the-line marketing efforts and influencers talking about us and friends over Zoom calls talking about that great purchase they just made. And all of that is helping to push brand awareness.

Ultimately, what matters is, if you tell someone, you have the following purchase mission, you need to buy a gift for your mother for Mother’s Day. You have two seconds, where do you go? What is on the tip of your tongue, that’s what we’re going for. And so that’s where the survey research, just asking people, what are your 10 favorite places to shop online? That’s our ambition. We don’t want to be the best handmade place. We don’t want to be the best home furnishing place. When we ask people, what’s your favorite place to shop online? I want them to say Etsy. And I think that that ambition is the right ambition for us. And we are now a top 10 site according to our internal research for many customers in the United States and the UK, but we can certainly move up that ranking. It’d be great to be top five. And by the way, there’s a lot more markets in the world than just the U.S. and the UK.

Debra Wasser — Vice President of Investor Relations

Yes. Josh, I thought you might want to add in there a little bit about Germany in case people didn’t hear what you had to say on the – we had a slide in there. Yes.

Joshua Silverman — President and Chief Executive Officer

We are making progress in Germany and Germany saw a really nice growth in 2020, and we’ve got more vibrancy now on the buyer and the seller side than we did before. But brand awareness in Germany is still actually quite low. If you ask the average German, where do you go to shop online? Not a ton of them are going to put Etsy in their top 10 or even necessarily going to have Etsy in the tip of the tongue. So in the past, what we’ve done is we’ve really leaned on performance marketing until awareness in the market is very high, and then we go with TV.

In Germany, we’re experimenting with going with TV earlier. Can we drive brand awareness, which is in fact, going to turn the funnel faster and make our performance marketing more efficient? And so that’s an experiment that we’re running starting in the second quarter. We’ll run it for a little while. You don’t learn this in just one quarter. But we’re spending an incremental $15 million in television ads in the second quarter. Almost all of that is going to be in the UK and Germany to see what TV can do over time. And I would expect that to be an investment that’ll span through 2021. But over at least the course of this year, what can that do to our brand metrics.

Nicholas Jones — Citigroup Inc. — Analyst

Okay. Great. Thanks Josh.

Debra Wasser — Vice President of Investor Relations

Next one is from Laura Champine at Loop. This one is for Rachel.

Laura Champine — Loop Capital Markets LLC — Analyst

Can you update us on your long-term margin expectation given that 2020 likely created several changes relative to your thoughts at the most recent Analyst Day, which was in 2019?

Rachel Glaser — Chief Financial Officer

Hi, Laura. So we did give guidance for margins in Q2 and from that guidance, you can see that they contract a little bit from what we delivered over 30% margins in Q1. And we’ve been talking for most of 2020, and we talked about it again last quarter that we would expect some margin contraction because we think now is the time to be investing. In fact, the words we used on this call are we’re leaving far too many things on the cutting room floor.

The thing that takes a bit of time to ramp is hiring people. And we are accelerating the hiring. We talked about hiring 100 people in Q1. Year-over-year, Q1 was 100 and was 18% growth in all of – sorry, it was 18% growth, not 118% growth in terms of headcount adds versus Q1 of last year. But that’s up from 14% in all of 2020. So you can see the uptick in hiring. And as we get more people onboard, that ought to contract margins a bit. We would expect those to yield future top side gains in future quarters.

And then you just heard Josh talk about investment in brand marketing. We’re going to continue to lean into brand marketing. And in fact, we’re spending $15 million more in Q2 in brand marketing, most of which is in UK and Germany. And so those things also will yield. But with brand marketing, the payback curve is a little bit longer. And so those things taken together without giving you specific guidance on margins, we believe we have a wonderful healthy business model with low fixed costs and not capital intensive, but these are the years that we’d like to be investing for that long-term growth to get future margin expansion.

Laura Champine — Loop Capital Markets LLC — Analyst

Perfect. Thanks, Rachel.

Shweta Khajuria — Evercore ISI — Analyst

Which of the product and marketing initiatives were most impactful in driving GMS growth, and importantly buyer frequency and habitual buyer growth?

Debra Wasser — Vice President of Investor Relations

Josh, do you want to start with that? And then Rachel can add anything that she wants to?

Joshua Silverman — President and Chief Executive Officer

Sure. There hasn’t been one launch, that’s been the big thing. And I do think that these tend to work collectively. So it is getting easier to find what you want on the site, meaningfully, easier to find what you want on the site. When you find it, it’s feeling more human. And you’re gaining more trust in the fact that it’s going to arrive on time, it’s going to be what you want. We’ll have your back if anything goes wrong.

And we’re making it easier for our sellers to do their job servicing customers and taking away some of the administrative work and other things for our sellers. And those things in combination are leading to a really good experience, which is what matters in terms of having people come back more and more, and we’re also projecting that more into the market through marketing, right.

So I really can’t point to one thing that was like the big thing. I’m happy about that because I hate to bet our business on one big swing for the fences. We think that working collectively and having this virtuous cycle spin our flywheel faster is a really healthy way to go.

Debra Wasser — Vice President of Investor Relations

Okay. I think that’s a great way to end it. We are out of time. If anybody didn’t get their question answered, please email us. We’re happy to chat. We will talk to you all very soon. Take care.

Joshua Silverman — President and Chief Executive Officer

Thanks so much.