Etsy inc (ETSY) Q4 2022 Earnings Call Transcript

Etsy inc (NASDAQ:ETSY) Q4 2022 Earnings Call dated Feb. 22, 2023.

Corporate Participants:

Deb Wasser — Vice President of Investor Relations & ESG Engagement

Josh Silverman — Chief Executive Officer

Rachel Glaser — Chief Financial Officer

Presentation:

Deb Wasser — Vice President of Investor Relations & ESG Engagement

Hi, everyone, and welcome to Etsy’s Fourth Quarter and Full-Year 2022 Earnings Conference Call. I’m Deb Wasser, VP of Investor Relations. Joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Jessica Schmidt, Senior Director of Investor Relations. Today’s prepared remarks have been prerecorded. Once we are finished with Josh and Rachel’s presentations, we will transition to a live video webcast Q&A session. Questions can be submitted via the Q&A chat window displayed on your screen. I’ll be reading your questions and we’ll 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, our business and our operating results as noted in the slide deck posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today’s earnings release and our most recent Form 10-Q, and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we disclaim any obligation to update them. Also during the call, we’ll present both GAAP and non-GAAP financial measures which are reconciled to GAAP financial measures in today’s earnings press release posted to our IR website along with the replay of this call. With that, I’ll turn it over to Josh.

Josh Silverman — Chief Executive Officer

Thanks Deb. We’re happy to speak with you this evening to share our latest performance and our outlook for the business. Once again in 2022, our team was able to significantly improve the Etsy customer experience, and do so in ways that had a meaningful and demonstratively positive impact on our financial metrics. We believe it’s no accident that Etsy’s performance has remained healthy in a volatile environment. We’re also proud of the continued focus we’ve had over the past five years on profitable growth and cost discipline, which we believe serves us especially well today. Our ability to retain pandemic gains supports our belief in the relevancy of our Right to Win strategy, the focus and discipline of our investment strategy, and the resiliency of our business model.

The Etsy marketplace ended the year on a high note with strong holiday performance and accelerating year over three-year GMS in the fourth-quarter. Etsy and our sellers helped to make the season bright. GMS grew year-over-year on a currency-neutral basis during Cyber 5. We had particularly strong days on small-business Saturday and Giving Tuesday, supporting our belief that buyers associated Etsy with shopping small and making a positive impact. We pulled out all the stops to help our sellers have the best season possible, which included holiday ad campaigns in the US, UK and Germany, spotlighting well-crafted items for all budgets, types of people and giftable moments, out-of-home campaigns in the UK and Germany, increased seller participation in our annual cyber sales event, educational moments and optimized selling tools, and last but certainly not least, our new Etsy Purchase Protection program, which enhances peace of mind for buyers and sellers. This strong fourth-quarter enabled us to finish 2022 having delivered consolidated GMS of $13.3 billion, down slightly from the prior year; record revenue of $2.6 billion, up about 10%; and non-GAAP adjusted EBITDA of about $717 million, essentially flat with the prior year as we reinvested most of the Etsy transaction fee increase back into the business. Rachel will of course review the financials later on.

From a topline perspective, we’re now nearly three times the size we were pre-pandemic. And we’ve been careful about how we’ve grown our cost structure with an eye towards investing in the fewest most important areas we believe will sustain and continue to grow the business visible in our profitable growth and strong free cash flow during what was undoubtedly a challenging year for e-commerce at large, as well as for Etsy. I’m truly proud of our performance, and importantly while we don’t have a crystal ball, it’s this sustained performance that gives us the conviction to believe that our discipline, focus and the size of our market opportunity sets us up well no matter what business conditions lie ahead.

Investment in our core Etsy marketplace have really paid-off. And you saw that as we went through 2022, maintaining most of our gains in the face of enormous headwinds. That performance is summed up here. We have nearly twice as many active buyers as we did in 2019. Shoppers are coming to us more frequently and spending more with Etsy and we’re continuing to build the Etsy habit. In addition to earning our place in buyers’ hearts, we believe we’ve also deepened our relationship with Etsy sellers. We’ve seen seller cohorts retain much of the gains achieved during the pandemic even if the world reopened and e-commerce headwinds increased. Etsy’s mission is to keep commerce human, and we believe that these past two years have shown that the customer needs we meet our both powerful and enduring and that Etsy offers something different.

In addition to maintaining our gains, we did in fact grow in some very important ways last year. Just a few examples. Strategies to introduce more buyers who identify as men to the joys of Etsy resulted in 22 million male active buyers at year end, up 124% since 2019 and now at our highest-level yet. We reactivated 24 million buyers who lapsed over the prior 12 months, the most ever reactivated in one year. Germany was a standout performer for Etsy in 2022, with GMS increasing at a healthy double-digit growth rate, and now over four times larger than in 2019. That’s pretty remarkable especially given macroeconomic conditions in that region of the world.

We made real progress in our newest core market India growing to over 120,000 sellers with approximately 5 million listings, over 30% of which thanks to our investments in local payment options are now available to local buyers. We’re making important strides as we methodically build the foundation for a vibrant two-sided marketplace. We believe that these metrics are indicative of just how early we are in expanding our share of wallet in our estimated two trillion-dollar TAM and our mission to bring the world a true alternative to commoditized shopping.

I’m also incredibly proud once again of how we cared for our people, our communities and our planet in 2022. We come to work grateful to be able to support creative entrepreneurs around the world, and as a result we continue to attract and retain world-class talent. Being part of a community means that when one part is suffering the rest of us try to step-up and offer our support. And even now as we start 2023, Etsy has already stepped-up to support sellers impacted by the California floods and of course by the devastating earthquakes in Turkey. As you’ll see in our soon-to-be filed 10-K we continue to make excellent progress on our ESG goals which remain very well-aligned with our business goals. At our core, we believe, people want to shop their values and they want to work where they can make a difference. We know there is so much more we can do to connect our mission to keep commerce human to the impact our marketplaces make in the world and we see this as an integral driver of growth for our entire house of brands.

No Etsy presentation would be complete without our Right to Win slide, the strategy we unveiled in 2019 which remains robust and relevant today. We’re confident that this strategy has enabled us to deepen our competitive advantages and gain market-share over time and that our disciplined ROI focused approach to investments in product, marketing, technology and people has and will continue to pay-off. Each year we pick a select set of customer experiences where we believe we can make material improvements in ways that result in materially better experiences for buyers, more sales for sellers and better returns for investors. Etsy teams often working in what we call a squad are tasked with a single customer experience to improve in ways that achieve a specific financial target. For example, in 2022 we tasked the Etsy Ads team to make ads more relevant for buyers while keeping seller ROACE above our target levels, which drove over $100 million in incremental annualized revenue, while improving the experience for our customers. Squads have a great deal of freedom to test fast and learn fast and a strong bias to action. They often push more than one release per week typically to 50% of Etsy’s audience so we can quickly measure whether that release has demonstrably lifted GMS or moved the target metrics. Importantly, we meet monthly to review the progress made by each squad. By doing this across our entire portfolio of work, we’re able to understand the degree of payback we’re getting we’re not from our investments, how they are impacting daily performance and adjust our work accordingly to ensure we’re moving the ball forward to improve customer experiences and meet our targets. It’s important to note and as shown on this slide that our teams work not only on the core buyer and seller experiences, we take the same approach across member services, trust and safety, payments, fulfillment, our Martech stack, site performance and enablement and so on. Last year, we said, in order to earn a greater share of wallet, we’ve centered our Right to Win investments on inspiration, having fun and engaging experiences that keep you coming back for more; efficiency, helping you quickly and easily get-in, buy and get-out when you already know what you want; and reliability, ensuring a stress-free and dependable purchase. I’m going to run-through some very tangible examples of how the approach I’ve just outlined shows up in our performance.

A great example of how we made Etsy more inspirational is with by our collections, a wafer uses to organize items into groups which are easy to share or come back to later. In 2021, we set a goal to increase the number and usability of collections and that year 29 million collections were created. In 2022, we shifted focus from creation to display to make collections a more useful part of the buyer journey and to develop ways for our community to inspire each other. Our teams delivered excellent results, including a 20% increase in items being added to collections, a 36% increase in the number of shop followers, and a 12% increase in the number of items favorited. All of this makes our work to engage buyers and personalize their experiences even more powerful. In 2023, we plan to focus on making collections more inspiring and shoppable, building new avenues for buyers to discover, save and purchase items as well as to find and follow shops to get targeted sales and personalized updates.

We made the Etsy buying experience more efficient. Improvements in the search experience drove lifts in site-wide conversion rate and average buyer spend. We improved the buyer experience in so many ways. One of my favorite examples from last year was putting an add to cart button directly on the search result page based on the insight that some buyers now feel they have enough information on the search result page to buy without needing to visit the detailed listing page. This made the buying experience faster and more convenient for those shoppers while improving conversion rate and hence driving more sales for our sellers. Our team is particularly excited about last year’s work to improve site performance. For example, we reduced page load times in search, which were cut by nearly one full second. These and other performance wins in 2022 drove nearly $100 million in incremental site-wide GMS. And we’ve made so much progress making the Etsy experience more trusted and reliable. This included our continued efforts to provide more transparency around delivery times and launching clear listing level return policies. At the end of 2022, over 30% of Etsy listings had a policy of accepts returns clearly visible at the listing level up from less than 10% when we started focusing on clarity of seller return policies in the fall. And Etsy purchase protection is already impacting the customer experience. Resolution times for customer issues dropped materially as our customer efforts score improved from 70% to nearly 90%. We have an equally disciplined approach to the payback we get on our marketing investments. Dollar spent in highly targeted and strategic ways to differentiate our brand, build awareness, attract new buyers, fuel engagement, and get buyers coming back. As you know, since 2018 we’ve leaned more heavily into upper funnel brand strategies through TV and digital video to capture the hearts of millions of global buyers and create a flywheel that elevates the effectiveness of our other marketing channels. As you can see, these efforts have significantly moved the needle on-brand awareness and loyalty and in particular on purchase intent, a critical leading indicator.

While we become a top 10 marketplace in the majority of our core markets, we continue to see so much opportunity to help buyers associate Etsy with more specific purchase occasions throughout the year, and to do so both among those who already shop Etsy and those who don’t. We’ve been getting strong returns from our brand spend in terms of in-period GMS as well as lifetime value of buyers. In addition to top of funnel brand work we’ve deepened our investments and elevated effort throughout the funnel. Our team delivered hundreds of millions of dollars of incremental annualized GMS by improving the data feeds to our advertising partners and affiliate channels, improving search engine optimizations and fun fact, we drove about $100 million in incremental annualized GMS just from improving our email campaigns. We’re seeing positive returns from new channels like out-of-home and podcasting. We’ll continue to lean into these carefully, testing and measuring ROI before going deeper.

With all this progress, investors often ask if there is still more opportunity to improve the Etsy marketplace. Absolutely. We believe there are many millions of potential buyers around the world who should be shopping on Etsy but aren’t yet, and so much more opportunity to build the Etsy habit for those who already know and love us. For 2023, we’ve centered our Right to Win Strategy and our teams work on these objectives: First, welcoming new buyers to the joy of Etsy. When we think about how we can foster continued growth over the coming years, we see new buyer growth is an important lever. We intend to meet new buyers where they are, in the channels in which they are spending time and help them feel at-home, no matter their interests or tastes, the country they come from, or how they came to us. Second, deepening by our curiosity and engagement. This is really about how the Etsy experience gets better the more you visit, the more you engage and the more you shop, such as advancing our personalization to delight you with our inventory and our purchase suggestions. Third, building trust when transacting with us. When you shop on Etsy, you’re buying from one of five million creative entrepreneurs around the world. We want to make sure both new and existing buyers have peace of mind when buying on Etsy. Among other initiatives, we’ll build-on the foundation of Etsy purchase protection to help buyers and sellers have even more confidence in us, while we continue to invest and ensuring a trusted and safe platform. And fourth, being the platform sellers love to sell on, creative entrepreneurs have so much to juggle. We’ll keep investing to help them manage their shops as efficiently and effectively as possible so they get the absolute most out of their time and money while delivering the best possible experience to buyers. We have so much on our road map that we’re excited to tell you about as we go through 2023.

In 2022, we worked to integrate Depop and Elo7, which joined Reverb and Etsy in our House of Brands. While the performance of each marketplace differed given their various stages of evolution and specific marketplace dynamics, we’re excited to unlock the potential of each. In 2022, Reverb invested in optimizing conversion rate, delivering a more customized experience to different types of music makers and driving international growth. Similar to Etsy, Reverb maintained the vast majority of its pandemic gains in 2022 and continued to meaningfully outpace the musical instrument market on a three-year basis, yet still represents less than 4% of the total musical instrument market. Depop has become a community-powered fashion marketplace to buy and sell unique fashion with approximately 30 million registered users. While reopening, competitive dynamics, exchange rate fluctuations and other factors impacted Depop’s 2022 performance, we believe it’s still very early days for the resale opportunity.

Kuthy and her team are focused on reigniting top line growth by improving the core economics of the business, including the reach and relevance of search and discovery, improving the web buyer experience, embedding value signals and establishing trust to transact. For Elo7, the easing of the COVID-19 pandemic in Brazil last year led to a resumption of consumer mobility and therefore, a return to in-person celebration in events, Elo7’s sweet spot, and the business began to see some performance improvement. Key areas of investment for Elo7 during 2022 included conversion rate improvements and giving sellers access to faster and more affordable shipping. Elo7 also began testing an online marketing campaign aimed at driving brand awareness as it builds a broader marketing strategy. Similar to Etsy, we believe that Elo7 can expand its consideration set in the mind of Brazilian consumers, becoming a destination they turn to more frequently for more of life’s special moments.

Last year, we said it was our aspiration to make Etsy a starting point for your e-commerce journey. I feel even more confident than I did a year ago that this bold statement is the right aspiration for us. In our quest to achieve this, we’ll remain hyper-focused on doing something different enough that is better enough and matters often enough to win sustained customer loyalty. I want to thank our incredible global team for all your hard work making our marketplaces better places to sell and shop in 2022 and to our shareholders for your continued support. While the world remains a fairly unpredictable place, we’ve proven our differentiation and resilience, and that gives us a lot of comfort as we keep our eye on the prize. With that, I’ll turn it over to Rachel.

Rachel Glaser — Chief Financial Officer

Thanks, Josh, and thank you everyone, for joining us. My commentary today will cover consolidated results for our House of Brands, key drivers of performance and Etsy Marketplace stand-alone results where appropriate. Fourth quarter consolidated GMS declined 4% year-over-year to $4 billion, nearly flat on a currency-neutral basis. Revenue increased 12.6% year-over-year to $807 million. And we delivered adjusted EBITDA of $227 million, representing a very healthy 28% margin. Foreign exchange headwinds moderated in the fourth quarter to 330 basis points, down from 400 basis points in the third quarter. We’re pleased that the Etsy Marketplace successfully anniversaried the incredibly strong prior year period, which included pandemic lockdowns and supply chain issues. In addition, we saw some acceleration in Etsy marketplace GMS growth on a year-over three-year basis, which I’ll discuss more in a few minutes. Our three subsidiary marketplaces had a tougher time than Etsy with some weakness in the quarter that weighed on consolidated results.

Drilling into fourth quarter revenue growth, marketplace revenue increased 11% year-over-year, primarily driven by the Etsy Marketplace transaction fee increase from 5% to 6.5%. Services revenue outpaced marketplace growth up 17.7% year-over-year, with consolidated ads revenue increasing 20% year-over-year. While we had expected to see normal seasonal headwinds for Etsy Ads on higher organic traffic during the fourth quarter, continued product enhancements drove better-than-anticipated performance. This included utilization of neural network embeddings, a type of machine learning advancement to increase ad relevance, which drove more clicks and purchases. We also launched a more visually engaging ad experience with videos on the homepage that increase conversion and return on ad spend for sellers.

We delivered another quarter of strong profitability in the fourth quarter, with adjusted EBITDA increasing year-over-year from $219 million to $227 million driven by the higher revenue. As you can see in the chart on the left, consolidated adjusted EBITDA margin declined on a year-over-year basis in the fourth quarter, primarily due to higher marketing spend and to a lesser extent, increased G&A expense and product development spend, which drove our margin down to 28.1% from 30.5%.

It’s important to note that a significant portion of product and marketing investments generally do not see payback in period, which I will discuss in more detail. As you can see from the chart on the right, we have delivered very strong bottom line profitability over the last five years, both in margin percentage and even more importantly in adjusted EBITDA dollars. I’d also like to highlight that since 2017, our capital-light business model and disciplined expense management has allowed us to convert nearly 100% of our EBITDA to free cash flow. And we have used a portion of this cash to repurchase shares to offset dilution resulting from stock-based compensation. During this period, our free cash flow has grown meaningfully, and our share count has remained flat.

Our consolidated product development spend increased 36% year-over-year to $113 million in the fourth quarter, primarily driven by headcount additions for the Etsy marketplace. As a reminder, our product development expense line is where most of our engineers sit and represents the largest portion of our headcount growth since 2020. We ended 2022 with approximately 2,790 employees, an increase of 16% on a consolidated basis compared to 2021. As you know and can see on the chart on the left, we began to slow hiring as our growth rate slowed in the second quarter of 2022, and we also experienced very strong levels of employee retention. Fourth quarter consolidated headcount was essentially flat to third quarter. For 2022, our revenue per average full-time headcount for Etsy marketplace was $1.4 million, which is well above the approximately $800,000 for the Etsy marketplace in 2019 as we’ve hired at a pace significantly below our revenue growth rate.

Josh explained how we carefully measure payback from the product development expense line, which we generally see within about 18 months. In addition, returns per core product headcount also remain in line with the year ago levels, an indication that we remain efficient even with a significantly larger size of our team. Product development spend as a percentage of revenue was 16% for 2022, which as you can see on the right is now similar to our pre-pandemic range and that what we believe is in a healthy range for sustainable growth and profitability.

During the fourth quarter, we increased our consolidated marketing spend by 20% year-over-year to $245 million, primarily driven by a 29% increase in performance marketing, which represents the majority of our spend. Consolidated brand spend increased 12% year-over-year as we ran new Etsy TV and digital video campaigns in our top three core markets during the important holiday selling season. The vast majority of our spend across our marketing channels is for the Etsy marketplace but also includes spending for our subsidiary marketplaces. And for those of you who compute a customer acquisition cost from the marketing spend numbers we disclosed, please remember that our attribution models use the lifetime value of a buyer, not just a 30-day view. So some of the return occurs in a later period.

For the full year, consolidated marketing spend increased only modestly, including increases in both brand and performance spend. And we delivered 40 basis points of leverage in 2022, with our consolidated marketing spend as a percentage of revenue decreasing to 27.7%. We continue to gain efficiencies in marketing. And as you know, our offsite ads revenue offset approximately 35% of Etsy marketplace performance marketing spend, allowing us to put more dollars to work on behalf of our sellers. For the Etsy marketplace specifically, performance marketing spend drove approximately $2.5 billion in annualized GMS in 2022, up from $2.3 billion in 2021.

Moving to Etsy marketplace performance on a stand-alone basis. During the fourth quarter, Etsy marketplace GMS declined 3.5% year-over-year and was largely flat on a currency-neutral basis. We saw accelerating trends on a year-over three-year basis and growth on a currency-neutral basis during the all-important Cyber 5, with our December strength being a key factor in delivering GMS at the top end of our guidance. When looking at full year performance trends shown on this slide, it is gratifying that we have far surpassed the 16% to 20% compounded annual growth rate target we set for the Etsy marketplace back in 2019.

From a geographic perspective, 45% of fourth quarter Etsy marketplace GMS was from transactions, where either the buyer or the seller or both were outside of the U.S. This GMS was up 5% year-over-year on a currency-neutral basis, driven in part by the continued strength in Germany. Our non-U.S. active buyers reached an all-time high of 34 million in the fourth quarter, continuing to outpace U.S. active buyer growth trends. The strong U.S. dollar drove growth in the U.S. imports for the Etsy marketplace, providing additional support for our non-U.S. sellers.

Moving to category performance. During the fourth quarter, we saw strong trends in apparel and items such as bags, purses and other gifts as well as in paper and party, driven by more in-person holiday gatherings this year. Top-selling items during the holiday included personalized gifts such as custom-named necklaces and jewelry boxes. This slide shows full year 2022 Etsy marketplace GMS in our top six categories, representing 86% of total Etsy marketplace GMS in 2022. Toys and games overtook beauty and personal care by a bit to end the year as a top six category. We believe our breadth of listings remains an important competitive advantage, allowing the Etsy marketplace to seamlessly respond to shifting consumer demand. As you saw from our reporting throughout the year, weakness in home and living and craft supplies was generally offset by strength in apparel and paper and party supplies. We ended the year with 89.4 million active buyers, which was down slightly from the prior year but has held up very well through reopening and other headwinds. Our active buyers have slightly increased on a sequential basis in each of the last two quarters. We added 9.5 million new buyers in the fourth quarter. While this figure is down about 6% from the prior year, it grew 51% on a sequential basis from Q3 2022 to Q4 2022. This is a spectacular number, significantly higher than the 44% sequential growth in new buyers in the prior year. On a full year basis, we acquired 55% more new buyers in 2022 than in 2019.

Lapsed buyers are defined as existing Etsy buyers who have not made a purchase in at least a year. In the fourth quarter, we reactivated a record number of lapsed buyers, nearly 9 million. Adding that to our strong performance in the first three quarters of 2022, we reactivated a record 24 million buyers for the year, up 24% from 2021 and 87% from 2019. We’ll continue to focus on this fertile growth opportunity in 2023. We ended the quarter with 7.4 million habitual buyers, a 194% increase from the fourth quarter of 2019, and they accounted for 40% of our Etsy marketplace GMS in the fourth quarter of 2022. The largest share of new habitual buyers came from Germany and Australia, a promising testament to our growing brand awareness in these markets. Our repeat buyer count remained largely unchanged from the prior year at approximately 36 million in 2022 despite the reopening headwinds, with fourth quarter repeat buyer strength coming from Germany and France.

As of December 31, we had $1.2 billion in cash, cash equivalents and short and long-term investments and a $200 million revolver that is currently undrawn. During the fourth quarter, we repurchased $150 million in stock under our $600 million May 2022 Board authorized repurchase program. Our free cash flow for the quarter was a healthy $286 million, converting 126% of EBITDA to free cash flow. I also want to point out that the capped call relating to our mostly retired 2018 convertible notes will be settled in shares on March 1. As a result, we expect to receive shares valued at approximately $157 million.

Now turning to outlook. So far this quarter, we have continued to see significant volatility in GMS on a week-to-week basis, which led us to bake a fairly broad range of outcomes into our Q1 guidance. In addition, credit card and other third-party data shows that there may be an overall shift in consumer demand to services and household supplies like groceries and away from discretionary categories. With that in mind, we currently estimate our first quarter 2023 consolidated GMS to be approximately $2.95 billion to $3.15 billion, revenue to be about $600 million to $640 million and with an adjusted EBITDA margin of 26% to 27%.

As we attempt to look past the first quarter, I’ll remind you that last year we had a very strong January. We started to see rather steep GMS deceleration in the latter half of the first quarter with this deceleration continuing until about May. In a stable macro environment, the math would suggest a return to GMS growth rates in the teens in the second half of this year. However, the data and information we are seeing so far in 2023 related to consumer spending shifts and pressure from the macro environment makes us very cautious. It is possible that the benefit we would expect from moving beyond the prior year steep comps could be negated by increasing recessionary factors. It’s just really tough for us to call right now.

So how do we plan in these uncertain times? We do a lot of scenario planning internally with a forecasting approach that starts with baseline trends from existing buyers and then layers on incremental growth from both new product initiatives and marketing. We also benefit from a marketplace model that operates with minimal capital requirements and relatively few fixed expenses. In fact, the majority of our consolidated expenses are either entirely variable or semi-variable with revenue trends. As I mentioned earlier, we started to meaningfully slow down our pace of hiring in the second quarter of last year, commensurate with the GMS run rate we were experiencing. Now with possible recession looming and the unpredictable way this could impact us, we are maintaining this prudent approach in 2023. We’re still hiring but focused on the fewest, most critical roles and tightening our belt significantly in other discretionary areas. And as you have heard today, we have a lot in our pipeline that we are excited about. So while there is clearly an opportunity cost associated with this decision, we think it’s the right thing to do given the very volatile macro conditions.

Etsy’s strong acquisition of new buyers and reactivation of lapsed buyers last year are just two proof points of the strength of our brand, representative of a through line so to speak, that cuts across volatility that we have seen and may continue to see in 2023. We highly value the agility and resilience of our team in our marketplaces, which have served us so well, enabling us to lean into critical growth investments while also protecting our margins. We believe that that puts us in a position of relative strength, and it’s our goal to do that again in 2023.

Being raised in California, I’ve always loved the saying that you can’t stop the waves, but you can learn how to surf. We have proven we know how to surf even through choppy waters, and we hope that gives you as much comfort as it does to us. Thank you all for your time today, and now I’ll turn the call back to Deb to take your questions.

Questions and Answers:

Deb Wasser — Vice President of Investor Relations & ESG Engagement

Hi, everyone. Nice to see you all again. Thank you for joining us. I’m going to kick it off right away with some questions. We’ve got quite a few in the queue. Start with Maria Ripps from Canaccord. This one is going to be for Josh. Investing in search functionality has consistently been a pillar of the Etsy growth strategy. Looking out over the next two to three years, what are your top investment priorities as it relates to search? With all the recent momentum in AI and large language models, could we see some type of chat-based search functionality integrated into Etsy at some point? And then briefly, how has your image search feature been trending?

Josh Silverman — Chief Executive Officer

Great questions. Thanks very much. So as you said, investing in search and discovery is a very, very core part of Etsy’s present and our future with over 120 million or about 120 million live listings. Getting you to the good stuff is really important. Looking back at just 2022, the search team launched about 120 developments that were ramped up, meaning experiments that worked that we ramped up. And the — some examples of those included Etsy Lens, as you referenced; better neural models; XWalk. And when we think about what those did, Etsy Lens is an example of something that allows you to talk with pictures instead of talking with words. So how do you tell the search engine what you want in really new and novel ways? XWalk helps you to process massive amounts of information, and neuro models help you to make sense of what people mean not what they say. And in fact, the neuro models we’re using use the same kind of underlying algorithms that ChatGPT uses. So we’re already using some of the underlying technologies that you’re seeing from great innovators like Open AI, and it’s having great impact.

By the way, the search team is also doing more prosaic things that are having a lot of impact. For example, search results are now getting good enough that we could put a Buy button right on search results and allow people to buy directly from search results without having to go all the way to the listing page, and that’s been a great collaboration of our team to figure out exactly what information you need on the search results page in order to give someone the confidence to buy. So we made a ton of progress in 2022 in ways that improved the customer experience and drove the bottom line. We’re really excited about our road map in 2023 and beyond. And I would say that similarly figuring out more novel ways to talk to our search engine, to tell it what you want, so multimodal search through maybe pictures and words, is going to be very important. Show me things of the following style that would match well with this couch. And so those kinds of things, I think, open up a huge opportunity for Etsy. Having multiple objective functions has been very helpful. How do I do something which drives conversion rate but also drives repeat visit rate? Those two actually might not be the same in terms of search results. So training our models to solve for more than one thing at one time.

Something I’m particularly interested in is how can we get better at quality. Everyone has their own view of what great looks like and what a really good item on Etsy looks like. So how can we start to better anticipate what’s right for you? How can we get more personalized so that you see only the best of Etsy as according to you? We have a great road map, and I’m really excited about the work that the team is doing. To your specific question of could we see some kind of chat-like interface, very possibly, yes. I would say that we are constantly testing what’s on the frontier. And if it makes our experience better and it does it in a way that’s profitable, we’re going to do it. One other thing I just want to say is every time that search team develops a new model, a new algorithm, we look at how much extra processing power has it used. And therefore, how much extra cost has it added? And how much does it improve conversion rate and the lifetime value of the buyers? And is that profitable to ramp up? And we only ramp up things where the benefit it adds is greater than the cost. Lastly, on your question about Etsy Lens, it’s very early days. We’re pretty subtle in terms of where we promote it in the search bar because we’re just trying to learn how do people use it and make sure that the search result quality that we get is really good, but it’s [Call Ends Abruptly]