Etsy, Inc. (NASDAQ:ETSY) Oppenheimer 25th Annual Technology, Internet & Communications Conference August 9, 2022 1:15 PM ET

Company Participants

Rachel Glaser – CFO

Josh Silverman – CEO, President & Director

Conference Call Participants

Jason Helfstein – Oppenheimer

Jason Helfstein

Good afternoon, everybody. Thank you for joining us for a fireside chat with Etsy management. I want to thank Josh, Rachel and Deb for joining us. Before we kick off, however, Rachel is going to read the safe harbor.

So Rachel?

Rachel Glaser

Don’t worry. I’m not going to read the safe harbor. I’m just going to refer you to our safe harbor, which can be found on Etsy’s Investor Relations website.

Question-and-Answer Session

Q – Jason Helfstein

Great. So I’ve got a bunch of questions that I’m going to answer. If you have some questions or kind of want me to dig deeper into something I’ve asked, there is a link just under the webcast, so you can feel free to put questions in there or also e-mail me.

So first question, guidance assumes a more cautious second half than the second quarter. I guess just talk about maybe some of the near-term trends that you’re seeing that are informing that view on the second half. And then we’ll kind of dig into that a little more.

Rachel Glaser

I’ll start off, guidance is my jam. So we gave some pretty good color on our guidance for the — we gave guidance for the third quarter, by the way, not for the full year. And we gave some good color on what we have been seeing on our monthly trends because we wanted to show that we’re starting to see a leveling off where we had seen steeper declines from Q1 to Q2 And what we are starting to see towards the end of Q2 and the beginning of Q3 was leveling off.

So that sets the stage for the guidance that we gave for Q3, which says basically at the top end of our guidance, we’re essentially flat at the bottom of the end of the guidance. We start — we see maybe some continued deceleration, but the slope is starting to level off as well.

And what that implies is that we are really essentially keeping over 90% of the gains that we made during the pandemic period of time. So it feels very, very positive to us. And one thing I can say about the second half of the year is that if you recall back in 2021, Omicron was just starting. We had Delta in the summer, and Omicron really kind of kick in into the mid-November to December period of time, which actually cut people to stay at home, work trips were canceled. And we actually saw probably some lift or acceleration in our fourth quarter from that factor, which we right now don’t expect to recur.

And we’ve also been very cautious about, and we don’t know how the macroeconomic headwinds are going to stabilize or become even stronger than they are now. So those are some of the unknowns that we’re tackling.

And we think because of that, the best way to look at our — our guidance is to look at on a year over a three-year basis, so comparing ourselves to the last stable period of time that we had. And looking at it that way, you see that we are actually — we have some very large comps as far as year over three years, when we get into the latter half of the year, but we are seeing this flattening trend.

Jason Helfstein

And then, I mean, just to kind of [indiscernible] you had better guide margins in the quarter than expected and some of that was take rate driven. So I mean, what’s the possibility that you reinvest that back into marketing and, ultimately, that does end up driving kind of better GMS than maybe the Street’s currently modeling?

Rachel Glaser

That’s a — it’s a great question. We’ve talked a lot about — so we did give margin guidance as well. The margin guidance for the third quarter is about 27% on a consolidated basis. We’ve talked about 400 basis points of contraction from our subsidiaries and newly acquired subsidiaries which would put Etsy’s margins alone back over 30%.

And you might — some of you might recall that in 2019, we had an Investor Day and gave long-term guidance, and we said at scale, over a five-year period, we would be 30% or higher. So we’ve passed that benchmark a number of times on an Etsy stand-alone basis.

On the question about reinvesting, marketing, we — the marketing model is very dynamic. So when we see that we can achieve our ROI hurdles either because lifetime value goes up or CPMs or CPCs go down or we have higher demand on visits and query volume.

It dynamically will adjust to allow us to keep spending until that last marginal dollar of spend is no longer positive against our ROI thresholds. We love that. Even our brand marketing, the television marketing or what we call above the line is semi-dynamic.

When we can see demand or CPMs changing, we can reach in and pull back some of our spend. So we will constantly be rational in that regard. So if there is incremental flow-through from increasing top line growth, we would automatically be reinvesting that if we think that the ROI is going to achieve our thresholds.

Josh Silverman

And so Jason, just to pile on that. It’s hard for us to predict in the third quarter and as you’re going out all the way to the fourth quarter is, what’s consumer demand going to be like? And so if we can reinvest it profitably in a way that drives top line, we will. But if demand is just not there, then we’re not going to spend it. And it’s hard to know that in advance.

Jason Helfstein

And so Josh, maybe kind of, keep going there. One of the questions we’ve gotten from investors is kind of why is Etsy appearing to be holding a better [indiscernible] than maybe other consumer [indiscernible] retail-oriented. Some of it may have been you guys just did a great job of setting expectations, right?

So — But it does seem like that companies who have a more affluent customer base are doing better. I mean, how do you think about that when you think about kind of viewer demographics and kind of segmenting your customers?

Josh Silverman

So I’m not sure I agree with the sentiment that our customer base is unusually affluent and that that’s what’s driving it. What we see is actually a really broad-based customer base across Etsy, people coming from all walks of life.

We did see during the pandemic some disproportionate gain among lower-income people. The government was providing an enormous amount of subsidy to people. And so they were turning around and spending some of that on Etsy. And as we’ve seen some deceleration or some softening in this first half of 2022.

That’s been also relatively broad-based. It hasn’t been entirely concentrated on lower income people or higher income people. Maybe a tiny bit more deceleration among the lower income people than the higher income people, but not enough to be really a smoking gun.

But to pull back, I’d start by saying where Rachel left off, that I think the right way to think about our business is really on a pre versus post pandemic basis or comparing this quarter to the same quarter in 2019 before the pandemic.

And what you see there is that Etsy is much, much bigger than we were before the pandemic, call it, roughly $2.9 billion of GMS versus like $1.2 billion of GMS before the pandemic. During 2020, we had everything going for us. Consumers couldn’t spend money travel, they couldn’t spend money dining out and they couldn’t really spend money going to off-line stores.

And then even when they went online, e-commerce was one of the few places they could shop, many places were out of stock, had supply chain issues. So Etsy was one of the few businesses really operating normally. Our sellers were fulfilling without a hitch through all of the pandemic.

And so we had everything going for us and the government was shoveling money into people’s pockets. Fast forward to 2022, things look very different. People’s wallets are really constrained and you have almost infinite choice again as to where to spend. And yet, we’re retaining almost all of the gains. In fact, if you factor in FX in masks, really, we are retaining all of the gains from the pandemic.

And I would chalk that up first and foremost, to the fact that people had a great experience coming to Etsy during the pandemic. So while they had to shop on Etsy in 2020, they’re choosing to come back in 2022 because they found that there’s a really delightful assortment of things on Etsy that are fairly priced, that offer good value, and that are different than what you’d find at Amazon or Walmart. They are a good alternative to that because they meet your needs, but they feel more made for you. You’re supporting another small business. There’s a lot to love about it.

In addition to that, great customer experience. And I think that’s the thing that matters the most right now. We are seeing continued good growth in international. So Etsy, a lot of people discovered Etsy, for the first time in international markets like the U.K. or Germany, during the pandemic, and we’ve got a lot of growth opportunity there.

We invested in marketing during the pandemic in a pretty big way. So brand awareness is a lot higher for Etsy. Millions of people — now Etsy in the United States and in the U.K. and increasingly in some other markets, Etsy is a household name. And that very much was not true before the pandemic. And so I think we feel the benefits of that, and I am optimistic that those are benefits that we’ll continue to feel for some time to come.

Jason Helfstein

And to that point, like just the kind of marketing in Germany, which we all know economically has kind of suffered amongst the worst precinct, but yet you’re seeing kind of good results there. Like, what do you think the lag is between kind of brand marketing and when you actually see a benefit using, like, Germany as like a test case?

Josh Silverman

Yes, it’s a great question. So we — as Rachel says, we do TV advertising, and we measure like within six minutes of the ad running, do we see a result. And we have a bunch of different ways to triangulate what kind of performance we’re getting from TV. Some of those are almost real-time metrics, some of them lag by a month or 2. For example, brand, what has happened to brand awareness and what has happened to consideration.

But we really focus on near-term results to give us confidence. But if we look at what we did in Germany, in 2021, we leaned into TV advertising in Germany earlier than we normally would have for a market like Germany and bigger than we normally would have for a market like Germany. And now in 2022, we’re seeing Germany really outperform our expectations.

And that’s really encouraging. And it suggests to me that there might be as much as a year lag from when you make a real investment and cause a splash to when people have had a chance to internalize that, maybe hear from a few friends about Etsy in a way that’s reinforcing and then come and try it themselves.

Jason Helfstein

So there’s, I guess, kind of a few other things, right, that one could say, right, the idea that the movement to get people to shop maybe like more sustainably, closer to home, that might tie into kind of the Etsy seller.

And then I think I’ve heard you talk about — when you’re buying a product in a store, it’s been kind of marked up multiple times from the kind of cost of goods sold until it’s gets in the consumers’ hands. And your sellers don’t do that kind of marketing.

Albeit, they probably do have a more expensive cost of goods sold. And so — is there any research you’ve done that suggests like you’re starting to get kind of like a reputation as like a value platform or like just more value for your money or something in that regard?

Josh Silverman

What I’d say what we don’t see is that the perception that Etsy is unaffordable. So I think one of the things I’ve heard from some investors is, “Oh, well, Etsy must cost a lot more, and therefore, you’re unusually susceptible to maybe a recession or discretionary spend headwinds.”

And actually, we don’t see from our buyers a broad-based perception in the United States that Etsy is much more expensive. And what we’re starting to lean into now with the TV campaign that we just launched literally a week or two ago, and you’ll see us do more and more is talk about Etsy is affordable, more special and more affordable. Better doesn’t need to cost more.

And for the past 150 years, we focused on the benefits of scale and mass production in terms of cost. What we haven’t talked about so much is all of the markups that have to happen when you produce something many time zones away, and then you need to put it on a boat, to store it in a warehouse, to ship it to another warehouse, to finally ship it to your door.

And suddenly, we’re all a lot more aware of that big global supply chain we’re all part of. Etsy simplifies things. There’s two hands making. She puts it in an envelope and she ships it to your house. And so sure she doesn’t benefit from mass production, but also there aren’t [3] markups between her and you. And I think that’s a message we can lean into more.

Jason Helfstein

So kind of maybe to the marketing point, kind of net active buyers declined sequentially in the last quarter. Yes, there’s a discussion of kind of moderating marketing. So you did talk about — kind of marketing is very ROI scientifically driven.

So it’s just the idea that basically in this market, there might be customers you could acquire, but like it’s just not worth it if you can’t forecast their ability to purchase enough over however you’re measuring lifetime value.

Josh Silverman

Well, maybe I’ll start and then turn it to Rachel. But just to put things in perspective, before the pandemic, we had — and I’m forgetting now, maybe 40 million, 40-some million active buyers. We had about 89 million active buyers last quarter. So the number of active buyers on Etsy has grown massively. Now during that time, as I said, during the pandemic, some people came to Etsy for masks because you couldn’t buy them in many other places in the beginning of the pandemic.

You didn’t have any other — you couldn’t spend money offline, you couldn’t spend money in malls, Etsy was one of the few places you can spend money. So if you’d asked me, let’s say, late 2020, how much of the gains of the pandemic we keep, I would have said I’m delighted if we keep 50%.

And in fact, if you look at our guidance at the time, we kept coming in way over the top of guidance, not because we were trying to softball just because we thought these gains, we must give back some of these gains soon.

And in fact, here we are in 2022 when you can spend money in almost everywhere you want and people’s wallets are a lot tighter. And I think we went from 89 million active buyers to 88 million active buyers over the course of six months. So we’re keeping almost all of those active buyers. And in fact, keeping almost all of the spend from those active buyers.

So I think that’s actually incredibly encouraging. We do look at, to your point, the marginal return on the next dollar spent. And right now, there are fewer people going to Google shopping, searching for a purchase-driven keyword than there were a little while ago. And so we’re — we’ve never been a growth-at-all-costs company. We’ve always focused on profitable growth, and we’re going to keep that focus.

Rachel Glaser

And I’ll jump in with a couple of other points. We still did acquire 6.4 million new buyers last quarter, which is 50% more than last year. So that — and then we — I think there was about 4.9 million reactivated buyers.

So we are still bringing in a lot more buyers. You’re right, we lost about 1 million net year-over-year in the quarter. And the other point that I would say is that we are constantly increasing our lifetime value of our buyers so that even if it’s in the cocktail of how you can spend more profitably, lifetime value goes up, sometimes CPCs go up, sometimes CPCs go down, and then sometimes the demand goes down.

So all of those things net, we ended up spending lower on performance marketing last quarter, but about 4% higher on brand marketing. So we constantly making that sort of algorithmic shift to make sure that we are still hitting that marginal what we call MROI, the marginal dollar is still hitting our internal threshold for ROI positive.

And then I think the last point that I would make is that we — we’re constantly finding ways to make the LTV go up. And when you look at our buyer cohorts, they are — they’re actually getting stronger. We showed that our pandemic cohorts were actually more retentive than the pre-pandemic cohorts.

But if you look at all our cohorts, pandemic and pre-pandemic, they have an interesting sort of fact pattern about them. They don’t enteric down to 0. They stay with us. forever, really. So even if they’re only coming once a year, they’re still coming back. And so the idea of this reactive — the pool of buyers that we can reactivate is very large and compelling, particularly since the pool of reactivated buyers is actually the aging of them is younger because we’ve acquired — the number of buyers that have shopped with us within the last 13 to 24 months is growing and it makes that — makes them more easier — more — we can more easily reactivate them than we previously have had before.

So the opportunity to continue to grow that active buyer base as we move forward is quite strong. And maybe the last point I’ll throw in there is that we — the number we give is GMS per trailing 12-month active buyer. Actually, the GMS per buyer, not trailing 12 month, but per buyer in the last quarter was actually better than our overall GMS. So we see some strength in the more recent buying activity than we’ve had in previous quarters.

Jason Helfstein

Got it. So I’m going to go into a product and take it in a minute, but there was a question online, just asking you to kind of expand upon that point. So you just said — so the GMS for the newest buyers is higher. So does that imply that’s offsetting maybe that is the GMS for, let’s say, which is the cohort where the GMS is lower?

Josh Silverman

So one of the questions we’ve gotten a lot is that our GMS productive buyer is a trailing 12-month metric. So is it being supported by GMS from the second half of last year, six months ago, when we were still feeling more of the effects of the pandemic, and should we expect it to go down.

So we looked at GMS, how many active buyers did we have in the second quarter and how much did they spend. And we compared that to the same quarter one year ago, and we saw that the number was actually higher. So the buyers who were active in the second quarter of 2022 spent more than the buyers who were active in the same quarter of 2021.

And Q2 of 2021, we were still feeling more pandemic effect. So we feel encouraged by that. We also showed cohort data for what is the strength of the cohorts we acquired during the pandemic compared to pre-pandemic. And the cohorts we acquired during the pandemic are actually performing better.

There was some hypothesis that they only joined us because of the pandemic. And once the pandemic is over, they’re going to sort of go away. They’ll be less valuable. And we’re not seeing that at all. And in fact, we’re seeing quite the opposite.

Jason Helfstein

So the main takeaway is that you expect GMS per buyer to keep growing, all right? I mean, kind of?

Josh Silverman

We hope so. What I would say is that the current — today…

Jason Helfstein

Over the long term.

Josh Silverman

It gives us reason for optimism.

Jason Helfstein

So then kind of talking a bit more about product, I guess, kind of starting with Etsy Ads, which kind of took a while to get it dialed in, but it’s working really well right now. and kind of has been a driver of take rate. Maybe talk about how you kind of further optimize it from here?

Josh Silverman

So there’s — Rachel, are you going to — forget — I forget who was taking that one, sorry. So there’s basically three levers. You can get more sellers to give you more budget you can make your algorithms better and you can give it more real estate.

And there’s actually a virtuous cycle between the three because as the performance of an ad gets closer to the performance of an organic listing, you can give more real estate to the ads. So imagine a world where an ad was every bit as good as an organic listing you could actually show a lot of ads without degrading the customer experience. But because ads is always a subset of your organic listings, it’s harder to get there.

We have many of the biggest sellers are already part of the Etsy Ads program. And some of them give us more budget than we need. So the upside in getting more sellers to give us more budget is there, but it’s probably not the biggest lever.

The bigger levers are getting our algorithms to be better, and we made real progress on that in the second quarter. So a lot of the technologies that we apply to search and recommendations, we then immediately apply to ads.

And so we were — got better at picking exactly the right ad for that buyer. What that meant was not only does that generate more revenue per pixel, but it made us confident to get more pixels to ads. And — so we were able to show more ads while still keeping the customer experience every bit as good. And the combination of the two then resulted in more Etsy Ads. One of the ways we did that was we observed that sellers give us a certain amount of budget actually per day. So they might say you can spend $3 per day, and so what we found was the quality of the ads was degrading over the course of the day. At 8:00 a.m., we had better ads than we did at 8 p.m.

So we refined our algorithms to titrate how quickly we were showing ads or how quickly we were spending on people’s budgets to keep the quality of the ads constant over the course of the day, and that yielded a better result, which meant that we could show ads in more places on the customer experience while still keeping the buyer experience positive. And that yielded higher take rate and more profit.

Where are we in this journey? I think we’re still early innings. So the most obvious places to show ads we now show ads. So a couple of years ago, we were seeing gains in Etsy Ads by just putting it in places that it didn’t exist at all. But we have a lot of opportunity to continue to make the algorithms a lot better.

Keep in mind that most search results have more than a — most searches have more than 1,000 relevant search results. So there’s a lot of opportunity to pick the right ad. And as we get better at that, we can increase ad load, and that’s a virtuous cycle.

Rachel Glaser

I was just going to add that we did add Etsy Ads inventory to the homepage in the last quarter. That’s a good example of what Josh was just saying. And then because the search results, the algorithms just keep getting better and better for Etsy Ads. The nearly as good as an organic search result to somebody’s query. And because we’ve gotten them so good, if you’re looking at things from an RPM perspective, one thing we would do is you don’t want to trade-off ad dollars for conversion rate on a non-sponsored ad. But because the ads themselves are so good, that does open up the question of how much more inventory is possible for Etsy Ads.

We, of course, want to be continuing to give a good consumer experience. But as the ads get better and better, it makes those choices gives us more optionality in how much inventory or we want to deploy.

Jason Helfstein

And before we keep going on product, there was another question online. Just talk about how inflation impacted — this will be a short answer, inflation impacted GMS per buyer in the quarter.

Josh Silverman

Well, short or long? Our sellers on average have not taken up their prices. So what we’ve seen is over a five-year period our sellers have taken up their prices by about 9% in total over the past five years. But we’ve also launched better tools to allow our sellers to use sales and promotions, and they’re using those tools more and more.

And in fact, when we look at the cumulative effect of their use of those tools, they’ve discounted their items by about 9%. So the net of that is that our sellers prices are flat over the past five years, well, obviously, we’re experiencing quite a lot of inflation at the moment. So that might suggest that our market share might be doing better even than our GMS suggests because many of our competitors are benefiting from taking up their prices where our sellers are not doing that.

And the other part of your question, you said very broadly, how is inflation affecting us. One would expect that inflation is hurting consumers and therefore, it is dampening demand. And it’s hard for us to know exactly how much that is dampening demand.

Jason Helfstein

So maybe talk about some of the tools that you now offer sellers to help them make these pricing decisions.

Josh Silverman

Yes. So for example, sellers can automatically offer a 10% discount to any repeat buyer. So when you buy something from a seller, they can automatically send an e-mail to that buyer — sorry, when you — yes, when a buyer buys something from a new seller, the seller can automatically send them an e-mail saying, “Here’s a 10% off, thank you, coupon to come back to my shop and buy again.”

That’s something we launched a couple of years ago, and it’s great for reactivating buyers and generating more frequency, sellers really like it. But it does create some promotional activity that you didn’t have a couple of years ago. And we’re launching more tools to allow sellers to do that in more nuanced ways.

If someone favorites one of your items, you can automatically send them a promotional offer or if they leave something in their shopping cart, but they don’t buy it, here’s a way to do that. So either on an automated basis like that or if they just want to run a sale, we have more tools to allow them to do things like that.

Rachel Glaser

And then I just wanted to jump in with one additional comment. When Josh referred to that we’ve had about a 9% increase over the past five years, we’ve seen them take pricing about 9% over the past five years, I just wanted to remind you that during that five years, we also made a push to introduce free shipping eligible and educate our sellers to move the shipping cost into their item price so that they could — the presentment can be shipping included.

And so that 9% would include — some of our sellers did that, not all of them, and some of them moved a portion of the price up, but that would be inclusive of that change in pricing from shipping. So net-net, there’s been very little increase in price across our entire seller base in spite of the inflationary changes that we’re seeing other retailers take pricing for them.

Josh Silverman

And there’s probably an opportunity for us to launch better tools to help our sellers think about how they should price to run analytics. And our sellers don’t have pricing departments like a big retailer would. And so to help them be a little more sophisticated about how to price, that is probably an area for us to invest in, in the future.

Also, the opportunity for our best sellers or sellers that deliver really great quality to stand out and to be able to get value for that. So for example, the Star Seller program, we’d like to think that a seller who earns a Star Seller badge, should be able to earn some premium for that great customer support that they offer.

Jason Helfstein

So purchase protection, newer products and time of the holidays, well, it’s tough for Etsy. I really wasn’t super worried about protecting myself. But I mean talk about what that is and why you think it will be appealing to consumers. And since it’s a form of self-insurance, it probably is pretty high margin.

Josh Silverman

Well, first, Jason, thanks for being a regular shopper on Etsy. I know you are. And because you’re a regular shopper on Etsy, you know that our sellers generally do a really great job. And we see the data as well, and so we know that.

But our newer buyers don’t. And that nagging voice in your head of what if it doesn’t arrive on time, but what if it arrives damaged, but what if it’s not as described, that friction — what our buyers tell us is that friction keeps them from buying more often on Etsy.

So we think by giving them peace of mind, we can unlock more frequency, more loyalty, particularly from less regular buyers. And because we have data across the whole marketplace, what we see is that it’s actually pretty affordable. Our sellers do a very good job. And so we said that we think it’s about $25 million we’ll be investing in the second half of this year to have buyers back when something goes wrong. In the grand scheme of Etsy, that’s a meaningful investment from us, but it’s affordable.

Jason Helfstein

Okay. So just another question that’s come up, what do you think the overlap is with your sellers between Amazon today? Like, I mean, we’ve all thought it’s kind of been small. It was — they were kind of the boogie man. That did not end up having any meaningful impact. But do you have any sense of what the overlap is?

Josh Silverman

What I could say, and we published this in our seller centers, is that our largest sellers our multichannel. So our largest sellers are, and have been for some time, selling on eBay, selling on Amazon. They have their own Shopify or Wix sites.

They do and they have — and collectively, those — all of those activities outside of Etsy make up a minority of their sales and do not appear to be growing as a percentage of their total sales. So what our sellers tell us is that their second biggest handle after Etsy historically had been offline craft fares. Now during the pandemic, that obviously changed. They didn’t have offline craft fares. I expect that will come back. We don’t see that we compete for sales with other channels.

Our sellers don’t take a successful shop on Etsy and shut it down. What they do is they look at where they are going to get a good return on time and they put more time into that channel, but they’re typically willing to sell on any channel that will bring them sales.

What they find is Etsy brings them more sales. Sellers ultimately don’t want a store. They want sales and the hard part is getting buyers. So for our sellers, the challenge is that they have reduced to a tiny thumbnail and 100 characters of text on eBay or on Amazon, where they are stacked directly next to a bunch of mass-produced product with no way to stand out. It is very difficult for them to compete.

It’s very easy to have a store in either — in any of those places, and it’s very difficult to succeed. What’s even harder is to create your own store. So many of our sellers open their own stores on Shopify or one of the other sites. And it’s possibly the best loyalty program we have at Etsy because it’s not until they set up their own store that they see just how hard it is to get buyers and what great value at 6.5% of sales, what great value that is compared to what they would spend to advertise.

And if you think about it, our sellers are ablative grass in a tornado. If you’re betsysbeeswaxcandles.com, trying to build brand awareness for your beeswax candles site, that’s a really difficult thing to do in a world where there are literally millions of brands out there trying to get your attention.

Etsy’s job is to invest in the brand of Etsy to bring millions of buyers, 88 million buyers, who come to Etsy because they’re dealing directly with the maker, and who know that that’s what they’re getting on Etsy and you can trust that and then lend that brand to our sellers. That turns out to be a platform that really lifts up our sellers, gives them a chance to really compete and bring them buyers who actually value what they have to offer.

Rachel Glaser

And because — just real quick while we’re talking about investing in Etsy’s brand, I just wanted to clarify one point that was made in an earlier question just so we have it correct on the webcast, we are investing on that Etsy purchase protection, $25 million annualized. I think it might have been $25 million in the second half, but that might have been what was said that it’s annualized.

And we’re — that’s our — based on our data and our research this thing only just launched. So we don’t know. We have a lot of like early warning KPIs to see if that’s actuals are roughly netting out to that amount. It’s a relatively small amount of our P&L to be investing in a super important program to protect our brand.

Jason Helfstein

So we have five minutes so I’ll ask one M&A, and I’ll go to one audience question. So kind of, Josh, since you and Rachel joined the company, you’ve executed quite well. You clearly know true side of marketplaces. You’ve made Depop, you’ve done Elo7, you did Reverb, Reverb was not profitable, how should we think about additional M&A? Do you want to see more meaningful progress in Depop and Elo before you do another deal? Or is it more of a function of if the right deal is there at the right price, you’ll pull the trigger?

Josh Silverman

Happy to start. So first, I would remind people that we laid out three different buckets of M&A. One is geographic expansion, and Elo7 is an example of that, where it’s like the Etsy on Brazil, but it’s Etsy just in a new market where we weren’t before.

We did DaWanda in Germany very successfully as another example of that. So there’s geographic expansion. There’s a technology or capability acquisition we can do and Blackbird was a very successful example of that, where we bought search technology and some really great people who made search much better at Etsy. And then there’s category expansion, and Depop and Reverb are both examples of getting Etsy into a new category or a new demographic with a peer-to-peer marketplace model.

For that category expansion, we laid out a very specific set of criteria, and it’s a high bar. It’s got to be a peer-to-peer marketplace just like Etsy without intermediary without taking possession of the items. It’s got low CapEx. It’s got to be a leading brand with great traction in a big market. We have to believe we can get it at a fair price, and we have to believe we have the bandwidth to actually take it on and manage it and add value to it. And so it’s got to meet all of those criteria. That’s not a low bar. So we’re always looking, but I would say we have a high bar for that.

And we’re very focused right now on setting up Depop and Elo7 for success. Really excited to see Kruti go over and be the next CEO at Depop. And so that’s our primary focus at the moment, not saying no to anything else, just we do feel like we’ve got a number of things we’re currently focused on.

Jason Helfstein

And the final two, we’ll take from the audience. So one on the clarification question, Rachel, just third quarter margin, you’re expecting 27%. That was what was said, correct?

Rachel Glaser

Correct.

Jason Helfstein

Okay. And then there was a question about product categories or specific — Josh, do you see specific product categories that have more potential than others on the platform?

Josh Silverman

Well, I’d say that it’s early days for all of our categories relative to their markets, they’re each early days. The one where we probably have most penetration is craft supplies, but even in the crop supplies category, we still have a relatively small market share. Home furnishings, our biggest category, has maybe a couple of billion dollars of GMS, but it’s against all of home furnishings that’s tiny jewelry, accessories, fashion.

In each of these categories, we are in the early days. Pet supplies, gardening, all of these things are for sale on Etsy. But as a share of their category, we think we’re very small. And that’s what gives us a lot of optimism for the future.

Rachel Glaser

And I need to clarify. I made an error. Our guidance for margins in the third quarter was 26%.

Jason Helfstein

Okay. 26%, we’re on the same page. So we’ll leave it at that. Thank you very much. Thanks for joining us today, and we’ll talk to you soon.

Rachel Glaser

Thanks, Jason. Thanks, everyone.