Etsy, Inc. (NASDAQ:ETSY) Goldman Sachs Communacopia + Technology Conference 2022 September 14, 2022 1:45 PM ET
Company Participants
Rachel Glaser – CFO
Conference Call Participants
Alexandra Steiger – U.S. Internet Research team at Goldman Sachs
Alexandra Steiger
Great. I think we can get started. So good morning everyone. Thanks for joining us. My name is Alexandra Steiger. I’m part of the U.S. Internet Research team here at Goldman Sachs. We are very pleased to have Rachel Glaser as CFO of Etsy with us today. Thanks for coming. Good to see you in person.
Rachel Glaser
It’s my pleasure to be here and thank you all for giving us half an hour, 40 minutes of your time. I mean before we jump in, I just wanted to refer everybody to the Safe Harbor that can be found on Etsy’s Investor Relations website. And I won’t read it all out to you, but you can take a look at it there.
Alexandra Steiger
Great. And with that, let’s get started. So one of the key takeaways at the swabs from your last earnings was the resilience of the Etsy business model and it’s this very current, uncertain macro environment. From a big picture perspective, what differentiates the Etsy business model versus some of its peers?
Rachel Glaser
It’s a great question, because I imagine we probably have a mix of people in here who know Etsy very well. And those of you that don’t, so let me start with the big picture at Etsy. It’s a differentiated marketplace; we have about 100 million listings on the site. And on the Etsy core marketplace, that’s about 5 million sellers, close to 90 million buyers. And almost everything on the site is either vintage or handmade in some way and I can talk about what I mean by that in a bit. We have a very differentiated economic model as well. So we don’t own any piece of the infrastructure for warehousing distribution, we own no physical retail. And that’s been great in this period of time, where we don’t necessarily have to make billion dollar bets on inventory purchases, or pay large sums of off our balance sheet for physical retail leases and things like that.
And the product itself is differentiated because we identify Etsy as a place where you shop for something special. There are other places where you shop, because of price or convenience. But you come to Etsy, because you’re looking for something special across six core categories that with a long, long tail of almost everything else that is out there to buy. We don’t do automotive or electronics. But almost every other thing, if you can buy it somewhere else, you can probably find that item on Etsy as well.
And our buyers just a thumbnail sketch of our buyers, those 90 million that I referred to before they skew female, but we have a mix of female and male lots of opportunities in both of those demographics. And they, they’re they’re pretty generalist as far as household income, although we have seen a shift away from the lower household income levels during this sort of macro environment that we’re in now.
Alexandra Steiger
And as a follow up to that to that question, can you also talk about the characteristics you briefly touched on it on your user base or buyer base? And have you noticed any change in spending or like purchasing behavior over the past few months?
Rachel Glaser
Yes. So let me start with — we define active buyer on Etsy as somebody who has shopped on the site, at least once in the last 12 months. So that’s our primary the number I referred to before almost 90 million were actually our last quarter, we reported 88 million. So we’ve seen a small deceleration in the number of active buyers. And then we think about another category that we call repeat buyers, those are buyers that come two or more times in a 12 month period.
And then the third category, which is actually the fastest growing category are what we call habitual buyers doesn’t take much to be called habitual it only six or more times in a year and spend $200 or more in a year. And then if you take another lens on it, we also look at new buyers. So people that have never we defined that as buyers that have never ever shopped on Etsy before versus existing buyers. And then a third state can be lapsed, and we use the word lapsed rather than churned or deactivated because, interestingly about Etsy’s buyers is they generally don’t ever go away. They may — they may take a break for a year or two. But when you look at the cohort data, you can see that they keep coming back to us many times, many of them over a 10 year period, even if it’s once every couple of years. In fact, if you ask those buyers, why didn’t you shop on Etsy last year? Why didn’t you buy on Etsy for XYZ purchase?
They’ll say, of course I love that. See I shop on Etsy and we can show them no you haven’t been here for over a year and they they’re like oh my gosh, why didn’t I think of it there’s the job to be done is really to work our way up into that top of mind habitual steady state that I that I talked about earlier. But we don’t really ever lose those buyers over time.
Now the thing that we’ve been working on is that concept of frequency and moving more of the active buyers to be repeats and more of that repeat buyers to be habitual but we also see tremendous opportunity to light up more new buyers and to reactivate the lapsed buyers and we are putting a lot of effort in that behind the work that we do on product and the work that we do on marketing, and I could talk about more of those things in just a bit. But we’ve actually seen over time, the shift from, for many years, we said that about 40% of our buyers came two or more times a year, meaning 60% came only one time a year, we’ve now seen that shifts during this pandemic time, shift to be slightly more than 50% are coming two or more times a year. And on average, across that repeat population, they’re coming five point something times per year, which is up a bit from four point something pre pandemic. So we’re seeing this shift in it sticking with us.
Alexandra Steiger
Before actually diving into the businesses to help in some of the current debates we were also having with investors. Let me ask you just one more on like the broader consumer and like macro environment.
So beyond the impact of the on-going reopening dynamics, which you helpfully itemized on the last call, can you just tell us, are you concerned about the health of the consumer going into the second half of this year and into 2023?
Rachel Glaser
Certainly something that we look at and we think about in terms of risks and headwinds. Be it — how does this environment affect not just our buyers, but buyers in general? And Etsy, arguably is 100% discretionary, that when you start thinking about discretionary things, Etsy is definitely in that in that category.
On the other hand, you know, Etsy’s young enough, we’re only 14 years old. We really haven’t experienced recession at all, at the mature business. And we don’t really have a sense of are we cyclical, or counter cyclical. So for instance, in that moment, in that moment, where you no longer can afford to buy the new sofa, maybe you still want to buy like a really beautiful throw blanket, and that you feel good about something that you can buy. And it’s a good value relative to other places where you can buy throw blankets, and you’re still feeling like you’re fixing up your house.
So at the moment, we see despite the fact that the government is no longer shoveling stimulus money into people’s wallets, the fact that consumers now have a lot more choice about where to spend versus where they had before, we’ve been hanging on to over 90% of our GMS compared to the pre pandemic period. So just for context, during the pre-pandemic, or GMS, what we call our gross merchandise sales was $4.5 billion or so. And at the end of 2021, we were $13 billion in GMS. So we, in the last quarter that we just reported, we were at $2.6 billion in GMS for the quarter, and the same period in 2019, was $1.9 million.
So we’re really significantly bigger than we than we were before hanging on to most of it. So consumer behavior on Etsy is showing us that they continue to come to Etsy for those special things. And even in the recession, you still need to buy birthday gifts, we’re seeing weddings and events pick up more than they ever did before. And actually — the Halloween is going to come around just like it did every year before. And Etsy is the perfect place to go for some of those things.
Alexandra Steiger
I’d like to move on to your forward guidance. So your Q3 guidance that you provided in August assumed a more cautious outlook versus your Q2 results. Can you just remind us of the underlying assumptions that went into the guide? And where do we sit today with only a few weeks left?
Rachel Glaser
Yes, so what we guided to for the quarter was $2.8 billion to $3 billion in GMS on a consolidated basis. Our consolidated GMS in Q2 was $3 billion. For the consolidated that includes all of our subsidiary marketplaces. And that would imply flat to a little bit down versus Q2. We’ve been guiding one quarter at a time and pre pandemic, we were giving full year guidance, not quarterly guidance. The reason we’ve been guiding one quarter at a time is it has been a very unpredictable volatile market. And we really couldn’t guess what was beyond the quarter. In fact, the guidance usually is given at least 1/3 of the way through the quarter. So we’re giving you two months of guidance, if you will. And in fact, in last quarter’s guidance we did give what we were seeing through July.
During all those quarters of the pandemic, we were giving what we try to give guidance that’s giving you as much information as we can possibly give without gaming it or trying to be too conservative. And we kept giving guidance that we were beating and that wasn’t because we were we’re trying to we were guessing as best we could and the market and the business kept surprising us, we kept over delivering on those numbers. So in January, we use this measure that’s called some a three year stack. So we’re comparing our current quarter, not only to the prior year, but what was the same period in the same growth rate in the period pre pandemic, because it’s been such an unusual time.
In January, our three year stack compared to the same quarter and 2019, we were at about 200% growth rate. And what happened starting in the first quarter of that year, as we started to see a detail that we might have expected to happen in the quarters in 2021. And in 2020, we kept expecting this detail to happen because we had really doubled and almost tripled the size of our business. And we started to see that detail happen in February going into March and April. And so we moved from all the way from like 200% growth on a three year stack, down to something that was more like 150% growth in April. And then we started to see a leveling off. So from April until May, June and even July, we were down closer to like a 140% growth rate on a three year stack. So you can see that the slope of that detail significantly slowed, it almost looked to us like it was starting to flatten.
So the guidance we gave for Q3 at the high end, would assume we were almost flat in Q3 versus Q2, maybe a little bit further detail. And the guidance at the low end assumed some continued to sell but still less steep than we were seeing from that Q1 Q2 period. We didn’t guide for the full year, we didn’t give guidance for Q4. But we did give some [Indiscernible] or some reminders about what to how to think about Q4. Q4 is typically a higher quarter for us because of the holiday season starting with back to school really going into Halloween and Thanksgiving and then the winter holidays.
But we had a very big quarter to laugh last year, we also had seasonality. And we were still seeing a lot of people staying at home or travel plans being cancelled because of the surge of Omicron. And we were still seeing the benefit of stimulus at that time. So there’s a big, big number to laugh going into Q4 of this year. So there was a little bit of caution, plus uncertainty, further macroeconomic headwinds, increases in the Fed hikes and how that what that does to inflation and consumer spending. So we dropped a little bit of cold water on our optimism we’re leveling off. We don’t know if we’re going to stay level or if we don’t know if we’ve hit bottom yet, for sure. But we were giving you what we observed through the end of July. And we’ll talk about our Q4 guidance when we get into our next call.
Alexandra Steiger
I’m not going to ask you to guide to Q4, obviously, but just how do you feel about going into the holiday season versus the last two years, which obviously I’ve been like very different.
Rachel Glaser
Yes. So, as I said, Q4 is a big, something we’re always excited about we do. We do things to get our sellers ready for it too. We just did something last week called Etsy up, which is a forum for our sellers to come in. And we give them the best guidance and advice as we can. And they get they help each other on how to market how to set up their shops, how to be prepared and really get them ready for the holiday season. We do a nice press event on the east coast where we bring in some media and talk about what we’re seeing trend wise and things going on for the holiday season in the market. And we are ready, we have what we call flush. So that’s like the whole team works on product development all year long until we get to a point where it’s kind of penciled down all the way pencils down, which is why it’s not a freeze, but it’s a slush because that we work really hard on getting our best product development completed and ready to go for the holiday season. And then we tried to get out of the sellers way and let them sell rather than any changes or introducing new product changes in the fourth quarter.
We also increase our marketing spend in the fourth quarter and really lean into the why Etsy and the win at the end and we’re going to talk about marketing in a little bit. But we do dial up the marketing spend. I don’t know if you’ve all seen our television ads, but at this time we’ve modified the creative a bit to really remind people why and when you come to Etsy but also to inject the relative value that Etsy has versus other places where you can go shopping. By and large, our sellers have not taken big pricing increases to offset inflation. So, we were always somewhat a value play relative to other places that relative to other retailers taking price up because of inflation we’ve become even more and more interesting to think about places to get great special items for a nice value. And we’ve really put a lot of things in place to help with the post purchase experience and increasing the reliability of shopping on Etsy. So will I get it in time for Christmas?
And what happens if it doesn’t arrive when it’s, if it doesn’t show up on my doorstep, even though the seller says they shipped it to, I have confidence that it’s going to arrive to arrive on time. And I can talk a lot more about how important that post purchase experience and reliability is in just a little bit. But I’ll let you do your next.
Alexandra Steiger
Yes, no, I definitely want to talk about some of your product initiatives. But let me ask you one more question just on like the user growth trajectory. So how should we think about some of the puts and takes influencing or impacting like the near term trajectory of your active buyer edition, especially given all the work you’re doing in terms of improving your product experience on the platform?
Rachel Glaser
Yes. So in the second quarter, we added over 6 million new buyers, and we reactivated almost 5 million lapsed buyers, that’s about 50% more new buyers than in the same quarter in the pre pandemic period. And however, that is a decrease. So at the end, it affects our active buyer growth. So that decrease in new buyers is definitely a headwind to FTEs growth, but it’s still significantly better. And as I said earlier, we’re holding on to the vast majority of the gains that we made during the pandemic period. We’re also seeing when we look at the cohort data, that the newer cohorts are at least as valuable, and in some cases more valuable than the than the older cohorts.
So we’re seeing a lot of engagement with this new influx of buyers that we’ve brought in and they’re sticking with us for the experience. A lot of that happens because of the product introductions that we’ve made to the site, that we continue to enhance ways for people to find the good stuff on Etsy and to be inspired to come back again. So we’re really everything we’re doing is thinking about that, that engagement with buyers, people don’t often come to other large ecommerce sites to be entertained, but they do come to Etsy quite a bit to hang out and to watch sellers talk about how they’ve made their item or to understand the story behind a seller or seller’s creation process. And so we really want to engage those buyers so that they come back and continue to onto conversion.
The active buyer base at the end of 2021 was about 90 million. And in each of the last two quarters, we’ve trended net, about 1 million buyers per quarter. So that’s going that is decelerating a little bit but that tells you that we’ve gone from 46 million buyers pre pandemic, and maybe we’re maintaining it about $88 million. And when we look at, usually we talk about GMS per active buyer on a trailing 12 months basis that was up 135% in the second quarter.
So a big number still a little bit of a decline versus the prior quarter. And when you look at rather than on a trailing 12-month basis, just the buyers that we got in the second quarter of 2022 versus the buyers, we got in a second quarter of 2021. Just for those three months, they’re actually spending more in the GMS per active buyers higher actually in the second quarter of 2022 versus 2021.
So the actual spending in period is strong and healthy. And we are maintaining that engagement and that activity level that we want it that we want to see. I might inject here also that when you look at the buyer, behavior by channel, so are we think about mobile desktop versus mobile web versus mobile app. Our mobile app channel has two quarters ago crossed desktop as the highest percentage of GMS that we have, and it’s always been the highest converting channels. And now we have the most the biggest audience and the highest converting channel our is our mobile app. That’s very promising that we’re getting the traffic in the place where we think we have the best chance to reach the audience and get them to convert.
Alexandra Steiger
Already very helpful color. Let me just jump back to some of the key product initiatives you’re working on. You mentioned search and discovery. You mentioned the purchase protection program. What is like the era you’re most excited about and how should we think about those initiative translating into buyer growth GMS per buyer growth but also increased purchase frequency?
Rachel Glaser
So we often think about our opportunity on product to address three, three main areas. So we want to think about efficiency. We want to think about inspiration. And we want to think about reliability. Efficiency, because when you have 100 million items on the site, each one sort of like a snowflake, then there’s no to like, it’s hard to find stuff. And sometimes you feel like you don’t have three hours to look for the look for the special special thing. Some people love that it’s like going to a flea market on a Sunday and rummaging through and finding the AHA, the, the golden, the golden treasure, but other people, they have less time and they want, they’re more practical, and they want to find the gift for their spouse or their partner or whoever, and be done. So helping people find the good stuff faster is really important. So we think about initiatives in the efficiency bucket, a lot to do with search, and I’m going to double click on search in a minute. A lot to do with things like putting an Add to Cart button right on the listing result page, rather than having them have to click through to the listing itself, or putting editor’s picks right on, right to the top of the place that you land when you’re coming in from the outside recommendations for instance, that helps you get to the good stuff, faster.
Inspiration, a lot to do with visual discovery. In the past year or two, we’ve added many, many more seller videos. So you can actually see the seller throwing their ceramic pot, or the dyeing of the wool for the mohair sweater that you’re going to buy. We’ve allowed buyers to upload video reviews. We’ve recently added live video feeds. The seller or seller can host them here I am hosting a how to make a baby shower. And here’s all the things that you can buy on my shop or another shots of a shot shop stops on Etsy. And that you can buy right through that that video feed. And we’ve gotten a lot of engagement with that and a lot more of those live videos uploaded.
And then we also have by we’ve enabled buyers to submit, buyer video reviews. And those are just some examples. But that video, that visual discovery is really important to what we call that a whole set of initiatives Explorer is really important to increasing engagement and allowing people to have fun while they’re on Etsy looking for that, that needle in a haystack.
The other place of inspiration, of course, is in search. And so finding the thing you might not have said I want, a white mohair sweater, but we can infer that you’re shopping for something new and looking for a beautiful thing to wear to that that new party that you’ve been invited to from your, your dwell time on other listings of things you’ve bought in the past, we were doing a lot with all of the search models that we have. And I am going to come back to the search point in the moment.
So search, and the search and visual discovery of two of the things that we think about in that efficiency category. And then the third category, reliability. We’ve done a lot, one of the biggest boulders I have I feel that we have at Etsy is knowing that you’re going to get the item on time, knowing that you can trust that it’s actually going to arrive, what do you do if it arrives damaged? What do you do if the seller says they shipped it, but it never shows up on your doorstep? Or somebody took it off your doorstep? How do you get resolution in there really have the confidence to buy on Etsy and to continue to come back on Etsy.
So we’ve done a whole suite of things over the past few years, working on shipping price to make the price fair or free. Working on estimated delivery date, that’s a lot to do with getting our sellers to have tracking on everything that they sell so that you can track the item and know when it’s going to arrive. And we really help them a lot and thinking about not only the elapsed time from when an item ships, but the price and the time they need to actually create the item that the process time that’s required, and making sure that the estimated delivery date is actually accurate so that we’ve increased the percentage of items that do arrive on time based on the way the date that was promised.
And we’ve gotten really good at that in the U.S. and we’re working on it internationally where a large, much larger percentage of listings internationally are now also having an estimated delivery date displayed and they’re improving on their on time delivery date percentage as well.
And then even more recently, we have launched something called Etsy purchase protection, which is Etsy has your back if it wasn’t the sellers fault, and it wasn’t the buyers fault yet the money has been paid and the item never shows up. Who’s going to cover that? Well, Etsy is going to cover that. And thank goodness our sellers generally do a really good job on making sure things don’t arrive damaged and putting the tracking on there. We estimate that it’s about $25 million, annualized that we’re putting, we’re taking from our P&L. We’re going to, we’re going to make sure that that item is covered and the buyer doesn’t get left holding the bag. And that it’s an okay experience for them that it gets taken care of, in a clean way.
So we’ve, we recently did a transaction fee increase, and part of that transaction fee increased is being to cover this increased investment off our P&L so we can keep our margins home. We’ve also invested considerably in our what we call our trust and safety organization. And that’s about marketplace integrity, and marketplace, compliance, that the items that you find on Etsy, our — follow our policy follow our values. We do a great deal of manual and algorithmic takedown of sellers or listings if they are not matching our policies to keep the marketplace safe, not just for buyers, but that all the other sellers that are selling legitimately on the site are, are are kept. The integrity is consistent and universal for everybody.
Alexandra Steiger
Great. I also want to spend some time on your advertising offering and maybe let’s start with on site. What’s the value proposition you’re providing to your sellers with your advertising offering?
Rachel Glaser
So Etsy has two — and we’re talking advertising, these are the ad products that we create for our sellers to advertise. There’s a whole other category, that’s Etsy.
Alexandra Steiger
And we’re going to talk about that as well.
Rachel Glaser
And I also said, I would get back to the good for color and search and I didn’t so I will squeeze that in, I’ll answer the advertising question and I want to just give you some color on search. So the two products are Etsy ads, which are gives the pace paid inclusion model really give sellers the ability to advertise on Etsy site. It gives you give the seller more prominence in the search results. And then the other product is called off site ads where the seller can use some of their budget to have their listings appear in in a PLA ad mostly on mostly on Google.
Let’s start with Etsy ads that that product has grown and grown, a lot of the growth comes because the ads are increasingly more relevant because they’re benefiting from the improvements in our own search algorithms and our own search. So the better the more relevant the paid advertising is the higher the click through rate. And higher the click through rate, the higher the return on adspend for the seller. And we’ve been able to we set a minimum floor on what that return on adspend has to be because we want it to be a good experience for the seller. That product has grown over 500% in the last five years, versus the Etsy marketplace. Revenue on its own is grown 250%. So it’s growing significantly faster than the other the other parts of our business and it’s been, all the while we’ve kept that return on adspend really healthy for the sellers.
We’ve increased seller budgets by we’ve seen an increase of about 80%. And we can’t even spend it all because we put that minimum floor on row so we won’t spend it if we can’t deliver that that minimum row ads. We see opportunity to expand the product is for instance last quarter we added Etsy ads on our homepage where they were they weren’t before. So we’ll continue to invest in sort of the efficacy of that of the search results. So we can keep making improvements in click through rate. And keep looking for places where it makes sense to integrate it at Etsy ads, in other parts of our of our site.
Offsite ads is more of a compulsory product. So if you’re a seller on Etsy, and we include your listing in our in the feed we give to Google for a PLA ad and somebody clicks on that listing and it turns into a successful sale, the seller will pay a slightly higher transaction fee if they get a successful sale from that click. They don’t pay anything if they don’t make a sale. So there’s you can imagine there’s often a case where somebody clicks on that listing, they come over to that sellers listing, they don’t buy that, but they buy something else nobody’s paying in that case. It’s really the old retail Co-Op ad model where the sellers are paying some and Etsy is paying some. So about 40% of Etsy’s performance marketing is offset by this contribution from sellers on the offsite ads product. So it’s also a very high row as they pay between 12% and 15% for that of a transaction fee for that PLA and that’s something like a six to eight times row ads for them.
Alexandra Steiger
Let’s pivot to take rights actually for a moment. So you recently introduced a change to your transaction fee structure on etsy.com. And you were clear on your attention to leverage this as an opportunity to increase the value for your sellers. How do you broadly thinking about the current transaction pricing structure and the value you’re providing to the seller base versus, some of the other marketplaces out there? And how do you think about the take rate trajectory going from here.
Rachel Glaser
So good thing that you said take rate also. So take rate has increased is doesn’t always increase because of the headline transaction fee changing. So examples of ways to bring take rate have been things like Etsy ads, which I just talked about, we, when we, when we worked, worked really hard on incorporating shipping costs into item price, so that so that the we did have more of the listings on Etsy be reflected as shipping included or free shipping eligible. That also brought take rate up. We’ve made lots of strides in expanding Etsy payments to more markets, which also brings the take rate up so a lot of those things, raise take rates, at the end of Q2, we were at 19.3% take rate.
That puts us sort of in the middle of the pack, it’s sometimes hard to compare apples to apples. So we’re not the highest take rate for marketplace, but we’re not the lowest either. And our credo has always been fair exchange of value, we would look at increases to take rate as long as the we’re giving some value to the seller to you, it’s not just a wholesale, we want more money, we’re going to take the take rate. The biggest change that we made recently was a change to the transaction fee, which is indeed a take rate increase. So I should add that offsite ads all of that that I explained before it effectively was a 1%, it ended up being a 1% take rate increase across all of those puts and takes have a slightly higher transaction fee on successful PLA listings.
So this past year, we changed the headline take rate, that headline take rate was at 5%, we changed it to 6.5%. That’s the second time in FDA history that we’ve taken a change to that headline take rate. But we do that with we’re taking the price up, we’re going to spend more on this case, we want to spend more on the Etsy Purchase Protection. We wanted to spend more on transaction, sorry, on trust and safety. We wanted to spend more on further product investment and also continue to fund marketing at a healthy level.
The last time we took the take rate up, it went from 3.5% to 5%. And almost 80% of that increase was reinvested in things like marketing and more seller tools and communication. So that exchange of value. If you ask the seller what they want from us, they probably won’t give you this answer. But what they really need are more buyers, more buyers. So we want to really investing in the marketplace. And the trusted brand really helps increase buyers and buyer conversion. And it really helps the seller.
And so overall from the vantage point we sit within and we’re doing something for the marketplace, it’s beneficial to buyers, it’s beneficial to sellers, and it’s also beneficial to Etsy.
Alexandra Steiger
In the interest of time, maybe let’s move on to margins and some of the expense line items. So, from like a high level perspective, how do you think about balancing growth reinvesting in the business and margin expansion in the near and long term.
Rachel Glaser
So we, as I said, we really love our marketplace model because we have a pretty high. That’s conversion of EBITDA to cash flow. And we have we enjoy healthy margins because we were not invested in a lot of the things that the physical foot apparatus that you need in the full supply chain. On our last call, we actually also talked about how we see the buckets of OpEx. So a high percentage of our total cost base is 100% variable with revenue. A good example of that is performance marketing. And the higher the GMS, the more we can lean into to performance marketing.
Another good example might be credit card processing fees and things like that. They are highly variable with revenue and dynamically move up or down based on what’s happening with GMS. The second bucket I call semi variable. Those are things that are not fixed costs but are harder to pull back on but we have we can make those choices. So costs. A lot of the Comp costs for instance is semi variable. And just in fact in this last quarter, we talked about, we had been investing a lot in people. In fact, when our, our GMS and revenue shot up during 2020 and 2021, our product development costs as a percentage of our revenue dropped steeply because we couldn’t react, we, we could keep hiring, but you can’t, all of a sudden, hire triple or quadruple is still take some time. And we wouldn’t do that anyway, we are patient and picky about the talent that we bring into the company. So it took a while.
But in this last quarter, product development finally got to a level that we think as a percentage of revenue got to a level that we think is healthy. But now as we see some headwinds, in the second half of the year, we said we would slow hiring down commensurate with the pace of GMS growth.
And then we have a percentage of our costs, that R&D fix maybe the leases to our to our office buildings would be in that category, a certain percentage of the comp, public company costs and things like that are fixed. So we really feel like we’re in a strong economic position about having a high flow through of incremental revenue to the bottom line. Our EBITDA in the last quarter with a 28% margin on a consolidated basis, but we have said that about 400 basis points of contraction comes from our investment in our subsidiary brands, the guidance we gave for the third quarter was 26% margin.
So if you add that 400 basis points on top, we’re still at about 30% margins for Etsy’s core business. And we we’ve been well over 30% on prior quarters, demonstrating that the model is scalable and support that kind of high profitability level. But we reserved we’re still a relatively young company with a lot of opportunity to invest. And so we still, we still reserve the right to like, we want to make good prudent investments we don’t we’re not a growth at all costs kind of company. We’re sort of, we like to balance profitable growth. And I think we’ve been demonstrating that over the past few years.
Alexandra Steiger
The last few minutes, I’d like to spend on capital allocation; you acquired three companies over the past few years, or three years, actually. Can you just remind us how you think about the potential for strategic M&A to kind of like expand your footprint your offering? And then beyond M&A how do you think about capital allocation?
Rachel Glaser
Yes. And I’m going to squeeze in the extra commentary I wanted to do you want to search into part of this answer? That’s okay, no, I said in the past that there’s like really three does academically speaking, there’s three ways you can spend capital, there’s sort of organic internal investments, which is where the search, investments may come in, then there’s M&A. And then there’s return of capital.
In the organic, just speaking about search, we’ve invested a lot of our product and engineering, talent in the solving or the search, opportunity. And I’ll say, you’re never really done there. But in the past few years, we’ve actually really built up and matured three different search models, one of them is Techspace. That’s an exact match to the query that you put into the search results. The second one is what we call ex-walk. That’s more relational. Meaning I know what Alexandra likes to buy. I know what she how much time is she’s dwelled on such and such item. I know a lot about the seller, are they do they ship on time? Do they have good return policy, I know a lot about the item. It’s nautical. And it’s, it’s in the home and furnishing home furnishing category. And you can merge all those things to give a better result, she might get a different set of results than I would get for that same query.
And the last one is neural IR, which is semantic inferring what you mean. So you might type in wedding gown, and you don’t get some of the results being the kind of dressing gown like a bathrobe, they’re all going to be gowns, we’ve started to merge all those together. So we’re getting even better search results. And that’s an example of us putting our own P&L to work on things that we think are good product investments for us.
On M&A, the vectors we look at would be geographic category, IP talent, probably missing a couple of vectors. And you’ve seen us do some M&A where several years ago, I mean, even before Josh and I joined in the company, we bought a company called Blackbird that was high on machine learning talent. In a couple years ago, we invested in a company called DeVonda in Germany, that was a basically geographic extension and we just did it. We had a referral agreement where we just added their audience to ours. And then most recently, we bought in a new category Depop in the base in the U.K. but with a robust growing U.S. audience that is in what we call the e-commerce space, fashion and apparel category We are already in but it expands our presence in that category and geographic with the acquisition of Elo7, and in Brazil, where the market that we weren’t in.
Those categories, those businesses we think have significant opportunity, it’s fair to say they face stiffer headwinds from the macro environment than we had anticipated when we made those acquisitions. But we see so much opportunity. We’ve recently placed one of our very brightest invest at the executives in as the CEO for Depop and her first day was two days ago. So I didn’t talk more about that.
And lastly, on return of capital, we do have a $600 million share repurchase authorization from our board. We like to offset the dilution that’s created from granting equity to our employees. By doing share repurchase authorization, I will say that that 600 million was granted at a time when the stock price was much higher. So it gives us a lot more room for repurchasing that might go beyond potentially having the ability to go beyond just offsetting the equity dilution. I got a lot in there in that last. Thank you all.
Alexandra Steiger
Well, thank you so much for joining us today. And it was great to see you.
Rachel Glaser
Thank you. Thank you so much.
Question-and-Answer Session
End of Q&A
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