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Etsy Inc (NASDAQ:ETSY)
Q3 2020 Earnings Call
Oct 28, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Deb Wasser -- Vice President, Investor Relations

Hi, everyone, and welcome to Etsy's Third Quarter 2020 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. And joining me today are Josh Silverman, CEO; Rachel Glaser, CFO; and Gabe Ratcliff, our Director of Investor Relations. Today's prepared remarks have been pre-recorded. The slide deck has also been posted on our website for your reference. Once we are finished with Josh and Rachel's presentations, we will transition to a live video webcast Q&A session. Question can be submitted by the Q&A window chat displayed on your screen. Feel free to use it at any time, as it will remain open throughout the entire conference call. I'll be reading your questions and Gabe will help me try to get to as many as we can.

Please keep in mind that our remarks today include forward-looking statements related to our financial guidance and key drivers, thereof, the impact of COVID-19 on our communities, business and strategy, the potential benefits of our marketing and product initiatives, and the anticipated return on our investments and their ability to drive growth. Our actual results may differ materially.

Forward looking statements involve risks and uncertainties, which are described in today's earnings release and our 10-Q filed with the SEC on August 6, 2020 and subsequent reports that we file with the SEC. Any forward-looking statements we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them. Also, during the call we'll present GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which you can find on 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 a lot Deb, and hello and welcome, everyone. The third quarter was another quarter of really sustained momentum for Etsy, which speaks to we think the strength and the dynamism of the business model. And as much as anything, I'm incredibly proud of how the team showed up yet again this quarter. In fact we took a recent employee engagement survey, which showed that employee engagement at Etsy is incredibly strong at a time when so many forces are trying to divide us, Etsy employees are coming together to support each other and really focus on the mission, serving our buyers and our sellers, and being proud to work for Etsy is something that we don't take for granted at a time when there's so much division in our society. So we are very focused in this quarter on leveraging all of the strength and momentum we've had in the business to lay the foundation for continued strength far into the future.

Rachel is going to take you through the numbers in more detail, but it was a very strong quarter across the board. And the headline is that the macro headwinds that we expected to see in the third quarter really didn't materialize. As a result, GMS and revenue were ahead of our own expectations, which meant that EBITDA margins were also significantly ahead of our expectations.

So let's unpack what's driving that growth. Turning to slide five. We are very, very focused on the activity of our existing cohorts and our new cohorts. And I'm sure you all are as well. So let's unpack those together. First, new and reactivated buyers grew at an astonishing rate. In fact, we added 15 million new and reactivated buyers over the 12 months ending in the third quarter.

In addition to that, active buyers grew by 56% year-over-year to 69 million active buyers for the 12 months ending in the third quarter. And that's out of a total base of 138 million unique buyers who've ever bought on Etsy. So one way to interpret that is that half of everyone who's ever bought on Etsy has bought in the last 12 months. That's both great in terms of Etsy's ability to reawaken many lapsed buyers, but it also means there's still a ton of opportunity to go and reawaken existing lapsed buyers.

And part of the reason why we think that we're seeing so much success there is as we've said before people who've bought on Etsy have generally had a very good experience. And so when we reach out to them and say, why have you not bought in the last 12 months? The most common answer we get is what do you mean? I love Etsy. I thought, I bought more often and we tell them, no, you actually haven't been in the last 12 months. And they said, oh gosh I just didn't think of it.So now in this moment, a lot more people are thinking of it and we're seeing that show up in terms of the reactivation of buyers as well as the addition of a very substantial number of new buyers.

Let's take a look in slide six and how those cohorts are performing. First, about 75% of the purchase activity in the third quarter was from people who joined Etsy prior to 2020. These are cohorts from 2019 and prior. And we're seeing a real step function increase in purchase activity from all of our prior cohorts. Taking the 2018 cohort as one example what we show you here is for people who made their first purchase in 2018, they made about 60% more purchases or 60% more GMS. They purchased on Etsy in the third quarter of 2020 versus the third quarter of 2019. And as you'll see on slide six about 50% of that was purchases of non-masks and about 10% was the purchase of masks.

Turning to new buyers on slide seven. You'll see that new buyers first accounted for about 25% of the GMS in the third quarter of 2020. And similar to existing cohort's new buyers look to be more active and purchase more than new buyers did a year ago. But it's a bit of a tale of two cities. We've got new buyers whose first purchase was not a face mask and those new buyers are more active than new buyers were a year ago even putting aside a second or third purchase that was a face mask. For new buyers whose first purchase was a face mask, as you often expect, their second and third purchases were more often face masks. So what we take from that is that new buyers whose first purchase was not a face mask likely we'll have a lifetime value as good or more good than previous cohorts. We're watching new buyers whose first purchased was a face mask, because it may be an indication that their lifetime value is going to be lower than what our traditional cohorts have been.

So why are we seeing such strength? We believe it's because Etsy stands for something different. At a time when there are more and more places coming online to sell you exactly the same thing, Etsy is a place you can go to actually connect with other people and find things that express your sense of identity. It's a place you can go to support small businesses in your community. It's a place that you can go to bring people together. And the way the marketplace works, it's incredibly dynamic and agile serving you the kinds of products that are relevant right now. So we think that the fundamental strength of the Etsy business model have been very important in allowing Etsy and Etsy sellers to rise to this occasion. And how have they been rising to the occasion? Well if we look at the second quarter of 2020, you'll see that overall e-commerce grew at an astonishing 45% year-over-year. That number would have been unthinkable a year ago. But Etsy grew more than twice as fast. And again in the third quarter, you'll see Etsy's growth was sustained. So we expect that Etsy gained significant market share yet again versus the overall e-commerce benchmark.

Turning to slide 10. I know there's always a lot of interest in what specific products and what specific categories are we seeing growth and you'll see that the story in the third quarter is substantially similar to the story of the second quarter of 2020. The same top six categories growing at very, very rapid rates and I would point out that these are each as stand-alone categories massive, massive industries and Etsy is already at scale and growing at extremely rapid rates. In fact, we believe Etsy is growing as faster or faster than the market leaders in many of these categories. And to peel back a little bit, the categories may be similar, but the items that are selling are always dynamic and changing. So for example in back-to-school, this year looks different than last year. It's a lot of custom desks and home learning supplies.

In jewelry and accessories, we're seeing a lot of vote necklaces. So the categories may be similar, but the items themselves are constantly responding to the times. And of course, masks continue to be a very substantial product in the third quarter. $264 million in GMS and 24 million masks sold. But as masks become more and more ubiquitous available in every retail outlet everywhere in the United States and across Europe, we are seeing sales decline sequentially. And that sequential decline is continuing into October. However, if masks were their own category, they would still be a top six category in the third quarter.

Moving on from our results. We have more conviction than ever that Etsy's mission to keep commerce human is incredibly powerful and that our strategy built around our right to win is compelling and durable. And so we are investing aggressively to deepen our strength in each of these four areas that collectively make up Etsy's right to win.

Starting with search and discovery. We have been investing for the past many years to make search dramatically better and to close what we call the semantic gap. And you'll see here that just over the past 12 months, the data we consume in each search query has doubled. It's just one way of giving you a sense for the sophistication of the algorithms that we are using. And when we talk about closing the semantic gap what we mean is translating what someone types to what they actually need. For example, understanding that the word dress and gown are substantially the same word and we can use gown results for someone's dress search query. Or if they type the word "emerald ring" it means rings that contain the stone emerald.

Etsy has made significant improvements in closing that semantic gap, but there's still a long way to go with a great road map that we think can continue to deliver sustained improvements to make the buyer experience better. We hit a major milestone in the third quarter launching our first-ever personalized search. You've been hearing me say for some time that two people who type in the same keyword will get the same results. And now, in the third quarter that is no longer true. We look at your clicks, your favorites, your add to carts and your purchases and we use those to inform the search results so that two buyers will now get different results for the same search.

This was an exciting first launch and it's showing promising results, not just in terms of conversion rate, but also in terms of repeat purchase rate. So we're very encouraged, but it's just the beginning and we will now have years of work to refine and improve these models. Plus we're incredibly excited to bring personalized search to Etsy Ads as well. We've been laser-focused on driving frequency launching both product and marketing initiatives to get people to come back more often and buy more often.

Just one example is a new buyer offer that we automated and launched in the third quarter, giving a $5 off on your next purchase to a select set of new buyers at both the click they have high lifetime value and a lower propensity to come back in first 30 days. And it's an example of something that we're able to launch now that we couldn't have done a year ago because of the investments we've made in our CRM systems and in machine learning. And it's just one of many examples of the kind of thing we're launching and driving -- to try to drive frequency.

Turning to the all-important holiday season. This holiday season is going to feel different for so many people, but we think that Etsy can play an even larger role in making it feel special and helping you connect to your loved ones even at a time when you need to be more distant. We're doing things a little bit different, pulling forward the season because we know many people are looking to shop earlier. And we're building our campaign around the theme: Gift like you mean it.

We continue to be really excited about the performance of our television advertising campaigns. In the United States they're becoming a mature channel where we're seeing really strong ROI and we're seeing strong improvements in terms of top-of-the-funnel brand awareness. So we're doing something new, investing even deeper in the fourth quarter, launching a more brand-focused television campaign at the same time as we have a more direct response campaign running concurrently. Starting with the brand campaign, that's a campaign that has a narrative that's designed to create an emotional connection, speaking to the differentiation of Etsy and using storytelling as a mechanism, I'm going to pause now so you can look at one example of those ads.

[video playing]

And at the same time we're going to running an ad that speaks to all of the different kinds of products and purchase occasions that you can buy on Etsy, designed to more directly drive you to come and shop. And here's an example of one of the spots in that campaign.

[video playing]

You'll be seeing these television ads start running this week. They launch on October 28. But of course our marketing investments are about so much more than just television. We've been making significant investments in our marketing tech capabilities and they've been yielding great results. Our performance marketing have been even more efficient in the third quarter than they've been in prior quarters, despite a step function increase in investment. We've also been able to really up our game in terms of our performance marketing in our European core markets which has driven very strong results and we're investing in some new areas for example podcasts which we're really excited about.

And in addition to that, as Etsy becomes an even more important part of the Zeitgeist, many leading influencers want to associate with Etsy. And we've created some really exciting collaborations with leading influencers where they curate collections of items that they love on Etsy and then co-market them together with Etsy. And it's an example of the power of a great brand like Etsy combining with great brands that individual influencers have to really go and spread the word in an even bigger way.

And of course none of this tremendous growth would have been possible if we weren't making meaningful investments in the infrastructure required to serve our platform. For example, I showed you just a few minutes ago the tremendous increase in data we're consuming to make our search algorithms more relevant. That's required meaningful investments in our data infrastructure in order to serve that growth.

We've been investing in site performance to make our page loads happen much faster because we know that faster page loads are really important to create sticky and have informing buyer experiences. And we've been investing meaningfully in our developer platform so that as we grow our engineering team, each new engineer can continue to be very effective and efficient. As just one fun fact, we push code on average every 30 minutes at Etsy. So investing to make our code base easy to work with and easy to deploy, we believe has very compelling long-term benefits.

And turning to Reverb. Reverb also had a great third quarter. In a time when industry sources indicate that the musical instrument industry contracted in the third quarter Reverb actually grew at a very healthy rate. We're pleased at how the take rate changes that were announced in the second quarter have been received by the market. And in fact seller and dealer growth has been very stable while we've seen sales grow.

And importantly, it's allowed Reverb to invest even more in marketing and in product development to grow the business for the future. The Reverb team continues to launch great product enhancements and really innovative and exciting marketing programs, and we're really excited about the continued growth potential of the Reverb platform.

So to conclude, the third quarter was a great quarter, where the Etsy team really put their heart and soul into executing for the benefit of the whole community. We're incredibly proud of what the team has executed and launched in the quarter not just for this quarter, but because we believe that Etsy has an incredibly compelling growth potential for months, years and decades to come. And we have a lot of conviction around making the investments that are going to allow us to achieve that full potential.

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

Rachel Glaser -- Chief Financial Officer

Thanks Josh and thank you everyone for joining us for our Q3 earnings call. My commentary today will cover consolidated results, key drivers of performance and Etsy's stand-alone results where appropriate. Q3 was another strong quarter across the board, as we delivered higher-than-expected GMS revenue and adjusted EBITDA. On a consolidated basis, Etsy's third quarter GMS grew 119% to $2.6 billion. Revenue grew 128% to $451 million, and adjusted EBITDA was $151 million with margins of 34%.

On our last earnings call, we indicated that we expected Q3 GMS growth to decelerate from Q2, partly due to lapping the 2019 Reverb acquisition and introduction of Etsy's free shipping initiative in Q3 of last year. Though our results came in better than our forecast, we did see deceleration as the quarter progressed. The month of July was up 152%; august was up 114%; and September was up 98% on a consolidated basis. The sequential deceleration in Etsy's stand-alone GMS growth was primarily driven by a steady decrease in mask sales and the deceleration of new buyer growth. Masks as a percentage of GMS contracted sequentially from 14% of GMS in Q2 to 11% in Q3. In fact, masks declined 34% month-over-month in September. While masks are still meaningful, we expect this deceleration to continue. New buyers also decelerated sequentially from 159% growth in Q2 to 127% in Q3 and with about half of the deceleration driven by mask buyers.

Despite the deceleration in overall GMS, we saw healthy underlying trends in non-mask GMS growth, which was 93% in Q3 the same growth rate as last quarter. Also notable of the four million mask-only buyers in Q2, 38% returned in Q3 for a non-mask purchase. Consolidated Q3 revenue was driven by growth in both marketplace and services revenue. Key drivers for the quarter were GMS volume, Etsy Payments expansion, Etsy Ads and Offsite Ads. Transaction revenue grew 121% year-over-year driven by higher GMS from visit growth and an expansion in conversion rate. Another revenue driver for the quarter was our Etsy Payments expansion. We now offer Etsy Payments in 45 countries across 21 currencies, processing 92% of our GMS in Q3, up from 88% year-over-year.

We continue to make strides in bolstering advertising products and initiatives to help sellers drive velocity in the marketplace. Etsy Ads grew 106% year-over-year and 19% sequentially versus Q2. We've made significant improvements to the relevance of our ad units by incorporating algorithms that more accurately match listings to search queries. In addition, we're also optimizing our bidding strategies to drive seller return. These changes have led to incremental improvements in both click-through rate and the conversion rate simultaneously improving the buyer experience, Etsy revenue and seller return on ad spend, a true win-win-win. As a result, seller budgets are increasing as demand for on-site advertising continues to outpace current ad load.

Offsite ads had a strong Q3, as we saw the benefit of a full quarter of revenue. Overall, opt out rates remained less than 2% and we focused our efforts during the quarter on optimizing return and channel mix for our sellers' listings. Etsy Ads, Offsite Ads and our expanded Etsy Payments platform all fueled further growth and take rate in Q3. Consolidated take rate expanded 120 basis points sequentially to 17.1%. Gross margin was 73%, up 820 basis points compared to last year and continue to benefit from our shift to Offsite Ads, which delivers incremental revenue without an equal offset in cost to them.

We continue to optimize our investments across our marketing channels. We've been rapidly expanding marketing initiatives for about two years now, leaning more heavily into upper funnel strategies through TV ads and paid social. We're also hard at work improving our own channels, optimizing email and push notifications through the buyer journey, while building out an integrated buyer CRM strategy across many segments. Q3 consolidated marketing spend was $127 million, up 153% year-over-year. Upper funnel marketing spend for the Etsy stand-alone marketplace, including television and digital video was 18% of our consolidated marketing spend in Q3, or approximately $23 million in the quarter. This is important, because as we shift spend up the funnel more of the return will be realized in future quarters.

Another factor impacting margins are increase investments in product and engineering as our hiring picked up momentum in Q3. We ended Q3 with 1,375 employees, an increase of 14% versus prior year, and a 6.3% increase versus the second quarter. In addition, we're augmenting our workforce by leveraging nearshore contractors, which allow us to rapidly scale up resources as needed. The talent we are adding to our product and engineering bench will focus on fire frequency initiatives, including search, as well as platform and foundation initiatives that allow us to deliver product more quickly and efficiently. We continually look at the metric of revenue per headcount, which is significantly higher than our peers, as well as GMS per dollar of product development spend a proxy for ROI. As noted last quarter, it will take some time for hiring ramp plans to fully impact our P&L. Our revenue per head count today is therefore higher than where we want it to be given our many opportunities to invest for growth.

Moving to our operating metrics. In the third quarter, active buyers grew 56% to approximately $69 million for the Etsy marketplace. GMS per active buyer on a trailing 12-month basis grew 8% year-over-year, driven in part by habitual buyers, which grew over 100% in Q3. This is up from 64% growth in the second quarter. It's great to see this performance of our most loyal buyers repeat buyers grew 70% to 27 million. Excluding masks, GMS per active buyer was up 4% and 6% on a two-year basis. Digging in a bit more on frequency as you know both new and reactivated buyers are important buyer segments for Etsy. New buyers are defined as buyers that are unique to Etsy and haven't made a purchase on the platform regardless of the time period, and a reactivated buyer is someone who has not purchased in over 12 months.

In the third quarter, we acquired nearly 10 million new buyers and reactivated five million existing buyers for a total of 15 million. We outlined last quarter that of the 19 million new and reactivated buyers in Q2 nearly 10% of them made four or more purchases across two or more categories. Since this metric was time-bound, it only partially reflected the purchase behavior of many new and reactivated buyers, especially those acquired near the end of the second quarter. So here we have adjusted to a 90-day window for all new and reactivated buyers in Q2, and the metric increases to 12%. Note that, we would expect reactivated buyers to decelerate since the buyer can only reactivate one time in a 12-month period. We'd also expect new buyers to continue to decelerate as demand for masks increases.

Active sellers grew 43% to $3.5 million for the Etsy Marketplace, and we're focused on growing the pie for all our sellers. Trailing 12-month GMS per active seller was up nearly 18%, and listings in our marketplace grew to over 80 million items. Recently, our teams have developed new initiatives, including improved shop recommendations to get sellers to their first sale more quickly, helping sellers to scale and investing in member support operations to optimize and streamline issue resolution. Another one of the factors fueling sustained growth in Q3 was robust performance internationally.

Etsy's stand-alone percent international GMS expanded 340 basis points sequentially to 37% of overall GMS. International GMS, excluding masks sales was up 106% on a constant currency basis and was driven in part by strong trends in the U.K. and Germany, with the strongest trend being domestic sales between buyers and sellers within the same country. Within the U.K. market, we've seen an acceleration in the share of online retail overall, from which we believe we are disproportionately benefiting thereby taking market share. Domestic growth in the U.K. was up approximately 250% in Q3 significant growth for this core international marketing investment. According to ComScore, Etsy is now a top 10 e-commerce site in the U.K. up from number 14 a year ago. With all of this momentum, we've made the decision to launch TV advertising in the U.K. for holiday season, which you will also see reflected in our marketing spend.

Moving now to the balance sheet. As of 9/30, we had $1.5 billion in cash, cash equivalents and short-term investments in addition to a $200 million revolver that's currently undrawn. During the quarter, we issued $650 million of seven-year convertible senior notes. A portion of the proceeds were used to buy back $301 million of our 2018 notes and a cash call.

I'll now review our outlook for Q4. This year has been anything but predictable. So we caution you to remember the potential headwinds we called out in the past and that appear in our slide presentation on factors impacting the business. We currently estimate consolidated GMS for Q4 in the range of $2.7 billion to $3.1 billion, which is up 65% to 85% to Q4 of last year. Revenue of $459 million to $513 million, up 70% to 90% versus last year and adjusted EBITDA of $117 million to $131 million with a margin in the range of 24% up to 27%. This implies 30% adjusted EBITDA margins for the full year at the midpoint.

We continue to model a wide range of outcomes in our guidance to account for significant uncertainty. This quarter primarily focused on U.S. election, impacts from the pandemic, continued uncertainty around the health of consumer spending, and the holiday shopping period which is being influenced by many factors. In terms of our GMS guidance a few things to keep in mind. First, so far October GMS trends for both Etsy and Reverb have been similar to what we experienced in September.

Second, in Q3, masks sales added an incremental $264 million in GMS, about a 23% decline versus the $346 million sold in Q2. Looking monthly, we can see steady deceleration and we currently expect masks sales to be substantially lower in Q4 than they were in Q3. We encourage you to factor the impact of mask deceleration into your Q4 models and incorporate the large rollover we will have as you update your 2021 models. Third note that in the fourth quarter, Reverb is currently expected to continue to grow more slowly than Etsy. In the context of our margin guidance, the largest sequential and year-over-year impact to Q4 margins will come from incremental marketing spend.

Let me unpack some of the additional spend and how we are thinking about associated return on its investment. First, as we showed you earlier, in Q4, we are launching a new television campaign with brand-focused creative specifically designed to drive emotional connection to Etsy. This investment will be in addition to our existing ad campaigns, which have a more prominent direct response design intended to drive immediate sales. Although in-period return is likely to be lower, we see this as a real opportunity to build brand affinity that will have positive return next year and beyond.

Second, we are investing in upper funnel marketing channels in both the U.K. and Germany. This spend is more experimental in nature and ROI for these markets is still to be proven out. So, we are forecasting to return below levels we currently achieve in the U.S.

Third associated with the new brand campaign, we will also be expensing the creative costs for the new ads in Q4. The increase in U.S. and Europe TV media spend together with a creative expense account for about a few hundred basis points of the sequential margin contraction.

Fourth, seasonality plays a role in fourth quarter margin contraction. We expect higher CPCs in our performance marketing, while continuing to target growth in impression volume. Though still achieving our ROI thresholds we expect lower in-quarter ROI on our fourth quarter spend which similarly may also drive a few hundred basis points of the margin contraction.

And last, macro headwinds and our hiring ramp may also impact Q4 margins. You've seen us be extremely disciplined in our investment approach and 2020 proved out the scalability and tremendous value of our marketplace business model. While these investments impact our margins on a short-term basis, we have a strong conviction and expect them to drive growth over the long-term as we lean into our enormous TAM.

One last comment about our outlook. We see a significant amount of uncertainty ahead in 2021 particularly in areas that we cannot control. We have not yet had a view to what our business would look like when the economy is fully reopen or if consumer spending worsens. We are therefore being cautious in our planning for next year. We encourage you to do the same in your models and pay particular attention to the quarterly growth over rates.

Meanwhile there's a huge election next week. Etsy has been very active and encouraging our employees to register, to vote, and to volunteer. We are providing our team a meeting-free day on election day. We have donated to Mission for Masks an organization that provides PPE to full workers and we have been using our social media channels to remind our millions of followers to get out and vote. We hope you will all do the same.

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

Questions and Answers:

Deb Wasser -- Vice President, Investor Relations

Okay. Thank you everyone. Thanks Rachel and thanks everyone for joining. I'm going to kick it off. We have quite a lot of questions in our queue already if you haven't already put one in, please do -- please do use the chat function.

I'm going to start with one from Kunal Madhukar from Deutsche Bank.

Kunal Madhukar -- Deutsche Bank -- Analyst

How has the GMS growth trends in the quarter to-date? So far how has that gone? I know we covered that, but let's just go over it again. How much of that could be pull forward of holiday spend as consumers anticipate shipping delays? Josh, I think that one is a good one for you to kick off with.

Josh Silverman -- Chief Executive Officer

Sure. Hey Kunal, thanks for the question. Hi everyone. Thanks for spending time with us. Yes, as we said in our prepared remarks, October has been largely consistent with September which means we've seen a great deal of sustained momentum through October to-date. And the fair point Kunal that some of that may well be a pull forward in holiday spending. We have been tracking that.

So, we look at keywords and we are seeing that purchases related to holiday shopping keywords things like for example, tree ornaments, are in fact happening a little bit earlier, this October than they were last October year. So we do see a holiday shift happening earlier in October than before. What we don't know is is that going to come at the expense of November and December or not? I'd say it's too early to tell but we certainly are encouraged by the momentum that we've seen sustained all the way through October.

Deb Wasser -- Vice President, Investor Relations

Okay. Great. Thanks, Josh. Next one is from John Colantuoni from Jefferies. Can you talk about recent improvements Etsy has made to Search and Discovery? And help parse out what portion of the increase in conversion is coming from those improvements versus a generally higher intent shopper resulting from the pandemic? Also can you detail any observations and purchase behavior that help you give you confidence the surge in spending on Etsy represents a permanent shift in consumption and habits?

Josh Silverman -- Chief Executive Officer

Thanks for the question. So we are seeing conversion rates elevated on Etsy and that has been sustained for some time. Part of that is no doubt, the fact that our customer experience continues to get better through things like improvements in search and discovery. And part of that no doubt is that people are arriving on Etsy with fewer options in the outside world and higher intent. And it's hard for us to parse out exactly how much is one versus the other.

What I would say is that we've seen steady and sustained progress in search. Month-after-month and quarter-after-quarter we launched new models that are better than the last models. So we've launched neural network models that are substantially more sophisticated. They're doing a better job.

As we talked about in the prepared remarks, in the third quarter we actually launched for the first time the personalization of search, meaning that two different people will see two different search results for the same keyword based on their purchase history. And that's having some impact on conversion rate already even in the very first launch of that model.

So -- and by the way we haven't even rolled that out yet to recommendations and browse. So we talk about search but more often we talk about search and discovery. And I will point out that those two are similar but not the same, with search we're given the benefit of someone typing in a keyword, which gives us a lot of understanding of what their intent is.

Recommendations, we just need to infer what we think you might like. So it's actually related but separate technology. We haven't begun to apply personalization to discovery or browse yet but we will soon. We'll also be able to apply it to Etsy Ads, which we think will make Etsy Ads even more powerful. So we continue -- and that's just search and discovery. We are doing things to make the trust in the marketplace better every month.

We're doing things every month to make the human interface between the buyer and the seller feel better every month. So no doubt that's having some impact on the customer experience and on conversion rate and then the impact of the pandemic certainly is as well.

Deb Wasser -- Vice President, Investor Relations

Okay. I'll pick up on that last one in terms of a macro question. This one is from Naved Khan from Truist. Any thoughts on the impact from reopening of physical stores for the expiration of extended federal unemployment benefits?

Josh Silverman -- Chief Executive Officer

We talked about in the second quarter, how the data are noisy. And we showed you some states and some countries and how reopenings have been not necessarily correlated with the trends that we've seen on our site. And I'd say that has continued to be true in the third quarter.

So things like states reopening retail may have some impact -- undoubtedly have some impact on what we're seeing in Etsy, but it's not like there's a one-to-one correlation. And part of that may be that a city might technically reopen stores but in terms of what is the culture of that city, how often are people going into those stores and what it feel like to be in those stores? I think there's quite a lot of difference around the country and around the world in terms of how that's impacted.

So what I'd say is that it's been pretty difficult for us to do things like tie store reopenings directly to the traffic trends that we've seen on the site. No doubt, it would stand to reason that those things are correlated over the medium term, but if you look over the short term sort of day-to-day and week-to-week, it's a little harder to see consistent patterns right now.

Rachel Glaser -- Chief Financial Officer

I'd just add some of the data that we gave, what showed that, even though there are stores that are kind of consistently reopening, our core business grew 93% in Q3 and it grew -- the core business also grew 93% in Q2. So it's remained stable. This is the business that is excluding masks. So it seems thus far store reopening haven't had a huge impact on Etsy's business.

Deb Wasser -- Vice President, Investor Relations

Okay. Thank you both. Next one is from Heath Terry at Goldman Sachs. What are you seeing from your shipping partners in terms of their expectations for delivery times and costs during the holiday season? How are you messaging these issues to your buyers and sellers? And can you quantify the impact this has had on your guidance for the quarter?

Josh Silverman -- Chief Executive Officer

I'll start and then maybe Rachel will want to add. We are able to track daily, what shipping times are like with different shipping providers and we can even track that down to the city level. And so as we present to buyers what the expected delivery date is, we're able to update that expected delivery date in nearly real time based on what we're actually seeing in terms of shipping times in their region or for that particular from-to pairing. And by the way, we didn't mention in our prepared results, but expected delivery date has been a very big focus of ours in the third quarter and we've made significant progress.

So at the beginning of 2020 only in the low 30% of listing views would have an expected delivery date. And now in October about in the mid-50% of listing views have an expected delivery date. So there's been a fairly dramatic increase in coverage for expected delivery date. We're doing a better job of telling buyers when they can expect the item to arrive and we do incorporate shipping times into that.

We are also tracking shipping pricing of course a very large percentage of items on Etsy shipped for flat rate mail in some of the lowest tier and cheapest parcel rates. And so we think that increases in pricing there while on a percentage basis may be meaningful in terms of the total cost of the total item, we don't think they're going to be as much of a headwind as maybe you're seeing in some other e-commerce sites.

So we are communicating very actively with buyers and sellers. We don't anticipate at this time it being a particularly material headwind for Etsy. And I'll say that, I think a lot of e-commerce sites are pretty nervous about Cyber Week because their ability to fulfill large quantities in a short amount of time is constrained. And that's where I think the benefits of the Etsy model really shine through.

Our sellers, our businesses largely have won working from their home and they're not as constrained in terms of having a supply chain dependent on a few factories or having everything shipped through one or two fulfillment centers. And so we're leading into Cyber Week. And I think this is going to be a time that also highlights the strength of the Etsy model there.

Rachel Glaser -- Chief Financial Officer

And the only thing I would add to that is that Etsy is known for it takes a little longer to get the item because you're buying things that are customized and personalized just for you on spec. And so our customers are somewhat conditioned to order early and maybe our holiday season has traditionally ended earlier than traditional retailers.

In this case if the shipping speed is slower for all it sort of levels the playing field for all. So I think that across the board and e-commerce we're all going to have the same sort of order by December 15th, the order by December 18th, if you want to get it in time for holiday not just Etsy in this case.

Deb Wasser -- Vice President, Investor Relations

Okay. Thank you both. So we obviously gave a lot of cohort data and there's a good multipart question here from Shweta Khajuria from RBC. What is driving greater spend levels? Is it fair to say that basket size is most cohorts increased? You point a 50% increase in your 2018 cohort spend in Q3 2020 versus Q3 2019 and also a 50% increase in spend in the first 90 days among new buyers in Q2 versus last year. What is driving direct greater spend levels? Is it selling across the categories? Is it your marketing initiatives? Is it bundling of products for free shipping? Lots of questions, but I think I'll turn it over to you Josh, you can start and then Rachel may want to add some things.

Josh Silverman -- Chief Executive Officer

Great. I'll start and I'm sure Rachel will catch what I missed. So I'm going to try to take that question in order. At the beginning, the first thing you said is it AOV that's driving an increase in cohort purchases? And for the most part I would say, no, it's not. AOV has not moved appreciably. In fact, mask is a low AOV item. So the mask surge that we saw actually drove down AOVs sitewide. And as masks have shrunk as a proportion of sales AOV has recovered somewhat. But if you take out masks, I think AOV has been relatively consistent throughout the pandemic period.

The biggest factor that's driving this increase in cohort behavior is the reactivation of lapsed buyers. So when we talked about that 2018 cohort a higher percentage than normal of the people who joined in 2018 have come back and bought at least one thing in the third quarter of 2019. And that reawakening of the lapsed buyer base across all of our prior cohorts is the number one thing that's driving that increase in GMS for each of the cohorts.

A second and still very substantial factor frequency in period or 90-day repurchase rate. Meaning that for people who did come back and buy in the third quarter, it was more often that they bought a second or even a third or fourth item in that quarter. So both of those factors are at play. And we did a bit to quantify the relative impact of those. You'll be able to see it when you look at how many active buyers and reactivated buyers there were and how much that accounted for in terms of increased GMS.

Rachel Glaser -- Chief Financial Officer

And we did give -- we gave a lot of data on this call. So the other metrics, I would point out would be some of the metrics that talk about frequency specifically. So our fastest-growing and most valuable cohort are what we call our habitual buyers. Those are buyers that come to us six or more times in a year or spend more than $200. And they -- that cohort grew 100% in the third quarter. I think last quarter we said, I think, grew 64%. And prior to that, that cohort has been growing in the low-20% range. So we really had a nice spike in the people that are coming the most frequently to us.

The next category down is, what we call, repeat buyers, which are people that come two or more times a year and that grew 70%. So we've got a nice uptick in the frequency. And then, the last metric that helps to sort of triangulate the frequency picture is that for our new and reactivated buyers so that was 15 million buyers in the quarter.

12% of them came four or more times across two or more categories. And so, they are coming more frequently and they're coming across multiple categories, not just a single category. And so those -- I think a lot of the marketing and product initiatives that we've put -- we've laid down since the beginning of the year are really helping to encourage repeat frequency.

Deb Wasser -- Vice President, Investor Relations

Okay. Thank you, Rachel. Moving to a question on Offsite Ads from Ygal Arounian from Wedbush. How has the traction been on Offsite Ads? How is it contributing to take rate? How are sellers reacting to it so far? Anything you can share on conversion and how it's driving sales? Is number one.

And then number two, with the biggest top of the funnel -- excuse me, with the biggest spend top of the funnel, what are you seeing there? And anything you can share on your ROI on your top of the funnel spending, understanding that it's early days?

Rachel Glaser -- Chief Financial Officer

I can start with just some of the specific numeric answers to those questions and then maybe, Josh, you want to talk about top of funnel value and impact. On take rate we didn't break -- we did say that the largest movers to take rate in the quarter or -- and I think we said it went up 120 basis points, were inclusive of Offsite Ads but also Etsy Ads, which performed really strongly and then Etsy Payments expansion into nine new countries.

And I don't think we gave the numbers specifically on Offsite Ads but that was one of the contributors to take rate increase, because we now have full quarter of it. And so, that was -- I mean. I think, the other metric we gave for Offsite Ads is that we've continued to see less than 2% opt out rate from the sellers that are able to opt out of it. So it's a very strong product and performing with return on ad spend that we think is very attractive for our sellers.

Top of funnel, we said that we -- 18% of our consolidated marketing spend was in upper funnel initiatives, which is about $23 million in Q3. And that we said marketing overall on a consolidated basis was up 153%. So we are spending significantly more on marketing and a big chunk of that is on upper funnel.

As always, we have a very strict ROI methodology, not only for performance marketing, but for all of our above-the-line marketing as well where we analyze it pretty stringently, just to prove out that every marginal dollar of spend is incrementally ROI positive as well.

It's a little trickier with above-the-line marketing. We use, I think, over nine different statistical models, some that we get from our media buyers, some from our internal models and then we use external iSpot data that's panel data that tells us how is this dollar of spend performing? And is it achieving the internal ROI thresholds that we have.

And so, we feel pretty comfortable that our marketing spend has a nice positive return. The one caveat that we talked about is that upper funnel marketing tends to have a lot longer yield curve and particularly with a brand-focused campaign that yield -- some of that yield is going to come out of the quarter a little bit more than performance marketing does.

Josh Silverman -- Chief Executive Officer

And I would only add that Etsy has suddenly and so powerfully becoming the zeitgeist right now. Suddenly you're hearing Etsy mentioned in the same breath as Amazon, eBay and Target. And that would have been something that would have been surprising to people, even two or three years ago. And if you look at our relative size, relative to those four companies, it's a pretty good company to be in. And so, this is a moment to be really leading in, we believe, to marketing.

If you look at the reawakening of the lapsed buyers, again, they don't think of themselves as lapsed. They love Etsy. They think of themselves as loyal Etsy shoppers. They just didn't know when to think of us. There are so many great purchase occasions you could use on Etsy and they just didn't think of us.

And so, the ability to be front-of-mind and use this time to really form habits and deepen our differentiation and reinforce our differentiation, we think is really powerful. And there's still a huge opportunity with 70 million people out there or 80 million people out there who have shopped on Etsy in the past and haven't shopped on Etsy in the past 12 months. That's a lot of lapsed buyers to go and reawaken.

And in addition to that, there are so many people who still have never shopped on Etsy, people who we might not have thought of as our core demographic a short time ago who's suddenly now maybe. Steve Martin is one of my favorite comedian and if you go check his Twitter feed he just posted "I just discovered Etsy. Goodbye." And then he falls into the Etsy vortex and is throwing up all sorts of great things he's finding on Etsy. And so, I think, we're broadening our appeal to more and more types of people and more and more demographics and we love it.

Deb Wasser -- Vice President, Investor Relations

Speaking of getting lost in the Etsy vortex or rabbit hole. This one comes from Rick Patel at Needham & Company. GMS per buyer up 50% year-over-year in Q3, which categories are getting the most GMS boost? And what's your confidence that this can continue on the other side of the pandemic? That's for Josh, I think.

Josh Silverman -- Chief Executive Officer

Yes. I mean, so we shared some category data. And I'd say it's very consistent with Q2. So home furnishings continues to be up over 120% year-over-year, but we're seeing different kinds of items. I gave a little bit of color in the prepared remarks, but what we're seeing even in October now, is things that are good for outdoor gatherings, blankets or fire pits.

Fire pits sell out everywhere else you can go, but there's going to be a steady supply of really cool made-just-for-you fire pits on Etsy. And so, individual items in each of these categories, our choosing really looked weak. But the categories are pretty largely consistent. Craft supplies continues to explode. Jewelry and accessories is doing great.

When we go to the future, I would say, in the near term of 2021 it's very difficult to predict. We're not even giving annual guidance these days. We're only giving quarterly guidance. 2020 has been an -- certainly, the most unusual year since World War II in the western economies. And I think it's likely that 2021 is also going to be one of the most unusual years in modern history. So trying to predict from this time to that time is very difficult.

And -- but I would say though that every interaction we have with customers, every additional purchase we have with them, every additional visit gives us a chance to deepen our relationship with them gives us a chance to form habits, gives us a chance to reinforce our point of difference and all of our signs and signals suggest that customers are having a very good experience on Etsy right now.

And frankly we have additional investment capacity and we are using that. We are doing things like investing in TV right now. We're expanding that to Germany and the U.K. in the fourth quarter so that we can really lean into this moment and try to build as much sustainable momentum not just now but into the future as we possibly can.

Deb Wasser -- Vice President, Investor Relations

Okay. Great. I'm going to go into some margin questions from Shweta Khajuria with RBC, so it's going to probably be for you Rachel. Could you please talk about your Q4 EBITDA margin guide and the puts and takes there? Etsy has a highly variable cost structure and Q2 and Q3 margins were healthy, partially due to upside in revenue. What are some of the most important factors you have taken into account for your Q4 EBITDA margin guide? Could you talk about your expectations on marketing and product spend and also lastly Reverb's impact on the margins?

Rachel Glaser -- Chief Financial Officer

Thanks for the question Shweta. Yes. So, for starters, I want to start with masks. So we've talked about a steady deceleration in masks and we even gave the amount that masks decelerated in September versus August. So that went down to 34% month-over-month I believe is the number that we gave. And so, we would expect masks to continue to decelerate in Q4. And in fact we gave some cautionary guidance about thinking about your 2021 models as well.

In fact; you could think of we gave the year-to-date mask number, but when you think about the full year something upwards of $700 million is pretty much going to need to be taken out of 2021 when you think about 2020. And that will come to play in Q4. So you ask specifically not Q4 you would assume masks decelerate. The second thing I want to point out is that we did our best to give guidance for top and bottom line for Q3.

And when we spend on marketing we had better-than-expected impact from our marketing and product initiatives in Q3 and lower-than-expected impact from headwinds in Q3. So we have a lot of unknowns in Q4. And so we're giving our best to give you top line guidance if our marketing, if the headwinds are again as we saw in Q3 if the headwinds are lower and the impact of marketing product is higher, you would expect to see additional flow-through to bottom line. But we're doing our best to manage through an unpredictable environment, particularly with elections coming up and the continued headwinds of the pandemic.

The last thing I think, we broke this out very specifically, when we talked about Q4 margins the biggest thing impacting our Q4 margins is our increase in marketing spend. And those things will hit margins. I laid out four different impacts. For starters we're spending on two above-the-line campaign that is very direct response-oriented meaning we expect direct immediate sales from that campaign. And then there's another television campaign that's new that is in addition to that campaign which is more brand focused. And we showed those examples on the call. And that -- so that's more media spend and more media spend where we would expect some of the yield is going to we achieved outside of the quarter not in the quarter.

Secondly, the creative costs from that new campaign, the brand campaign will all be expensed in Q4. Thirdly, we're also spending more internationally, specifically in the U.K. and Germany, not only on above the line, but on using putting our marketing technology to work really through targeted -- better targeted performance marketing and paid social. And then the last piece of this is we're spending more on performance marketing and it's a lot more competitive to buy media in performance marketing in the fourth quarter. So CPCs will be higher, but we want to get the same impression volume. So we'll be spending deeper into the yield curve still hitting our ROI thresholds, but probably lower ROI than we would have achieved in our previous quarter just because the CPCs will be higher.

Deb Wasser -- Vice President, Investor Relations

Okay. Great. We are at 6: 01 so I'm going to squeeze in one more here. I think this one will be for you to end with Josh. This is from Tom Forte of D.A. Davidson. Can you please discuss the structural competitive advantages, your sellers provide you versus other e-commerce platforms, when it comes to making products at times when large-scale manufacturers are having a hard time keeping up with demand such as masks, desks, during back-to-school gifts for the upcoming holiday?

Josh Silverman -- Chief Executive Officer

Got it. I'll answer the question Tom. I appreciate it.

Deb Wasser -- Vice President, Investor Relations

Okay.

Josh Silverman -- Chief Executive Officer

So first I'd say that there are more and more places coming online to sell you the exact same thing. And if it's the exact same product you can find in 10 or 100 other places, they can only compete on who can sell it to you cheaper or ship it to you faster. And Etsy is the one place you can go, where you're going to find things that are truly unique and different than what you're finding everywhere else and made just for you. And by the way there are millions and millions and millions of them. So for each person, there is some form of beautiful that's just for you. And we're doing a better and better job of surfacing that and helping you to find that. But some of the strengths that our sellers bring are that a they're able to personalize it for you. They're able to customize it for you. So if you need a desk they're going to make it for the dimensions of your room. If you need some clothing, they can actually change the color or the length or the fit to be designed just for you. If you're gifting you can gift like you mean it. But our sellers have also demonstrated tremendous agility. They respond to trends within days. They can literally look at what keywords are really getting a lot of traction, where is the search volume happening and start making product within hours or days of the trends that they're seeing.

And last, but certainly not least, they're not reliant on one supply chain concentrated around very few factories and fulfilled from a very few fulfillment centers. And that allows for the dynamism of the marketplace to meet the buyers where they are and to be able to do that in times when other people are meeting constraints. So we think that the individualization, the personalization and frankly the humanity of the Etsy marketplace at a time when you're being pulled apart and distant from people the opportunity to connect to create connections and meaningful connections, we think is super important now, but we think it's enduring too. We think that that kind of thing is something people are going to discover in this time fall in love with and I believe continue to want for years and decades into the future.

Deb Wasser -- Vice President, Investor Relations

All right. Well thank you Josh and Rachel. Thank you all for your questions. I know we didn't get to everyone. So you know where to find us. We will talk to you during the quarter. Thank you all so much and go out roll. Take care.

Duration: 62 minutes

Call participants:

Deb Wasser -- Vice President, Investor Relations

Josh Silverman -- Chief Executive Officer

Rachel Glaser -- Chief Financial Officer

Kunal Madhukar -- Deutsche Bank -- Analyst

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