Rachel Glaser
Senior Director of Investor Relations at Etsy
Thanks, Josh. And thank you, everyone, for joining our second quarter earnings call. My commentary today will cover consolidated results for our House of Brands, key drivers of performance and Etsy Marketplace stand-alone results where appropriate.
Last quarter, I commented that one of the things I'm most proud of is Etsy's ability to navigate through choppy waters. And our second quarter performance further demonstrated the resiliency of our business, the benefit of our capital-light, highly profitable business model and our team's strong execution.
We delivered strong second quarter consolidated GMS of $3 billion, roughly flat year-over-year. Revenue increased 7.5% year-over-year to $629 million, and adjusted EBITDA was $166 million with a healthy 26.4% adjusted EBITDA margin. We are pleased to have delivered strong profitability through this challenging business cycle while also investing in future growth. It's worth noting that our adjusted EBITDA has grown at a 43% CAGR since the second quarter of 2019.
While year-over-year consolidated GMS growth remained negative in April, trends turned positive in May and June, driven primarily by strong Etsy Marketplace growth in several of our international markets and continued growth in active buyers. FX headwinds softened to 20 basis points, down from 200 basis points in the first quarter. GMS for our 3 subsidiaries was largely flat in the second quarter, driven by a return to year-over-year GMS growth at Depop, which was offset by some softness at Reverb and Elo7.
Our solid revenue growth can be attributed to continued growth in our marketplace revenue, which increased 3% year-over-year. In addition to the impact of the Etsy Marketplace transaction fee change that we fully lapped during the quarter, marketplace revenue also benefited from a mix shift to more international transactions that often yield higher payments fees and some positive contribution from our subsidiaries.
While a smaller percentage of revenue overall, services revenue was our standout growth driver in the quarter, with a 21% year-over-year increase, the highest growth rate in this component since Q4 of '21. Etsy Ads was the key driver here due to continued product optimization. For example, we utilize multiple retrieval systems to increase the relevance of paid ads, including integrating XWalk, our real-time retrieval engine. These enhancements allowed us to show more ads in our search results without negatively impacting conversion rate.
These contributions drove consolidated take rate to 20.9%, modestly ahead of the take rate implied at the midpoint of our quarterly guidance. We are pleased with the strength of our profitability and the returns we are getting on our investments in both product development and marketing. Q2 was another excellent quarter for returns in both areas. And you'll see that even as we have gained further leverage in marketing, we have -- we are leaning a little bit more into product development, where we see very strong value creation, productivity and velocity as we have scaled.
We believe the investments we are making will continue to be drivers of long-term growth and differentiation as we unpack the significant opportunity ahead. And as I just alluded to, our consolidated product development spend increased 19% year-over-year to $122 million in the second quarter. Meanwhile, for the Etsy Marketplace, product launches increased over 50% year-over-year, a great sign that we're getting bolder and faster despite getting bigger.
We continuously realign resources to focus our talent on the areas we believe will have the highest yield, which is why we have some of the highest revenue per headcount amongst our peer set. We have strong conviction that our teams are working on the true, vital few to enable 2023 and 2024 growth.
Our consolidated marketing spend increased 1% year-over-year to $166 million, driven by a 1% year-over-year increase in consolidated brand spend. We leaned into our Etsy Hazard campaigns in our top 3 markets, highlighting home and living, style and gifting purchase occasions. Our performance marketing spend was largely flat to last year as we ran incrementality tests on our ROI models and selectively pulled back on performance marketing spend in several key channels. Overall, we gained leverage on our marketing spend in the second quarter, with marketing as a percentage of revenue decreasing 160 basis points year-over-year to 26%.
While we primarily utilize ROI model to drive our marketing spend, we understand investors' focus on LTV to CAC and thought we could use this opportunity to provide our view of how you should think about this metric, specifically for the Etsy marketplace.
Let's start with CAC. Many of you have concluded that the rate of growth of our total Etsy marketplace marketing spend has outpaced our new buyer growth. That is correct. In fact, from 2019 to 2022, blended new buyer customer acquisition cost increased about 50% after accounting for off-site ads revenue. Effectively, offsite ads revenue offset a portion of our performance marketing spend. And as such, OSA revenue is important when considering your CAC calculations, and we've seen that a minimis factor leads to incorrect conclusions.
And then moving to LTV. The Etsy marketplaces customer lifetime value also increased about 50% over the same period, which allowed us to spend deeper while maintaining very strong efficiencies. This very impressive increase in LTV was driven by a higher GMS per active buyer, transaction fee increases, Etsy Ads growth and Etsy Payments expansion. The stability in our CAC to LTV reflects our long-stated philosophy of investing to a marginal ROI threshold that we establish for all of our marketing spend worldwide.
So what do we mean when we say that we have maintained very strong efficiencies? We think this slide should help clarify our view. While our blended LTV to CAC has held steady, our performance marketing ROI has increased over 40% since 2019 due to the following: successful expansion of our paid marketing to new channels and more countries, which drove an increase in paid GMS and which we believe has contributed to significant non-U.S. GMS growth; and as our buyer mix evolved, we increased the amount of performance marketing spend that goes to retaining and reactivating buyers and encouraging purchase frequency.
We have worked hard to maintain the gains we achieved during the pandemic period as well as through reopening and challenging macro conditions. Given our healthy buyer retention rate as well as the significant retention of our GMS and scale of Etsy, we believe this investment has been well made. And as a reminder, our LTV models assume that the majority of the payback comes within the first 30 days after acquisition, but there is a tail on the investment, which drives future retention and frequency, which is the L in lifetime value.
In connection with that, we also have significantly expanded our brand investments during this period, which, as we have reported, moved brand awareness up materially in our core markets, contributing to Etsy now being more of a household name than we were several years ago. In summary, we feel great about the returns our marketing spend has generated, and we will continue to invest with discipline and focus as the marketplace scales in the future.
Moving now to our review of Etsy marketplace GMS and buyer metrics. During the second quarter, Etsy marketplace GMS was nearly flat year-over-year, declining just 0.7% to $2.6 billion. While we continue to experience week-to-week volatility, year-over-year growth trends turned positive during the quarter. These results can be attributed to several factors, including easier year-ago comparisons, positive order growth, moderating FX headwinds and healthy growth in select international markets.
We also saw our average order values remain largely unchanged on a year-over-year basis. Data suggest that Etsy marketplace GMS remains pressured by consumer wallet share shifts from goods to services and headwinds to consumer discretionary spending, particularly for lower household incomes. When using U.S. Census average household income data by ZIP Code, we have seen a clear delineation of GMS trends between buyers with income above $100,000, where we experienced meaningful GMS growth; and lows below that level, where we continue to see declines.
This slide shows a monthly view of Etsy Marketplace performance, where we've seen an encouraging trajectory towards positive GMS growth since the beginning of the year despite the stiff macro headwinds. In fact, the Etsy marketplace's GMS was marginally positive year-over-year in July, making our third consecutive month of growth.
From a geographic perspective, 47% of Etsy marketplace GMS in the second quarter was from transactions where either the buyer or the seller or both are outside of the U.S. GMS, excluding U.S. domestic, returned to positive year-over-year trends, increasing 5% in the second quarter. While we had a modest year-over-year decline in the U.K., we reported year-over-year growth in some of our core markets, including Germany and France. We also saw strength in select noncore Western European countries, an encouraging testament to our growing awareness in these markets, particularly as we have carefully expand our performance marketing with limited, very targeted spend and improve our overall search and discovery capabilities in those markets.
We are pleased to report that year-over-year GMS trends improved sequentially in 3 of our top categories: home and living, apparel and craft supplies, as shown on the left side of this slide. We also had year-over-year growth in horizontal categories, such as gifts and personalized items, with Etsy being a great Mother's and Father's Day destination. We remain extremely excited about our long-term ability to gain market share in our top categories as well as improve awareness of Etsy for specific purchase occasions where we have so much great and unique merchandise to offer.
The Etsy Marketplace ended the second quarter with a new all-time high of 90.6 million active buyers, and our positive year-over-year growth rate accelerated sequentially to 3% from 1% in the first quarter. Growth in our non-U.S. active buyers continued to outpace trends in the U.S. as the majority of our active buyers are still in the U.S. We also continue to see strength at active buyers who identify as men, which increased 8% year-over-year.
While our GMS per active buyer on a trailing 12-month basis for the Etsy marketplace declined 6% year-over-year to $128 in the second quarter, we are seeing early signs of stabilization on a sequential basis, as you can see from the chart. Overall, our GMS per buyer has held up fairly well, up 28% since the second quarter of 2019. And we continue to maintain nearly all of our pandemic gains. We remain optimistic in our ability to once again inflect GMS per buyer over the long term, both in the U.S. and internationally.
We added 6 million new buyers in the second quarter, which is over 40% higher than the average number of new buyers we acquired on a quarterly basis in pre-pandemic periods. We also saw the negative year-over-year new buyer trend moderate to 3% in the second quarter compared to a 6% year-over-year decline in the first quarter. We reactivated nearly 6 million lapsed buyers, up 21% year-over-year. Overall, we've done a really good job of keeping our active buyers engaged. In fact, our active buyers' retention rate on a trailing 12-month basis remained above pre-COVID levels. On a quarterly basis, retention trends improved from both the prior year and prior quarter.
We ended the quarter with 7 million habitual buyers, up 218% from the second quarter of 2019, but down 9% year-over-year. Encouragingly, our habitual buyers were largely flat on a sequential basis as the strong pandemic-related periods fully rolled out of the trailing 12-month figure. Germany, France and several noncore Western European markets experienced strong habitual buyer growth. We also saw a year-over-year increase in the number of habitual buyers who e identify as men.
Continuing the trend we previously reported, the vast majority of the year-over-year decline in individual buyers can be attributed to buyers moving into the repeat purchase category, with very few of these buyers lapsing entirely. Strong performance in Western Europe also contributed to a 2% year-over-year increase in repeat buyers.
Before moving to the balance sheet, we recorded a noncash impairment charge of $68 million to the long-lived tangible and intangible assets related to Elo7. This impairment charge was fully offset by tax benefits related to Elo7, which netted to a neutral impact to our quarterly net income and earnings per share.
As of June 30, we had $1.2 billion in cash, cash equivalents and short- and long-term investments. During the second quarter, we repurchased $39 million in stock under our $600 million May 2022 Board authorized repurchase program, of which approximately $114 million remained available as of June 30. On June 14, the Board authorized a new $1 billion share repurchase program. Our free cash flow this quarter was a healthy $128 million. We continue to convert nearly 90% of our adjusted EBITDA to free cash flow on a trailing 12-month basis as our marketplace operates with minimal cash requirements.
Now turning to our outlook. We expect to complete the Elo7 divestiture shortly, so that business is only included in our guidance for half of the quarter. As a reminder, Elo7 reported $70 million in GMS for all of 2022, so 0.5% of our consolidated total GMS. Elo7 represented less than a 50-basis-point headwind to our consolidated adjusted EBITDA margin last year.
We currently estimate our third quarter 2023 consolidated GMS to be approximately $2.95 billion to $3.1 billion, about $3.03 billion at the midpoint, up slightly compared to last year. External factors we're keeping an eye on for the third quarter include those that could influence consumer discretionary spending, including wind down of previously high levels of consumer savings, potential negative impact from the resumption of student loan payments this fall and discontinuation of child tax credits. On the plus side, we are reading all the same data UR about the potential for a soft blending for the U.S. economy. So given the continued uncertainty, we're forecasting the midpoint of our guidance to land with a slightly positive year-over-year performance, similar to what we delivered in July.
We are forecasting revenue of $610 million to $645 million, up nearly 6% at the midpoint compared to the third quarter of last year. The implied take rate for the third quarter is down slightly sequentially, and please keep in mind that we sometimes see seasonal pressure on our fourth quarter take rate. We currently expect another very strong margin quarter for Q3 with an adjusted EBITDA margin of 27% to 28%. It's quite encouraging to be guiding to a slightly positive GMS at the midpoint of our guidance with another sequential improvement in our GMS trend line currently anticipated for the third quarter. We aren't economists, so it's hard to predict how the macro environment fares from here. But as Josh highlighted, we have an impressive pipeline of product and marketing initiatives where we continue to see strong value creation and return on investment and strongly believe we are on the right path to reaccelerate growth.
Thank you all for your time today, and I will now turn the call back to Deb to take your questions.
