Good day, ladies and gentlemen, and welcome to the Etsy Inc Third Quarter 2015 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Jennifer Beugelmans. Please go ahead.

Thank you, Sabrina, and good afternoon, and welcome to Etsy's third quarter earnings conference call. Joining me today are Chad Dickerson, CEO, and Kristina Salen, CFO. Before we get started, just a reminder that our remarks today include forward-looking statements relating to our financial performance and results of operations, business strategies, outlook, mission and potential future growth. Our actual results may be materially different. Forward-looking statements involve risks and uncertainties which are described in our press release today and in our 10-Q filed with the SEC on August 6, 2015. Any forward-looking statements that 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 both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release which you can find on our website – our Investor Relations website. A link to the replay of this call will also be available there and if you'd prefer to access the replay via phone, you can find that information in the press release as well. With that, I'll turn the call over to Chad. Chad?

Thanks, Jennifer, and thanks to each of you joining us today. We're excited to talk with you about the progress we made at Etsy in the third quarter. Etsy’s third quarter 2015 results showed continued strength in the business. This quarter, Etsy driven its key metrics. GMS was up nearly 22% and Etsy's revenue growth was approximately 38% year-over-year. Our number of active sellers increased approximately 19% to more than 1.5 million, and our number of active buyers increased approximately 25% to 22.6 million. As we’ve shared before we are focused on four key areas making Etsy an everyday experience, building local marketplaces globally, offering high-impact seller services and expanding the Etsy economy. First stuff is our focus on making Etsy an everyday experience, which is all about mobile. We believe it’s our most important strategic initiative and that’s why we talk about it first every quarter. As we shared previously, we’re quite proud of Etsy’s mobile offerings and in fact during the third quarter we saw 60% of our visits and 44% of our GMS come to Etsy through the mobile device. Most of this mobile traffic comes to Etsy’s mobile web, which generally converts at a significantly lower rate than desktop, and both of these channels convert at a lower rate than mobile apps. So with the shift in traffic patterns that’s occurred over the past several quarters, a majority of our traffic that previously came into Etsy through the desktop experience now comes to us through mobile web. Our strategy has been and continues to be to drive traffic from the lower converting mobile web experience into our higher converting app experience. We measure our progress in the narrowing of the gap between mobile visits and mobile GMS. In fact it is one of the most important…

Thanks, Chad, and hello to everyone joining us today. Just a note, unless I say so, all the comparisons I'll be referring here are on a year-over-year basis. Let's start with GMS. During the third quarter of 2015, the Etsy marketplace generated $568.8 million in GMS, up 21.7%. Growth in GMS was driven by growth in active sellers and active buyers. At the end of the third quarter, Etsy had 1.5 million active sellers, up 19.4%. As a reminder, an active seller is one who has incurred at least one charge from us in the past 12 months. Also at the end of the third quarter, Etsy had 22.6 million active buyers, up 24.9%. Also, as a reminder, active buyers are those who have bought on Etsy at least once in the past 12 months. Etsy's third quarter results demonstrate our continued year-over-year progress in narrowing the gap between mobile visits and mobile GMS and highlighted the results of continued improvements in our mobile offerings. Approximately 60% of our visits come to us from a mobile device, which is up 500 basis points year-over-year and flat quarter-over-quarter. This growth continue to outpace the rate of growth on desktop, more importantly about 44% of our GMS came from a mobile device, up 600 basis points year-over-year and 100 basis points quarter-over-quarter. Etsy's international business continue to expand with international revenue growing 36.6% in the third quarter. However, percent international GMS declined to 29.3% in the third quarter, compared to 31.6% last year, and 30.2% in the second quarter. As a reminder, percent international GMS is a percent of total GMS from transactions where either the buyer or the seller is outside of the U.S. We continue to believe that we can grow percent international GMS over time to represent 50% of…

Thank you. [Operator Instructions] Our first question comes from the line of Heath Terry of Goldman Sachs. Your line is now open.

Great, thanks. Kristina, I was wondering if you could give us a bit of an update on the progress in building out local sellers and some of the key markets that you’ve been working in as a way to offset the impact of FX on the dollar based sellers that you have across broader transactions. And then to the extent that you are exploring same day delivery here in New York around the holiday season, realized its very too early to say anything specifically about how – what kind of impact that’s having, but curious as to the response from sellers to the rollout of that? What sign-up has been like and what the interest level has been like from sellers outside of New York City?

So, Heath, I’m going to jump in. This is Chad speaking obviously.

Thanks, Chad.

The local market places, as I mentioned in my remarks, one of the things that we’ve learned from talking with our sellers and buyers I mean in the U.K. and Australia for example and again the U.K is the strongest market, is that those buyers tend to prefer buying local goods in those markets. So, as I mentioned, we’ve been running tests and search to feature local merchandise, domestic merchandise in those markets, more prominently to really meet those buyer needs and expectations. So we’re just testing that right now, but that’s one way that through the search experience, which drives a lot of traffic and transactions to drive that local marketplace. On Etsy ASAP it’s very much a test at this point. What we have noticed in the last holiday season was a lot of local activity here in New York City. So as the days go on, it gets closer to Christmas or Hanukkah, we noticed that buyers in the New York area were buying from local sellers even through our normal system. So, we’re just piloting that out. It’s one of the new tests that I think what we really focused on there is it’s more about buying local and promoting that local community. I think it’s important to note to those of you on the call, who live within the New York area on Wall Street that we deliver to you. So please take advantage of it.

And Heath, I will just add a couple of quantitative points to Chad’s comments. With regard to international sellers, as we talked in the past about the different buckets of GMS, U.S. dollar to international buyer being a biggest bucket of international GMS, but international seller to U.S. buyer continuing to grow nicely and of course as we mentioned on the call, local international seller to international buyer doing very well. So we continue to see great health in our international sellers. And a lot of it has to do with the kinds of efforts that we're making, Chad mentioned on the product side, and also continued grassroots effort to attract sellers to the platform. And the question of Etsy ASAP, I think it is important to note it is a pilot. The sellers we’re in it were handpicked. So we're not expecting sellers to sign up for the program because it's a pilot it's a small group of sellers who are participating. But still a lot of nice inventory and I encourage you to go to the site and look at what we're offering in Etsy ASAP right now on the platform.

Great, thank you.

Thank you. And our next question comes from the line of Brian Nowak of Morgan Stanley. Your line is now open.

Thank you for taking my questions. The first one is on the lifetime value and the way you’re evaluating the ad spends. Can you just help us to better understand kind of how you’re quantifying the global attribution model, the positive ROI and what's the best way externally for us to kind of get your understanding for the ROI in your ad spend? Then the second one, I just be curious for any impact at all since the Amazon launched handmade and kind of how you think about the seller overlap and any impact from the sellers moving on to Amazon at also part? Thanks.

Yes, we’ll take the second one first, the question about Amazon handmade. As I said before in other venues, we know our sellers extremely, extremely well. We’ve been working with them for a decade. And we believe that Etsy is the best platform for them to be creative entrepreneurs and build businesses on their own terms. We’d also know and talked about before on these calls that half of our sellers sell in multiple venues and that Etsy is the primary source of income for those sellers, who sell in multiple venues. So really based on what we're seeing in our conversations with our sellers, we have no reason to believe that any competitors are having an impact on our seller business right now.

And Brian to follow up on your marketing question. I'm really glad you asked this question. I think there has been some analyses out there that doesn't capture our marketing spends accurately and so this gives us a chance to talk openly about it. As we noted in our prepared comments, year-over-year growth in marketing spend, during the first three quarters of the year, has been impacted by business changes and reorg that we put in place in September 2014. So, it's actually not comparable. And as we noted in this particular quarter it was up 74% on a year-over-year on a comparable basis, 57% in the second quarter on a comparable basis, when we reported 77%. And in the first quarter was up 45% on a comparable basis, when we reported 63% growth. And so making a quarterly connection between our marketing spend and its efficiency is disconnected from our global attribution model and because our LTV is a two year LTV, so we are looking at a positive ROI, we're looking at a dollar in a dollar out over a two-year basis. For example when you look at quarterly marketing spend , we don’t take into account any seasonable spend and you will be able to see able to see this when you look at in the fourth quarter which is our biggest quarter but from a year-over-year growth rate perspective, start to taper down . Another reason that from this marketing spend divided by active buyer is not so accurate for us, is because it includes a number of expensive, that go beyond direct new buyer acquisition cost. And we are only paying for a season close, for a small minority of those active buyers it’s another reason why the math of marketing spend, kind of the net ad number doesn’t work, we are not spending money to acquire each of our active buyers. And when you look at our marketing expense, at a growth level it contains many other things, PR, seller development, brand design, brand research and not just our digital marketing dollar. And the last thing it’s important keep in mind is that 90% of our GMS comes from organic sources. So only 10% of it is a result of our paid marketing dollars, and paid GMS as we pointed out has grown nearly 2.5 times our reported GMS growth rate in the first three quarters of the year and how that paid GMS has made an outsized contribution to our new buyer growth. So that’s why we feel confident when we look on a quarterly basis, and our marketing – our digital marketing dollars that had been put in place are performing well. And the second layer to that of course is the positive ROI model. And we committed to remaining ROI positive at the aggregate corporate level.

Great, thanks. One more just on the manufacturing marketplace, Chad talked about how should you think about kind of cadence of kind of go to market and kind of pushing that out – is it a 2016 event or is it something kind of look at the end of the fourth quarter?

So it’s important to note that, this is a slow rollout. We are still working out the business model for it. If you recall for example we launched wholesale a little over a year ago and wholesale is still very much a contained product for us. And that was still fine-tuning. So what I would say is not to think of it even from a 2016 perspective as a significant contributor. Really think of it for us, it's just the beginning. It's just the first innings of Etsy manufacturing. What we think is a great long-term opportunity for Etsy.

Great. Thanks.

Thanks, Brain.

And our next question comes from the line of James Cakmak of Monness, Crespi, Hardt. Your line is now open.

Great, thanks for taking the questions. I appreciate all the color you have provided on the marketing side. Kristina so I understand correctly, if I look at just snapshot here for the third quarter. It's been about $10 million on search and then product ads and about 10% of your traffic is paid so is the math looking at $10 million to acquire about 100,000 new buyers this quarter, is that the way to think about the customer acquisition cost? And then Chad, on the organic growth and buyers, research is one of the things that you guys have really talked about – I want to understand, what exactly being done on the backend to work with that to create a structured dataset which can potentially even further improve your organic traffic?

So I will take the marketing question first and then Chad can answer your search question. So James just to be clear, we are talking about 10% of our GMS, our paid GMS. Comes from our marketing spend. So we disclosed that we spent about $10 million in the quarter between GPLA SEM and affiliate marketing and if you take out 10% of our GMS, that would be – it's not directly correlated in the quarter because of our two-year LTV but if you insisted on doing a quarterly comparison that would be your best comparison as to what that $10 million is generated.

Great. And on the third site I’ll talk about it in two different ways. You obviously have the question about organic search. We continue to make investments in SCO, over the past quarter we’ve launched a new category browsing system on Etsy that you’ll see if you look at the homepage. We believe that this is more SCO friendly and more search engine friendly, but really, early days of that. On the on-site search you talked a bit about this in the last quarter, but we’ve been live now for a few months with exploratory search, which is really leveraging all the investments that we’ve made in big data and data analysis to create out of all of the unstructured data on Etsy over 30 million listings, a very structured shopping experience that is useful and satisfying to a typical commerce buyer. So we continue to invest on both sides of the organic search via outside search engines but also our search engine on Etsy.

Okay. Thank you and just one follow-up. How important is it for you to maintain growth in active buyers that outpaces the growth of active sellers? Is it going to be more about just making sure that flywheel is going? Because we have seen the growth rates begin to increasingly converge or is that more about gaining more and more longer share from existing base? Thank you.

Sure, James, so the first thing I’d say is, we don’t actively connect active seller growth with active buyer growth so it’s distinct initiatives for us. On the active seller side, what we’ve said consistently is we don’t believe we have an inventory problem. The opportunity we have is to connect our amazing 1.5 million active sellers with more and more buyers over time. And so when we think about active seller growth, that active seller growth that you see is largely organic. We don’t have plans in place or significant initiatives in place to acquire sellers proactively. And so we get really excited when we see our active seller growth because it is a testament to the power of the platform. On the active buyer side, we had certainly through our paid channels and our or organic channels, whether it’s engaging our existing buyers for acquiring new ones we’re certainly focused on – proactively focused on growing active buyers. When we look at the current growth rate in this quarter, what I’d like to point out with regard to active buyer growth is two things: the first is that in this quarter we anniversary AOM and the acquisition of a little market, which represents about 2 to 3 percentage points of active buyer growth. And the second thing I’d like to point out also in the international realm is to remember that our U.S. seller to international buyer GMS, which is our biggest bucket of international GMS. That GMS declined 12% year-on-year when compared to 6% decline in the second quarter, flat in the first quarter, and then up double-digits in both the fourth quarter and third quarter of last year. So what that means is that our international buyer activity has been contracting in the quarter and that impact the active buyer growth. This active buyer represents a buyer who has purchased from us in the last 12 months.

Thank you. [Operator Instructions] And our next question comes from the line of Gil Luria of Wedbush Securities. Your line is now open.

Yes, thank you. So you mentioned your seller growth. It looks like the net ads – the seller net ads in the quarter were the lowest you’ve reported and were significantly down year-over-year. What do you describe that to?

Gil, as we said before, we don't really think about it in terms of net ads. When we look at active seller growth, its active seller growth over the course of the twelve month period and from an active seller perspective, we're not looking to add on a quarterly basis. And so from our perspective, we look at our active seller growth and we're really excited about it. It represents largely organic growth and points to the power of our platform.

Got it. And then you mentioned the shift to integrating PayPal into direct checkout. So it sounds like you're no longer – that now direct checkout is mandatory for any new store, could you remind us when you started that and when that anniversaries next year?

We launched in October 27. So it was actually a fourth quarter launch, not a third quarter launch.

Got it.

So we will anniversary on October 27, 2016.

Got it. Thank you.

Thank you. And our next question comes from the line of Thomas Forte of Brean Capital. Your line is now open.

Great. Thanks for taking my question. So the first one I had was on the Etsy manufacturing marketplace, what gives you confidence you’ll be able to rollout this initiative and basically protect your brand, basically meaning forge agreements with manufacturers that are true to the way that Etsy does business. And then second, just unclear, you sort of answered this question, but when did you begin experiencing the pressure on the international FX exchange rates on buyer behavior, so we can know when you’re going to anniversary that next year? Thanks.

All right, I will take the first one and Kristina will take the second one. Thanks, Tom. On Etsy manufacturing, I think it’s really important to understand that the network that we're building is very – as I mentioned we're reimagining manufacturing and it's more human, it’s smaller scale. And what we're seeing in the early days of the launch of our marketplace, it's been out a few weeks now, is that the range of participants are, as I said in my earlier remarks, range from Etsy seller, we've seen a lot of Etsy sellers who were offering their excess capacity to other sellers to very small operations like I mentioned in the [indiscernible] operations up to family-owned factories. So in terms of the brand, we think that we're really proving this re-imagination of commerce via the product and showcasing manufacturers in a way that is very consistent with the brand, very transparent and very valuable [ph]. So we think over time, we’re just proving it with the products and the participants in the marketplace. We're being very selective and very careful in who we allow. Up until now we've had about 600 manufacturers apply in the marketplace to give you a sense of scale at this point.

And Tom to answer your FX question, I think our international buyer to U.S. seller activity mirrors the global currency. So if you were to look at the euro, for example, which is the currency we're most exposed to, we’re also exposed to the Australian Dollar. The euro has started to very gradually slide in the fourth quarter and the beginning of the first quarter, but it really took a dive in the second half of March of this year. If you go back and look at euros to U.S. dollar charts, you'll see what I mean. And so from our perspective, we start to anniversary this in a significant way in the second half of March of 2016.

Great. Thank you very much.

You bet.

And ladies and gentlemen, this does conclude the program for today. Thank you for participating. You may all disconnect. Everyone have a great day.