Etsy, Inc. (ETSY) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined the First Quarter 2016 Etsy Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. Jennifer Beugelmans, Vice President of Investor Relations. Ma'am, you may begin.

Thanks, Letif [ph], and good afternoon everyone, and welcome to Etsy's first 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 and in our 10-K filed with the SEC on March 1, 2016. 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 non-GAAP to GAAP measures is included in today's earnings press release which you can find on 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 hello to everyone listening. I'm excited to share our recent progress with you, which includes strong execution against our product roadmap and important milestones within each of our four strategic initiatives. In the first quarter of 2016 our revenue grew nearly 40% and GMS grew 18%. As of March 31, our vibrant community expanded to include 1.6 million active sellers and 25 million active buyers. We believe our first quarter performance provides a good foundation for the rest of 2016 and we are reiterating our full-year and three-year guidance. I'd like to recap our progress starting with our Etsy Everyday strategy. We believe the power of human connection is central to the Etsy buyer experience and making these connections a regular habit for Etsy sellers and Etsy buyers, particularly on a mobile device, is one of our most important initiatives. In 2015 we improved the mobile experience from end-to-end and developed products and tools that enabled Etsy sellers and buyers to connect and transact more seamlessly across multiple devices, countries and currencies. This important foundational work further expanded our momentum in mobile during the first quarter. As of March 31, our mobile apps had been downloaded more than 35 million times. We also continued to narrow the gap between mobile business and mobile GMS, which we view as a key data point for the success of our Etsy Everyday strategy. During the quarter, approximately 63% of our visits and slightly more than 47% of our GMS came to Etsy through a mobile device. All of this work created a solid platform to launch more products, tools and services in 2016 and we're already off to a strong start in the first quarter with the introduction of Shop Videos and our new Shop Home, the front door to our seller shops in the marketplace. We've heard from our buyers that they're more likely to purchase an item when they know the story about a shop and the people behind it. At the same time, sellers have expressed interest in having more creative control over their Etsy shops, promoting their brand and standing out in the marketplace. Responding to these community voices, we launched Shop Videos in January and our new Shop Home in early April. Both products promote people-centered commerce and enable sellers and buyers to connect in new ways. Shop Videos allow sellers to quickly record, edit and upload a video to share the stories behind their shops directly with buyers. Shop Home pages have received a complete redesign and are now more customizable and mobile-friendly, and they provide a consistent shop experience for buyers regardless of their device. The new Shop Home offers a more modern look and gives our sellers the additional creative control over the look and feel of their Etsy store fronts. Let's turn to our international strategy where our focus is on building local marketplaces globally. In the first quarter, approximately 30% of our GMS came from international sales, which was roughly flat compared to the first quarter of 2015. Although the majority of our international GMS continues to be driven by cross-border trade, during the first quarter we continued to focus our efforts on fostering local connections and encouraging interactions between sellers and buyers in the same country. Although this GMS cohort remains one of our smallest, its growth accelerated for the fourth quarter in a row and was faster than any other GMS bucket during the first quarter. The U.K. continues to serve as a powerful example of our emerging success in fostering in-country transactions in our key international markets. This quarter we once again saw nearly half of our U.K. GMS come from domestic transactions and GMS growth between U.K. sellers and U.K. buyers accelerated in the first quarter to roughly 70% year over year. This growth is significantly faster than GMS growth between U.K. buyers and sellers in other countries. In addition to tailoring content, search results and listings on Etsy for local markets, we're also engaging in our international communities through local events and partnerships. We recently launched a partnership with the Galleries Lafayette Group in France through its local sellers we featured in Etsy shops at select stores in Paris. We believe that initiatives like this support our efforts to build the Etsy brand globally by emphasizing local connections and communities. Our third strategy is building high-impact seller services and we made significant progress in recent weeks. During the first quarter, seller services revenue grew nearly 60% year over year and represented approximately 53% of our total revenue. Last quarter we told you that, during 2016 we would launch a new seller service. And in early April we introduced Pattern by Etsy. Pattern, which is available globally, enables Etsy sellers to create their own custom websites in minutes, leveraging all of the hard work and investment they've already put into their Etsy shops. As we've outlined before, any seller service we launch will address the fundamental pain point that our seller space running their created businesses and will allow sellers to spend more time on creative work and less time on administrative tasks. We know from our sellers that they need help with marketing and promoting their businesses. Based on our surveys, more than a third of our active sellers are interested in opening a commerce site of their own. Pattern not only demonstrates our commitment to our seller line business model, it also illustrates how we're working toward our long-term goal to support our sellers wherever they choose to pursue commerce. As we shared with you before, our research indicates that more than half of our sellers sell in other channels, even though Etsy remains their largest source of sales. So we're excited to offer Pattern to Etsy sellers who want to take their creative businesses to the next level. Overall feedback has been really positive and we can't wait to see the Pattern sites our sellers build to showcase their brands. Looking ahead, we'll continue to explore opportunities to further expand the geographic reach and functionality of our existing seller services, as well as add new ones. Finally, our fourth strategic initiative is expanding the Etsy economy. At a high level, this initiative includes many of the long-term debts we're making and our ability to reimagine commerce. Etsy Wholesale and Etsy Manufacturing are two important examples of how we believe we can add new members to the Etsy community. During the first quarter we continued to enhance both of them. Within Etsy Manufacturing, we focused on improvements to the existing search and match experience between sellers and manufacturers and making it easier for these values-aligned manufacturers to use our marketplace. We continue to receive a steady stream of applications from manufacturers and we know that the program has helped facilitate numerous connections and partnerships between sellers and manufacturers. In Etsy Wholesale, more than 15,000 retail boutiques have applied to participate in our programs. We remain focused on facilitating new relationships in order to broaden the reach of the Etsy economy. Expanding the Etsy economy also means supporting an environment that makes it easier for creative entrepreneurs to grow their businesses and connect with other stakeholders who share their values. In March we hosted an event in Pittsburgh that connects small, creative businesses, small manufacturers and economic development groups. And in a few weeks we'll be hosting the first ever Etsy Maker City Summit at our Brooklyn headquarters, which will bring sellers, retailers and manufacturers from the Etsy community together with city leaders. Etsy Maker City champions a new model for economic prosperity, one that puts people at the center of commerce, promotes sustainable production, and empowers people to build creative businesses on their own terms. We entered 2016 with strong momentum and Etsy has not missed a beat. With a clear roadmap, a deep bench of talent, and engaged community, and solid financial footing, I firmly believe we have the tools in place to continue to achieve our vision and deliver value to all the stakeholders within our community. So now, before I turn the call over to Kristina, a quick note on an exciting development. Etsy's homepage will be getting a makeover later this week. The new homepage will offer a more relevant experience for every visitor, whether they're signed in or signed out, and whether they're a first-time shopper or a highly-engaged seller or buyer. So I encourage all of you to visit etsy.com in the coming days to check it out. With that, I'll turn the call over to Kristina to walk you through our quarterly results. Kristina?

Thanks, Chad, and hello to everyone. Just a heads-up, unless I say so, all comparisons I'll be talking about here are on a year-over-year basis. Let's start with GMS. During the first quarter of 2016, the Etsy marketplace generated $629.9 million in GMS, up more than 18%. Growth in GMS is driven by growth in active sellers and active buyers. At the end of the first quarter, Etsy had 1.6 million active sellers, up about 12%. 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 first quarter, Etsy had 25 million active buyers, up about 20%. Active buyers are those who have bought on Etsy at least once in the past 12 months. Etsy's first quarter results demonstrated our continued year-over-year progress in narrowing the gap between mobile visits and mobile GMS and highlighted the results of continued improvement in our mobile offering. Roughly 63% of our visits come to us from a mobile device, which is up nearly 400 basis points from last year and up roughly 200 basis points from last quarter. This growth continued to outpace the rate of growth on desktop. More importantly, about 47% of our GMS came from a mobile device, up more than 400 basis points from last year and approximately 300 basis points from last quarter. Etsy's international business continued to expand, with international revenue growing roughly 47% in the first quarter. Percent international GMS was 30.3%, which was a slight decrease compared with the 35% last year, but an increase compared to the 29.2% last quarter. And as a reminder, percent international GMS is the percent of total GMS from transactions with either the buyer or the seller is outside the U.S. We continue to believe that we can grow percent international GMS over time to represent 50% of our total GMS. Currency rates continued to directly and indirectly affect Etsy's overall GMS growth rates and percent international GMS. Excluding the direct impact of currency translation on our non-U.S. dollar denominated goods, Etsy's GMS growth would have been approximately 19%. The 0.7 percentage point impact is an improvement compared to both last year and last quarter. We continue to believe that weaker local currencies in key international markets are having an indirect impact on international buyer behavior and GMS growth. That said, as we begin to anniversary the U.S. dollar's major gains against global currencies, it becomes increasingly difficult to estimate the indirect impact of currency exchange rates on international buyer behavior. GMS between international buyers and U.S. sellers continued to decline year over year, albeit less than we've seen in previous quarters. For comparison purposes, this bucket of GMS was down about 11% in the first quarter of 2016, which compares to an approximate 13% decline last quarter. The continued year-over-year decline leads us to believe that the indirect impact is still a drag on overall GMS growth. This trend has extended into the second quarter of 2016 as GMS between international buyers and U.S. sellers still declined year over year but improved sequentially compared to the first quarter of 2016, in the month of April. In contrast, excluding ALM, GMS between international buyers and sellers in the same country grew about 56% in the first quarter, and we also saw this growth accelerate further in April. Turning to revenue, during the first quarter, total revenue was $81.8 million, up 40%, driven by growth in seller services revenue and, to a lesser extent, growth in marketplace revenue. We also recognized $1.7 million in gift card revenue. This benefit reflects a payment from our third-party service provider related to unused gift cards. Excluding this payment, revenue growth would have been about 37%. Marketplace revenue grew 18.5%, primarily due to growth in transaction fee revenue, and to a lesser extent, growth in listing fee revenue. Seller services revenue was up roughly 60% and revenue from each of our three services grew faster than GMS and marketplace revenue. Of note, direct checkout continued to benefit from our integration of PayPal into our payment service in late October 2015, and therefore saw its growth accelerate for the second quarter in a row. Gross profit for the first quarter was $53.9 million, up nearly 43%, and gross margin was 65.9%, up 130 basis points. Once again, gross profit grew faster than revenue. This was due to the leverage we achieved in our technology infrastructure and employee-related costs and the gift card revenue, which carries a very high incremental margin. Turning now to operating expenses. Etsy's total first quarter operating expenses were $47.2 million, up 10.5%. Total OpEx as a percent of revenue declined to about 58% in the first quarter, compared with roughly 73% last year. This favorable comparison was partly due to a one-time expense in the first quarter of 2015 related to the $3.2 million charitable contribution we made to Etsy.org. Excluding this expense from last year, OpEx would have grown more than 19% year over year but still would have grown more slowly than revenue. Marketing expenses totaled $15.8 million, up nearly 30%, representing about 19% of total revenue, versus roughly 21% last year and roughly 26% in the last quarter. The increase in marketing expenses continues to be driven primarily by increased spending on digital marketing, including product listing ads and affiliate marketing campaigns, as well as from higher employee-related expenses. Digital marketing continues to generate strong returns for Etsy. Digital marketing expenses in the first quarter grew roughly 30% and generated positive ROI based on our global attribution model. Like last quarter, this resulted in a paid GMS growth rate that was more than triple our reported GMS growth rate. This performance demonstrates that, as we optimize our spend in digital marketing and scale our strategy, we can generate efficiency gains and strong ROI. Product development expenses totaled $12.2 million, up 22%, representing nearly 15% of total revenue, versus about 17% last year and about 13% last quarter. The increase in product development expenses was driven by higher employee-related expenses as we continued to grow our products and engineering staff. G&A expenses totaled $19.1 million, down about 7%, representing roughly 23% of total revenue versus roughly 35% last year and roughly 18% last quarter. Excluding the one-time contribution to Etsy.org made in the first quarter of 2015, G&A expense growth would have been 10.5%, driven by increased professional services spend and rent expense for new office locations. Finally, from a comparison perspective, we also benefited from a mark-to-market adjustment that resulted in lower stock-based comp related to our acquisition of ALM. Headcount at the end of the quarter grew to 852 people, compared with 819 as of December 31, 2015. Looking ahead to the rest of 2016, we expect the pace of hiring to acceleration. Non-GAAP adjusted EBITDA was $14.8 million, up roughly 121%. This resulted in an adjusted EBITDA margin of 18%, up 630 basis points year over year and was driven by the leverage we gained from employee expenses, the high-margin revenue from the gift card benefit I mentioned, and leverage we gained in marketing spend. First quarter net income was $1.2 million, compared with a net loss of $36.6 million last year. Etsy's net income included an $8.1 million foreign exchange gain and a $13.6 million tax provision, both mostly non-cash. During the quarter we recorded positive cash flow from operations of $1.8 million. This compares with $8.9 million in cash from operations generated last year. The year-over-year decrease in net cash provided by operating activities for the quarter was mainly due to the timing of payments to certain vendors. Additionally, to date, we've invested $20 million on the build-out of our new headquarters, including about $10 million in the first quarter. As we've said before, we intend to invest up to $50 million for the build-out. As of March 31, 2016, we had cash, marketable securities and short and long-term investments totaling $281.7 million. To wrap this up, we are reiterating both our 2016 and our three-year guidance. As a reminder, we expect a three-year revenue CAGR in the 20% to 25% range and a three-year GMS CAGR in the 13% to 17% range. In 2016, we expect revenue growth to be at the high end of this range and that GMS's growth will be near the midpoint of this range. We continue to anticipate that the key factors impacting revenue and GMS growth over the next three years will be, number one, the further narrowing of the gap between mobile visits and mobile GMS. Number two, stable percent international GMS. And remember, our guidance assumes that currency remained stable compared to average levels in December 2015. Number three, continued revenue growth in our listing seller services, driven by both adoption and product enhancements. And finally, number four, modest contributions from new product launches and new seller services, including recently developed products and tools such as Pattern by Etsy. We expect to exit 2018 with a full year gross margin that is in the mid-60% range and that 2016 gross margin will be 64% to 65%. We anticipate that the key factors impacting our gross margin forecast over the next three years will be, number one, continued revenue growth from our existing seller services, driven again by adoption and product enhancements, and number two, the impact from new seller services including Pattern by Etsy. I would note though that we don't anticipate launching any new seller services over the next three years that will be dilutive to our gross margin. We also expect to gain leverage in our operating cost structure over the next three years, particularly within marketing spend. In 2016 we expect marketing expense as a percent of revenue to decline, but that overall operating expenses as a percent of revenue will increase This increase will be driven by expenses associated with our new headquarters here in Brooklyn and with Sarbanes-Oxley compliance. As we planned, we expect to complete construction and move in to our new Brooklyn home in the second quarter of 2016. To remind everyone, our headquarters is subject to build-to-suit accounting, and therefore we will not recognize rent expense once we move in. Instead, we expect to recognize incremental depreciation and interest expense of between $1 million to $2 million in the second quarter. After the second quarter we expect to record on average $3 million in depreciation and interest expense per quarter for the duration of our 10-year lease. Finally, from an adjusted EBITDA margin perspective, we estimate that our margin in 2016 will be comparable to 2015 in the 10% to 11% range and that it will expand to high-teens exiting 2018. Over the next three years this translates into overall adjusted EBITDA growth that will be more than two times faster than revenue growth. As a reminder, our strong adjusted EBITDA performance in the first quarter was largely driven by the leverage we gained in employee expenses, the positive impact from that high-margin gift card revenue, and the seasonally low level of marketing spend. In the second quarter we expect to accelerate the pace of hiring. We also don't anticipate another significant gift card revenue benefit. And we expect to accelerate our marketing spend as is typical. Based on these factors, we anticipate adjusted EBITDA margins that will be in the 6% to 7% range in the second quarter. And as a final reminder, historically we record the lowest adjusted EBITDA margins during the second and third quarters. So with that, thanks for listening. I'd like to turn the call back over to Letif [ph], our operator, to open it up for Q&A.

Thank you, ma'am. [Operator Instructions] Our first question comes from the line of Heath Terry of Goldman Sachs. Your question please.

Great. Thanks. Chad, I was wondering if you could give us a sense of the adoption that you've seen both from a manufacturer's perspective but also from a seller's perspective into manufacturing and the manufacturing offering that you've got as you, you know, I guess you're approaching close to nine months with the latest version of that initiative, sort of what you've learned about seller demand for that. And then Kristina, I was wondering if you could also give us a bit of a sense of what kind of impact you saw to -- in the stabilization and I guess even weakening of it, of the dollar here. I know you'd talked about building the intracompany and the growth that you've seen in intra-country sellers and marketplaces. But to the extent that that was a headwind last year, can you tell how much of a benefit it was this quarter that things have started to stabilize from an FX perspective.

Sure. So I'll start with the manufacturing question. Thanks for the question, Heath. It's still, as you mentioned, we’re nine months in to Etsy Manufacturing, it's still very early. We've had, as I mentioned, hundreds of manufacturers apply to the program. At this stage it's very early and it's a long-term bet for us. I think the really important thing to understand from a guidance perspective is that we're not expecting Etsy Manufacturing to be a meaningful contributor this year.

Heath, on the international front, as I mentioned, the direct impact was still an improvement compared to both last year and last quarter. It was about 0.7 percentage points. So we're seeing a sequential improvement there and a year-over-year improvement. The indirect impact on the international buyer behavior, as you know, has always been an estimate for us. And what we're seeing is sequential improvement in both the quarter and in April, but still negative on a year-over-year basis. As I mentioned, the bucket of GMS that is international buyer to U.S. seller was down 11% in the first quarter, which is an improvement over the 13% decline that we saw in the fourth quarter. It's the first sequential improvement that we've seen, Heath. I'd also say and reiterate that we're seeing another sequential improvement in the month of April, which is a continuation of a positive trend but the first signs of a positive trend. It still is down, however, in April, albeit less so. What's super-exciting for us on the international front is continued progress on our local marketplaces global strategy. I think it's so important to remember that this bucket of international buyers and international sellers in the same country grew about 56% in the quarter. In the U.K. alone it grew 70%, and that's an acceleration. And again we're seeing that growth further accelerate in April, both the U.K. and in our five key markets. So we're very excited about the progress we're seeing in our global local strategy and the improving trends that we're seeing from an indirect currency perspective, albeit more tempered.

Okay, great. Thank you.

You're welcome.

Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your question please.

Hi. This is Michael Costantini on for Brian. I just have two quick ones on the guidance. Number one, so your GMS of 18% was above guidance for midpoint of 13% to 17% for the year. What do you expect to cause a deceleration in GMS throughout the year? And then on your EBITDA guidance, you said you expect EBITDA margins to be in the 6% to 7% range in 2Q versus 18% 1Q and guidance for 10% to 11%, so, what should we expect to drive that margin contraction for the rest of the year? Is it increased marketing spend? Thanks.

Thanks, Mike for the question. So when we look at the first quarter, we think we executed really well across all areas of Etsy. And that resulted in robust growth in marketplace and seller services revenue and also outsized EBITDA margins. Today we're reiterating our guidance for 2016 and for the next three years. Our performance in the first quarter was just driven by strong execution and we think we're well-positioned for a productive year going forward. But as it pertains to GMS, recall what we've talked about in terms of the drivers of our top line performance for 2016. We've talked about narrowing the gap in mobile GMS but we've said that the expectation is that we'll continue at the slow but steady pace of narrowing that we saw in 2015. We've talked about the percent international GMS as being roughly flat year over year, meaning no significant improvement in the contribution. And we've talked about robust seller services revenue growth coming from growing adoption. So when we look at those three underlying drivers of our GMS and revenue growth, what we've seen in the first quarter aligns with that. We narrowed the gap at a pace that was similar to previous quarters, the gap in mobile. Our international GMS was roughly flat year over year, slight improvement versus the fourth quarter. And we had robust seller services revenues growth driven in part by a -- by the integration of direct check-out into PayPal which will start to anniversary as we move through the year. So all of these are positive and in line with the drivers that we expected for our GMS and revenue guidance. From a margin perspective, as we've said in our guidance, we expect to -- we expect to see leverage in marketing expense as a percent of revenue as we move through the year. We saw it in the first quarter. So, marketing expense as a percent of revenue, marketing expense growth, won't necessarily be a driver of margin deterioration. But what we have said is we expect OpEx in full to grow as a percent of revenue. So far our performance has been in line with these expectations and again we're looking forward to a productive year. What we've called out specifically with regard to the first quarter relative to the remaining quarters of the year is that our marketing expense tends to be lower in the first quarter than another quarter, and I encourage you to look at 2015 and 2014 to validate that assertion. Also very specific to this first quarter is during the quarter we benefited from a one-time impact of gift cards revenue recognition, and that carries 100% incremental margin for us. And this revenue was about 2 points of adjusted EBITDA margin in the first quarter. And so, and finally, just to look at it seasonally, during the second and third quarters, we tend to record the lowest adjusted EBITDA margins of the year because we accelerate the pace of hiring and we ramp up our marketing campaigns as we move through the year. And again, I encourage you to go back and look at 2014 and 2015 to see evidence of that.

Thank you.

You're welcome.

Thank you. Our next question comes from Andrew Bruckner of RBC Capital Markets. Your line is open.

Thank you and good afternoon. I know you don't give specific guidance for each seller service, but I'm wondering if you could remind us of the order of importance and where at maturity you think Pattern will fall out in that. And then, how much Pattern cost to develop? And your thoughts around developing it in-house versus partnering with one on the website builders? Thanks.

Sure, Andrew. So you're right, we don't break out the individual revenue contribution from direct checkout, promoted listings and shipping labels. So what we've said is that direct checkout is the largest contributor to seller services revenue. Promoted listings is a solid second. And shipping labels is a distant third. However, shipping labels is booked net, so it's 100% incremental. Promoted listings has the high incremental margin you'd expect from a search ads business. And direct checkout, while it has very nice margins, has lower than core Etsy margins, which again one would expect from a payment business. With regards to Pattern, you know, Pattern should have a scale margins that are similar to typical custom website margins. We haven't even recorded any revenue yet associated with Pattern because it's still on free trial, and as a reminder, it's $15 a month, with the first month free. So when we think about Pattern at scale, we haven't given any particular guidance with regard to its contribution to total, just as we haven't given any particular guidance on any of our seller services as to where they'll stand over the long term in terms of their total contribution to seller services revenue. I'd also say, with regard to the question of costs, to launch Pattern is really about headcount allocation. It doesn't require any tech infrastructure investment, any capital investment whatsoever. It's about looking at the opportunities that we have over the long term and prioritizing those opportunities by putting our best product managers, engineers and marketers behind it. So, Pattern doesn't require a significant amount of dollar investment. And to be sure, the team that works on it was relatively small and very nimble in getting the product out.

And Andrew, I would add that the design of Pattern is built very specifically for Etsy sellers, so that they can really leverage their investment in their Etsy shop. So if you look at the cohort data for our sellers that we've released in the last call, our sellers have really loyal -- are really loyal and many of them have invested multiple years in their shops. And Pattern is a really great way to help our sellers who want to build a custom website, be able to launch their website literally in minutes. And as Kristina said, it's a relatively small team, but I think it's just another demonstration of the world-class engineering and product that we have here at Etsy.

Thank you.

Thank you. Our next question comes from the line of Gil Luria of Wedbush Securities. Your question please.

Yes, thank you for taking the question. Can you remind us what the economics are for the new headquarter? So I understand the accounting, but do you own the new building? Do you own the new facility? What's going to be the cash, the periodic cash outlay, for the new headquarters, and how much is that going to be compared to what you've had previously?

Sure, Gil. So it is a lease, it's a ten-year lease. And we're recognizing it using the build-to-suit accounting method, which causes us to record the full cost of the building plus any significant construction cost related to the build-out on our balance sheet as a capital asset. We've also booked a corresponding liability, the facility financing obligation. So we will still make traditional cash rent payments to the landlord. However, those payments to landlord will be treated similar to other capital leases. They'll be comprised of interest expense and principal payments on the facility financing obligation. But I would say, keep in mind that we negotiated a free rent period with the landlord, so these cash payments won't start until that free rent period ends. So, moving forward, there'll be two P&L impacts for you to think about, and that we -- I tried to highlight a bit in my prepared remarks. Depreciation expense related to the capital assets and interest expense related to the payments on the facility financing obligation. And so that will be an incremental $1 million to $2 million in the second quarter. And then going forward, it will be on average about $3 million a quarter for the remaining ten years on the lease. Once the free rent period ends in 2017, cash principal payments will be reflected on the cash flow statement, but it's not something that we'll see in 2016.

And can you give us a preview of what we'll see on the cash flow statement in terms of quarterly expenses?

I'm sorry, with regard to the new headquarters?

Yes, please.

As I said, I don't know if I can give you much more of a preview than what I just gave. So the expectation --

Well, the magnitude of the impacts on the cash flow statement in 2017 from the move to the new headquarter.

We haven't disclosed that information, but as we get closer to 2017 and talk more specifically about 2017 guidance, we'll be happy to break that out for you.

Great. And then follow-up question on the gift cards and how that works. Which gift card breakage did you get in the first quarter of the year? When were the gift cards sold? When were they not used? Should we expect this type of an impact every first quarter of the year then?

The answer to your last question is no. So let me explain a little bit what happened in the first quarter. Three years ago we launched gift cards. And what we -- with a third-party provider. And the terms of our agreement was that over the ensuing three years we would spend time understanding the rate of breakage for our gift cards. We reached that three-year mark in the first quarter. And the third-party provider recognized revenue based on assumptions of gift cards that would never be used. Going forward then, we'll be using that standard to recognize unused gift card revenue and it will be a much smaller, almost de minimis impact on a monthly basis for gift card revenue going forward. Literally we're talking about thousands of dollars.

Got it. Thank you very much.

You're welcome.

[Operator Instructions] Our next question comes from the line of Blake Harper of Topeka Capital Markets. Your question please.

Thanks. Wanted to ask you about what the pipeline looks like for new seller services and how does it go from the idea, to implementation, to the product release. I know you get some feedback from a lot of your sellers. But just how, you know, what do you have and how many different types of products are you thinking about that you could eventually introduce for the seller services?

Thanks for the question, Blake. First of all, we announced in the last quarter that we plan to announce one seller service for this year, and that service was Pattern. However, we have talked frequently in the past about the research that we've done with our sellers. We spend a lot of time talking to our sellers about what they need. And one of the key pieces of that research that's been really consistent is our sellers spend about half their time on business tasks and half their time on creative tasks. And they really look to Etsy to build products to help them spend less time on the business tasks so that they can spend more time on the creative tasks. So we've talked to sellers for many years. Pattern was an example of addressing a marketing need. Our sellers really consistently told us that they wanted to be able to market themselves on their own websites, about a third of our sellers said that. But there are many other services that our sellers have asked or have told us that they need help with, so you can expect in the future that we'll continue to define and implement those services. I think the important thing is we really believe that we have a multiyear, long-term opportunity to build new seller services. And our seller services business today is only five years old; we've only had this revenue stream for five years. So we feel really confident that there are a number of services that we can build long term for our community.

Got it, thanks. And then one more question if I could. Given you let go of [ph] some cohort data for both of your sellers and buyers that had -- that [inaudible] platform, I just want to see if you are able to provide any update on either that data or some of the sellers and buyers that you've acquired in the years since, either in 2013 or -- 2012 or 2013 and 2014, and how that compares to the data that you've provided at the time.

Thanks, Blake. We'll be updating our cohort data on an annual basis. So we have no updates in particular with regard to our cohorts. But one of the things that we did say when we provided 2011 and 2012 cohort data in the fourth quarter, and it's listed in the 10-K for those of you who haven't seen it, is that 2013 cohort data looks a lot like 2011 and 2012.

Thank you. Our next question comes from Darren Aftahi of Roth. Your line is open.

Yeah. Thanks for taking my questions. Just a couple. First, Kristina, can you quantify how big the ALM stock comp benefit was in the quarter? And then second, on Pattern, does it at its existing state tie into like buyable pins, buy buttons on Twitter and Facebook? And if not, are there plans to do that in the future? Thanks.

Sure. Just really quickly to your question, we'll be releasing that number in the 10-Q, which should be out in the next few days.

And on the second question, Darren, Pattern. Pattern is really an example of us helping our sellers sell anywhere they sell, in this case a website. Over the long term we do see opportunities to help our sellers sell in other venues, but we have no immediate plans in the areas that you just described.

Thank you.

We have a follow-up question from the line of Brian Nowak of Morgan Stanley. Your line is open.

Hi. This is Michael again on for Brian. I just had a quick one on basically CapEx. So there's $10 million this quarter for the headquarter build-out and you said you'd incur $50 million for the headquarters in the entirety. Will that all be incurred in CapEx in 2016 or will that be spread out over a few years? Thanks.

Sure thing, Mike. We incurred about $22 million total, as you've mentioned, and the remainder will flow through 2016.

Thank you.

You're welcome.

There appear to be no further questions in queue at this time. That does conclude the Q&A session of our call and the conference for today. Thank you, ladies and gentlemen, for your participation. You may disconnect your lines at this time. Have a wonderful day.