Etsy, Inc. (ETSY) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome Etsy’s 3Q 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Jennifer Beugelmans, VP of Investor Relations. Ma'am, you may begin.

Thank you 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 strategy, 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 4, 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 through a 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 good afternoon everyone joining us today to talk about our third quarter results which included revenue growth of 33% year over year, GMS increasing 19% year-over-year and adjusted EBITDA up 110% year over year. Our results demonstrate both the sustainability and strength of our business model as well as our ability to leverage technology to connect people through commerce. As we continue to build our markets and seller services platform we've steadily grown our community to over 1.7 million active sellers and more than 27 million active buyers, with buyers and sellers in nearly every country in the world. We have a scaled global platform that offers a personalized and human commerce experience. It's one where buyers can find unique goods and also where creative entrepreneurs can access a platform of seller services exclusively focused on their needs as they start scale and manage their businesses. Overall, we're proud of our progress and believe we're well positioned to build on the momentum we have across our business. So let me take you through a few recent highlights. As we discussed in the past, our Etsy Everyday initiative is about making Etsy easy to access no matter what device a buyer or seller is using. For that end, we place a strong emphasis on optimizing the mobile experience. But the spirit of Etsy Everyday is much more than mobile. It's about making Etsy a more regular go to shopping destination for our buyers and showcasing the depth and breadth of the items within our markets. Last quarter, I mentioned that we're working to more clearly define and position the Etsy brand in a way that will help broaden our audience. We think we can encourage our loyal base of buyers to return to Etsy not just once or twice a year but any time they're looking for unique item for their everyday lives. One example of that work is our first ever global brand campaign called Difference Makes Us. We rolled this campaign out in September and it highlights unique everyday items on Etsy, from coffee mugs to bedside tables we have thousands of designs to match every style and personality and our buyers can express their individuality through Etsy purchases. The campaign videos were rolled out across the digital and social channels and have been viewed almost 70 million times since they were launched just seven weeks ago. We're looking forward to highlighting our difference makes us theme in our global holiday campaign. As we gear up for the biggest shopping season of the year in the fourth quarter. Once buyers come to Etsy, we also want to make it easier for them to find the unique items they want. Over the past eighteen months, our teams have made significant enhancements to the search experience. We believe features such as exploratory and localized search are helping our buyers to more easily find the items they're searching for among the 40 million unique listings on Etsy. Over time, we believe that features like these can help drive purchase frequency within our existing buyer community. In addition, this quarter we acquired the machine learning company Blackbird Technologies. We believe Blackbeard's unique combination of AI and deep learning capabilities will help us make search easier more relevant and more personalized for buyers on Etsy. We gained world class talent through this acquisition and I'm excited for our teams to work together to accelerate our progress and search and to explore ways that more broadly apply this advance technology across our platform. The acquisition of Blackford reflects our ongoing commitment to building a company where deep technology expertise is a long term competitive advantage. Let's move to our international efforts where we're focused on building local markets around the world specifically in the UK, Canada, Australia, France and Germany. We continue to make product enhancements such as our new localized homepages and host in person events that bring together sellers and buyers in each of these markets. We believe that these types of efforts are encouraging transactions between buyers and sellers in the same country. This quarter, the percentage of GMS from international buyers purchasing from sellers located in the same country increased in nearly all of our five key markets. And in the UK, our largest international market, we once again saw more than 50% of GMS come from transactions between UK sellers and UK buyers. One of Etsy’s greatest strengths is that we offer a localized experience but we're also a global marketplace that connects people around the world allowing them to conduct cross border transactions by reducing barriers created by language and geography. Our innovative machine translation technology automatically translates listings, reviews, promoted listings and messages between buyers and sellers. This feature set Etsy apart from other marketplaces and we believe they contribute to our global growth. For example, we began applying machine translation to promoted listing searches in the second quarter and as a result click through rates increased among non-English speaking users. Although this feature is an immaterial driver of our promoted listings revenue growth this quarter, we're really proud to be able to leverage our technologies to connect sellers and buyers around the world. Overall, we're excited about opportunities to further expand our global presence and deepen engagement among sellers and buyers around the world. Let's turn now to our progress in building a seller services platform that supports creative entrepreneurs as they start scale and manage their businesses. Our first seller service was launched just five years ago and today seller services represent over half of our revenue. We believe this continued growth in seller services demonstrates our unique ability to understand and respond to our seller's needs. And we think there is much more we can do as we work towards our goal of supporting sellers wherever they pursue commerce. One area where sellers ask us for more help is marketing and advertising. We continue to focus on driving adoption of promoted listings on Etsy and also see opportunities to introduce complimentary marketing and advertising tools off to Etsy. Longer term, we see an even bigger opportunity to create a larger and more comprehensive suite of marketing services. A few weeks ago, we took an important step in this direction with the launch of Google shopping ads which enable sellers to reach audiences off of Etsy by advertising their listings in Google search results. Before we offer this tool, launching a digital ad campaign was difficult and time consuming for our sellers often taking weeks to set up and then requiring daily maintenance. Our Google shopping ads tool takes no more than a few minutes. Sellers simply set a daily budget right from there Etsy accounts and then we manage and optimize the rest. While this tool is in its very early days, we're encouraged by feedback so far. We believe it will be an effective way to drive traffic to our seller shops and ultimately to Etsy. We're also continuing to invest in our existing seller services like Direct Checkout. This quarter we helped streamline payments and checkout for even more sellers around the world by launching Direct Checkout in Hong Kong and Singapore. We entered 2016 offering this service in 22 countries and we are now up to 36. So I'm particularly proud of the progress we've made expanding our geographic reach. We also recently added resiliency and redundancy to our payments platform through a new payment processing partnership with Adyen which has been fully implemented since our last call. This enhances our existing capabilities and helps ensure that our sellers around the world can continue to depend on our Direct Checkout platform. Turning to Pattern, we continue to see a healthy rate of conversion from free trials to paid users. Since launching this custom website service in April, we've regularly rolled out new features and enhancements based on seller feedback. These include things like new design themes for store fronts and onsite blog, a CRN tool that allows buyers to sign up for seller newsletters and the launch of guest checkout which gives buyers the ability to complete a purchase even if they don't have an Etsy account. Another area that sellers specifically tell us is a challenge for their creative business is accounting and tax prep and we identify new opportunities to help our sellers start, scale and manage their businesses, we evaluate options to either build or partner with industry leaders to develop solutions together. So to end, in the third quarter, we entered a partnership with Intuit. This partnership allows us to offer sellers in the US and the UK an affordable way to simplify their accounting and bookkeeping using QuickBooks Self-Employed. We've already received direct feedback from sellers saying that this tool saves them time and reduces the potential for errors by seamlessly exporting their Etsy sales and expenses to QuickBooks in just a few clicks. Finally, we're also helping our sellers grow their businesses by bringing new constituents into the Etsy economy. Our biggest ongoing effort within this initiative is Etsy Wholesale. Since its launch just two years ago, we've had more than 20,000 retail boutiques and 9,000 sellers signed up and we're excited about the long-term potential this program has to create meaningful growth opportunities for sellers and for Etsy. In closing, we're proud of what we've accomplished so far this year, we believe all of the work we've done from technology and product enhancements to brand awareness to expanding our seller services platform positions us for a great 2016 holiday season and a strong start for 2017. The uniqueness of the items in our markets and the strength and loyalty of our global community set us apart and create an experience for both buyers and sellers that cannot easily be replicated. With that I'll hand it over to Kristina to walk you through our financial results. Kristina?

Thanks Chad and hell to everyone, just to note unless I say so all comparisons I'll be referencing here are on a year-over-year basis. Let's start with GMS. During the third quarter of 2016 the Etsy marketplace generated $677 million in GMS, up 19.1% driven by growth in active sellers and active buyers. At the end of the third quarter, Etsy had over 1.7 million active sellers, up about 11% and active sellers one who has incurred at least one charge from us in the past twelve months. At the end of the third quarter, Etsy had over 27.1 million active buyers, up slightly over 20%. Active buyers are those who have bought on Etsy at least once in the past 12 months. As we've highlighted to you in past quarters, mobile is integrated into everything we do and this quarter roughly 65% of our visits came to us from a mobile device. This is up 500 basis points, continuing to outpace the rate of growth on desktop, roughly 49% of our GMS came from a mobile device, also roughly 500 basis points. The mobile app conversion rate expanded more than mobile web and desktop conversion rate. So the gap between mobile visits and mobile GMS narrowed slightly this quarter. We measure the change in the mobile gap by comparing the yearly change in percent mobile GMS with the yearly change in percent mobile visit. We narrow the gap when mobile GMS grows at a faster pace than mobile visit. Similar to last quarter, we saw conversion rates for desktop, mobile web and mobile apps increase during the third quarter, marking the fourth consecutive quarter of growth. Etsy’s international revenues grew roughly 51% in the third quarter and international seller GMS crew robustly in each of our key focus market. Percent international GMS was 30.4%, which was up 110 basis point. This marks the second consecutive quarter of as year-over-year improvement in this metrics. So it is a sequential decline from the second quarter. Ss a reminder percent international GMS is the percent of total GMS from transactions where either the buyer or the seller is outside of the US. So this includes both cross border transactions and transactions for the buyer and the seller are located outside the US. Similar to the second quarter, our international performance this quarter was largely driven by four factors. First, three out of our four international GMS categories are growing robustly. As we have historically done, we exclude [indiscernible] from this calculation to provide you with a sense of how Etsy’s markets are doing. We've seen continued GMS growth between US buyers and international sellers, between international buyers and sellers in the same country, and between international buyers and sellers in different countries. These three international categories have each grown faster than overall GMS. Second GMS between US sellers and international buyers improved sequentially for the third consecutive quarter. So it was down 7% year-over-year. Global currency exchange rates remain volatile in some cases reached new lows in the third quarter of 2016. We continue to believe that these fluctuations are negatively impacting GMS between US sellers and international buyers. Third, the pace of GMS growth between international buyers and sellers in the same country grew 65% year-over-year. This continues to be the fastest growing category of international GMS and this growth demonstrates the progress we are making in our strategy to build local marketplaces globally. Finally fourth, currency exchange rates continue to have a slightly negative direct impact on Etsy’s overall GMS growth rate and percent international GMS. Excluding the direct impact of currency translation of GMS from non-US dollar denominated goods, GMS growth this quarter would have been one percentage point higher or slightly more than 20%. This currency drag is an improvement compared to last year but slightly more of a drag compared to last quarter. We're encouraged by the slight year-over-year improvement in percent international GMS this quarter given currency and other geopolitical global event. But it's too early to draw any conclusions about whether these trends are sustainable. Given these dynamics, the composition of our international GMS has changed over the last several quarters. GMS between US buyers and international sellers remains the largest category of international GMS. But GMS between US sellers and international buyers, GMS between international buyers and sellers in different countries, and GMS between international buyers and sellers in the same country are all now similar in size. For your reference, GMS between US sellers and international buyers was historically the second largest category of international GMS. Finally, with regard to currency and our international business, I want to note Brexit. Like most other companies with global businesses, we're continuing to watch this situation closely. Should the UK invoke Article 50 we will evaluate any potential impacts to the business as they unfold. We haven't seen any impact specifically attributed to Brexit as yet. However we will continue to monitor developments in the UK and greater Europe. We remain focused on executing our strategy to build local marketplaces globally which we believe may help mitigate the impacts of currency fluctuations and other macro development in the future. Turning to revenue. During the third quarter, total revenue was $87.6 million, up 33% driven by continued growth in seller services and marketplace revenue. Marketplace revenue grew 18%, primarily due to the growth in transaction fee revenue and to a lesser extent growth in listings fee revenue. Seller services revenue was up 50% and was driven primarily by revenue growth and Direct Checkout was continued to benefit from our integration of PayPal. Seller services revenue also benefited from growth in promoted listings and to a lesser extent shipping labels which both each grew faster than marketplace revenue. Pattern also contributed to our revenue growth this quarter but we continue to expect just a modest contribution from this service over the next three years. As a reminder, during the fourth quarter of 2016 we will anniversary the integration of PayPal into Direct Checkout, which has been a primary driver of seller services revenue growth this year. Once we have lapped this Direct Checkout enhancements, we expect Direct Checkout revenue growth and consequently seller services revenue growth overall to significantly decelerate. Gross profit for the third quarter was $58.2 million, up 40% and gross margin was 66.5%, up 330 basis points. Gross margin was positively impacted this quarter by a one-time payment from a third-party payment processor of $1.1 million, which reduced our cost of revenue. Once again, gross profit grew faster than revenue, a trend we have seen since 2014. This is due to the leverage we achieved in our technology infrastructure, the one-time payment I just mentioned and leverage in employee related costs. Turning now to operating expenses, Etsy’s total third quarter operating expenses were $55.6 million, up about 29%. Total operating expenses as a percent of revenue declined to about 63% in the third quarter compared with approximately 66% last year and 60% in the last quarter. Operating expenses declined as a percent of revenue due primarily to leverage in digital marketing expenses and to a lesser extent employee-related costs. Marketing expenses totaled $18.7 million, up nearly 13% representing about 21% of total revenue versus roughly 25% last year and roughly 20% in last quarter. The increase in marketing expenses was driven by brand marketing and to a lesser extent higher employee related costs. As Chad mentioned, our global brand campaign was launched across digital and social channels such as YouTube and Facebook. Not only were these channels relatively economical, we believe they're uniquely suited for engaging with potential buyers and sellers and for connecting with our existing community. Digital marketing expense which excludes brand marketing related spend on digital channels such as YouTube and Facebook declined in the third quarter by roughly 6% year-over-year but continued to generate strong returns for Etsy and a positive ROI based on our global attribution model. Similar to the last few quarters, our paid GMS growth rate was close to triple our reported growth rate. For comparison purposes, it's important to remember that marketing expenses grew approximately 88% in the third quarter of last year, driven primarily by growth in digital marketing, where the majority of the spend was related to product listing ads on Google. Overall in the fourth quarter, we expect marketing expense growth to accelerate compared with the third quarter, driven by digital and brand marketing spent. Product development expenses totaled $14.9 million, up 31% representing nearly 17% of total revenue which decreased slightly compared to last year. The increase in product development expenses was driven by higher employee related costs as we continue to grow products and engineering staff. G&A expenses totaled $21.9 million, up 44% representing roughly 25% of total revenue versus roughly 23% last year and roughly 26% last quarter. The increase in G&A expenses was driven by higher employee related costs as well as higher overhead expenses including $800,000 in depreciation expense related to our new Brooklyn headquarters. Headcount at the end of the quarter grew to 979 people compared with 921 as of June 30, 2016. Third quarter net loss was $2.4 million compared with a net loss of $6.9 million dollars last year. Etsy’s net loss included interest expense of $2 million dollars associated with the build to suit lease accounting related to our new Brooklyn headquarters, a $1.3 million foreign exchange gain and an income tax provision of $4.4 million. All of which are primarily non cash. Non-GAAP adjusted EBITDA was $13.1 million, up roughly 110%. Our adjusted EBITDA margin expanded to 14.9 %, up from 9.5% compared to the third quarter of 2015. This increase is driven by revenue growth and leverage in digital marketing expenses related to Google product listing ads, employee related cost and tech infrastructure. During the quarter, we recorded positive cash flow from operations of $9.2 million, this compares with $5.4 million in cash from operations generated last year, the year-over-year increase in net cash provided by operating activities for the quarter was mainly due to revenue growth and leverage in operating expenses. The build out of our new Brooklyn headquarters is complete. And we invested approximately $40 million, which is below the planned investment of up to $50 million. As of September 30, 2016, we had cash, marketable securities and short term investments totaling approximately $270 million. To wrap it up, based on our strong year to date performance, we are raising our full-year guidance for GMS revenue, gross margin and adjusted EBITDA margin. We are also reiterating our three year guidance. As a reminder, we expect a three year GMS CAGR in the 13% to 17% range and a three-year revenue CAGR in the 20% to 25% range. We expect to exit 2018 with a full year gross margins that is in the mid 60% range and an EBITDA margin in the high teens. For 2016, we now expect GMS growth of at least 17%, growth of at least 30%, gross margin of at least 65% and adjusted EBITDA margin of at least 14%. Embedded in this guidance is our continued expectation that we will gain leverage across our total operating expense structure for the full year. We now expect marketing and G&A expense both to decline as a percent of revenue, while product development expense, as a percent of revenue, will be in line with 2015, driven partly by our acquisition of Blackbird. Specific to the fourth quarter of this year, I’d remind everyone that we will anniversary our integration of PayPal into our direct checkout seller service. But we still expect solid growth. This integration has been the primary driver for direct checkout revenue growth this year and more broadly seller services revenue growth overall. As we anniversary this integration, we expect direct checkout revenue growth to decelerate. But even with this shift, we still expect to deliver strong growth in the fourth quarter and our guidance include GMS growth of at least 15%, revenue growth of at least 20%, gross margin of at least 65% and an adjusted EBITDA margin of at least 13%. Finally, I want to touch on the news we announced today that I'll leave Etsy next March. Those of you who know me will immediately recognize that this is not a decision I came to lightly. During the past four years, I've learned so much and I've had the pleasure of working with so many teams within Etsy. I've been able to scale our finance team, which now includes accounting, FP&A, Investor Relations, BusDev, Tack, PaymentOp, Analytics and HR. We've grown from about 12 folks when I started to almost 200 today. These people work hard for Etsy and I'm really proud of them. Also during my time at Etsy, I stepped in to run marketing and I had the opportunity to help implement our first ever strategy to begin investing in wire acquisitions, which has grown paid GMS in an ROI positive way. It's been a really great learning experience too to step in whenever I've been needed. Over the past few years, helping manage international and the product organization at times. While I know that Etsy is in great hands with the team here, I want to do everything I can to ensure a smooth transition. So I'll be staying on to see us through the 2016 reporting cycle and to allow time to thoughtfully recruit my successor. My decision to leave at the end of March is bittersweet, but I'm confident that this is the right time for me to take what I've learned here and move on. I’m lucky that I get to take with me everything that's special about Etsy.

So before we open up to questions, I want to first thank Kristina for her immense contributions. Over the past four years, Etsy has grown and changed in so many ways. We've grown our GMS from $895 million in 2012 to nearly $2 billion in just the past nine months alone. We've had so many major moments over the past four years that Kristina has been a part of, including becoming a public company. When Kristina joined as our first ever CFO, we were making big decisions about our future, including whether or not to go public. And one of the reasons I hired Kristina was because I knew she was the right person to help Etsy figure out many of these important questions. I’ve spent a lot of time with Kristina over the past four years and it's been really great to work with her as a partner as Etsy has tackled big and small challenges. I know that this is the right time for Kristina to begin the transition to thinking about her next opportunity. And as a CEO, you want to work with partners who help navigate the company through key challenges and when it comes time to move on, you want them to be positioned for even greater things in the future. Kristina has been a key partner for me and Etsy and I'm excited for Kristina to take a piece of Etsy with her, as she plans for what I know will be a very successful future. For now though, I look forward to continuing to work closely with Kristina over the next five months. With that, I'd like to turn the call back over to the operator to open up for Q&A.

Thank you. [Operator Instructions] And our first question comes from Heath Terry from Goldman Sachs. Your line is open.

Great thank you. Kristina, curious given your comments around the return that you guys are seeing on marketing, why if there -- basically what reason you have for not leaning into that more given the return that you're seeing there? And then to the extent that there's -- that you are seeing this growth in local sort of international to international seller and the success that you're having there, how quickly do you envision adding additional focus markets to the five that you've been focused on?

So I'll just take the last question first, Heath. We don't have any plans right now to add another focus market. We're really proud of the fact that the UK is over 50% local. But just as a reminder, when we look at our other four markets, none is close to 50%. I think Australia is probably the closest near 30%. So we have a lot of work to do in all of our five focus markets. So no plans, no announcements to make right now about another focus market. With regard to marketing, as you know, Heath, we're super focused on that ROI and it ebbs and flows in any given quarter, based on our attribution model and we really look at it over the fullness of the year. We're excited about our marketing plan in the fourth quarter, which will marry everything that we've learned about digital marketing over the past four years with the excitement of our second global brand campaign. So that's why in the fourth quarter, you'll see both digital and brand marketing expense growth accelerate. And will be to use your term leaning into that in the fourth quarter, which is also our biggest shopping quarter of the year.

Great. Thanks, Kristina.

Thank you. Our next question comes from Mark Kelley from Citigroup. Your line is open.

Thanks a lot for taking the question. Just on direct checkout, I know you already lapped the PayPal integration last month, but how should we think about whether it’s the new -- additional of new geographies or Apple Pay throughout the course of last year. How much can that offset some of the deceleration? And then on Google Shopping ads, is that something that sellers were specifically looking forward and is that a promoted listing or is that other revenue? Thank you.

On direct checkout, Mark, what I would say is that the integration of PayPal was the primary driver of direct checkout growth in 2016 and sixteen. Things like Apple Pay or extending to a new geography adds growth over time, because it adds convenience for both our sellers and buyers. But the integration of PayPal in to direct checkout was definitely a positive driver of growth from the end of October of 2015 through the end of October of 2016.

And on Google Shopping ads, without a doubt, marketing and advertising is an area that our sellers have really been asking for help on and Google is obviously a really important channel for them. So combining Google Shopping ads off Etsy with promoted listings on Etsy gives our sellers many more options for advertising. So it's something that we’ve continued to hear about. From a revenue standpoint, it's really important to understand revenue for Google Shopping ads is other revenue and it's part of a commercial agreement that we have at Google. All of the dollars that our sellers spend go straight to their ad campaign. In terms of how it works with promoted listings, our sellers again it’s creative entrepreneurs, they want to spend a lot of time, learning complex tools, so we've been able to integrate both Google Shopping ads, and promoted listings into a single dashboard that makes it really easy for them to advertise. And Etsy’s search to be a promoted listings and in Google search, via Google Shopping ads.

That's great. Thanks a lot.

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

Thank you. I'm wondering if you can talk a little bit about how you -- with the Etsy Everyday campaign, actually increased the number of transactions that active buyers do in a given period, and how you drive them to kind of both spend more on GMS and increase their number of purchases overall. A little bit more granularity would be helpful? Thank you.

So, thanks, Andrew. You'll probably remember at the end of last year in our 2015 10-K, we talked about frequency in there being a longer term opportunity to increase the frequency of purchases of our buyers, meaning half of our buyers roughly in 2015 bought only once. And so we think there's a longer term opportunity in frequency, but really it's everything we do and everything we've done over the past year at both the top of the funnel, all the way down to purchase has an impact on the buyer experience, has an impact on conversion rate and then their likelihood to come back. So if we start with just making it easy for them to sign in, which we did with social sign in and Facebook and Google plus, if we move to deep linking in our apps, so no matter where she's coming in, whatever channel she's coming in from, whether it's Facebook or Pinterest or Google search, she has the opportunity to land in the app, which is higher converting. Then some of the things that we've launched over the last 18 months with regard to exploratory search, local search, just recently in the second quarter, translations of listings and conversations between buyers and sellers into local languages, all of those things have a positive impacts on her experience and also get her more quickly to purchase. And then finally just the myriad of things we've done in payments over the past 18 months, whether it's Apple Pay or Google Wallet, the PayPal integration of course, but even extending into geographies as Chad mentioned, Hong Kong, Singapore. All of that has a positive impact on her ability to check out quickly. So over time, this positive buyer experience resonates with her and she comes back and we look forward to talking about in 2017, more about all those things we'll do around buyer frequency.

You know, I want to say a couple of words about brand and how we’re shaping the brand. I mentioned in my earlier remarks the difference makes us campaign and what we're doing there as part of the Etsy Everyday strategy is really emphasizing Etsy as a place that buyers come to find merchandise that they can use in their everyday lives. I think part of what we're doing is really shaping the perception of the brand in the mind of the buyer in a way that they'll be more likely to come back to buy things on Etsy rather than each day, every day and just gifts on an irregular basis.

Thank you.

Thank you. Our next question comes from James Cakmak from Monness Crespi Hardt. Your line is now open.

Hi, thanks. I just wanted to touch again on the conversion rate. So we've been seeing an improving, this is the fourth consecutive quarter. Can you just talk about kind of what your, the trend in that -- your guidance, your three year guidance contemplates just further improvement from here and I guess as you look across the cohorts, how much more room you have to go in that metric? And then secondly on the marketing, it sounds like it's something that it's an area of service that you guys start to get more aggressive in. You know what you contemplate potentially acquiring companies then to boost those efforts to be another lever to potentially drive faster growth than the three year outlook that you have given today?

Thanks. With regard to conversion rate, just to clarify, what happened with conversion rate is that our conversion rate has expanded in each of our three channels, desktop, mobile web and mobile app for four consecutive quarters, but because of the mix shift to mobile web, our conversion rate overall has not expanded and so what we look at, if you want to understand what underpins our guidance, one of the drivers of our guidance is a slight narrowing of the mobile gap similar to what we did in 2015, which was small. And when we look at what we've been able to do in the mobile gap this year, it's pretty much so far accomplished that, the slight narrowing of the mobile gap. We're very excited about the ability to increase conversion rate across all of our channels. We think that point to our ability to iterate across multiple channels if points to frankly our product and engineering prowess. I don't think many companies are able to do that. But it doesn't mean that our overall conversion rate grows because of the mix shift that we see to mobile web, which, as you recall, has a conversion rate that's 50% or more below desktop. With regard to marketing services, James, what I would say is that marketing services or advertising services is an area that we're very interested in. It's an area that our sellers frequently request for help when we survey them about different kinds of services that might be useful. We have a great track record of building those services. Promoted listings which was our first seller service from 2011 is now a significant revenue contributor to Etsy. And we're very excited about what we're doing with Google Shopping. It's not something that is seen elsewhere. So we're really focused on building marketing services and as we move through the coming quarters and years, we hope to talk with you more about the marketing services that we build.

It’s helpful. Thank you.

Thank you. Our next question comes from Brian Nowak from Morgan Stanley. Your line is open.

Hi. This is Michael Costantini in for Brian. Can you just talk to your digital marketing spend in particular on Facebook and YouTube versus the other digital channels you called out. Just curious what channels are you shifting spend away from and can you talk to kind of conversion rates and customer stickiness you're seeing from customers who are driving to your site from Facebook and YouTube? Thanks.

So just a clarification, when we talk about digital marketing spend, we're talking about acquisition marketing. So we're not including YouTube and Facebook. YouTube and Facebook are categorized under brand marketing spend and so when we discuss our digital marketing spend on being down year-over-year in the second quarter and third quarter, it wasn't about taking away from one to give to the other. It was more about very high growth rates we were lapping in the previous year. For example in the third quarter of 2015, our digital marketing spend, the lion's share, the vast majority of which is Google product listing ad, our digital marketing spend last year grew nearly 90% year-over-year. The amount of money that we're spending on YouTube and Facebook is a low, low seven figure amount that pales in comparison to the roughly $10 million a quarter we spend on Google product listing ads. So I wouldn't want you to get the impression that we're shifting dollars from one to the other.

That's helpful. Thanks.

Thank you. Our next question comes from Tom Forte from Maxim Group. Your line is open.

Great. Thank you for taking my questions and Kristina, best of luck with your next endeavor. The first question I had was on international, it sounds like you have a better handle on the fluctuation exchange rates, given the local international efforts. How should we think about your ability to adjust to continuing fluctuating rates as far as how that will effect either the deceleration or an acceleration in your percent of volume coming from international? And then last year, if I recall correctly, you had at least a beta test with Postmates fray, fast shipping initiative for the holiday. Is that something you're going to do again this year? And then on shipping, can you talk at all about the attachment rates for some of the efforts you’re doing, think you’re added to FedEx beyond the U.S. mail and the Canadian mail. Thank you.

Thanks, Tom. I’ll try to remember those question. Starting with currency fluctuations, I wouldn't want to give you the impression that we've aced currency. I think if we had a crystal ball on currency, Etsy would be in a very different business right now. But what I would say is that we are laughing currencies at currency fluctuations from last year and at the same time, our local business is doing really well in many of our key focus markets. It's important to remember though that our local business is in local currency. So that roughly 65% growth that I cited is in US dollar terms. That's a 65% growth in local GMS between international buyers and sellers in the same country. That’s in US dollar terms. And when you consider that in the third quarter, some currencies reached new lows, that means our local currency growth is even stronger in our build local marketplaces global lease strategy. So I can’t predict what's going to happen with currency as I mentioned on the call. We continue to monitor particularly BREXIT very closely and we continue to see really robust growth in these three out of four categories of international GMS growth that we play in. Your second question was I believe about Postmates, Postmates was a beta, it was just in New York City. We will not be renewing Postmates in the fourth quarter of this year. I'm sorry Tom if that infringes upon your last minute shopping plans. The last thing I would say, with regard to a tax rate in shipping and in our shipping revenue, we'll release penetration rates amongst our active sellers at the end of the year as we do every year. I don't have any update to give you right now.

Thank you.

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

Thanks for taking my questions. Just two if I may. One, can you give an update on the adoption rates with Pattern and any specific verticals you’re seeing traction there. And then two, just want to clarify on the 4Q guidance. Did you say you will see an acceleration year-on-year on marketing spend from third quarter? Thanks.

On Pattern, we have no update to provide, other than what we've said in the second quarter that we’re really pleased with the enthusiasm from our sellers. Chad mentioned that we've made a few enhancements and since we launched that we're excited about. And the last thing I would say is while Pattern was a revenue contributor in this quarter, we still expect a modest contribution from Pattern over the next couple of years. And your second question I believe was a clarification point on marketing expense. What I said in my remarks is that we expect digital and brand marketing expense growth to accelerate from the third quarter growth rate and that's really aligned with the largest shopping quarter of the year for us.

Great. Thank you.

Thank you. Our next question comes from Blake Harper from Loop Capital. Your line is open.

Thanks. I wanted to ask about search and specifically about the potential you have with what Blackbird and AIC drives that are search conversion, but wonder if you can provide any detail about either the number of percentage of transactions that do come from search on your platform or the for some instances of searches that end up leading to the purchases and how that conversion or shift over time could where you could potentially see from that?

Yes. Thanks for the question. I mean search is a really important channel for us and Blackbird has, it’s an incredibly talented team with really strong deep learning and artificial intelligence capabilities and they do specialize on search, although as I said earlier, you can apply their technology in lots of different ways, given how many things you can do with machine learning. We're just really excited to be bringing that team on to work with us. They really complement a team that, at Etsy, has already done things like building exploratory search. We've talked about the conversion increases that we've seen over the past few quarters. So we really see the Blackbird team as accelerating our already strong effort to make search better on Etsy. We're just super excited to have them joining, they've just joined several weeks ago. So it's very early.

Okay. Thanks.

Thank you. And I'm showing no further questions from our phone lines. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.