Good day, ladies and gentlemen, and welcome to the Q4 2017 Etsy Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Head of Investor Relations, Ms. Jennifer Beugelmans. Please go ahead.

Thank you, Andrew. Good afternoon, and welcome to Etsy's fourth quarter and full year 2017 earnings conference call. Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO. Before we get started, just a reminder that our remarks today include forward-looking statements relating to our outlook, business strategy, market size, financial guidance, and key drivers thereof. Our ability to execute on our strategy to own special purchase occasions, the impact of our key initiatives, our product roadmap and potential future growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in our press release, our 10-Q filed with the SEC, November 8, 2017, and our 2017 10-K that we expect to file with the SEC in the coming day. 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. Finally, for your reference, we have posted 2 presentations through our IR website today. We have a short deck that highlights our fourth quarter progress and which we'll be referencing on our call today, and an updated more robust deck that shares additional detail about our story. With that, I'll turn the call over to Josh. Josh?

Thanks, Jennifer, and good afternoon everyone. Today I want to recap the important progress we made in 2017 and specifically highlight our executions in the second half of the year. I'll also talk about the strength we saw during the holiday season and walk you through our core areas of focus for 2018. We're excited to continue building on our momentum and demonstrating that we can drive growth through innovation and focused execution. In a sea of sameness, Etsy stands for something special and the world needs that now more than ever. In fact we estimate that our total market opportunity is over $155 billion and this estimate encompasses just the online portion of our top six GMS categories in our core six geographies. We believe we have a long runway for growth and we're acting with urgency to move faster. On our last two calls, we said our efforts to unlock this growth would focus on four key initiatives: trust and reliability, search and discovery, marketing capabilities and best-in-class tools and services for our sellers. We exceeded guidance on every metric in 2017. In Q4 and as shown on Slide 4, GMS grew 17.8%, 460 basis point acceleration compared to Q3. Revenue growth also accelerated to nearly 23.6% and our adjusted EBITDA margins of 25.6% with the highest we've ever reported. Ultimately what this performance really means is that we have materially improved the buyer experience, helped our sellers have a great holiday season and have begun to demonstrate that our efforts are bending the curve on GMS growth. We've accomplished a lot since last May. Slide 5 features some highlights from 2017. First, we enhanced our leadership team by bringing on Rachel as CFO, Mike Fisher as CTO and many other key leaders across the company. They joined…

Thank you, Josh, and hello everyone. We ended the year on a strong note delivering one of our best ever holiday seasons for our sellers and over $1 billion in GMS in Q4. This quarter we accelerated both US domestic and international GMS growth sequentially, accelerated revenue growth sequentially and posted our highest ever adjusted EBITDA margins as a public company. This provides a solid foundation from which to continue to execute on our strategy and improve the platform for Etsy sellers and buyers. Please refer to Slide 7 which illustrates these 2017 achievements. My remarks today will cover four areas. First, I will update you on our key operating metrics for the fourth quarter. Second, I'll give you a quick recap of our latest four year cohort data. Third, I will review the financial results and finally I will provide 2018 guidance. Unless I say so all numbers presented are rounded for ease of reference and the comparisons I’ll be referring to are on a year-over-year basis. Let’s start with key operating metrics of GMS first. During the fourth quarter of 2017, Etsy generated $1 million in GMS, up 17.8%, and representing our first ever billion dollar quarter. At the end of the fourth quarter, Etsy has $33.4 million active buyers, up 17%, and over 1.9 million active sellers, up 11%. Growth in both active buyers and active sellers demonstrate that our vibrant two sided marketplace continues to grow at a healthy rate and we're particularly pleased that the total GMS grew even faster than active sellers, signifying an increase in average GMS per seller. Our efforts to accelerate GMS in the past few quarters, we’re primarily focused on growing visits and conversion rate. Let's take a look at visit growth first. Mobile web continues to be a large…

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

Great, thanks. Josh wondering if you could help on that for us a little bit the drivers behind the GMS acceleration. And I know you guys provided some level of detail, but particularly interested in how much do you feel like some of the technology improvement that you guys made particularly around AI and machine learning as well as search functionality contributed to the acceleration? And then as we look at initiatives like the Google ad spend partnerships with your sellers on the platform, how much of an impact do you feel like that that can have particularly outside of the holiday season? I guess just in terms of scale if you can provide any color there that would be helpful.

Great, hi, Heath, and thanks for the questions. On the first one, we made progress in improving the buyer experience that I think did have a material impact on the fourth quarter. If you think about that what we did do for buyers first when they comes to the site are we helping them to find things that they like and are excited to buy and improvements in our search algorithms using machine learning and AI, particularly things like Context Specific Search helped materially to improve the buying experience. So more people are finding something they like. Next are they actually converting that into a purchase? And we made progress in removing friction from the buyer funnel, so that they did. If you think about reasons why someone finds something they like and don't buy, the number one reason they state is they're just not ready to buy it. So by providing more signals like Best Seller badges or there is only one of these items left, we provide more urgency for buyers. And that's in response something we've heard from buyers actually that they – they said I am not ready to go to buy and then they come back two weeks later and are disappointed to find that that item is already sold recognizing that many of our items are one of the kind providing more of those signals to buyers just helping to drive urgency and therefore conversion rate. We also do things like improved transparency of shipping and other things that really help to provide better information to buyers, so that they can make a better informed buying decision and buy with more confidence, improving our return policies is another example. Because it's the fourth quarter, well, the holiday season looms large and we also did…

Great, thank you very much.

Thank you.

Thank you. And our next question comes from the line of Dylan Haber with RBC Capital Markets. Your line is now open.

Great, thanks for taking my question. Given the success you’ve seen with the Labor Day and holiday sales, what additional seasonal sales if any would you plan on adding in 2018? And how frequently should we expect to see these platform-wide scale initiatives on Etsy? Thanks.

So that’s something we’re going to test and learn. I think the sales that are tried in true tool of retail that have worked for the past a couple of hundred years. And what we are not is a discounter that's always in the business of discount. However, many great retailers want occasional sales and promotions. And what I like about that for Etsy is it's a reason for buyers to think about us again and discover that we’re relevant more often throughout the year. We have over 30 million buyers and they have had very positive experiences on Etsy in general that have promoter stores at very high, but we need to retrain their habits to have them think about us more often. And sales and promotions is one tool we have to give them an excuse rationale to come back more often and try us for other times, here when they might not always. So there is obvious seasonal periods when that could make sense. Christmas or the holiday season is one, Valentines Day is another. And then there might be things during the year that we could do that are unique to Etsy than nobody else is doing. And you should keep an eye out to that. We are paying a lot of attention though to the fact that they need to happen it in an appropriate cadence. So we're not a discount site by nature of which we owned.

Great, thank you.

Thank you.

Thank you. And our next question comes from the line of Edward Yruma with KeyBanc. Your line is now open.

Hi, thanks for taking our questions. This is Matt on for Ed. So we think it's fair to say that sellers and employees pushback at least initially on a lot of changes that you guys put in places for past year, but given the past year was so successful. Do you see any increased enthusiasm from resellers who try new things? And if you do see some momentum with sellers, how do you view your take rate level moving forward? Thanks.

We're focused on growing the pie for everyone and GMS is the best measure for how big the pie is for everyone. And so that’s what we do. And you know as a platform our job is to make the experience better for all of our buyers and sellers. On any given day, there will be individual winners and losers because that's the nature of the marketplace, you know, is the product that particular seller is selling is it in fashion or not, how is it resonating with the marketplace that's up to each of our sellers. We've got to create the best platform we can to give all of them the best chance to compete, win and we're seeing a lot of progress in that and we're really excited about that. As we continue to focus on driving value for everyone, we'll look at what levers make the platform better make and make the platform even healthier that's always going to be the thing that we focus on. Then we can think about the right share of value when as we're driving more value for others what’s the right share for us, but the main thing is how do we make the pie bigger.

Thanks.

Thank you.

Thank you. And our next question comes from the line of Sam Kemp with Piper Jaffray. Your line is now open.

Great, thanks for taking the question and congrats on a really solid quarter. So Josh last quarter you talked about planning and rolling out a new user experience from the user interface sometime in the second half of 2018. I was wondering can you just give us an update on the direction that you're thinking that that's going to go and what the users can kind of experience outside of just the changes that you're already making inside search and recommendations? And then Rachel, there's a lot going on at the marginal line in your guidance right now, but if I'm normalizing for the restructuring benefit and adding back the $15 million for the cloud transition costs, it looks like of the high end of your guidance range you’re looking for somewhere around in the range of 350 basis points of kind of if you will core margin expansion. Can you just talk about what the driving components are there whether it's the renegotiated lower Etsy payments cost or the higher mix of paid Seller Services or just kind of foregone operating expense growth? Thanks.

Sure, I'll think the first and then Rachel will take the second. So, I don't recall specifically talking about a brand new UI, but I think maybe what you're referring to, we've got a very balanced portfolio product roadmap initiatives for 2018 that I am really excited about. And here's how I think about those. We want to study cadence of things that we have high confidence you're going to improve the buyer and seller experience. And we feel like we've got a really robust roadmap of ideas to do that. These are things that are perhaps best practices already used in other parts of the web that we haven't yet adopted or things that we think have a high likelihood to succeed across each of search and discovery and trust and reliability et cetera. And we've got a good pipeline of those. We also want to make sure that we're stretching ourselves and we're thinking about bolder bigger events. That we have less confidence we’ll work, but we'll move the needle if they work and having a good portfolio that encompasses both of those in the right levels is how we’re thinking about 2018. I do think what's important for us and what you’ll hear me come back to again and again is velocity. The more we can ship product enhancements, the quicker we learn and the quick things get better. So we feel great about the fact that since May we’ve launched more than 350 products in marketing enhancements. And this idea that we go quickly from idea to testing and market and improving the experience for our customers and generating more learnings is really important and something we continue to focus on.

Hi, Sam. On the margin question, so let me see if I can break it down for you. So first we talked about annualized savings of about $35 million. And then that is offset by some extent increased while the margin migrating to the cloud because we'll have some dual expense during that two year period of time that the migration happened. The third component we gave that we did have slightly lower costs in headcount in the fourth quarter because of higher attrition and we put a number on that of about $1.3 million of favorable impact in the fourth quarter, so we're sort of guiding you to add that back when you’re thinking about a margin. And then we have of course higher GMS – continued GMS and revenue growth in our guidance and you're seeing a higher flow through of debt to EBITDA as we scale our business, so we've taken cost down in 2017 but those fixed costs are growing at a slower rate in 2018.

Thank you.

And our next question comes from the line of Matt Yamamoto with D. A. Davidson. Your line is now open.

Hey, guys. Thanks for taking my question. How should we think about your long-term margin potential when Etsy first went public prior to management suggests your long-term adjusted EBITDA margin target from the high teens and low 20s. One of your strength is taking over the helm has been to do more with the less. How does that translate into long-term margin potential?

So you know marketplace business is our wonderful businesses. They’re really hard to build. And if you can build them, they have wonderful economic architectures. And I see no reason why our margin potential won't look like other good marketplaces over time. We're very focused on growing the pie for everyone. And so, our directive is to grow. It's not always true that throwing more money if the problem makes it better. So what you've seen us do is focus on doing fewer things better in order to move faster and with more focus in order to deliver more growth. And that’s what we have said several months ago and I hope that we're starting to deliver proof now that we meant it. This is really about growth. And as we grow, we do think the margins will look very attractive and unwind with other marketplace companies.

Thanks for the color. I will step back.

Yeah.

Thank you. And our next question comes from the line of Darren Aftahi with Roth Capital Partners. Your line is now open.

Hi. This is Dillon on for Darren. Thanks for taking my question. I was wondering if you could talk a little bit to some of the new seller tools that you might be implementing sort of the roadmap. So when those could go live? And do they go live for all sellers? Do you test them across certain markets first? And then as it relates to some of the margins, is there a room to increase the marketing spend if you see traction in digital acquisition or marketing efforts like you talked about through those email initiatives?

Yeah. So on the first one look I don't have any enjoin now, right now, specifically around the seller paid marketing roadmap, our seller tools roadmap. What I will say is sellers are looking for ways to understand manage and grow their business. And so you should expect to see us focus on tools that help them do exactly that. I talked about it in my prepared remarks for example analytics that can help them get a better understanding of what's actually driving their business. One of the things that our sellers really want is the opportunity to invest behind their own growth. And so, Rachel talked about our Google Shopping initiative and how we're really – we ransomed promotions to help them understand the value of Google Shopping. This is a great way that they can invest in us driving traffic to their listings. So they leverage our experience with paid marketing and all of our great marketing capabilities in a way that that puts their more control directly in their hands. And those kinds of things I think are very exciting. Our sellers really like them and it helps them to drive their success. We’re going to continue to invest behind them.

And then I guess the second part of the question, one of the things we said on the call was that – we got – we achieved a one quarter payback on our marketing spend, which we apply that we could be spending more. So we're constantly – and it indicates as we said that we’ve really optimized our bidding. And so we're looking at ways to be able to deploy our capital on even higher – continued high ROI marketing initiatives. However, we are also looking at the synergies between ourselves and our sellers. So we have attractive community and almost 2 million sellers that also can use their own muscle and their networks to drive social traffic for instance and we've given them tools to be able to do just that. So there's a combination of paid and three methods of marketing that we're trying to deploy and equal measure.

Great, thank you.

Thank you.

And ladies and gentlemen that does conclude our Q&A session for today. With that said thank you for participating in today's conference. That concludes the program and you may all disconnect. Everyone have a wonderful day.