Good day, ladies and gentlemen, and welcome to the Etsy's Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Ms. Deb Wasser, Etsy's Vice President of Investor Relations. You may begin.

Thank you. Good afternoon and welcome to Etsy's third quarter earnings conference call. Joining me today are Josh Silverman, our CEO; and Rachel Glaser, our CFO. Before we get started, just a reminder that remarks today includes forward-looking statement relating to our market opportunity, international growth, the timing of product launches in our cloud migration, the impact of our 4 key initiatives, pricing model, marketing and product investments, and cloud migration on future GMS and revenue growth, our holiday plans, our financial guidance and related drivers, and our anticipated expenses and their impact on future financial performance. Our actual results may differ materially from the statements made. Forward-looking statements involve risks and uncertainties, which are described in our press release today and Q2 10-Q, and any subsequent reports that we filed with the SEC. 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 will 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 prefer to access a replay via phone, you can find that information in the press release as well. Finally, for your reference, we hope that you’re following along with the presentation we have created to highlight our third quarter progress. It accompanies our webcast and it's posted on our IR website. With that, I'll turn the call over to Josh.

Thanks Deb, and thanks everyone for joining us on Election Day. Etsy's growth accelerated again in the third quarter to nearly 21% on a constant-currency basis. Revenue growth exceeded 41%, fueled by the launch of our new pricing structure, and our adjusted EBITDA margins grew to nearly 23%, while we also increased our investments in the business. Active buyers grew 17% to 37 million worldwide. This is the fourth consecutive quarter that GMS has grown faster than active buyers, evidence that we are seeing increased buyer activity on the platform, which is a key proxy for improvement in frequency. We grew the number of active sellers by 8% and GMS per active seller is also increasing. Two principal levers contributed to our progress this past quarter. The first is our continued product investment, focused on improving the shopping experience on Etsy. By making it easier to find and buy the great products available for sale on Etsy, we're doing a better job converting visits into purchases. The second lever was our new pricing structure, which enabled us to ramp up investments in marketing, shipping improvements and customer support. Let's look at the product lever first. As you know, product investments are prioritized within our four key initiatives. Search and discovery, customer liability, marketing and seller tools and services as shown on Slide 6. We made continued progress in all four initiatives, and tonight I'll highlight examples in two of them. Starting with search and discovery. An important insight that attracted our focus this quarter is that almost all of the visits coming from a search engine land into a specific item listing page rather than the Etsy homepage or category landing page. This creates a potential dead end if that particular item was not a precise fit for that buyer…

Thank you, Josh, and hello, everyone. Solid execution is the theme that best describes Q3. From the first phase of our migration to Google Cloud, to the launch of our price increase, to the smooth integration of DaWanda buyers and sellers to our marketplace, our team is consistently and tenaciously delivering on our goals. We do this with a disciplined approach to resource allocation as evidenced in our strong results this quarter. Q3 was the first quarter that reflects changes to our pricing model, our fourth consecutive quarter of acceleration in active buyers and our highest quarter of GMS growth in constant currency since Q2 2016 and we have continued to expand our adjusted EBITDA margins. So let me unpack some of the drivers of this performance. Unless I say otherwise, all numbers presented are rounded for ease of reference and the comparisons I'll be referring to are on a year-over-year basis. On Slide 14, we have outlined our key operating metrics. Etsy generated $923 million in GMS in Q3, up 20.4%. On a currency neutral basis, GMS growth would have been approximately 20.8%, 40 basis points higher. At the end of the third quarter, Etsy had 37 million active buyers, up 17% and over 2 million active sellers, up 8%. GMS from repeat buyers continues to grow and represented 83% of overall GMS. We continue to see signs that frequency is improving as GMS per active buyer on a trailing 12-month basis was up 2% year-over-year and accelerated for the fourth consecutive quarter. GMS from paid channels, which was roughly 17% of overall GMS, was up 57% compared to last year. This was driven primarily by our investments in Google Product Listing Ads and SEM, both of which benefited from incremental spend, following the changes to our pricing model.…

[Operator Instructions] And our first question comes from the line of Edward Yruma with KeyBanc Capital Markets. Your line is now open.

I guess, first on a two-year basis, your guidance for the fourth quarter from GMS growth perspective would indicate a pretty nice acceleration. I guess, any specific call-outs? Is it symptomatic because it's a holiday period or is this indicative of kind of a faster rate of growth overall?

I'm sorry, I just want to make sure I'm understanding the question. You're saying that the two-year build between 2018 versus 2016 is faster than 2017 to - , 2018 to 2017?

When I look at the two-year growth compare of kind of 2Q and 3Q versus what you're implying for 4Q, right, you obviously have a much more difficult comparison in 4Q. So I'm just trying to unpack a little bit kind of what's driving that? And is that symptomatic with the holiday season or is that kind of a sign that the business is really accelerating?

Well, I'll start and then maybe Josh wants to jump in. So you're seeing our trend, we've been continuing to accelerate GMS quarter after quarter on a currency neutral basis and we are giving you guidance that would suggest that that trend is something that we'd to expect to continue. There is a range, so in the fourth quarter, the range would be 17% to 20%, yes, compared to a higher comp from last year. At the low end of that range, there wouldn't be acceleration versus Q3. But the - towards the midpoint or higher, we will continue to follow the trend line that we're seeing so far in 2018.

Yes. So I mean, I think you're right. The comp is tougher this quarter than it has been in the past and we're giving you guidance to suggest that we think we can maintain growth for the rest of this year. It's early in the quarter. Q4 is a really back-weighted quarter, but we think that the product improvements that we are making are having an impact on the customer experience. We think the marketing investments that we're making are working. And so we're coming into the fourth quarter feeling cautiously optimistic about our ability to sustain our growth.

And one other follow up, if I may. You announced the repricing between 1Q and 2Q. You had indicated that the adjusted EBITDA margin would remain kind of consistent due to kind of stepped up investment. I guess, what gave you the confidence to kind of flow-through some of the upside [Technical Difficulty]

Ed, did we lose you?

And it looks like Edward's line…

Should we answer the question though? So the answer to the question is what we said last quarter was that we were flowing through 20% of the incremental revenue. And so just bear in mind by the way that the revenue did not launch until two weeks into the third quarter. So this quarter, we're getting a full quarter of that incremental revenue. And in our highest - certainly we indicated that typically 30% of our revenue in GMS comes in the fourth quarter, so it is a full quarter of the incremental revenue and a - and the highest revenue quarter and that's approximately the same flow-through to EBITDA.

And our next question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is now open.

This is Shweta for Mark. Could you please expand a little bit on the Promoted Listings opportunity? I know Rachel talked about it a little bit in her prepared remarks, but in particular, which of the three opportunities in Promoted Listings, specifically either adding sellers to use Promoted Listings or adding inventory or improving the algorithm, do you think offers the most upside in the near to mid-term?

So we've shared that maybe 15% or so of sellers are adopting Promoted Listings, but they are disproportionately our largest and most successful sellers. I think we've also shared that they have given us more budget than we are currently able to spend. So one way, we've taken advantage of that over the past, call it, 18 months as inventory expansion. And what I mean by that is providing more real estate on Etsy for Promoted Listings. And that's been pretty successful. And there's probably still some opportunity to find more real estate that would be available, but we have done a fair amount there and are starting to lap some of that. An area that I think still has quite a lot of opportunity is to do better on the algorithms we use to pick which Promoted Listing to show to which user at which moment. And that is rich and robust and full of machine learning, where you get better and better and better over time, and I think we're still very early days in terms of the quality of those algorithms. The other thing that I would point out there is more traffic. There's a fourth lever, which is obviously getting more traffic to the website, it would drive more Promoted Listings and so we're working hard on that as well.

And our next question comes from the line of Laura Champine with Loop Capital. Your line is now open.

It's really on your comments, Josh, on the shipping fees coming down. Is there any kind of a roadmap you can give us? I'm confident that you're not quite where you'd like to be yet maybe on percentage of products that offer free shipping or anyway you can quantify where Etsy is on the progress on reducing shipping costs to your buyers relative to what your goal is?

So when sellers - when buyers say they find an item they liked on Etsy and they didn't buy it, one of the top reasons was because shipping price was too high. And so we know this is a material friction point for us. And I shared a couple of numbers. I think the one that I find most powerful is that buyers perceive about half of the items on Etsy as having a price that is too high relative to what they expect. And by the way what they expect may not be directly related to what the postal service is charging the seller. And the sellers have in mind sometimes something very little. So what you're seeing is, first, a lot of education from me over the past few quarters, not just me, but the whole team to educate sellers more about how to think about shipping prices. Now, what we've started to do is to incorporate that more into our search algorithms, so that we more prominently promote things that buyers perceive have attractive and competitive shipping prices. Sellers pay a lot of attention to where they rank in the search algorithms. And by the way, we've also recently launched some more detailed and more easy-to-understand seller dashboards that our sellers can really see what's happening with their search results and what they can do to make that get better. And you're going to see some pretty prominent discussions or promotions for sellers, where their shipping price is perceived to be too high, we're going to be letting them know that that's impacting their search. And that if they want to become more prominent, they've got to fix that. I think that it needs to be the case that buyers find shipping prices on Etsy to be…

And our next question comes from the line of Thomas Forte with DA Davidson. Your line is now open.

So apologies in advance, if I'm putting too much emphasis on this. But when I think about the Holy Grail for Etsy, I think about your ability to improve repeat usage and really the frequency, getting that consumer to buy twice a year instead of once a year and I think of your efforts to improve search is one of the things you're doing toward that end. What I was curious is, you do a lot of small adjustments that make improvements, I think you've talked before about 2, 3 basis points improvements in GMS growth. So the question I have is, how long would it take or how long might it take to get that core consumer to buy twice a year? And when you get to that level, what does success look like? Does success look like a meaningful ramp in GMS growth and then more leverage on your OpEx or do you think it's more gradual?

I don't think you're putting too much emphasis on it. I mean, I think it's one of the key things that - a huge opportunity for Etsy. And just to pull back for a second. What gets me really excited is what spending time in the inventory of Etsy, looking at so many great products for sale that really are relevant. And we've got to do a better job surfacing the good stuff and surfacing it at the right time for the right buyer. That's on us, we've got to do a better job and I think we're making real progress. But I know that the product is there and it's terrific. The other thing and that gives me a lot of confidence is we're not trying to create a whole new use cases that don't currently exist. There are meaningful numbers of people who love us for weddings. There are meaningful number of people who love us for birthdays. There are a meaningful number of people who love us for decorating their apartments. There are meaningful number of people for who love us for getting dressed up and wearing that special dress for the party. There are large communities of people who exist for each of those purchase occasions. We've got to do a better job of stringing them together and telling that story. And I do think that that's a combination of incremental steady progress, where we're making the experience better every time you come and visit and I do think people notice. And then some more disruptive changes. And as we make steady progress in the product, starting to disrupt people's understanding about the brand and what it is and when we're relevant at the right time, I think that's where maybe more high-funnel above-the-line kinds of marketing can help to reeducate about the consumer, about all the different times that we are relevant.

I think Tom the other - you asked sort of when do we see that happening, I - we can't give you guidance specifically on 2019 or beyond. I think that might be interesting fodder for conversation at the Investor Day that we'll have in the spring. But what we did say was that frequency - sort of the green shoots of improvement in frequency has been starting to show and that - this is the fourth consecutive quarter, where GMS on a trailing 12-month basis per active buyer has been - has increased. And so you're seeing all the things that Josh just described as reasons to believe, and initiatives that we're putting behind it to make it happen, are starting to actually show up in the numbers.

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

But I hopped on a little late, so if this has been answered, I apologize. Just two things quick. First on the holiday season. Are you guys doing anything strategically different around sellers and discounts and sales beyond kind of trend that right-size the competitive nature of shipping? And then any update on the kind of transition of DaWanda, how that visionary business performed in the quarter?

Let me take the DaWanda one first and then maybe Josh can talk about holiday. So we said that the migration of DaWanda sellers to Etsy went very well and the redirect of the DaWanda website to Etsy's website in Germany went very well. We said that Germany is now our second largest international market outside - with the U.K. being first and then we also said that the vibrancy - there's a sign of vibrancy in that German market because actually 50% of the transactions are happening between buyers and sellers that are in the German market. So that's, to us, a sign that you've got a really healthy two-sided marketplace there. So for all intents and purposes, we felt really pleased with the migration of DaWanda. We also said that international was 35% of total GMS, I think, a year ago, so it's - and it was growing 26% in the quarter, I think 27% on a currency neutral basis. Germany contributed to that, but on its own without - and Germany is a, on its own, a significant driver of our overall GMS growth, international is growing nicely, but you can use those numbers to figure out what contributions DaWanda made to all of that.

And in terms of holiday, if I look at the buying experience today versus what it was on January 1 of this year, we've made real improvements. It's easier to find the good stuff and it's easier to buy things on Etsy. And I think that that is bearing fruit. As we look at specific holiday preparations, the big strategic decision we made is to try to avoid throwaway work. So we really tried to focus on things that would be reusable and valuable throughout all of 2019 and beyond, instead of just one-offs for the holidays. So some of our big focus areas are around curation and discovery. So you're seeing already nicely curated sets of editors' picks and other things to really highlight and showcase some really great stuff for sale in Etsy. We've improved the recommendations algorithms, we continue to improve the search algorithms. You will see our sellers are enabled to run cyber sales, so we will enable our sellers to participate in that this year like we did last year. And we've built a better platform to allow for sales to happen with a lot less effort from our staff here at Etsy as well as from the sellers. So we think we're going to have a really great holiday experience and we hope it turns into strong results as we've guided for the quarter.

And our next question comes from the line of Ronald Bookbinder with IFS Securities. Your line is now open.

First, I was wondering, if I could get a little clarification on shipping. You guys do negotiate - Etsy does negotiate shipping fees with the major shippers to get the entrepreneurs the best shipping rates possible. Is that correct? And secondly, given your strong cash flow and EBITDA growth, do you think you could increase the debt leverage that you have and even do more share repurchases in the future?

On the shipping, yes, we have carrier relationships in Canada and the U.S. and we've got the Canada Post and in the U.S. we have the United States Postal Service and FedEx and we just completed an arrangement with Royal Mail in the U.K. And we've said in the past that we're working in close on also a carrier arrangement in Australia. So those things provide good rates for our sellers and they can choose or not, it's not required to use our shipping label products, which not only gives them access to those preferred rates, but also gives them the ease of being able to easily turn a shipping label and have accuracy with what the shipping cost is going to be. So that's sort of a stepping stone to getting more unification on best rates that they can then pass forward to the customer and get things like tracking number, so that we can better estimate delivery dates and things like that. But we're - it's still early days yet. There's still a lot of opportunity on shipping and that is one of them. On the debt leverage, yeah, so you can look at our fundamentals and you can see that we have a pretty nice balance sheet, very clean and lots of opportunity to do further capital raise and financing and more to come on that. We've announced our share buyback today and we think that's a good use of capital for the moment and we can talk more about balance sheet as we go forward.

[Operator Instructions] And I'm not showing any further questions at this time.

Thank you all for your time. I'll see you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.