Jennifer Beugelmans - VP, IR Chad Dickerson - Chairman and CEO Kristina Salen - CFO.

Heath Terry - Goldman Sachs Brian Nowak - Morgan Stanley Gil Luria - Wedbush Securities Tom Forte - Brean Capital.

Good day, ladies and gentlemen, and welcome to the Etsy Second Quarter 2015 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Jennifer Beugelmans, VP of Investor Relations..

Thanks, Liz, and good afternoon everyone, and welcome to Etsy's second 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-Q filed with the SEC on May 22, 2015. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them.

Also during the call we'll present both GAAP and non-GAAP financial measures. A reconciliation of 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?.

Insurgent movie. Eleven sellers were selected to participate in the pilot in conjunction with the home entertainment release of the movie last month. The feedback we've received from Lionsgate is that this partnership is a wonderful way for the entrepreneurs who sell on Etsy to create merchandise that is inspired by fans and made for fans.

We believe that partnerships like this demonstrate our strong relationships with brands, and we look forward to exploring other opportunities like this in the future. Before I turn the call over to Kristina, I want to acknowledge another significant milestone that we reached this past quarter, our ten year anniversary.

Etsy was born out of a simple idea that an online marketplace should exist to create creative entrepreneurs with buyers in search of unique goods. As we've continued to execute on our mission to reimagine commerce, Etsy has come to represent a powerful alternative to traditional commerce and a different people-centered model for doing business.

We're continuing to build for the long term and we believe that Etsy will continue to have a positive impact on our global community in the years and decades ahead. To celebrate our 10th year, in mid-June we organized a mass volunteer mobilization event for Etsy employees. And in total, Etsy employees volunteered over 600 hours company-wide.

We're proud of the positive impact Etsy employees have had on our global community over the past 10 years. We remain focused on creating positive and sustainable results for our entire community, including our shareholders.

We believe our four key areas of focus, making Etsy an everyday experience, building local marketplaces globally, offering high-impact seller services, and expanding the Etsy economy will allow us to build a successful business and community for the long term. We appreciate the opportunity today to report our progress.

And with that, I'll hand it over to Kristina to go over our financial results in more detail..

intercompany debt and our tax provision. Both of these related to the revised corporate structure we implemented on January 1st of this year. As a reminder, the revised corporate structure was implemented to more closely align with our global operations and future expansion plans outside of the U.S.

This quarter, Etsy's net loss was again impacted by these same factors. Regarding the intercompany debt, net loss was actually favorably impacted by a $5.8 million non-cash, non-operating currency exchange gain. This compares to a currency exchange loss of $20.9 million last quarter.

However, largely offsetting this non-cash, non-operating gain, we recorded a $4.9 million tax provision, of which $2 million was non-cash. This compares with a $10.7 million tax provision last quarter. We expect that, in absolute dollars, the first quarter tax provision of $10.7 million will be the highest of 2015.

During the quarter we generated $4.7 million in cash from operations, compared with $700,000 in the second quarter of 2014. As of June 30, 2015, following the successful completion of our initial public offering, we had cash and marketable securities totaling $268.2 million.

To close, I'd like to highlight a few factors we should consider when thinking about Etsy's third quarter of 2015. Although we won't be providing quantitative guidance, we will continue from time to time to highlight qualitative factors to keep in mind that could impact a specific quarter.

For the third quarter 2015, I'd like to highlight four items, most of which we've discussed previously. First, just like we conveyed in the first quarter 2015, if currency exchange rates remain at current levels, GMS growth related to goods that are listed in non-U.S. dollars will be directly and negatively impacted by currency translation.

We also believe that currency exchange rates would continue to have an indirect impact on GMS growth by affecting the behavior of buyers outside the U.S. and dampening their demand for U.S.-dollar denominated goods.

Second, similar to what we conveyed in the first and second quarters, we plan to spend more on marketing in absolute dollars in the third quarter, compared with both the second quarter of 2015 and the third quarter of 2014. Etsy's digital marketing spend will continue to be focused on search engine marketing, primarily Google product listing ads.

I think it's important to remind everyone that, while we are deliberately increasing our marketing spend, unique to an internet e-commerce company of our size, we have spent relatively few dollars on marketing historically. In fact, even today, roughly 90% of our traffic comes to us directly from organic sources.

Third, also similar to the second quarter, we expect to increase the pace of hiring in the third quarter compared with both the second quarter of 2015 and the third quarter of 2014. As a reminder, our hiring tends to increase as we move throughout the year and it's also increasing year over year to support the anticipated needs of the business.

And finally, we'd like to remind investors that, by the end of third quarter 2015, we'll mark the anniversary of the full relaunch of promoted listing, which has been the biggest driver of seller services year-over-year revenue growth this year. As we approach this anniversary, we would expect promoted listing revenue growth to decelerate.

And with that, thank you for listening, and I'll turn the call back to our operator Liz to open it up for questions..

[Operator Instructions] Our first question comes from the line of Heath Terry with Goldman Sachs. Your line is now open, please go ahead..

Great. Thanks. You've talked a good bit in the past about the effectiveness of the initial investments that you've been making in marketing, and I was wondering if you could just give us a bit of an update on the, you know, where the ROI that you're seeing there is falling. You mentioned the incredibly strong organic traffic that you're seeing.

Wondering where the rest of that is coming from and how those efforts are shaping up relative to your expectations..

Great. Hi, Heath. So as you point out, organic traffic continues to be a significant percentage, 90% of our traffic. And that is a high-class problem, so to speak, and very different from most of the e-commerce companies that are out there.

When we look at the GMS that's generated from organic traffic, I think it's safe to assume that that also represents the vast, vast majority of our GMS.

Pay GMS, the GMS that is generated from these direct marketing efforts, is growing faster than organic GMS, a multiple of organic GMS, which we take as a positive sign of the returns of our marketing dollars. One of the things that I would remind everyone of is, prior to 2014, we hardly marketed at all.

Indeed the percentage that we spend on marketing as a percent of revenue within the low-teen. Beginning in 2014, we started to amplify that. And in reality, the growth rate of our marketing spend is decelerating from a triple-digit percentage growth in 2014.

That being said, we continue to apply the conservative attribution model that we use to allocate every single marketing dollar that we spend, that assumes that paid traffic has lower returns than organic traffic. It assumes a very conservative two-year return rate.

And that's conservative because historically we've been much more successful in retaining our buyers over the long term. And it forces marketing spend to be ROI-positive at the aggregate level for the Company, meaning that our total marketing dollars are ROI-positive even if in one country we might be breaking even or slightly negative.

So all of that rigor has been maintained with the increase in marketing spend both in this quarter and last quarter, and we'll continue to maintain it in future quarters..

Great. Thank you. That's really helpful. And then I guess one more.

Given the growth that you're seeing in seller services, can you update us a bit on the breakdown of mix there between direct checkout and product listings and shipping?.

Sure. Well, I'll repeat what we said in the past. We aren't breaking it down between the three specifically. We'll likely provide annual updates in terms of penetration..

Okay..

But the information that we've given in the past with regard to the breakdown remains. Shipping labels is the smallest because it's booked -- because it's booked net. Direct checkout and promoted listings are very similar in terms of their contribution to overall seller services revenue..

Okay, great. Thanks, Kristina..

You bet..

Our next question comes from the line of Brian Nowak with Morgan Stanley. Your line is now open..

Thanks for taking my questions. I have two. The first one, on the buyer growth. I think this sequential absolute buyer growth is around 860,000, was the fewest we've seen.

Understanding that you're committed to generating positive ROI and kind of remained disciplined on the marketing spend, can you just talk to us about how you think about kind of accelerating this buyer growth going forward, or is that not something that we should think about in the model in the near future? And I have one follow-up..

Thanks, Brian. So your question is, should we think about accelerating our active buyer growth? And you're specifically linking that fact to marketing. I think it's important to remember, again I'll just reiterate the point of our maturity GMS coming from organic, the vast, vast, vast majority.

And so as we think about active buyers, we're thinking about activating or increasing the engagement of our existing buyers, and then, yes, bringing on new buyers through paid acquisition. So when we think about the active buyer growth rate number, we don't have as an explicit goal to accelerate active buyer growth.

What we're focused on is increasing the engagement of our existing buyers and bringing in high-quality new buyers, which fits [ph] that ROI matrix that I lead [ph] out. But what I would also highlight is it's important to think about our active buyer activity from quarter to quarter in terms of seasonality.

And so, historically, if you look at third quarter and fourth quarter, does tend to be, I guess for obvious reasons given holidays, tend to be more active from an active buyer perspective, whether it's an existing buyer and her level of engagement, or new buyer acquisition..

Great. Then as a follow-up, I appreciate the color again on the international buyers purchasing from U.S. sellers down 6%. Just a couple -- what percentage of international GMS is that at this point? And how fast did that grow in 2Q14? Thanks..

Sure. We haven't disclosed the breakdown of all of the buckets, but what I would say, just to give some more color on that point, is that our largest bucket of GMS by far is U.S. buyer to U.S. seller. And intuitively it makes sense.

Our largest community is buyers, 21.7 million active buyers, and we disclosed in the past that the majority of them are U.S.-based. And then we look at our seller community, 1.5 million active sellers, and we've disclosed that the majority of them are U.S.-based. So you put that together, U.S. seller to U.S. buyer is the vast majority of our GMS.

If you look at -- if you look at the smallest bucket, the smallest bucket of the five that we look at is international seller to international buyer in the same country. And that's the piece that we're really trying to grow with our build local marketplaces globally. It is the smallest by far and it's growing he fastest.

So we're very encouraged by the growth rate that we're seeing, it's sign [ph] that our international strategy is working. But all of the other buckets, whether it's U.S. seller to international buyer, international seller to U.S. buyer, they all are small relative to the big bucket of U.S. buyer to U.S. seller.

And then to answer your last question, second quarter 2014 growth rate of the metrics that you referenced was in line with the fourth quarter range, similar to the fourth quarter and third quarter..

Great. Thank you..

Our next question comes from the line of Gil Luria with Wedbush Securities. Your line is now open..

Thank you. Wanted to follow up on that question. You're very helpful giving us the growth rates for international to international and international from the U.S. Would you mind giving us the complements, so, U.S. to U.S. and U.S.

buyer from international seller?.

No, I'm sorry, Gil, we're not breaking out all of the individual growth rates of the five buckets of GMS. We're breaking out that U.S.

seller to international buyer to highlight that indirect impact, to try to get some color around what we think that indirect impact is on our overall GMS growth rate and to help investors better understand how to think about the impact of FX going forward..

Got it. Thank you..

You're welcome..

[Operator Instructions] Our next question comes from the line of Tom Forte with Brean Capital. Your line is now open..

Can I ask you a couple of questions on some initiatives you launched during the quarter and what they might mean to the business near term and longer term? The first is you launched a crowdfunding effort, and then wanted to see where you are on your small badge manufacturing certification, for lack of a better way of putting it, basically giving your sellers the opportunity to work with small badge manufacturers that you've certified as a way to expand their businesses.

And then I had a follow-up question after that..

Sure. Thank you, Tom. So, starting with the crowdfunding to fund our Etsy initiatives, that initiative is so incredibly early at this point that we don't have, yes, specific results to report. Very much a pilot program, but something that we're watching really closely. The second question, around responsible manufacturing.

At this point we have 4,700 sellers in that program and 7,900 manufacturers. And it's important to note that 85% of those relationships are between sellers and manufacturers in the same country. So our manufacturing program is largely a local phenomenon when it comes to country..

Great. And then I recognize that a lot of your advertising efforts have been focused on product listing ads and Google. But you're starting to see more and more social networks like Pinterest launch buy buttons, and I would think you're a natural to leverage that opportunity.

How should we think about Etsy's ability to leverage those buy buttons on a go-forward basis?.

Sure. So we see buy buttons as a great potential advertising channel for our sellers, and we've been talking to all the major platforms, learning about what possible integrations might look like. I think the buy button ecosystem at large is still very early and everyone has kind of a different standard.

One of the things that we're trying to figure out is, when we look at Etsy, one of the most important aspects of Etsy is the person-to-person connection. And we find that many of our transactions on Etsy involve conversations between the buyer and seller. So that's something that buy buttons really don't make possible.

So it's something we're thinking about. We did run a pilot test with Tumblr where you could buy within Tumblr. That generates some conversion. But it's a fairly small pilot. But it's something that we're watching really closely and continuing to talk to the various platform partners.

But overall we think it's a great opportunity potentially for our sellers..

Great. Thank you very much..

I'm showing no further questions on the phone lines at this time..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect..