Jennifer Beugelmans - VP of IR Chad Dickerson - CEO Kristina Salen - CFO.

Mark Kelley - Citigroup Heath Terry - Goldman Sachs Andrew Bruckner - RBC Capital Markets Tom Forte - Maxim Group Sam Kemp - Piper Jaffray Michael Costantini - Morgan Stanley Darren Aftahi - ROTH Capital Partners Blake Harper - Loop Capital.

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the call over to your host, Ms. Jennifer Beugelmans, VP of IR and FP&A. Ms. Beugelmans, you may begin..

Thank you and welcome to Etsy's fourth quarter and full-year 2016 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, guidance, mission, product [technical difficulty] and potential future growth. Our actual results may be differ materially.

Forward-looking statements involve risks and uncertainties which are described in our press release and our 10-K filed with the SEC today February 28, 2017. 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 as well as our 10-K, which you can find on our Investor Relations Web site.

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?.

first, raising brand awareness of etsy.com as an everyday shopping destination. Second, making enhancements that encourage purchase frequency, and finally connecting sellers and buyers locally as we continue to scale globally.

In terms of raising brand awareness, research studies show that perception among existing buyers is that etsy.com is a shopping destination just for special occasions. This couldn't be further from the truth with nearly 45 million items across more than 50 retail categories, there's something for everyone.

As I mentioned in 2016, we launched our Difference Makes Us global brand campaign, which highlights the breadth and depth of items available on Etsy. The videos received more than 138 million views between the launch in mid-September and the end of the year.

These brand marketing efforts have already begun to move the needle for our overall brand awareness and we're pleased with the early results. For example, in the U.S., and our five key international markets which are the U.K., Canada, Australia, France, and Germany, we saw an increased number of searches for Etsy among users who view the ads.

In fact, some markets saw triple digit percent increases. Overall, in 2016, we saw a slight increase in frequency compared with 2015 and we're happy to see this moving in the right direction. But what's important to highlight is that we’ve a lot of room to drive this metrics higher.

Over the past few years, we focused our spending primarily on digital acquisition marketing and Difference Makes Us is really just the first foray in the shaping brand perceptions. We are proud of our work today and we intend to invest more and expand our marketing mix in 2017 to include other digital channels and brand marketing.

We believe that maturing our marketing mix in this way is a natural and logical evolution for the Company. We’ve not invested significantly in brand marketing in past years, but plan to in 2017, because we see shaping brand perception as a critical component of driving long-term growth. Next is making enhancements that encourage purchase frequency.

In addition to our marketing efforts, we will continue to leverage our historical strength as a product and technology company. We want the Etsy shopping experience to be fun, engaging and seamless across all devices and our work continue to pay off in 2016 as we increase conversion rates across-the-board on desktop, mobile app, and mobile web.

Now we’re adding structured data to our listings that will allow sellers to tag key item attributes creating more filter in search choices and ultimately making it easier for buyers to find what they want.

Add to this work, the machine learning capabilities we’ve gained through our Blackbird acquisition, we will be able to deliver even more personalized search results and recommendations tailored specifically to buyers based on purchase history and other key signals. We are also enhancing the checkout experience.

Buyers can now complete purchases from multiple sellers in one quick transaction with our new multi-shop checkout feature that we launched earlier this year and we will be adding guests checkout in the coming months. Our third area of focus within our market strategy is connecting sellers and buyers locally, while scaling globally.

Etsy's markets are global and we continue to drive our international business with a focus on expanding local markets, while further extending our global scale. International GMS were either the buyer or seller or both are outside of the U.S., with 30.4% of GMS in the fourth quarter.

As we’ve discussed in the past, our technology platform transcends geographic borders and allows buyers and sellers to connect and transact even if they don't speak the same language or use the same currency.

In 2016, we extended our use of machine translation and machine learning across the etsy.com market including applying our proprietary techniques to promoted listings, and we also expand a Direct Checkout so that it now reaches a total of 36 countries.

Within our five key focus markets, we also continue to nurture the local ecosystem by encouraging domestic connections between sellers and buyers. As we continue to grow etsy.com, I also want to talk more about our plans to launch Etsy Studio. The craft supply market is enormous.

Approximately $44 billion in the U.S alone according to the Association for Creative Industries and it hasn't seen much innovation through the years. In fact the vast majority of sales still take place off line. This is the category that’s meant to enable creative expression and we see an opportunity to do a lot better.

Craft supplies have longed [ph] in a part of etsy.com and through conversations in research with our buyers and sellers, we've learned a lot about the unique challenges of selling and shopping for items within this category. Applying their feedback and our deep knowledge, we see a significant opportunity to shake up the space.

We believe that we can elevate our best offering of 8 million craft supply items among existing and new buyers, offer current craft supply buyers a more tailored experience, and help drive sales for existing craft supply sellers and attract new creative entrepreneurs to our market.

We believe Etsy Studio will allow us to participate in the large addressable craft market by offering a differentiated buyer experience. First, the current process for envisioning a DIY project and then buying the necessary craft supplies is disconnected and time-consuming.

Many crafters look up inspiration or direction for project on various Web sites and then they go elsewhere to source materials. With Etsy Studio buyers will be able to browse tutorials and instructional content and then purchase all of the relevant materials without ever leaving the page.

We believe this cohesive and engaging experience will make buyers want to return again and again. Second, we tailored Etsy Studio buyer journey specifically for craft supplies. From category specific search filters to a quick checkout process, each step is optimized for finding and purchasing everything you'll need for your next project.

Third, Etsy Studio will offer a vast range of materials and supplies that craft supplies buyers may not be able to find in other venues. Among the millions of items, buyers will find everything from deeds, paint and knitting needles to more unique items like hand dyed fabric, hand-carved weaving looms and original DIY kits.

Etsy Studio leverages all of the platform investments we've made over the past 12 years. And like etsy.com this new market will be global and optimized for mobile web. Sellers can also take advantage of Direct Checkout and shipping labels at launch.

We also plan to introduce promoted listings on Etsy Studio within the next several months and we're exploring opportunities to build a native app. Naturally we will also continue to invest in product enhancements and marketing initiatives to build this brand going forward.

We’ve already received great feedback from sellers who participated in a limited prototype and we're really excited to begin scaling this new market. Over the next several weeks, all craft supply sellers will gain access to the market to begin setting up their shops ahead of our launch in April.

So we don't expect Etsy Studio to contribute to our GMS or revenue results in 2017, we're very excited about its long-term growth opportunities. I look forward to sharing more updates on our progress in the coming months.

With Etsy Studio coming online this spring, we're really excited about the idea of having multiple markets driving long-term growth in our business. Let's turn now to seller services. Over the past five years we build and launched four great paid services, which grew to 55% of our total revenue in 2016.

Each of these services addresses a specific seller pain point. Continuing to enhance and expand this line up remains a key priority. At the same time, we see an opportunity to building connect services for creative entrepreneurs and to support them wherever they want to sell.

We envision Etsy as decentralized hub and go to resource for creative entrepreneurs. We want to be the best destination for sellers to find cohesive offerings that address every aspect of starting, managing, and scaling a creative business. Let's talk about our 2017 strategy to address these three aspects of running a business.

First, starting a business. We want to be the first place people go when they want to turn a creative passion into a business. So just $0.20 and an idea an Etsy seller can list an item that reaches a global audience of nearly 30 million active buyers.

We also offer a wealth of educational resources and community support like Etsy Teams that offer new entrepreneurs both advice and encouragement.

This year we're focused on making it easier than ever before for both new and existing sellers to quickly and accurately list and categorize their items through a series of enhancements, especially through the work we’re doing with structured data.

Next we want to make it easier for Etsy sellers to run their businesses so that they can devote more time to making or designing. We want to help our sellers address pain points with our services and tools, such as Direct Checkout, Shipping Labels, and our partnership with Intuit.

These all reduce the amount of time that a seller spend on administrative tasks. Recently we rolled out a new inventory management tool that enable sellers to manage inventory across their Etsy channels and give their customers a better view of everything that shop has for sale.

Third, about 81% of Etsy sellers that they want to grow their business and we want to help them scale. In 2016, we launched Pattern, so that sellers could market and brand themselves beyond the Etsy.com market. We continue to make monthly updates to this custom Web site builder in response to requests from sellers.

Recently we made improvement to SEO, so that Pattern site show up more prominently in search engine results. Marketing is the area where sellers most frequently asked us for help, so we continue to explore opportunities to create a more robust suite of marketing services.

Our Google shopping tool that we launched in the fourth quarter is a great example of our success in creating easy effective advertising options for our sellers. Finally, we want all of these great tools and services to be easy to access and use and to help sellers seamlessly manage multiple sales channels.

We recently launched a significant enhancement that brings many of our existing services and tools in the one convenient place. Shop Manager is a streamlined dashboard that provides sellers with one entry point to track orders, manage inventory, view metrics and stats and have conversations with their customers across all Etsy channels.

We’ve already received positive feedback from sellers saying that Shop Manager has dramatically improved their daily workflow. This is an important milestone in our goal of supporting sellers wherever they sell and we’ve an ambitious roadmap ahead.

In closing, we’ve entered 2017 on strong footing with a clear strategy and with several launches that open-up new long-term growth opportunities for Etsy and our sellers.

We look forward to investing in brand marketing to drive frequency and increase overall awareness across our markets, launching our new market Etsy Studio, creating a more seller friendly cohesive and sticky services platform, and becoming the centralized hub for creative entrepreneurs to start, manage, and scale their businesses.

All of our work will be powered by our innovative technology and supported by our passionate talented employees.

Our team remain focused on advancing our mission to re-imagine commerce and continuing to fuel the Etsy economy by providing local and global markets for our creative entrepreneurs and connecting thoughtful consumers with unique items from our sellers.

As we do this, we will continue to support our sellers and look to create long-term value for all of our stakeholders. With that, I'll turn it over to Kristina to walk you through our results and our 2017 and revised three year outlook.

Kristina?.

revenue growth from our existing seller services driven by both adoption and product enhancements, and new seller services such as Pattern by Etsy. This means that we don't believe that any of our recent or upcoming launches will be dilutive to our gross margin between now and 2018.

We continue to expect to exit 2018 with a high teens adjusted EBITDA margin driven by leverage across our operating expense structure during the 2016 to 2018 period that our guidance covers. In 2017, we expect adjusted EBITDA margin to be between 12% and 14%.

In 2017, we expect operating expense as a percent of revenue to increase, driven by our investment in brand marketing and an increase in product development expenses stemming from our acquisition of Blackbird Technologies. These increases will be partially offset by G&A expense, which we expect to decline as a percent of revenue in 2017.

Throughout the year, we expect to invest approximately $20 million in brand marketing, up from approximately $6 million in 2016. Excluding our brand marketing expense, adjusted EBITDA margin in 2017 would be approximately flat compared with 2016.

We believe elevating the Etsy brand will not only allow us to further penetrate a large addressable market of untapped buyers, but will also encourage existing buyers to make more frequent purchases.

Even at the expense of lower margins in the near-term, we're committed to our investment in brand marketing because we believe it will position us for sustainable future growth.

Finally with regard to guidance, last quarter we mentioned that we've completed the build out of our new Brooklyn headquarters in which we invested approximately $40 million, our largest CapEx to date. During the build out, the associated costs were a significant portion of our total CapEx spend.

Now that the build out is complete, we expect CapEx in 2017 to return to more normalized levels like we saw in 2014 when CapEx was approximately 5% of full-year revenue. To wrap it up, today is a bittersweet moment for me, as this will be my last earnings call at Etsy.

I've learned so much during my time here and these last four years has been nothing short of amazing. Etsy looks a lot different today than it did when I first started. We're a public company. We've scaled our business along with our employees and we’ve even built a new headquarters.

I couldn’t have achieved these milestones without my amazing team and I know that Etsy will be in great hand after my departure. I want to thank everyone at Etsy for making my time here fulfilling and for giving me memories that I will never forget. And with that, I'd like to turn the call back over to Chad..

Thanks, Kristina. Since this is your last call at Etsy, I want to sincerely thank you for your immense contributions over the past four years. I really appreciate it. Many of you know that Kristina has not only served as a trusted partner to me, but to many leaders here at Etsy.

And we will certainly miss her, but I can't wait to see what she will be doing next. In terms of recruiting her successor, we’ve been actively betting and speaking with candidates over the past several months. And I'm confident that through this process we will identify the right person to help lead Etsy's next phase of growth and advance our mission.

I look forward to providing further updates in the near future. Over the past several months, Kristina, the rest of the management team, and I’ve been working closely with the finance and accounting teams to ensure a smooth and seamless transition upon Kristina's departure next month.

We’ve a deep bench of senior talent across the organization and I'm confident that we won't miss a beat. With that, I'd like to open the call-up for Q&A..

Thank you. [Operator Instructions] Our first question comes from Mark Kelley with Citigroup..

Hi, great. Thanks a lot. Just a question on the $44 billion market you outlined tonight and Chad you talked about on your blog when Etsy Studio was announced. It’s a big opportunity.

I’m just curious how much overlap if any do you think there is between a flagship marketplace and Etsy Studio? And it sounds like there isn't a lot data [technical difficulty] guide for that opportunity? And a second, is it too early to you gauge the benefits that multi-shop checkout can have on spend per visitor, per buyer? What’s the right way for us to think about positive [indiscernible]? Thank you..

Sure. I will start with Etsy Studio. I think the first thing that’s important to understand we're really excited about the market opportunity and again $44 billion adjustable market, a lot of that is actually on or offline.

When we look at that against all the other categories on Etsy, it's important to understand that no single category on Etsy is more than single digits in terms of the percent of sales.

So craft has been an important category in Etsy, but we really believe that launching Etsy Studio will give us the opportunity to attract a whole new set of buyers and a whole new set of sellers to really expand the opportunity there. So we're super excited about that.

On multi-shop, it is too early to comment, but I think the important thing to note is I would point you back to what we said about our success in conversion rate improvements over the past five quarters. We believe that things like multi-shop are incredibly important in making it easier for our buyers to transact on Etsy.

So it's just part of our overall plan to improve the buying experience..

Helpful. Thank you very much and Kristina good luck with the next phase of your career. Thanks..

Thanks so much, Mark..

Thank you. Our next question comes from Heath Terry with Goldman Sachs..

Great. Thanks.

Chad, just curious if you could give us a little bit more detail behind the guidance, particularly the reacceleration that’s implied for 2018? Are there specific products like Pattern that are behind that or is it more a function of the investments in marketing that you're making this year, having a delayed impact?.

So, Heath, just a clarifying point and I’m happy to go through the math in more detail, but at the midpoint there it does not imply a reacceleration in our GMS growth.

And just to use this as a reminder for what our guidance -- the purpose of our guidance here is when we launched guidance in 2016 it was the first year that we get it and we launched guidance to really underscore the opportunity in our core business.

And what we've said in 2016, it was repeated again in 2017 is that our guidance only includes a very modest contribution from new services like Pattern as Chad said in his remarks, even that Etsy Studio is not expected to contribute GMS or revenue in 2017.

And so, there is nothing to read into our guidance other than this -- a great opportunity in our core business, a predictability of that growth rate and the baseline for what we think we can do in 2017 and 2018..

Okay, great. Thank you..

Thank you. Our next question comes from Andrew Bruckner of RBC Capital Markets..

Thank you. And Kristina, it's been great working with you, so best of luck..

Thanks, Andrew..

Thinking about the narrowing that mobile gap even further, what levers do you have to kind of push people greater towards the app, and app downloads been an area where you’ve been investing? And then secondly, just a quick modeling question. Q1 last year, as you had kind of a bump from gift cards.

Should we expect a similar thing this year?.

I can take the last question first and then I will pass it over to Chad to talk about our strategy to narrow the gap, with the mobile gap.

The quick answer is no, and I'm glad that you highlighted the gift card revenue benefit that we achieved in the first quarter, and I'd also add that there was one other benefit that we achieved in the third quarter as it related to a one-time payment from a third-party payment processor.

Although these things we've said are margin on our reported market and adjusted EBITDA margin in 2016, by approximately one percentage point. And Chad, do you want to talk about our mobile gap strategy..

And in terms of continue to narrow the mobile gap, just to review really quickly our highest converting environment is the mobile app, followed by desktop and then mobile web. As I mentioned, over the last five quarters we’ve improved conversion across all platforms. So we feel really, really good about that.

So we continue to grow app, mobile web, and desktop and we do drive people from mobile web and through the app environment. But I think for operating in a world where we’ve to improve on all three at all times. So I think the [indiscernible] we've been doing a great job, improving conversion across all those channel..

Thank you..

Thank you. Our next question comes from Question comes from Tom Forte with Maxim Group..

Great. Thanks for taking my question. Kristina, best of luck [technical difficulty] endeavor. You talked a lot about the local initiatives to drive local buyers and sellers and how in the U.K when you hit 50% of your volume, you saw an acceleration in sales growth.

Can you update us on other markets where you’re doing that, and do we have to wait for 50% penetration to see an acceleration of sales growth or they’re possibly like to occur earlier? Thank you..

So what we said in the past is we are really excited about the accomplishment in the U.K of 50% of GMS in that market is domestic, making us a truly local player in the U.K.

What we've also said is the strategies that we applied in order to do that in U.K., we started those the earliest in 2013 and we were able to take the U.K from call it a high teens domestic market to U.S 50% plus domestic market in roughly four years.

That being said, the market that’s closer to the U.K is Australia, it's still behind however -- its roughly 30% and so we still have ways to go in our other -- our four other key focus countries outside the United States.

But we're seeing really strong growth in domestic GMS coming from those countries which is why see the 40% plus growth in what we call international domestic, which is international GMS between buyers and sellers in the same country. So we’re just very excited with what we've seen.

We’re continuing to apply what works in the U.K into the other focus countries and we're continuing to see results..

Thank you..

You’re welcome..

Thank you. Our next question comes from Sam Kemp with Piper Jaffray..

Thanks for taking the question.

I guess, on Etsy Studio first, have you guys considered potentially establishing relationships with suppliers directly so that you could sell through a one deep platform on Etsy Studio? And then secondly, Instagram obviously has been doing a lot to [indiscernible] monetization efforts and one those that goes through shop now button.

Can you talk about any potential integration that you’ve looked to do between Pattern and Instagram to take advantage of that traffic? Thanks..

Sure. First on Etsy Studio, we’re bringing 8 million unique items into the marketplace from Etsy and we’ve a network of sellers today who are selling craft supply, so that’s really our focus out of the gate.

In terms of Pattern and social networks, we're really always looking at social network activity and where our sellers are living in advertising promoted, so that’s something that we keep an eye on, but we don’t have any specific plans to announce..

Great. Thanks..

Thank you. Our next question comes from Brian Nowak with Morgan Stanley..

Hi this is Michael Costantini for Brian. Just a quick one on marketing, please. Despite the ad spend and the margin contraction you’re forecasting this year, you’re still targeting high teen EBITDA [ph] margin for 2018. So, just curious what gives you the confidence that you can or will pull back on ad spending in 2018? Thanks..

It's important to note few of the other buckets of operating expense that we have with regard to product development and G&A. As you know, our product development this past year has been impacted in 2016 and in 2017 will be impacted by the acquisition of Blackbird Technologies and the associated employee related expenses.

And G&A has been impacted not only by the new headquarters here in Brooklyn, but also by increased professional services spend mostly related to Sarbanes-Oxley, which you'll see in our 10-K, our disclosure around our Sarbanes-Oxley compliance which is something that the finance team and the engineering teams have worked very hard to accomplished this year.

So those expenses will taper off as well with regard to all of it though it's that revenue growth and when you look at our highest mentor [ph] margin revenue growth that’s embedded in our guidance combined with gross margin roughly in the mid 60s, there is an opportunity to continue to spend and grow our spend in a number of different ways whether its marketing or G&A or product development and still are paying significant leverage from where we’re today..

That’s clear. Thank you..

You’re welcome..

Thank you. Our next question comes from Darren Aftahi from ROTH..

Thanks for taking the question. I offer my best wishes to you Kristina in your endeavors.

Just quickly if I may on growth and operating expenses, what assumptions are built in terms of investments this year for Etsy Studio and is there going to be any attraction in terms of revenue embedded guidance, but if you could give any clarity on that, that will be helpful. Thanks..

So our marketing spend guidance include marketing spend for Etsy Studio, but it is not what I would call a material significant portion of our marketing spend at all. And Etsy Studio in terms of product development is not at all an expensive endeavor from an R&D perspective. So, it is de minimis in the impact there.

The only place that you will see it is in marketing spend and again it does not represent a significant portion of the increase in marketing spend.

Chad you may add…?.

Great. Thanks..

I just want to -- I wanted to add and reemphasize what I said in my remarks. Etsy Studio is really built on all the platform investments that we’ve been making over the past 12 years. So direct checkout, shipping labels, search all of those things are baked in and as Kristina said it's not a material investment in that term..

Great. Thank you..

Thank you. And our final question is from Blake Harper with Loop Capital..

Hi. Thanks. Kristina, just want to say it was great to work with you and best of luck as well..

Thanks, Blake..

Two questions. First of all, on the -- your comments about promoted listings tapering off there.

Was it -- is it possibly that it's been cannibalized some by the GPLAs, and just wanted to try to reconcile some of your comments there about the promoted listings, little bit later, but so having one of the largest deals [ph] from your sellers being marketing services.

And then secondly, maybe for Chad, are there other categories and see how some type of critical math that could benefit from being broken out and have a dedicated platform the way you just did with Studio?.

I will take promoted listings and then Chad can answer the categories question. It's important to remember that promoted listings sold out every single quarter, every single week. And so we're still seeing significant revenue growth from promoted listings.

As I said in my prepared remarks, promoted listings revenue growth exceed markets revenue growth, so there are still significant demand from our sellers who used promoted listings to use it. So, what we’re focused on is making sure that promoted listings continue to provide that high ROI positive experience for our sellers, number one.

And then number two, create new marketing services and tools, Google Shopping as an example which we highlighted that serve a broader spectrum of our sellers. Promoted listings is for sellers who can handle high-volume and that doesn't represent the majority of our sellers.

So we are really pleased with the performance of promoted listings, including the penetration and we're really excited about the new opportunities that we have in marketing services overall..

And on the second question about categories, I think the important thing to understand is, as I was saying a bit earlier, we've made a lot of investments in platform over the years, and Etsy Studio really represents our first category market.

And as I said earlier, we were able to leverage all of the platform investments that build that market really quickly. So I think as a Company, we’re really well positioned with Etsy Studio, but also to be nimble potentially with other opportunities in the future..

Okay. Thanks a lot..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day..