Good day, ladies and gentlemen, and thank you for your patience. You've joined the First Quarter 2016 Etsy Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Ms. Jennifer Beugelmans, Vice President of Investor Relations. Ma'am, you may begin.

Thanks, Letif [ph], and good afternoon everyone, and welcome to Etsy's first 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-K filed with the SEC on March 1, 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 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?

Thanks, Jennifer, and hello to everyone listening. I'm excited to share our recent progress with you, which includes strong execution against our product roadmap and important milestones within each of our four strategic initiatives. In the first quarter of 2016 our revenue grew nearly 40% and GMS grew 18%. As of March 31, our vibrant community expanded to include 1.6 million active sellers and 25 million active buyers. We believe our first quarter performance provides a good foundation for the rest of 2016 and we are reiterating our full-year and three-year guidance. I'd like to recap our progress starting with our Etsy Everyday strategy. We believe the power of human connection is central to the Etsy buyer experience and making these connections a regular habit for Etsy sellers and Etsy buyers, particularly on a mobile device, is one of our most important initiatives. In 2015 we improved the mobile experience from end-to-end and developed products and tools that enabled Etsy sellers and buyers to connect and transact more seamlessly across multiple devices, countries and currencies. This important foundational work further expanded our momentum in mobile during the first quarter. As of March 31, our mobile apps had been downloaded more than 35 million times. We also continued to narrow the gap between mobile business and mobile GMS, which we view as a key data point for the success of our Etsy Everyday strategy. During the quarter, approximately 63% of our visits and slightly more than 47% of our GMS came to Etsy through a mobile device. All of this work created a solid platform to launch more products, tools and services in 2016 and we're already off to a strong start in the first quarter with the introduction of Shop Videos and our new Shop Home, the front door to…

Thanks, Chad, and hello to everyone. Just a heads-up, unless I say so, all comparisons I'll be talking about here are on a year-over-year basis. Let's start with GMS. During the first quarter of 2016, the Etsy marketplace generated $629.9 million in GMS, up more than 18%. Growth in GMS is driven by growth in active sellers and active buyers. At the end of the first quarter, Etsy had 1.6 million active sellers, up about 12%. As a reminder, an active seller is one who has incurred at least one charge from us in the past 12 months. Also at the end of the first quarter, Etsy had 25 million active buyers, up about 20%. Active buyers are those who have bought on Etsy at least once in the past 12 months. Etsy's first quarter results demonstrated our continued year-over-year progress in narrowing the gap between mobile visits and mobile GMS and highlighted the results of continued improvement in our mobile offering. Roughly 63% of our visits come to us from a mobile device, which is up nearly 400 basis points from last year and up roughly 200 basis points from last quarter. This growth continued to outpace the rate of growth on desktop. More importantly, about 47% of our GMS came from a mobile device, up more than 400 basis points from last year and approximately 300 basis points from last quarter. Etsy's international business continued to expand, with international revenue growing roughly 47% in the first quarter. Percent international GMS was 30.3%, which was a slight decrease compared with the 35% last year, but an increase compared to the 29.2% last quarter. And as a reminder, percent international GMS is the percent of total GMS from transactions with either the buyer or the seller is outside the U.S.…

Thank you, ma'am. [Operator Instructions] Our first question comes from the line of Heath Terry of Goldman Sachs. Your question please.

Great. Thanks. Chad, I was wondering if you could give us a sense of the adoption that you've seen both from a manufacturer's perspective but also from a seller's perspective into manufacturing and the manufacturing offering that you've got as you, you know, I guess you're approaching close to nine months with the latest version of that initiative, sort of what you've learned about seller demand for that. And then Kristina, I was wondering if you could also give us a bit of a sense of what kind of impact you saw to -- in the stabilization and I guess even weakening of it, of the dollar here. I know you'd talked about building the intracompany and the growth that you've seen in intra-country sellers and marketplaces. But to the extent that that was a headwind last year, can you tell how much of a benefit it was this quarter that things have started to stabilize from an FX perspective.

Sure. So I'll start with the manufacturing question. Thanks for the question, Heath. It's still, as you mentioned, we’re nine months in to Etsy Manufacturing, it's still very early. We've had, as I mentioned, hundreds of manufacturers apply to the program. At this stage it's very early and it's a long-term bet for us. I think the really important thing to understand from a guidance perspective is that we're not expecting Etsy Manufacturing to be a meaningful contributor this year.

Heath, on the international front, as I mentioned, the direct impact was still an improvement compared to both last year and last quarter. It was about 0.7 percentage points. So we're seeing a sequential improvement there and a year-over-year improvement. The indirect impact on the international buyer behavior, as you know, has always been an estimate for us. And what we're seeing is sequential improvement in both the quarter and in April, but still negative on a year-over-year basis. As I mentioned, the bucket of GMS that is international buyer to U.S. seller was down 11% in the first quarter, which is an improvement over the 13% decline that we saw in the fourth quarter. It's the first sequential improvement that we've seen, Heath. I'd also say and reiterate that we're seeing another sequential improvement in the month of April, which is a continuation of a positive trend but the first signs of a positive trend. It still is down, however, in April, albeit less so. What's super-exciting for us on the international front is continued progress on our local marketplaces global strategy. I think it's so important to remember that this bucket of international buyers and international sellers in the same country grew about 56% in the quarter. In the U.K. alone it grew 70%, and that's an acceleration. And again we're seeing that growth further accelerate in April, both the U.K. and in our five key markets. So we're very excited about the progress we're seeing in our global local strategy and the improving trends that we're seeing from an indirect currency perspective, albeit more tempered.

Okay, great. Thank you.

You're welcome.

Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your question please.

Hi. This is Michael Costantini on for Brian. I just have two quick ones on the guidance. Number one, so your GMS of 18% was above guidance for midpoint of 13% to 17% for the year. What do you expect to cause a deceleration in GMS throughout the year? And then on your EBITDA guidance, you said you expect EBITDA margins to be in the 6% to 7% range in 2Q versus 18% 1Q and guidance for 10% to 11%, so, what should we expect to drive that margin contraction for the rest of the year? Is it increased marketing spend? Thanks.

Thanks, Mike for the question. So when we look at the first quarter, we think we executed really well across all areas of Etsy. And that resulted in robust growth in marketplace and seller services revenue and also outsized EBITDA margins. Today we're reiterating our guidance for 2016 and for the next three years. Our performance in the first quarter was just driven by strong execution and we think we're well-positioned for a productive year going forward. But as it pertains to GMS, recall what we've talked about in terms of the drivers of our top line performance for 2016. We've talked about narrowing the gap in mobile GMS but we've said that the expectation is that we'll continue at the slow but steady pace of narrowing that we saw in 2015. We've talked about the percent international GMS as being roughly flat year over year, meaning no significant improvement in the contribution. And we've talked about robust seller services revenue growth coming from growing adoption. So when we look at those three underlying drivers of our GMS and revenue growth, what we've seen in the first quarter aligns with that. We narrowed the gap at a pace that was similar to previous quarters, the gap in mobile. Our international GMS was roughly flat year over year, slight improvement versus the fourth quarter. And we had robust seller services revenues growth driven in part by a -- by the integration of direct check-out into PayPal which will start to anniversary as we move through the year. So all of these are positive and in line with the drivers that we expected for our GMS and revenue guidance. From a margin perspective, as we've said in our guidance, we expect to -- we expect to see leverage in marketing expense as…

Thank you.

You're welcome.

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

Thank you and good afternoon. I know you don't give specific guidance for each seller service, but I'm wondering if you could remind us of the order of importance and where at maturity you think Pattern will fall out in that. And then, how much Pattern cost to develop? And your thoughts around developing it in-house versus partnering with one on the website builders? Thanks.

Sure, Andrew. So you're right, we don't break out the individual revenue contribution from direct checkout, promoted listings and shipping labels. So what we've said is that direct checkout is the largest contributor to seller services revenue. Promoted listings is a solid second. And shipping labels is a distant third. However, shipping labels is booked net, so it's 100% incremental. Promoted listings has the high incremental margin you'd expect from a search ads business. And direct checkout, while it has very nice margins, has lower than core Etsy margins, which again one would expect from a payment business. With regards to Pattern, you know, Pattern should have a scale margins that are similar to typical custom website margins. We haven't even recorded any revenue yet associated with Pattern because it's still on free trial, and as a reminder, it's $15 a month, with the first month free. So when we think about Pattern at scale, we haven't given any particular guidance with regard to its contribution to total, just as we haven't given any particular guidance on any of our seller services as to where they'll stand over the long term in terms of their total contribution to seller services revenue. I'd also say, with regard to the question of costs, to launch Pattern is really about headcount allocation. It doesn't require any tech infrastructure investment, any capital investment whatsoever. It's about looking at the opportunities that we have over the long term and prioritizing those opportunities by putting our best product managers, engineers and marketers behind it. So, Pattern doesn't require a significant amount of dollar investment. And to be sure, the team that works on it was relatively small and very nimble in getting the product out.

And Andrew, I would add that the design of Pattern is built very specifically for Etsy sellers, so that they can really leverage their investment in their Etsy shop. So if you look at the cohort data for our sellers that we've released in the last call, our sellers have really loyal -- are really loyal and many of them have invested multiple years in their shops. And Pattern is a really great way to help our sellers who want to build a custom website, be able to launch their website literally in minutes. And as Kristina said, it's a relatively small team, but I think it's just another demonstration of the world-class engineering and product that we have here at Etsy.

Thank you.

Thank you. Our next question comes from the line of Gil Luria of Wedbush Securities. Your question please.

Yes, thank you for taking the question. Can you remind us what the economics are for the new headquarter? So I understand the accounting, but do you own the new building? Do you own the new facility? What's going to be the cash, the periodic cash outlay, for the new headquarters, and how much is that going to be compared to what you've had previously?

Sure, Gil. So it is a lease, it's a ten-year lease. And we're recognizing it using the build-to-suit accounting method, which causes us to record the full cost of the building plus any significant construction cost related to the build-out on our balance sheet as a capital asset. We've also booked a corresponding liability, the facility financing obligation. So we will still make traditional cash rent payments to the landlord. However, those payments to landlord will be treated similar to other capital leases. They'll be comprised of interest expense and principal payments on the facility financing obligation. But I would say, keep in mind that we negotiated a free rent period with the landlord, so these cash payments won't start until that free rent period ends. So, moving forward, there'll be two P&L impacts for you to think about, and that we -- I tried to highlight a bit in my prepared remarks. Depreciation expense related to the capital assets and interest expense related to the payments on the facility financing obligation. And so that will be an incremental $1 million to $2 million in the second quarter. And then going forward, it will be on average about $3 million a quarter for the remaining ten years on the lease. Once the free rent period ends in 2017, cash principal payments will be reflected on the cash flow statement, but it's not something that we'll see in 2016.

And can you give us a preview of what we'll see on the cash flow statement in terms of quarterly expenses?

I'm sorry, with regard to the new headquarters?

Yes, please.

As I said, I don't know if I can give you much more of a preview than what I just gave. So the expectation --

Well, the magnitude of the impacts on the cash flow statement in 2017 from the move to the new headquarter.

We haven't disclosed that information, but as we get closer to 2017 and talk more specifically about 2017 guidance, we'll be happy to break that out for you.

Great. And then follow-up question on the gift cards and how that works. Which gift card breakage did you get in the first quarter of the year? When were the gift cards sold? When were they not used? Should we expect this type of an impact every first quarter of the year then?

The answer to your last question is no. So let me explain a little bit what happened in the first quarter. Three years ago we launched gift cards. And what we -- with a third-party provider. And the terms of our agreement was that over the ensuing three years we would spend time understanding the rate of breakage for our gift cards. We reached that three-year mark in the first quarter. And the third-party provider recognized revenue based on assumptions of gift cards that would never be used. Going forward then, we'll be using that standard to recognize unused gift card revenue and it will be a much smaller, almost de minimis impact on a monthly basis for gift card revenue going forward. Literally we're talking about thousands of dollars.

Got it. Thank you very much.

You're welcome.

[Operator Instructions] Our next question comes from the line of Blake Harper of Topeka Capital Markets. Your question please.

Thanks. Wanted to ask you about what the pipeline looks like for new seller services and how does it go from the idea, to implementation, to the product release. I know you get some feedback from a lot of your sellers. But just how, you know, what do you have and how many different types of products are you thinking about that you could eventually introduce for the seller services?

Thanks for the question, Blake. First of all, we announced in the last quarter that we plan to announce one seller service for this year, and that service was Pattern. However, we have talked frequently in the past about the research that we've done with our sellers. We spend a lot of time talking to our sellers about what they need. And one of the key pieces of that research that's been really consistent is our sellers spend about half their time on business tasks and half their time on creative tasks. And they really look to Etsy to build products to help them spend less time on the business tasks so that they can spend more time on the creative tasks. So we've talked to sellers for many years. Pattern was an example of addressing a marketing need. Our sellers really consistently told us that they wanted to be able to market themselves on their own websites, about a third of our sellers said that. But there are many other services that our sellers have asked or have told us that they need help with, so you can expect in the future that we'll continue to define and implement those services. I think the important thing is we really believe that we have a multiyear, long-term opportunity to build new seller services. And our seller services business today is only five years old; we've only had this revenue stream for five years. So we feel really confident that there are a number of services that we can build long term for our community.

Got it, thanks. And then one more question if I could. Given you let go of [ph] some cohort data for both of your sellers and buyers that had -- that [inaudible] platform, I just want to see if you are able to provide any update on either that data or some of the sellers and buyers that you've acquired in the years since, either in 2013 or -- 2012 or 2013 and 2014, and how that compares to the data that you've provided at the time.

Thanks, Blake. We'll be updating our cohort data on an annual basis. So we have no updates in particular with regard to our cohorts. But one of the things that we did say when we provided 2011 and 2012 cohort data in the fourth quarter, and it's listed in the 10-K for those of you who haven't seen it, is that 2013 cohort data looks a lot like 2011 and 2012.

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

Yeah. Thanks for taking my questions. Just a couple. First, Kristina, can you quantify how big the ALM stock comp benefit was in the quarter? And then second, on Pattern, does it at its existing state tie into like buyable pins, buy buttons on Twitter and Facebook? And if not, are there plans to do that in the future? Thanks.

Sure. Just really quickly to your question, we'll be releasing that number in the 10-Q, which should be out in the next few days.

And on the second question, Darren, Pattern. Pattern is really an example of us helping our sellers sell anywhere they sell, in this case a website. Over the long term we do see opportunities to help our sellers sell in other venues, but we have no immediate plans in the areas that you just described.

Thank you.

We have a follow-up question from the line of Brian Nowak of Morgan Stanley. Your line is open.

Hi. This is Michael again on for Brian. I just had a quick one on basically CapEx. So there's $10 million this quarter for the headquarter build-out and you said you'd incur $50 million for the headquarters in the entirety. Will that all be incurred in CapEx in 2016 or will that be spread out over a few years? Thanks.

Sure thing, Mike. We incurred about $22 million total, as you've mentioned, and the remainder will flow through 2016.

Thank you.

You're welcome.

There appear to be no further questions in queue at this time. That does conclude the Q&A session of our call and the conference for today. Thank you, ladies and gentlemen, for your participation. You may disconnect your lines at this time. Have a wonderful day.