Etsy, Inc. (ETSY) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcomd Etsy’s Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today’s conference, Jennifer Beugelmans. Ma'am, you may begin.

Thanks, Esther, and good afternoon, 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 strategy, 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 today and in our 10-K filed with the SEC on May 5, 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 a 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 good afternoon to everyone joining. We’re excited to talk with you about our second results, which included 39% revenue growth year-over-year, 23% year-over-year GMS growth, which was an acceleration compared with the first quarter and 246% adjusted EBITDA growth that resulted in 16.5% adjusted EBITDA margin. Our vibrant community expanded almost 1.7 million active sellers and 26.1 million active buyers. Based on our strong performance to date and our expectations for the reminder of the year, we’re raising our 2016 guidance. Kristina, will provide you with more color on our financial performance and updated outlook after my remarks. Before providing some detail on our progress during the second quarter, I want to take a moment to reflect on Etsy’s evolution over the past 11 years and our long-term plans for the future. Etsy began as on online marketplace that connected thoughtful consumers with creative entrepreneurs around the world. Today, our business is so much more in our marketplace. Over the past five years, we expanded Etsy’s business from a simple marketplace to include a seller services platform that helps our community of creative entrepreneurs making money by following their passion. We now offer a robust suite of high impact seller services tools and other features that address our sellers pinpoint. In the second quarter of 2016, eight seller services represented 55% of Etsy’s revenue and we believe we have exciting opportunities ahead to introduce additional services to support Etsy sellers in new ways. Etsy buyers tell us that they come to Etsy to find products that they can’t find anywhere else. In a world where most retailers are competing to provide commodity goods at the lowest price with the fastest shipping, Etsy’s unique inventory and our vision for a more human, personal and global approach to commerce helps us and our sellers stand apart. Besides from the range and uniqueness for the items from our sellers, we made it easy for Etsy sellers and Etsy buyers to seamlessly connect online and offline on any device in ten languages around the world. We were able to do this because Etsy is fundamentally a technology company that can innovate quickly and deliver products and services that work for Etsy sellers and Etsy buyers on a global scale. Looking ahead, we believe we build a strong foundation, one that will allow us to tap in the new opportunities, further scale our business, reach new audiences and move closer to realizing our mission to re-imagine commerce. To do this, we’ll continue to execute our strategies to grow our marketplaces and seller services platform. As we work on driving growth in our marketplaces, one of our most important initiatives is Etsy every day, our focus on making Etsy a daily habit. Over the past 18 months, you’ve heard me talk about mobile and how mobile is integrated into everything we do. Over the past several months, we launched several products that made it easier for buyers to come to Etsy, sign in, search, connect and transact across all devices. We continue to optimize the buyer experience on etsy.com across mobile and desktop and in doing so, we’ve been able to drive conversion rate gains across the board over the past year. We believe that this work has helped us achieve sustained active buyer growth and will remain an important focus for Etsy. We also believe however, setting freest [ph] engagement and frequency and become long-term growth drivers. For example, better connecting our existing base of active buyers to the more than 35 million items for sale in etsy.com with search enhancements, we’re successfully encouraging the 53% of Etsy buyers who made just one purchase in 2015 to come back to Etsy more frequently are two areas of opportunity. In recent months we’ve taken a close look at our brand definition in positioning, we’ve been exploring ways to raise awareness of Etsy as a go to shopping destination. In special occasions, the unique items that express your style and individuality in your daily life, we want to show that there is something for everyone, every day on Etsy. We plan to bring this point of view to live in our 2016 holiday campaign, which we believe will be our strongest yet. We’re excited to share more details in the coming months. Turning to our international strategy, we believe we just scratched the service when it comes to realizing our global potential. Our ability to scale internationally is driven in part by our powerful technology platform. One example of this is our innovative use of machine translation, which helps localize the Etsy experience and making it easier for Etsy sellers and Etsy buyers to transact when they don’t share the same native language. With this advanced technology, we support Etsy sellers and Etsy buyers from different parts of the world, who would normally be separated by language, as they message each other, search and browse listings and reviews. Machine translating listings in particular dramatically increases the items available to non-English speakers. In the second quarter we applied this technology to promotive listing searches, we used proprietary data in our machine marine technique to optimize and fine tune the quality of translations across our site on an ongoing basis to help enhance the overall experience for our global community. We also continue to foster local communities and marketplaces in five key geographies, Australia, Canada, France, Germany and the UK. Over the long-term, our goal is to grow international to represent 50% of our GMS. Our current priorities are to create more seamless connections between local Etsy sellers and Etsy buyers by tailoring content, supporting local events, elevating our brand awareness and listening and responding to the unique needs of our sellers in their respective markets. During the second quarter, we continued to organize Etsy seller meet ups in educational events, hosted our annual craft party in dozens of cities around the world and we expanded Apple Pay to Canada and Australia. We also launched localized search in France and Germany, expanding this in the UK and Australia. Localized search makes listings and local Etsy sellers more prominent to Etsy buyers within their respective country. During the quarter, we saw GMS growth between French buyers and French sellers and between German buyers and German sellers accelerate significantly year-over-year and sequentially and we believe that local search encourages this activity. The UK continues to serve as a powerful example of our emerging success in fostering local communities in our key international markets. For the first time ever, more than half of UK GMS was from UK buyers purchasing from UK sellers. In addition, the growth rate of GMS between UK sellers and buyers accelerated in the second quarter to more than 75% year-over-year and continues to grow significantly faster than GMS between UK buyers and sellers in other countries. We believe all of this hard work has had a particularly positive impact on GMS growth between international buyers and sellers in the same country and we’ve seen year-over-year GMS growth in this category accelerate for three consecutive quarters. Let’s turn now to seller services, which delivered 58% revenue growth in the second quarter. As we’ve discussed before, our strategy for growth in seller services involved expanding the geographic reach and functionality of existing services and launching new ones that help our sellers address their most critical business pinpoint. In the second quarter, we made enhancement to promotive listings and shipping labels, which we believe will make our sellers more successful. We added new inventory to promotive listings on mobile web and desktop and paid more opportunities for sellers to advertize their items. And we also added FedEx as our newest shipping label carrier, so that U.S. sellers have another option for purchasing and printing labels directly from Etsy. Early in the second quarter and as we discussed in our first quarter call, we launched a new paid seller service called Pattern by Etsy. Pattern enabled Etsy sellers to create their own custom websites in just minutes, leveraging all the work that they've already put into their Etsy shop. Pattern has the same marketplace business model as etsy.com and its supported by our Direct Checkout and shipping label services. As a reminder, we don’t expect any material contribution from Pattern this year, but we’re pleased with the response it’s received from our sellers, early days [ph] that suggest a healthy rate of conversion following the 30 day free trial period. Since launch, we further optimized Pattern and we made a series of updates to improve its functionality. Some of the updates include, standard search capabilities, new design templates, the ability to preview mobile sites, improved SEO across all pages and Pinterest verification. In addition to these new services and features, I also want to emphasis our commitment to service of reliable and trusted platform for our sellers. Last month an issue with our third party process of role play [ph], led to delays in the processing of payments for purchases made on Etsy using Direct Checkout. Although, Etsy engineered a work around for the transactions be processed and the issue is now been resolved, we still recognize the frustration and the inconvenience that it caused Etsy sellers and buyers. We’re working to make the platform even stronger, adding redundancy and resiliency and we’re 100% committed to making sure a Checkout on Etsy remains reliable, convenient and secure. We believe we have a long runway for growth of our services platform in the coming years and we’ll continue to look for opportunities to introduce more tools, features and paid services that support creative entrepreneurs wherever they chose to pursue commerce. In addition, we also wanted to forward Etsy sellers as they grow and steal their business by bringing new constituents in what we call the Etsy economy. Two great examples are Etsy wholesale, which offer a new sales channel for Etsy sellers and Etsy manufacturing, which enables Etsy sellers to find partners, so they can steal their production responsibility. We’re excited about our upcoming open call event, which is part wholesale program. Open call gives a group of Etsy sellers the opportunity to meet, interact and showcase their products to their retail partners and dozens of small boutique owners. The event will be connecting Etsy sellers with our newest retail partners Cooper Hewitt, Paper Source and giggle as well as existing partners Whole Foods and Macy's Herald Square. In closing, as I look across the business, we’re excited about the progress we’ve made over the past 11 years or even more excited about the significant opportunities that lie ahead. We have a strong technology platform and a robust product road map focused on optimizing our existing marketplaces and services making Etsy accessible to an even wider group of people, increasing engagements and creating new channels for growth. We also have a world class team that is incredibly excited about building the next chapter for Etsy. With that I’ll turn the call over to Kristina to walk you through our financial results and our revised guidance. Kristina?

Thanks, Chad, and hello to everyone. Just to note, unless I say so, all comparisons I'll be referencing here are on a year-over-year basis. Let's start with GMS. During the second quarter of 2016, the Etsy marketplace generated $670 million in GMS, 22.6%, driven by growth in active sellers and active buyers. At the end of the second quarter, Etsy had almost 1.7 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. At the end of the second quarter, we had 26.1 million active buyers, little over 20%. Also as a reminder, active buyers are those who have bought on Etsy at least once in the past 12 months. [indiscernible], roughly 64% of our visits come to us from the mobile device, which is up 400 basis points from last year, continuing to outpace the rate of growth on desktop[ph] . Slightly more than 47% in the GMS came from a mobile device, also up 400 basis points. During the second quarter, our conversation rates increased in desktop, mobile web and mobile app. In addition desktop conversation rate [indiscernible] similar to overall mobile conversation rate and therefore the gap between mobile visits and mobile GMS remained constant when compared with last year. As a reminder, we measure the change in mobile gap by considering the early change in present mobile GMS with the early change in [indiscernible]. We narrow the gap in mobile GMS at a faster pace than mobile visit. Overall, the peak progress was made in mobile. Year-over-year mobile GMS grew 34% and accelerated compared to last quarter. Etsy's international business continued to expand, with international revenue growing roughly 54% in the second quarter and we achieved healthy marketplace growth in each of our key focus markets. Percent international GMS was standard with 30.7%, which was up 50 basis points, compared with last year and up 40 basis points, compared to the first quarter of this year. This is the first year-over-year improvement we’ve seen in this metrics and keep working [ph]. As a reminder percent international GMS was the percent of total GMS from transactions with either the buyer or the seller if outside of the U.S. This includes both [indiscernible] transactions and transaction where both buyer and the seller who are located outside of U.S. The improved international performance this quarter was largely driven by three [indiscernible] First, excluding our French marketplace ALM, we had a poor international GMS category was growing [ph] robust. We’re seeing continued GMS growth between U.S. buyers and [indiscernible] sellers, international buyers and sellers in the same country and international buyers and sellers in different country. These three international categories have each [indiscernible] other GMS between U.S. sellers and international buyers were down 8% this quarter. This metrics has improved for three consecutive quarters. We continue to believe that this year-over-year decline indicative of the indirect impact of fluctuating global currency exchange rate, the international buyer behavior over the [indiscernible] And finally third, decent GMS growth between international buyers and sellers in the same country has continued to accelerate, rose from 67% year-over-year. In fact GMS growth between international buyers and sellers in the same country accelerated to a third consecutive quarter. It’s been the fastest growing category of international GMS for the past three quarters, to the point that it is similar as a percentage of total GMS across all GMS between U.S. sellers and international buyers and GMS between international buyers and sellers located [indiscernible]. Also the smallest category, [indiscernible] continued exploration in its [indiscernible]. The exchange rates continue to have direct healthy leading [ph] impact on Etsy’s overall GMS growth rate when compared to international GMS. Expecting a direct impact, currency translation of GMS for non-U.S. dollar denominated was [indiscernible] and slightly more than [indiscernible]. This proprietary [ph] drive is an [indiscernible] last year and quarter. Although, we’re encouraged by the small improvement in international GMS this quarter, given currency and other geopolitical global events, it’s too early to draw any conclusion [indiscernible]. Finally with regard to currency [indiscernible], I want to touch on Brexit. Most other companies with global business world is watching fluctuation shift [ph], but still very early. [indiscernible],the second quarter impact [indiscernible] against Brexit. We continue to monitor developments in the UK and Greater Europe, [indiscernible]. [indiscernible], impacted currency fluctuations with other macro developments. Turning to revenue, for the second quarter full revenue $85.3 million, up 39%, driven by both growth in seller services revenue and elevated growth [indiscernible]. Marketplace revenue grew 22%, primarily due to growth in transaction fee revenue and, to a lesser extent, growth in listing fee revenue. Seller Services revenue grew 58.1% year-over-year and was driven primarily by revenue growth in Direct Checkout, which continued to benefit from the integration of PayPal. Seller Services revenue also benefited from revenue growth from Promoted Listings and Shipping Labels, [indiscernible]. Our newest seller service [indiscernible] also contributed to revenue growth this quarter. As a reminder we expect [indiscernible]. Gross profit for the second quarter was $56.3 million, 43% and gross margin was 66%, up 160 basis points. Gross profit grew faster than revenue in the second quarter due to the leverage we achieved in technology infrastructure and employee-related costs. Turning now to operating expenses, second quarter operating expenses were $51.6, up 19.3%. Total operating expenses as a percentage in revenues declined to about 60% in the second quarter, compared with approximately 71%. Operating expenses declined as a percentage of revenue due primarily to leverage in digital marketing expenses and, to a lesser extent, employee-related costs. Marketing expenses were $18.3 million [ph], up 11% and about 20% of full revenue versus 25% last year, roughly 19% in the last quarter. The increase in marketing expenses were driven by higher employee related costs, [indiscernible] marketing expenses were up 17.6% [ph] in the second quarter of last year. The second half of this year, we expect growth in revenue to accelerate compared with first half of this year as we ramp up a more significant annual campaign. Marketing expenses in the second quarter declined roughly 7% year-over-year continued to generate strong returns for Etsy, with [indiscernible] involved. Similar to the last few quarters, it was [indiscernible] on our quarter GMS growth rate. Product development expenses grew $78 million, up about 18%, compared to nearly 14% of total value and 16% last year, about 15% past quarter. The increase in product development expenses was driven by high employee related costs, you need to grow [indiscernible]. G&A expenses totaled $23.5 million, up 28% representing roughly 26% of total revenue to roughly 29% to roughly 23% last quarter. [indiscernible] overhead related to new office locations, including depreciation expense related to our new Brooklyn headquarters and expenses associated with Sarbanes-Oxley compliance. Headcount at the end of the quarter was 921 people, compared with 852 as of March 31, 2016, which was an accelerated rate of growth compared with the first quarter. In the second half of 2016, we expect the pace of hiring to continue to be similar to the first half of 2015. The second quarter net loss was $7.3 million, compared with a net loss of $6.4 million last year. Etsy’s net loss included interest expense associated with build-to-suit lease accounting related to our new Brooklyn headquarters, $6.4 million foreign exchange loss, and an income tax provision of $4.3 million, all three of which were primarily non-cash. Non-GAAP adjusted EBITDA was $14 million, up roughly 246%. This resulted in an adjusted EBITDA margin of 16.5%, up from 6.6% in the second quarter of 2015. This increase was driven by driven by high-margin incremental revenue growth and, to a lesser extent, leverage in digital marketing expenses and employee-related costs. During the quarter we reported positive cash flow from operation 17.2 million, this compares with $4.7 million in cash from operations stranded at last year. The year-over-year increase in net cash divided by operating activities for the quarter was mainly due to revenue growth and leverage in operating expenses. To date we’ve invested $32 million in the build out of our new Brooklyn headquarters and as we said before, we intend to invest another $15 million for the build out by the end of 2015. As of June 30, 2016, we cash, marketable securities and short-term investments totaling approximately $278 million. To wrap it up, we had a strong first half of 2016, we’re raising our full year guidance for GMS revenue and adjusted EBITDA margin. We’re also reiterating our full year guidance three year guidance. For GMS, we’re raising our 2016 growth outlook to range at 15% to 17% from the midpoint of our original 13% to 17% guidance range. At this time, don’t expect the payment processing issues early in the third quarter to have material financial impact on our future results and our updated guidance [indiscernible]. For revenue growth, we’re raising our 2016 outlook to range at 25% to 28%, up from the high end of 28% to 25% guidance range previously. I’ll add that we expect - 2016 gross margin, we continue to expect 2016 gross margin in the 64% to 65% range. Also in 2016, we now once again leverage total operating expenses for the full year. We continue to expect marketing expense as a percent of revenue to decline and G&A expense to increase with the overhead associated with our new Brooklyn headquarters. We continue to expect to recognize on average, $3 million of additional depreciation and interest expense per quarter for the duration of our lease for our new Brooklyn headquarters. Finally, we’re increasing our 2016 adjusted EBITDA margin guidance to a range of 13% to 14%, from a range of 10% to 11%, reaching higher expectations for revenue growth and operating in roads. This means that at the mid-point of our updated revenue guidance, adjusted EBITDA will grow about two times revenue. As a reminder historically adjusted EBITDA margin in the fourth quarter is seasonally higher than adjusted EBITDA margin in the third quarter. And with that I’d like to turn the call back over to the operator, Esther to open it up for Q&A. Thanks.

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

Great, thanks. Kristina, you touched on the impact that end country sellers had on the quarter, can you give us a sense of sort of where you’re in terms of building out that network? Are we second inning, third inning here in terms of the impact that we could reasonably expect that to have on the business? And then when you - when you’re thinking about sort of guidance for this year, clearly given the acceleration that we saw in Q2, the guidance that you’ve provided implies pretty significant deceleration, is there anything beyond just sort of pragmatism behind that that we should be thinking about in terms of maybe putting into context?

Sure, Heath. So just a clarification on your first question, when you said end seller, you meant GMS between local buyers and sellers, like UK seller to UK buyer?

Exactly, the initiative that you guys have had in the five countries?

So in the UK, as we mentioned we’re above 50% of our GMS generated in the UK is between local buyers and sellers and we’re super excited about that. So when we look at our other key focus countries, Australia, Canada, France and Germany, none are close to that 50%, so we’re still in early days in other countries. I would say, Australia is probably the closest, but it’s where the UK was a couple of years ago. So I wouldn’t want to walk away with the assumption that we have this type line rolling in over the next couple of months. But I think what it points to is, a long-term opportunity to drive growth in those category. With regard to guidance, I think you’re right. On the revenue, you pointed to a deceleration in the second half from the perspective of revenue growth. I think there’s a couple of things that - first of all we’re super excited about 40% revenue growth in the first half of this year and we don’t want to kick away from that great achievement. But historically as you know Heath, we’ve seen deceleration in revenue growth was moving to the second half of the year. Our guidance does not extrapolate the first half into the second half and that’s because - just as a reminder, what report our revenue growth guidance assumption [ph]. And what you’ve seen in the first half and - move us to increase on our assumption the second half and what are those things. Remember underlying our growth with the assumption that the piece of the narrowing of the mobile gap will continue as it had in 2015. Whereas, you just saw in the most recent quarter, we were able to sustain and gain that gap, we didn’t narrow it and so there is reason to be overly ambitious about that in the second half. And what we’ve also said is, underlying our guidance is the expectation that percent international GMS in 2016 remains flat, with 2015 and we’re really excited about what we saw in the second quarter, the first quarter since 2014 where we actually saw an extension in that, but maybe I’m pragmatic, but one quarter is not a trend make. And given what we’ve seen in other currency fluctuations shift in the last few months, as well as geopolitical events, we don’t think there’s any reason to deviate from our guidance which is flat international GMS year-over-year. And finally, our guidance - underling our revenue guidance, we’ll continue penetration of our existing seller services and modest contribution, our new seller service. When we think about our existing seller services, we talked about very positive developments in promotive listings and shipping labels that drove growth in the second and that isn’t expected they won’t drive growth in the second half. But I would remind you that insert the anniversary the integration of PayPal at the end of October of this, so that’s something to consider. And remember that Direct Checkout is our largest contributor seller services revenue just in terms of size. And I would also add than, with regard to our new seller service, we’re very excited you asked me that. We’re very excited in and that we’re seeing in terms of conversion from free trial and [indiscernible] sellers, but that doesn’t cause us to change our expectation that the contribution will still be modest relative to the rest of seller services.

Got you. Thanks Kristina, that’s really helpful.

Thanks, Heath.

And our next question comes from the line of Andrew Bruckner with RBC Capital. Your line is now open.

Thank you and great quarter. I’m looking if you can talk a little bit about what you’re seeing on the mobile front in terms of mobile visits and mobile GMS, the gap closing there and if there’s any initiatives that you’ve done or if it’s just kind of behavior on the whole? Thank you.

Thanks, Andrew for the question. So I think it’s really important to understand that when you’re narrowing that gap with mobile visits and GMS, it’s really the accumulation of a lot of different types of work. We talked about the work that we’ve done in sign in and search and Checkout and other areas of the business. So it’s really - and I mentioned that we do it in conversion increases across the board over the past year. So I think our mobile success has largely been due to many of those initiatives on the core buyer experience really resulting in a great mobile experience for buyers and for sellers. And Kristina, did you have something to add there on the numbers?

I just wanted to point out that we’ve highlighted since the beginning with regard to narrowing gap, as it won’t be a straight line up into the right, it’s a long-term strategy and we feel like we’re still in the early innings of narrowing that gap. Indeed, we’ve only narrowed it a little bit over the past few quarters, so it’s really a long game as opposed to something we expect every single quarter in narrowing that gap.

Understood, thank you.

And our next question comes from the line of Mark Kelley with Citi. Your line is now open.

Hi, thanks for taking the question. I guess, now that you’ve added FedEx as an option for shipping labels, can you talk about how expect that to impact the growth for that segment in isolation. Maybe there’s something you can drawn from when you added the seller services categories in the past, like adding PayPal and direct check out. And then second, the real pay issues as I know is not impacting much if anything, but is there a way for us to think about what percent of transactions use that service? Thanks.

Sure, on the FedEx point, we just rolled out that this quarter. It’s - really our goal with sellers is to provide and buyers regard as much choice as possible and that’s only in the U.S. So we don’t expect any significant contribution from FedEx.

And I would just add to that, just to underscore. We don’t expect FedEx to have anywhere near the impact of some kind of integration like something like PayPal for example. FedEx is just - it’s a great partner, but it’s one of many shipping label services that our sellers could use.

And the second question is about?

Transactions.

So in Etsy, we run transactions through PayPal and through Direct Checkout and PayPal is embedded in Direct Checkout, so our credit card transactions run through real pay and that’s why we had the issues that we described with the credit card transaction.

Great, thanks.

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

Hi. This is Michael Costantini on for Brian. Chad can you please expand a little bit more on the group conversion rates are seen on both desktop and mobile in the quarter. Specifically what change did you make, and did you make these changes globally and how should we think about that in terms of impacting buyer growth and GMS for buyer looking ahead.

Sure as I noted in my remarks we have seen conversion increases across the board, on all platforms, desktop, mobile web and mobile apps. And it is really our success there as really just varies focus product development and improving the core experience, everything from sign in to browse to search we talked about exploratory search a couple of quarters ago but that is still going quite well and finally with Checkout. So the mobile experience as well as the desktop on the mobile apps and mobile web, have all improved and we continue to improve that day after day after day. It is really in baseball term it is really about having a lot of basics consistently and that’s what we have been doing over the past year.

Thanks.

And our next question comes from the line of Tom Forte with Maxim Group. Your line is now open.

Great, thanks for taking my question and great quarter. So when you talk about PayPal being a tough comparison or when you talk about adding FedEx to your shipping options, is what make PayPal tough comparison that you are seeing both increased adoption and your better economic on PayPal versus some of your other payment options and then is it possible than to the effect that if you could get higher conversion rates for FedEx and higher price point with that also could then over time be beneficial to your shipping color services?

So I think it is helpful Tom, let’s take a step back before we dive a little deeper and just remind everybody this relative size of these revenue bucket. So remember that direct check out is the largest of the seller services, mode of listing is a solid number two and shipping labels is distant three and then shipping labels were called at, it is booked net of the cost associated with the writing the shipping labels, typically we received volume discount from our partners and we are passing nearly a 100% of those savings on to our sellers. Shipping labels is a welcome seller service, adds great value to our sellers and tone of time and money. They are also with the 100% increment in margin which as a CFO, I love the business. From funds contribution perspective these are direct check out businesses just significantly larger than shipping label.

Then one other quick follow up then. You talked historically about percent of listings that are dodged and animated, as the rates to gage [ph] effective currency changes, can you access that number?

It hasn’t changed materially from what we have discussed previously which is the high single digit low, low double digit percent of our GMS is a non-U.S. dollar denominated good. In other words -

Great thank you.

Already the transactions on our platform, our U.S. dollar denominated good, even if the seller is located in another country she chooses to list her items in US dollar term or the most part.

Thank you.

You’re welcome.

And our next question comes from the line of James Cakmak with Monness Crespi Hardt. Your line is now open.

Hi thanks, first one, can you just tell little bit difference of promoted listings how that is trending I know there is adding more inventory there, there is other things we can do on that front and then secondly since Amazon handmade has come on board, obviously you guys are growing favorably through that, can you just talk about the growth and the selection and improvements in collection that you have seen even with greater competition in this space. Thanks a lot.

Our timing and promoted listings and I’ll hand it over to Chad to talk about handmade. So promoted listing, I think it is important to note that even though we did expand inventory in the quarter that was really a secondary driver from listings growth. What is really growing promoted listings growth is improvements in click through rate and that points to some of the improvements that Chad had talked about in his remark in order to make promoted listing more relevant to a buyer starts. So we are very excited about those improvements in promoted listings and handmade, Chad.

Yeah in Amazon handmade, we haven’t seen any impact to date; our market place is be off 35 million unique items in the market place. So we are really - we feel great about the scale of our inventory. And also just as a remainder our surveys have told and we have reminded investors that more than 50% of our sellers selling other platforms but for that group, the multi-channel sellers Etsy is their largest source of sales.

Thank you.

You’re welcome.

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

Thanks for taking my question. Can you talk more about the machine learning, excuse me, the machine translation and the impact its having on your cross border transactions and secondly beyond on the cost side of the equation, the second half of the year, beyond increase assumption in marketing, what other kind of big items are increasing first half to second half, that kind of gets to lower margin, what you are turning to in the first half of the year, thanks.

Yes, thanks for the question. So as I mentioned Etsy’s is very much a technology company and one of the things that we are doing is really exciting, we have been doing for some time is machine translation of listings in order to increase inventory in the market place. Kind of give you example of how that works, if a French seller is selling and they want to sell to English speaking seller, the machine translate the French listing so that it shows up in English to other buyers and we do machine translation of messages and that sort of thing. So machine translation really allows us to do is that, increase with the inventory for non-English speakers but it also allows us to conduct transactions between people we normally wouldn’t be able to conduct transactions. So underneath the machine translation, we have a machine learning framework that we use to update the dictionary to use Etsy’s specific terms. So it just one of many things that we have done again. I spoke earlier about the many things that we have done to drive growth and I think that increasing the inventory for machine translation is one of the things that help us do that and it is very technology perspective is very difficult, we are really proud of that.

And with regard to crossing expenses in the second half, Chad, I point you first towards our bedded assumptions at revenue decelerates through the second half of the year. Revenue growth excuse me, I talked about at the beginning of this call. Our incremental revenue is high incentive to margin plus first half relative to the second half, probably the biggest driver is revenue assumption. I’d also point you to the number of hires to look at the biggest delta that seen our, because our margin guidance in the second quarter versus what we delivered, but first thing I’d communicate is that our revenue growth exceeded our guidance and again our revenue growth hangs in this margin. The second thing I would say is, where we had expected a number of hires to be evenly phased through at the quarter, listed and payments towards the end of the quarter. And so will be bringing all those hires into the third quarter, the fourth quarter and we also have said that we expect to tire at similar phase during the second half as we did in first half. By the way most of those hires will come in third quarter, hiring really does slow down as we move into the holiday season. And then finally the last thing I would had like the point we do expect to marketing expense gross to accelerate compared to the first half. In the first half marketing expense growth was roughly 19.5%, we are going to accelerate from there as we move into the second half, these are the three things I would focus on the revenue growth rate, assumptions around employee hires and when they hit and third assumptions around marketing expense growth.

Great thank you.

You’re welcome.

Ladies and gentlemen, that does conclude our Q&A session. Thank you for your participation in today’s conference. This does conclude the program, you may all disconnect. Everyone have a wonderful day.