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?

Thanks Jennifer and good afternoon everyone. Thanks for joining us to talk about our fourth quarter and full-year 2016 financial results. I’m excited to walk you through our 2016 results and it was such a productive year. We made it easier for buyers to search for and find unique items. We kicked off our first ever global brand marketing campaign to highlight the range of items available in the etsy.com market. We also acquired Blackbird Technologies so that going forward we will be able to deliver more personalized search recommendations through more sophisticated use of AI and machine learning. During the holiday season, we experimented with promotional offers and other search engine activities to encourage new buyers to explore the market during the time of the year most critical to many of our sellers. Within our services platform, we supported sellers as they started, manage and scale their businesses. Last year we launched a new paid seller service, a custom Web site builder pattern by Etsy, launched our Google Shopping tool to help sellers advertise their goods in Google search and partner with Intuit to make accounting and taxes easier. We strengthened our existing services as well by extending direct checkout to sellers in 14 new countries and added redundancy and resiliency to our payment system. This along with other hardware generated strong 2016 financial results, which exceeded our guidance including GMS of $2.8 billion, up 19% year-over-year, revenue of $365 million, up 33% compared to last year and adjusted EBITDA margin of 15.7%. Etsy's growth reflects the success of the creative entrepreneurs to use our platform. We succeed when they succeed. Throughout 2016, our community continued to grow and as of December 31, 2016 we had 1.7 million active sellers and 28.6 million active buyers. Our business is well…

Thanks, Chad, and hello to everyone joining us today. 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 fourth quarter of 2016, Etsy's markets generated $865.2 million in GMS, up nearly 17%. Growth in GMS is driven by growth in active sellers and active buyers. As Chad mentioned, we had a strong year of performance and our results exceeded both our full-year and fourth quarter guidance. For the full-year of 2016, our markets generated approximately $2.8 billion in GMS, up nearly 19%. At the end of the fourth quarter, Etsy had 1.7 million active sellers, up 11.8% and 28.6 million active buyers, up nearly 19%. Our community of buyers and sellers continue to grow at a healthy rate and we're releasing updated cohort data that we believe demonstrate the stickiness of our platform. As a reminder, in our 2015 10-K, our cohort data indicated that if we had 100 active sellers in 2012, 32 of those sellers would still have been active in 2015, four years later. Also average GMS for 2012 active seller was $4,557 in 2015 and that was 4x higher than it was in 2012. We're pleased to see that these trends have continued into our 2013 seller and buyer cohorts. We'd also note that our five-year data for our 2012 cohorts are consistent with year four trends and early data indicate that our 2014 cohorts are behaving similarly as well the 2013 data, our A&R [ph] 2016 10-K. But let me walk you through the highlights. For the 2013 seller cohort, 32% of active sellers remained active in 2016 and their average GMS in 2016 was $4,620, approximately 4x higher than it was in 2013. Before we talk about our buyer…

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.