Good day, ladies and gentlemen, and welcome to the Second Quarter 2017, Etsy, Inc. Earnings Conference Call. As a reminder, this conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Jennifer Beugelmans, Vice President. Ms. Beugelmans, you may begin.

Thank you and good afternoon, and welcome to Etsy's second quarter earnings conference call. Joining me today are Josh Silverman, CEO; and Rachel Glaser, 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, market size, cost savings initiatives, guidance, mission, product roadmap and potential future growth. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties which are described in our press release today and in our 10-Q filed with the SEC on May 2, 2017, and subsequent reports that we file with the SEC. 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 Web site. A link to the replay of this call will also be available there, and if you 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 Josh. Josh?

Thanks, Jennifer, and good afternoon everyone. Since joining as CEO in May, I have had the opportunity to immerse myself in the business, review our strategy and operations and speak with employees, sellers and buyers around the world. And I have come away even more enthusiastic about the opportunity ahead. I am also really encouraged by the strong progress we have made in only the past three months. Etsy is highly differentiated from any other ecommerce platform. We have built a two-sided marketplace with one of the largest selections of unique goods, a brand that people around the world admire, and a passionate community of 1.8 million active sellers and nearly 31 million active buyers. In short, we have an enviable foundation that has allowed us to consistently deliver double-digit GMS and revenue growth for the past several years. Yet I believe, we are still in the first inning when it comes to unlocking the full potential of Etsy. There has been much speculation about the size of the market for handmade. But handmade is not a purchase occasion nor is it representative of all of our 45 million listings. Etsy is about so much more than handmade. Buyers come to us when they want something special. And being the destination for something special is powerful because special can't be commoditized. In a world where mass e-tailers are taking an increasing share of everyday commerce, people search for an alternative to those mass e-tailers when they want to feel that their purchase was special. That includes occasions when they are seeking self expression. When they want to signal that they put a lot of thought and care into a purchase and when they want to have fun and be inspired. Etsy is uniquely well positioned to win those occasions. But…

Thank you, Josh, and hello, everyone. Before I dive into the financial results for the second quarter, I would like to echo Josh's excitement about joining Etsy. Not only do we have solid fundamentals including growing GMS and revenue, strong growth profit, positive EBITDA, a large cash balance and no debt. But we also have a highly differentiated value proposition, a beloved brand and a huge market opportunity. This gives us an incredible foundation to invest in our growth and make meaningful market share gains. In the past 90 days, we have already gotten initiatives underway that are building momentum and delivering results. I am very excited to join the immensely talented team and be a part of Etsy's future. My remarks today will cover three areas. First, I will update you on our key operating metrics for the quarter. Second, I will review the financial results which we covered in our earnings release. And, finally, I will provide an update on our 2017 financial outlook. Unless I say so, all numbers presented are rounded for ease of reference and the comparisons I will be referring to are on year-over-year basis unless specifically noted. So let's start with the key operating metrics with GMS first. During the second quarter of 2017, Etsy generated $748 million in GMS, up 12% driven by growth in active sellers and active buyers. GMS from pay channels continued to grow faster than overall GMS. At the end of the second quarter, Etsy had 31 million active buyers, up 17%. Also at the end of the second quarter, Etsy had over 1.8 million active sellers, up 11%. Growth in both active buyers and active sellers demonstrate that our community of buyers and sellers continues to grow at a healthy rate. Additionally, as Etsy sellers become more…

[Operator Instructions] Our first question comes from the line of Mark Kelley of Citigroup. Your line is open.

First one is just walking through the moving pieces on the marketing initiatives a bit more. You suspended the brand campaign for the moment, redeploying some of that capital elsewhere. I think some of the older targets that you had or a dollar of investment needed to return a dollar plus over the next two years, even though I think you were hitting that earlier in like flat quarters. Is there a change to that thought process there? And second, thanks for giving color on what percent of GMS flows through Etsy Payments. I am just curious, did you see any attrition from sellers that didn’t want to convert and is there a way to think about a normalized active seller growth rates since you had nice growth in the quarter but curious if maybe that could have been a little bit better if some people turned away. Thank you.

Thanks a lot for the questions. Much appreciated. In terms of marketing, our philosophy is really straight forward, which is that when we invest money in marketing dollars, we expect to deliver a positive ROI for the shareholders. I know that sounds obvious, but we work very hard to live that every single day. So we do look at how do we make sure that we are doing that as effectively as possible. So the first step in that was really to dive deep into our attribution models and makes sure that Rachel and I were very comfortable with the methodology we used to determine ROI. And I think Rachel and I are comfortable with that methodology. Second, we look at how can we further optimize our spend and get more return for the amount of money we spend or spend more money with a really good return. And that has to do with both improving our capabilities internally, as well as driving better conversion rates from visits to purchase and getting buyers to come back and buy more often. And we are working on all parts of that. In terms of the payments, you know we feel good about that transition and I think that the roadmap that we did to mandate at Etsy Payments is a roadmap that we would look to follow again and again. First, we test them to make sure that by driving people through the Etsy Payments product, they actually have a better experience and buyers convert at a higher rate. We began by testing that. That works very well and our data was very convincing that this is actually a better experience in the market place. Once we had conviction from data, we then mandated it in the markets where Etsy Payments is available and I would say that that transition has gone very, very well. So our sellers have converted. We have not seen material attrition and we think that it's a win for both buyers and sellers in the market place. In terms of seller growth, I think the last piece of your question, you know we feel good about the seller growth we have had. In particular, it's really about the breadth and depth of inventory that we have on the site and do we have the right inventory matching the demand and I think we continue to be a great place for creative entrepreneurs to come and grow their business and we are going to keep focusing on that.

Thank you. And our next question comes from the line of Sam Kemp with Piper Jaffray. Your line is open.

Maybe a second question on Etsy Payments. Can you all out the benefit of Etsy Payments being mandated, seller services revenue during the quarter specifically. And then, Josh, when you think about Pattern, how do you think about that longer term? Where do you think that that should go and how big an opportunity that could be both to sellers and to shareholders.

Sure. The first part of your question, can you just give me a little more color, what specifically more would you like to know about the payments?

Yes. The actual, like revenue dollar contribution. You had a pretty significant step-up in terms of seller services penetration as a percentage of GMS. Just would like a little bit of color on how much of that was from the Etsy Payments coming through.

This is Rachel. Nice to meet you Sam. Thank you for the questions. We haven't been disclosing the amount, the contribution from our seller services by line item. But the primary driver is that it is -- it is a primary driver of seller services revenue and is the largest component of that. We said that in the past. And I think part of your question was, how has that mandate gone or why have we mandated it. Really the answer is because it's the best platform for our sellers. We consistently see that they get more GMS when they are on Etsy Payments versus the one they are off.

And you know, if you look across our seller services, we have got shipping and payments are both services that we offer to our sellers and they are win, win, win, because they remove friction for buyers, which drives more conversion, first and foremost. Which creates a better experience for sellers which then grows the market place which is also good for us. So those are both areas that we think have been very strong. Another area that I would point to is Promoted Listings and then Google products ads, where the opportunity for sellers to invest in their own success by funding marketing to promote their ads both on and off of Etsy. It's something that we see a lot of appetite for and we are very well positioned to help them do that. And in fact it's very synergistic with work we would do anyway to drive our own performance marketing tools. And so this is really a great area for us to partner with our sellers to help them build their business and I am excited for us to continue to invest in that area. The second part of your question, I am sorry, can you ask it again, I lost it?

Yes. When you think about Pattern, what's the opportunity there? How do you want to see the product change etcetera?

Thank you, very much. So Pattern is a great start and we have a large and passionate community. 1.8 million creative entrepreneurs and we have the best platform to serve that particular community. And in particular we have something to offer them that no one else offers, which is the Etsy marketplace. The number one place to go for buying unique and special items. And so we attract a large and growing set of sellers that they want the opportunity to market themselves on Etsy and off Etsy as well. And Pattern is a great way for them to do that. So we launched Patten not long ago and just this past quarter we expanded Pattern by allowing them to including inventory that we allow on the Etsy marketplace and now also inventory that maybe not be a fit for the Etsy marketplace but nonetheless is something our sellers sell. So now they can really use Pattern as a true multichannel platform for all of their sales and the feedback from our sellers has been really positive. So we are going to continue to invest to make sure that we give our sellers what they need to help them to grow their business.

[Operator Instructions] Our next question comes from the line of James Cakmak of Monness Crespi Hardt. Your line is open.

Your first question, can you just talk through the guidance, the upper end of the guidance on the GMS side, 14%. What are the assumptions going into that? And then secondly, on the gross margin it was ticked down but at a slower rate than what we saw in the first quarter. But that happened at the same time that Etsy Payments was mandated to offset. So can you just help us understand what's going on with the gross margin? I guess how we should think about it going forward?

Hi, James. This is Rachel. Nice to talk to you and thank you for questions. So on GMS, we gave a range that we believe is appropriate for what we are seeing so far this year. We have only -- Josh and I both only have been here, I think ten weeks in total respectively, and Josh has -- a lot of activity early days of getting people focused on the right initiatives. Stopping initiatives that we didn’t believe were focused on the core Etsy marketplace. And then doing a number of experiments to see which ones we are going to have the biggest impact on GMS. And we like to say here that we win some and learn some. So a lot of them have been wins but not all of them have been wins. So it's really early days now but we started in June and then July had rolled some of these initiatives into the market and we are starting to see that we are getting some real impact. But it's still early, so we are comfortable with the guidance we have given for GMS. If you take the top end of that GMS range, it would imply acceleration in the second half of the year and you can do the math there. At the midpoint it implies acceleration and we are feeling pretty comfortable with those numbers. So I hope that answers your GMS question. And remind me what was your gross margins question?

Basically the compression in the gross margin slowed from the first quarter to the second quarter but at the same time you had Etsy Payments becoming mandated which is a gross margin headwind. Just was trying to understand the sequential improvement there and then how to think about it as we progress through the year.

Gross margin, I think, was down 400 basis points -- sorry, 100 basis points. And that was due primarily to employee related expenses and professional fees. It wasn’t -- the Etsy Payments in the quarter did not have a headwind on gross margin.

There is obviously multiple revenue lines that have different margins structures to them. So things like the transaction fees on GMS flowed through at very high margin and Payments flows through at a much lower margin and you pointed to Payments. But it's also true that things like Promoted Listings flow through at a very high margin. And so there is obviously a mix going on there but with the EBITDA guidance that Rachel gave you, we are trying to give you what we expected and bottom line growth which is that we can grow the business and do it profitably.

I will give you two other factors on the Etsy Payments. As a higher margin on some of the international transactions and in addition, we were able to negotiate with our, some of our payment vendors that helps offset some of the margin compression that we typically see from Etsy Payments.

Thank you. And at this time I am showing no further questions. Ladies and gentlemen, this does conclude today's Q&A session and conference. Thank you for your participation in today's conference. You may all disconnect. Everybody have a great day.