Etsy, Inc. (ETSY) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 Etsy Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Head of Investor Relations, Ms. Jennifer Beugelmans. Please go ahead.

Thank you, Andrew. Good afternoon, and welcome to Etsy's fourth quarter and full year 2017 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 outlook, business strategy, market size, financial guidance, and key drivers thereof. Our ability to execute on our strategy to own special purchase occasions, the impact of our key initiatives, our 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, our 10-Q filed with the SEC, November 8, 2017, and our 2017 10-K that we expect to file with the SEC in the coming day. 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. Finally, for your reference, we have posted 2 presentations through our IR website today. We have a short deck that highlights our fourth quarter progress and which we'll be referencing on our call today, and an updated more robust deck that shares additional detail about our story. With that, I'll turn the call over to Josh. Josh?

Thanks, Jennifer, and good afternoon everyone. Today I want to recap the important progress we made in 2017 and specifically highlight our executions in the second half of the year. I'll also talk about the strength we saw during the holiday season and walk you through our core areas of focus for 2018. We're excited to continue building on our momentum and demonstrating that we can drive growth through innovation and focused execution. In a sea of sameness, Etsy stands for something special and the world needs that now more than ever. In fact we estimate that our total market opportunity is over $155 billion and this estimate encompasses just the online portion of our top six GMS categories in our core six geographies. We believe we have a long runway for growth and we're acting with urgency to move faster. On our last two calls, we said our efforts to unlock this growth would focus on four key initiatives: trust and reliability, search and discovery, marketing capabilities and best-in-class tools and services for our sellers. We exceeded guidance on every metric in 2017. In Q4 and as shown on Slide 4, GMS grew 17.8%, 460 basis point acceleration compared to Q3. Revenue growth also accelerated to nearly 23.6% and our adjusted EBITDA margins of 25.6% with the highest we've ever reported. Ultimately what this performance really means is that we have materially improved the buyer experience, helped our sellers have a great holiday season and have begun to demonstrate that our efforts are bending the curve on GMS growth. We've accomplished a lot since last May. Slide 5 features some highlights from 2017. First, we enhanced our leadership team by bringing on Rachel as CFO, Mike Fisher as CTO and many other key leaders across the company. They joined a talented team and together are leading the charge to create a better shopping experience for Etsy buyers and to drive sales growth for Etsy sellers. Second, we outlined our strategy to gain market share and began executing on our four key initiatives that we believe we need to conquer in order to win. And with this greater focus and a streamlined organizational structure, we dramatically accelerated the velocity of our product and marketing enhancements. Within trust and reliability, we bolstered trust in both our platform and in the Etsy brand. This means that we removed friction from the buying experience and improved our relationship with our buyers. Throughout the second half of 2017, you've heard us speak about a variety of enhancements we've launched including seven simple words, multi-shop checkout and Best Seller badges, which have helped Etsy offer an easier, more reliable and more compelling buying experience from start to finish. Within search and discovery, we remain focused on helping buyers to find exactly what they want from among the more than 15 million special items in our marketplace. Our goal is to help those buyers, who arrive knowing exactly what they're looking for and also to delight those just seeking fun, inspiration and serendipity. New developments in AI and machine learning, offer the potential for step function improvements in our ability to deliver these experiences. And while we believe we've made meaningful progress in these areas over the past few quarters, we're still in the very early stages of leveraging these capabilities to their full potential. For example in the fourth quarter, we continue to build on our Context Specific Search ranking, or CSR foundation, by applying its power to our market features, which led to conversion rate in GMS wins. We also created personalized recommendations on the homepage for each buyer and improved recommendations based on items placed in their cart. In 2017, we made steady progress improving our marketing capabilities, our third initiative. We brought new buyers to the marketplace and continued to engage with existing buyers. In fact during Q4, paid GMS attributable to our marketing efforts grew 45%, and the marketing collaboration with our product team, utilized our recently launched sales and promotions tool to curate and market our first ever site wide sales during Labor Day and Cyber Week. Events which generated incremental GMS, but more importantly helped to increase relevance with our buyers. The improvements we make deeper in the fold, for example by improving conversion rate or buyer LTV also helps us to generate higher returns per visit. So improvements in our marketing capabilities and improvements in our buyer experience can create a virtuous cycle. Within our forth initiatives seller tools and services, we worked hard in 2017 to provide sellers with the best-in-class resources to help them start, manage and scale their businesses. We're listening closely to what our sellers are telling us they want and we're laser focused on executing our product strategy to deliver what they need to succeed. It’s worth pausing for a moment to show how our work in 2017 helped our sellers to win during the important holiday season. As I mentioned, we built the tool that allowed our sellers to offer discounts in sales during the fourth quarter and we organized a cyber week sale that positioned Etsy to compete more effectively during those key shopping days. With regard to shipping, shipping price and timing have become a deciding factor for many shoppers. In the past because of insufficient transparency unexpected shipping dates, the holiday season has been shorter perhaps even for most other retailers. So we launched the tool that gives buyers the ability to filter items that were ready to ship within one to three days and items offering free shipping. In addition, we launched a holiday gift guide, which helped to inspire shoppers and a gift wrap tool that allowed sellers to ship wrapped gifts directly to gift recipients saving buyers more time. There's still much work to do to improve the shipping experience on Etsy and this will be an area of strong focus in 2018. However, we believe the work we did this holiday season will not material to our quarterly results, laid important groundwork for improving our shipping experience as well as the overall buying experience for all gifting occasions. We're excited about the long runway for continued growth that we believe is still ahead of us. Since May of 2017, we launched approximately 350 product enhancements with more than 20% having a measurably positive impact on GMS. These wins are not just financial wins, we believe they're laying the foundation for a better shopping experience and reflect the progress we've made in building a culture of excellence. We feel confident that we can continue to launch product enhancements at a rapid pace and improve the overall buyer and seller experience in ways that positively impact GMS. We’re proud of the work we’ve accomplished in a relatively short period of time and believe we've begun to bend the curve on GMS growth, our most important metric. One thing I admire about marketplace models is that they get better as they get bigger. And with Etsy we believe we have much more room to grow. The table is set for 2018 and we’ve entered the year on strong footing with a clear strategy and a product roadmap that we believe will support the long-term success of Etsy and our sellers. Now let me provide more color on our plans and product roadmaps for 2018. We will continue to execute on our strategy to own special purchase occasions throughout the year, grow our Etsy.com marketplace in our six core geographies through focusing on our four key initiatives. In 2018, our product roadmap tracks our four key initiatives. We expect that many of our new products and features will deliver steady and reliable improvements to the buyer and seller experience; well several are bolder events that could move the needle more, but are more experimental and less predictable. Let me briefly touch on each of our four key initiatives starting with trust and reliability. In 2018, we’ve planned to make it easier to shop for and find unique items by making the buying process better and more transparent. We will focus on bolstering Etsy's reputation and track record as a reliable and safe place to shop by making clear how each seller handles returns and exchanges and by clarifying expectations around shipping. We also plan to collect more structured data from our sellers in order to provide buyers with the information they need to make a better purchase decision. We believe that success in these launches and others were removed friction from the browsing and buying experience hoping to convert views into purchases. But first, shoppers need to be able to find items they love from within our vast marketplace of over 50 million items for sale. Hence our second pillar is search and discovery. In 2018, our focus here will remain on leveraging advances and artificial intelligence and machine learning and combining it with our expertise in human-curation in order to create unique discovery experiences that help buyers find exactly what they're looking for, inspire their imaginations and elevate the browsing experience to make it more intuitive, more fruitful and more fun. We also want to take the complexity out of sifting through millions of special items to help buyers land on that one item that is special for herb. For example we plan to continue to optimize listings to provide buyers with the information they need to make better purchase decisions. And by leveraging our machine learning and AI capabilities, we will continue to gather data from browsing activity in transactions to deliver timely recommendations and make a more personalized search experience. We believe our efforts in this area will help buyers discover items that fit their unique styles, drive conversion rates and support GMS growth. Our third initiative is building world-class marketing capabilities. In 2018, we plan to focus on bringing buyers to Etsy and getting them to return more frequently. We believe we can do a better job of integrating our performance marketing efforts with the marketing efforts of our sellers in order to drive traffic and grow the benefits both Etsy and our sellers. For example our goal is to leverage more sophisticated automated solutions for product listing ad and to scale our marketing investments. We plan to leverage our new e-mail platform in order to send more personalized and targeted emails and push notifications to buyers to give them a reason to come back to Etsy more frequently. And to get buyers engaged and excited about coming to our site, we intend to utilize the Etsy community more to curate the shopping experience and make it more engaging. Our fourth strategic initiative is to provide best-in-class sellers tools and services. We know that our sellers want to grow their sales and it's our job to give them the tools and services they need to be successful. In 2018, we plan to enhance existing products and launch new capabilities tailored to seller needs and key stages in their journey. We aim to give sellers meaningful market place insights, expanded marketing and branding capabilities and opportunities to improve the Etsy buyer experience. Etsy sellers want to attract more buyers, improve customer satisfaction and grow a loyal fan base. We expect to help guide seller marketing decisions through powerful analytics, improved Etsy’s shipping and order management tools and offer capabilities for building lasting buyer relationships. In 2018, our goal is to give our sellers more control over their business growth than ever before. By the end of the year, we’ll know we've been successful in executing across these initiatives if we've made progress addressing the key buyer and seller opportunities shown on Slide six. So at the end of 2018 we'll be asking ourselves. First, have we encouraged more buyers to come to Etsy and shop for special items? Second, have we made the browsing experience better? Is it easier for our buyers to search for and find exactly what they're looking for? And have we created urgency for shoppers to buy now? And lastly have all of these culminated in driving GMS growth up for our sellers. We're encouraged by our execution so far across our four key initiatives and believe we are well positioned to make significant headway in 2018. In closing, we’re excited about the progress we made in 2017. As I mentioned in my opening remarks, Etsy stands for something special in the sea of sameness. I'm grateful to Etsy sellers for partnering with us, Etsy buyers for shopping with us and our employees for their hard work and helping to support our vibrant community. And with that I'll turn the call over to Rachel.

Thank you, Josh, and hello everyone. We ended the year on a strong note delivering one of our best ever holiday seasons for our sellers and over $1 billion in GMS in Q4. This quarter we accelerated both US domestic and international GMS growth sequentially, accelerated revenue growth sequentially and posted our highest ever adjusted EBITDA margins as a public company. This provides a solid foundation from which to continue to execute on our strategy and improve the platform for Etsy sellers and buyers. Please refer to Slide 7 which illustrates these 2017 achievements. My remarks today will cover four areas. First, I will update you on our key operating metrics for the fourth quarter. Second, I'll give you a quick recap of our latest four year cohort data. Third, I will review the financial results and finally I will provide 2018 guidance. Unless I say so all numbers presented are rounded for ease of reference and the comparisons I’ll be referring to are on a year-over-year basis. Let’s start with key operating metrics of GMS first. During the fourth quarter of 2017, Etsy generated $1 million in GMS, up 17.8%, and representing our first ever billion dollar quarter. At the end of the fourth quarter, Etsy has $33.4 million active buyers, up 17%, and over 1.9 million active sellers, up 11%. Growth in both active buyers and active sellers demonstrate that our vibrant two sided marketplace continues to grow at a healthy rate and we're particularly pleased that the total GMS grew even faster than active sellers, signifying an increase in average GMS per seller. Our efforts to accelerate GMS in the past few quarters, we’re primarily focused on growing visits and conversion rate. Let's take a look at visit growth first. Mobile web continues to be a large part of our growth story as a significant driver of both GMS and visits in the quarter. Mobile web visits were approximately 46% of overall visits this quarter and roughly 67% of our visits came to us from our mobile web or app device this quarter. This was up 200 basis points year-over-year and continues to outpace the rate of growth on desktop. The vast majority of our visits came to us from our organic searches. However, our paid marketing efforts have also contributed to visit growth in recent quarters. In addition to our pay channels, we are also focused on providing tools for our sellers to drive visit growth through their own efforts. For example, we believe the social media tool we launched last quarter will eventually help to drive our referral traffic from social channels. Mobile GMS grew 27% year-over-year, increasing as a percentage of total GMS to approximately 52%, up from approximately 49% last year. Growth in mobile GMS was driven in part by several product launches including the introduction of scarcity badges and nudges, which leverage our unique inventory and nudge buyers along the shopping journey improvements to listing pages and the implementation of guest checkout on mobile web. We have also seen success in improving conversion rate. Mobile web traffic converts at about half the rate of desktop traffic and during the fourth quarter we saw improvements in desktop and mobile web conversion rate versus prior year. This strength allowed us to move our aggregate conversion rate up this quarter despite softness in our mobile app conversion rate. Several product launches impacted aggregate conversion rate, for example our efforts to enhance search and discovery that particularly helped by context specific search ranking, which improved the relevancy of search results for each individual shopper. ALB has remained relatively stable in the past couple of years and improved modestly in 2017 compared to 2016. Following the launch of multi-shop checkout in early 2017, the number of items sold per transaction grew slightly. User recommendations on the home page and buyer nudges that create urgency signals also contributed. Turning to international GMS for 2017 we achieved our first billion dollar year with slightly over $1 billion in international GMS. As a reminder international GMS is defined as any transaction in which the buyer or the seller is not the U.S. In the fourth quarter percent international GMS grew 300 basis points to 33%. International GMS growth accelerated to 28% and continues to grow faster than overall GMS. The strength in our international business was driven by healthy activity between international buyers and sellers as well as the strong contribution from U.S. buyers making purchases from international sellers. In the fourth quarter, we also narrowed the conversion rate gap for our core international geographies versus the U.S. We believe that closing this conversion rate gap represents a large potential growth opportunity. We are also leveraging our technology to drive international growth. Our international progress was supported by several product one initiatives including broader local search boost, context specific search ranking and an increase in local listing inventory. Overall, this contributed to strong new buyer growth and higher conversion rates. On an annual basis, we’ve shared data about the health of our marketplace and the loyalty of our sellers and buyers. The full update can be found in our 2017 10-K which will be filed in the next few days, but I will share some brief highlights here. For the 2014 seller cohort, 32% of 2014 active sellers remained active in 2017 and their average GMS in 2017 was approximately three times higher than it was in 2014. And our 2013 seller cohort data, 32% of sellers were also still active in 2016 and their average GMS was nearly four times higher than it was 2013. Our 2014 buyer cohort behaves similarly towards 2013 cohort with 39% of our 2014 active buyers remaining active due 2017 compared with 41% for the 2013 cohort and remained active through 2016. The average annual GMS was $169 million for our 2014 cohort and $174 for our 2013 cohorts. Keep in mind that during 2013 we began to scale our digital marketing efforts. Our model assumes that buyers from these pay channels behaved differently and generally worsen buyers who come to us through organic channels. This suggests that we are doing a good job of acquiring high value sticky buyers to look more similar to organic buyers. In 2017, GMS from new buyers represented approximately 19% of overall GMS, decreased slightly compared to last year. As we bring new buyers to Etsy, we believe that increasing purchase frequency has the potential to generate an ecosystem that accelerates growth. Buyers with higher frequency can be more valuable to Etsy and their lifetime value could allow us to invest more to acquire them. We measure frequency and purchase date as a percentage of buyers who make purchases on multiple days in 2017 with approximately 40% more or less flat compared to 2016. With these operational metrics in mind, let me now turn to their impact on our financial results. During the fourth quarter total revenue was $136.3 million up approximately 24%. Revenue growth accelerated for the third consecutive quarter driven by both growth in Seller Services and to a lesser extent marketplace revenue. Etsy’s international revenue grew 42% in the fourth quarter led by greater adoption of Seller Services and GMS growth. Seller Services revenue was up 33% and represented 60% of total revenue. Marketplace revenue accelerated to 16% primarily due to growth in transaction fee revenue and to a lesser extent growth in listing fee revenue. As we saw in the third quarter, our marketplace revenue growth was a bit slower than our overall GMS growth mainly due to the free listings promotions we ran to stimulate local inventory in our international markets. Despite this marketplace revenue growth accelerated sequentially for the first time since Q2 2016. Seller Services revenue growth was driven primarily by growth in Etsy payments and Promoted Listings. While we now have broad coverage for payments, we continue to see incremental opportunities to expand utility and geographic reach of Etsy payments by adding more currencies and countries. Promoted Listings was our fastest growing seller service and revenue growth accelerated for the third quarter in a row due to improved fixed fee rate and more available inventory in the platform. We expect Seller Services revenue driven largely by promoted listings to continue to grow faster than marketplace revenue and GMS through 2018. Next, I'd like to discuss the usage of our Seller Services shown on Slide 8, which we disclosed annually. During 2017 approximately 54% of our active sellers used at least one seller service compared with 52% last year. Approximately 50% of our active sellers use Etsy payments compared with 46% last year and approximately 85% of our GMS were processed through Etsy payments compared with 78% in 2016. As a reminder, during May of 2017, we transitioned nearly all eligible sellers to Etsy payments because we believe it is the best way to transact on our platform. Approximately 15% of our active sellers used Promoted Listings compared to 16% last year. Although Promoted Listing’s usage ticked down a bit, revenue continue to grow robustly driven both by higher to cure rates and new inventory. In fact active sellers grew 11% in 2017 versus 2017. So on an absolute basis Promoted Listing usage by actual sellers was up approximately 4%. Asset products Promoted Listings requires that our sellers, the ROI-positive in aggregate and we are working on ways to better educate sellers on the value that this product can create for their businesses. Approximately 28% of our active sellers in U.S. and Canada where we offer shipping label used that service compared with 26% last year. As Josh mentioned, there is much more we can do to improve shipping. And as we continue to drive growth in our Shipping Label seller service, we think – we will think about expanding the geographic reach or adding more delivery functions. And finally, 2.5% of our active sellers use pattern, which looks flat, compared to last year. Within our strategy, one of our initiatives is to provide best-in-class seller tools and services and we’re encouraged by the increase in the percent of active sellers that use at least one seller service in 2017 compared to last year. In the fourth quarter, we ran an Etsy funded seller promotion that incentivized sellers to use Google Shopping. The cost of this incentive was reported as contra revenue in our other revenue line. We recorded $28 million in GMS generated from Google Shopping up 43% this quarter compared to the third quarter. This contra revenue was the primary reason for the negative 300,000 in other revenue. Gross profit for the fourth quarter was $92 million, up 26%, and gross margin was 68%, up 110 basis points. Gross margin expanded primarily because of the lower fees renegotiated with one of our third party payment processors. Turning now to operating expenses. Etsy’s fourth quarter operating expenses were $74 million, up only 6% and represented 54% of total revenues; drown from 63% last years. Marketing expenses in the fourth quarter totaled $35 million dollars, up 14% representing 25.4% of total revenue compared to 27.6% last year. The majority of our marketing spend is related to digital acquisition marketing, but also includes the expenses related to our marketing and communication staffs who efforts are focused on PR, email and social medial amongst other things. Our digital marketing spend is primarily on Google Product Listing Ads and search engine marketing and continues to generate a positive ROI based on our attribution model. During 2017, we achieved a payback period of one quarter and improvement compared to two quarter payback in 2016 and well ahead of our eight quarter payback model. While we have an attribution model that we believe adequately captures appropriate buyer lifetime value, we’re in the process of assessing other inputs like synergies between our efforts and those of our sellers and the behavior of buyers on the platform. Product development expenses totaled $18 million in the fourth quarter, up 10% representing 13% of total revenue compared to 15% last year. G&A expenses totaled $18 million in the fourth quarter, down about 19%, representing 30% of total revenue compared to 21% last year. Headcount at the end of the quarter decreased to 744 people compared with 1,043 last year. We have a number of product and engineering roles to fill and we have added recruiters to more rapidly fill these critical positions. Fourth quarter net income was $45 million compared with a net loss of $21 million last year. Diluted earnings per share were $0.36 compared with a net loss per share of $0.19 last year. Operating income, which excludes benefits from FX, taxes and net interest expense was $18 million in the fourth quarter. Next I would like to update you on the impact of the recent U.S. tax reform legislation on our business. In fourth quarter results, we were reported a tax benefit to the impact of the new legislation of approximately $26 million, which is primarily driven by the downward adjustment of our deferred tax liability. This adjustment is a result of the reduction in the U.S. statutory corporate tax rate from 35% to 21%. Non-GAAP adjusted EBITDA was $35 million. This resulted in an adjusted EBITDA margin of 25.6% compared to last year's adjusted EBITDA margin of 13.9%. Adjusted EBITDA performance this quarter was driven by revenue growth and lower employee-related expenses including voluntary attrition that we expect to backfill. Approximately $1.3 million of adjusted EBITDA year-over-year was due to voluntary attrition. During the quarter, we recorded net cash provided by operating activities of $35 million. This compares to $20.1 million in the fourth quarter of 2016. The year-over-year increase in net cash provided by operating activities for the quarter was primarily driven by revenue growth and savings in employee-related expenses. During the quarter, we have repurchased 586,000 shares, which have been retired for a total cost of approximately $10.3 million. As of December 31, 2017, we have cash, marketable securities and short-term investments totaling approximately $341 million, an increase of $58 million, compared to December 31, 2016, driven by improved operating income. Now let me walk you through our 2018 guidance as shown on Slide 9. We expect GMS growth to be in the range of 14% to 16% year-over-year, revenue growth to be in the range of 21% to 23% year-over-year and we expect our 2018 adjusted EBITDA margin to be in the range of 20% to 22%. The key factors impacting revenue and GMS growth in 2018 are first continued visit growth. Second, conversion rate growth, which we expect to benefit from product launches focused on enhancing the buying experience. We also expect continued growth in international GMS and expect it to grow faster than overall to GMS driven by global product enhancements and international domestic marketplace activity. Finally, our outlook includes continued Seller Services revenue growth, which we expect to grow at a faster pace than the marketplace revenue growth. We expect Promoted Listing to be the primary driver of Seller Services revenue growth in 2018. In addition to the key factors impacting revenue and GMS, we anticipate that the key factors impacting adjusted EBITDA margin in 2018 are lower operating expense as a percent of revenue from changes we made to our operating structure in 2017, which created approximately $35 million in annualized savings. We expect to gain the most leverage in G&A followed by product development. We will partially offset these expense savings with expenses related to our planned migration to Google cloud. We initiated this migration in Q4 and we expected to take approximately two years to complete. We expect to spend approximately $10 million to $15 million in 2018 related to this migration. Throughout the first few phases of the migration, we will maintain some of our existing data center infrastructure to ensure the reliability of our platform. So this class won’t completely go away this year. That said compared with 2017, we expect to reduce capital expenditures related to maintaining our existing data center infrastructure by $4 million to $5 million in 2018. Once we have fully migrated to the cloud, we expect our total cash costs will decrease compared to our standalone data center infrastructure. In 2017, both the increase in our stock price and our actions to reduce headcount triggered option exercises, which led to a tax benefit for Etsy and created a net operating loss in 2017 that we can carry forward to partially offset our 2018 tax liability. We expect to pay less than $3 million in cash taxes in 2018, slightly lower than what we paid in 2017. Overall, we believe that tax reform legislation positively impacts net income in 2018. In conclusion, we are excited about the year ahead and are looking forward to supporting the success of our sellers with new product enhancements that make the shopping experience on Etsy even more fun for our buyers. As we continue to execute, we think we can grow the pie for everyone and we look forward to updating you on our progress throughout the year. Before we open the line to questions, I want to thank and acknowledge Jennifer Beugelmans, our VP of Investor Relations, who will be leaving Etsy early next month. Jennifer has been a preferred steward of our Investor Relations strategy at Etsy and she has had a significant impact on our business overall. On behalf of everyone here at Etsy, we thank Jennifer for all her contributions and wish for the best in her next chapter. With that we would now like to open the line for questions.

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

Great, thanks. Josh wondering if you could help on that for us a little bit the drivers behind the GMS acceleration. And I know you guys provided some level of detail, but particularly interested in how much do you feel like some of the technology improvement that you guys made particularly around AI and machine learning as well as search functionality contributed to the acceleration? And then as we look at initiatives like the Google ad spend partnerships with your sellers on the platform, how much of an impact do you feel like that that can have particularly outside of the holiday season? I guess just in terms of scale if you can provide any color there that would be helpful.

Great, hi, Heath, and thanks for the questions. On the first one, we made progress in improving the buyer experience that I think did have a material impact on the fourth quarter. If you think about that what we did do for buyers first when they comes to the site are we helping them to find things that they like and are excited to buy and improvements in our search algorithms using machine learning and AI, particularly things like Context Specific Search helped materially to improve the buying experience. So more people are finding something they like. Next are they actually converting that into a purchase? And we made progress in removing friction from the buyer funnel, so that they did. If you think about reasons why someone finds something they like and don't buy, the number one reason they state is they're just not ready to buy it. So by providing more signals like Best Seller badges or there is only one of these items left, we provide more urgency for buyers. And that's in response something we've heard from buyers actually that they – they said I am not ready to go to buy and then they come back two weeks later and are disappointed to find that that item is already sold recognizing that many of our items are one of the kind providing more of those signals to buyers just helping to drive urgency and therefore conversion rate. We also do things like improved transparency of shipping and other things that really help to provide better information to buyers, so that they can make a better informed buying decision and buy with more confidence, improving our return policies is another example. Because it's the fourth quarter, well, the holiday season looms large and we also did some things that are very holiday season specific this year. So most e-commerce sites in the holiday season are running cyber sales and in the past we have not. So this year, we ran a cyber sale and that puts us on equal footing with all of the other e-commerce players [indiscernible] and people coming to Etsy expecting to find deals do in fact find deals. And sales and promotions and some of the other things we did like what are items that are available to be shipped on short notice helped to put us an equal footing in the holiday season. So I'd say a couple things we did were important for the holiday season and then a number of things we did were important for all year round. You asked specifically about buyer acquisition and paid marketing. And we're also making progress there. So there's number of levers we have to improve that in our marketing capability. One is the sophistication of our bidding algorithms and those are improving. And as our bidding algorithms get better, we can get better ROI with the same spend or spend more and maintain our ROI. It's also true that as things like conversion rate and buyer LTV go up; you can actually invest more and maintain good ROI. So there is a virtuous cycle there. What I point to in our paid marketing in general and I think that’s gets to your second question is what we’re very focused on is the margin return of the next dollar spend. So we're always looking at for the next dollar we spend in performance marketing, are we delivering a good ROI that delivers good value to our shareholder. We’re making progress there, but we think there is still more room to go in improving our capabilities to allow us to invest more profitably. I don't foresee step function increases in those investments. I think we're going to make steady progress, but we’re going to keep our eye on the prize and to the extent that we can invest in a way that delivers really going returns for shareholders we're going to do that.

Great, thank you very much.

Thank you.

Thank you. And our next question comes from the line of Dylan Haber with RBC Capital Markets. Your line is now open.

Great, thanks for taking my question. Given the success you’ve seen with the Labor Day and holiday sales, what additional seasonal sales if any would you plan on adding in 2018? And how frequently should we expect to see these platform-wide scale initiatives on Etsy? Thanks.

So that’s something we’re going to test and learn. I think the sales that are tried in true tool of retail that have worked for the past a couple of hundred years. And what we are not is a discounter that's always in the business of discount. However, many great retailers want occasional sales and promotions. And what I like about that for Etsy is it's a reason for buyers to think about us again and discover that we’re relevant more often throughout the year. We have over 30 million buyers and they have had very positive experiences on Etsy in general that have promoter stores at very high, but we need to retrain their habits to have them think about us more often. And sales and promotions is one tool we have to give them an excuse rationale to come back more often and try us for other times, here when they might not always. So there is obvious seasonal periods when that could make sense. Christmas or the holiday season is one, Valentines Day is another. And then there might be things during the year that we could do that are unique to Etsy than nobody else is doing. And you should keep an eye out to that. We are paying a lot of attention though to the fact that they need to happen it in an appropriate cadence. So we're not a discount site by nature of which we owned.

Great, thank you.

Thank you.

Thank you. And our next question comes from the line of Edward Yruma with KeyBanc. Your line is now open.

Hi, thanks for taking our questions. This is Matt on for Ed. So we think it's fair to say that sellers and employees pushback at least initially on a lot of changes that you guys put in places for past year, but given the past year was so successful. Do you see any increased enthusiasm from resellers who try new things? And if you do see some momentum with sellers, how do you view your take rate level moving forward? Thanks.

We're focused on growing the pie for everyone and GMS is the best measure for how big the pie is for everyone. And so that’s what we do. And you know as a platform our job is to make the experience better for all of our buyers and sellers. On any given day, there will be individual winners and losers because that's the nature of the marketplace, you know, is the product that particular seller is selling is it in fashion or not, how is it resonating with the marketplace that's up to each of our sellers. We've got to create the best platform we can to give all of them the best chance to compete, win and we're seeing a lot of progress in that and we're really excited about that. As we continue to focus on driving value for everyone, we'll look at what levers make the platform better make and make the platform even healthier that's always going to be the thing that we focus on. Then we can think about the right share of value when as we're driving more value for others what’s the right share for us, but the main thing is how do we make the pie bigger.

Thanks.

Thank you.

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

Great, thanks for taking the question and congrats on a really solid quarter. So Josh last quarter you talked about planning and rolling out a new user experience from the user interface sometime in the second half of 2018. I was wondering can you just give us an update on the direction that you're thinking that that's going to go and what the users can kind of experience outside of just the changes that you're already making inside search and recommendations? And then Rachel, there's a lot going on at the marginal line in your guidance right now, but if I'm normalizing for the restructuring benefit and adding back the $15 million for the cloud transition costs, it looks like of the high end of your guidance range you’re looking for somewhere around in the range of 350 basis points of kind of if you will core margin expansion. Can you just talk about what the driving components are there whether it's the renegotiated lower Etsy payments cost or the higher mix of paid Seller Services or just kind of foregone operating expense growth? Thanks.

Sure, I'll think the first and then Rachel will take the second. So, I don't recall specifically talking about a brand new UI, but I think maybe what you're referring to, we've got a very balanced portfolio product roadmap initiatives for 2018 that I am really excited about. And here's how I think about those. We want to study cadence of things that we have high confidence you're going to improve the buyer and seller experience. And we feel like we've got a really robust roadmap of ideas to do that. These are things that are perhaps best practices already used in other parts of the web that we haven't yet adopted or things that we think have a high likelihood to succeed across each of search and discovery and trust and reliability et cetera. And we've got a good pipeline of those. We also want to make sure that we're stretching ourselves and we're thinking about bolder bigger events. That we have less confidence we’ll work, but we'll move the needle if they work and having a good portfolio that encompasses both of those in the right levels is how we’re thinking about 2018. I do think what's important for us and what you’ll hear me come back to again and again is velocity. The more we can ship product enhancements, the quicker we learn and the quick things get better. So we feel great about the fact that since May we’ve launched more than 350 products in marketing enhancements. And this idea that we go quickly from idea to testing and market and improving the experience for our customers and generating more learnings is really important and something we continue to focus on.

Hi, Sam. On the margin question, so let me see if I can break it down for you. So first we talked about annualized savings of about $35 million. And then that is offset by some extent increased while the margin migrating to the cloud because we'll have some dual expense during that two year period of time that the migration happened. The third component we gave that we did have slightly lower costs in headcount in the fourth quarter because of higher attrition and we put a number on that of about $1.3 million of favorable impact in the fourth quarter, so we're sort of guiding you to add that back when you’re thinking about a margin. And then we have of course higher GMS – continued GMS and revenue growth in our guidance and you're seeing a higher flow through of debt to EBITDA as we scale our business, so we've taken cost down in 2017 but those fixed costs are growing at a slower rate in 2018.

Thank you.

And our next question comes from the line of Matt Yamamoto with D. A. Davidson. Your line is now open.

Hey, guys. Thanks for taking my question. How should we think about your long-term margin potential when Etsy first went public prior to management suggests your long-term adjusted EBITDA margin target from the high teens and low 20s. One of your strength is taking over the helm has been to do more with the less. How does that translate into long-term margin potential?

So you know marketplace business is our wonderful businesses. They’re really hard to build. And if you can build them, they have wonderful economic architectures. And I see no reason why our margin potential won't look like other good marketplaces over time. We're very focused on growing the pie for everyone. And so, our directive is to grow. It's not always true that throwing more money if the problem makes it better. So what you've seen us do is focus on doing fewer things better in order to move faster and with more focus in order to deliver more growth. And that’s what we have said several months ago and I hope that we're starting to deliver proof now that we meant it. This is really about growth. And as we grow, we do think the margins will look very attractive and unwind with other marketplace companies.

Thanks for the color. I will step back.

Yeah.

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

Hi. This is Dillon on for Darren. Thanks for taking my question. I was wondering if you could talk a little bit to some of the new seller tools that you might be implementing sort of the roadmap. So when those could go live? And do they go live for all sellers? Do you test them across certain markets first? And then as it relates to some of the margins, is there a room to increase the marketing spend if you see traction in digital acquisition or marketing efforts like you talked about through those email initiatives?

Yeah. So on the first one look I don't have any enjoin now, right now, specifically around the seller paid marketing roadmap, our seller tools roadmap. What I will say is sellers are looking for ways to understand manage and grow their business. And so you should expect to see us focus on tools that help them do exactly that. I talked about it in my prepared remarks for example analytics that can help them get a better understanding of what's actually driving their business. One of the things that our sellers really want is the opportunity to invest behind their own growth. And so, Rachel talked about our Google Shopping initiative and how we're really – we ransomed promotions to help them understand the value of Google Shopping. This is a great way that they can invest in us driving traffic to their listings. So they leverage our experience with paid marketing and all of our great marketing capabilities in a way that that puts their more control directly in their hands. And those kinds of things I think are very exciting. Our sellers really like them and it helps them to drive their success. We’re going to continue to invest behind them.

And then I guess the second part of the question, one of the things we said on the call was that – we got – we achieved a one quarter payback on our marketing spend, which we apply that we could be spending more. So we're constantly – and it indicates as we said that we’ve really optimized our bidding. And so we're looking at ways to be able to deploy our capital on even higher – continued high ROI marketing initiatives. However, we are also looking at the synergies between ourselves and our sellers. So we have attractive community and almost 2 million sellers that also can use their own muscle and their networks to drive social traffic for instance and we've given them tools to be able to do just that. So there's a combination of paid and three methods of marketing that we're trying to deploy and equal measure.

Great, thank you.

Thank you.

And ladies and gentlemen that does conclude our Q&A session for today. With that said thank you for participating in today's conference. That concludes the program and you may all disconnect. Everyone have a wonderful day.