Good day ladies and gentlemen, and welcome to Etsy's Second Quarter of 2018 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Deb Wasser, Vice President of Investor Relations. Please go ahead.

Thank you, operator. 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 includes forward-looking statement relating to our business strategy, financial guidance, and key drivers, thereof, upcoming product launches, investments and marketing and international growth and the impact of our four key initiatives, and new pricing model on future GMS and revenue growth. Our actual results may differ materially from the statements made. 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 9, 2018, and subsequent reports that we filed with the SEC. Any forward-looking statements that we make on this call are based upon our beliefs and assumptions today, and we don't have any obligation to update them. Also during the call, we will 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 will 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 a replay via phone, you can find that information in the press release as well. Finally, for your reference, we hope that you’re following along with the presentation that we had created to highlight our second quarter progress. It accompanies our webcast and its posted separately on our IR Web site. With that, I'll turn the call over to Josh.

Thanks, Deb, and good afternoon, everyone. Q2 was an exciting quarter, marked by strong business performance, along with several major announcements and launches. Let's start by diving into the results, highlights of which are shown on Slide 4. First, GMS growth was 20.4% year-over-year, a 60 basis point acceleration compared to Q1 and our fourth consecutive quarter of accelerating year-over-year GMS growth. On a constant currency basis, GMS accelerated from 17.6% in Q1 to 19.3%. We grew revenue 30% year-over-year and EBITDA margins remained strong at 21%.Excluding a one-time adjustment related to shipping, revenue growth would have been 27%, our fastest growth rate since the third quarter of 2016. Active buyers grew 17% and active sellers grew 8% indicating that we continue to deliver on our commitment to bring a growing base of buyers to our sellers. Our conversion rate increased for the third consecutive quarter, driven most notably by improvements in mobile web, which was our fastest-growing platform by number of visits and conversion rate. And while it's still early days, we continue to see promising signs that we're making progress improving buyer frequency. For example, trailing 12-month GMS per active buyer is up year-over-year for the first time since the fourth quarter of 2016. Furthermore, our 60-day repeat purchase rate continued to improve and the number of buyers that made four or more purchases within the last 12 months grew at an accelerating rate. Our most significant news of the second quarter was, of course, the changes we announced to Etsy's pricing model. Over the past 13 years, Etsy has built a vibrant highly differentiated two-sided marketplace, giving our sellers access to nearly 36 million buyers, who value the kind of unique special items that our sellers have to offer. In addition, we provide creative entrepreneurs with services…

Thank you, Josh and hello everyone. It was a fantastic quarter for Etsy. As our financial and operating results will show. The second quarter was our highest quarter of GMS growth since Josh and i1 joined last year and the first quarter, with a GMS growth rate above 20% since Q2 2016. We are excited that our team's focus on our four key initiatives, it's having a tangible impact in our strategy to own special is taking faith. Before diving into the financial highlights, let me tough on two developments that impacted the business and our resources during the quarter. GDPR and state sales tax. During the quarter, we had cross-functional team hard at work preparing for the EU's general data protection and regulation, which will into effect on May 25. Overall, we are pleased with Etsy implementation. We saw a minor GMS softness in Europe in Q2, as GDPR consumed engineering resources that would otherwise have been pushing forward on our product road map. And also because of added friction to buyer experience factors we expect to continue in the back half of the year. The other event I will call out is a supreme Court Decision in the South Dakota versus Wayfair case, which overturned Quill, a decision that had kept states from taxing purchases made from online sellers, you lack a physical presence in the state. It is worth noting that there was a 24-day consortium, including South Dakota, that has provided guidance on a small business exemption threshold of $100,000 or $200 transactions? If the GMS and transaction threshold were applied to every state, the majority of our GSM would be excluded from states sales tax. I’m going to now move into our operating and financial performance, followed by providing our updated 2018 guidance. If I…

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

Great. Thanks. As we look at the virtuous cycle that you guys have talked about related to the increase in take rate. Can you give us a sense of just sort of how quickly you expect the flow-through, the marketing line. I guess, you’ve touched on it, Rachel, in your comments on sort of the marketing guidance. I guess, how quickly you think that will impact GMS growth? I know you took numbers up slightly for the -- in your revised guidance, but just kind of curious how much of an impact or how quickly you think that impact actually shows up in numbers as we think about the impact of just performance advertising.

Yes. Thanks Heath for the question. Where it affects us, the way we think about our performance marketing is for the next dollar we spend what's the return on that next dollar. And so what this allows us to do is push further down that curve, there's a bunch of, let's say, key words we were buying or GPLA ads we were investing in before that were already profitable. So you're already getting those, right? It allows us to push a little deeper. So on the performance marketing side, the forward-looking guidance that Rachel provided, already anticipates both the increased investment we will be making in performance and its impact on GMS. What we have yet to see is whether these new LTVs make other marketing channels ROI positive, which have not been the case in the past or which we haven't tested in the past. So that's going to be an interesting area for us where there's speculative investments. Let me talk for a second about TV, in particular, because it gives a bit of a view of how we do things here and how we think about things. We've never done TV advertising before. So we don't know how it's going to work. So we're doing R&D on that in the second half of the year and the way we’re going to do that is we created two separate TV campaigns that test two different concepts. Each of those campaigns will be tested in three local markets. So we will pick three cities that are test cities, and we will have three control cities and we will run the TV ads in the test cities and then we will be able to measure the impact on visits and purchases and GMS for people in those cities. Now if you buy a TV ad in a local region, it's about 5x more expensive than doing a national buy. So we wouldn't expected that particular campaign in those cities was necessarily ROI positive, but we could extrapolate if it were a national buy. Would it then be ROI positive? So by structuring a test using only cities, we get much better data on efficacy. And then we would have to think about how that would scale on the future. That’s why we're describing these campaigns as R&D. So we can learn how to put that extra money to work in a way that really grows the pie for everybody.

And I just would add that means that the guidance we gave just now for GMS really assumes almost no upside from the TV marketing spend that will be doing in the second half of the year. If we see that it, what we extrapolate to indicate that it is ROI positive has a potential of the ROI positive, that would be something that we would do more potentially and we build that into our 2019 guidance. I'd say that we have a tolerance, so let the payback periods be longer than what we see with SEM and the Google PLA ads. But we would still be looking for an ROI positive result. It's not just pure brand marketing on face.

Now that's really helpful. And then, as you realize that it's incredibly early, but curious how you found the seller reaction to the take rate increase relative to what you had expected and planned for?

They were $2 million sellers if you do a price increase, you'd expect some local discontent and we got some very much in line with what we thought. We also had quite a number sellers coming out and saying that they really supported it and that they’ve been wanting us to invest more aggressively in marketing for some time to invest more in tools, to invest more in customers part. So I was delighted actually by the number of sellers it really came out and we are supported. But I think what really matters is what are they doing. And as you said, it's still very much early days. But we've been pleased by the behavior we're seeing, which is we do not see a difference right now in the data in churn or in pricing as two important metrics that we’re tracking.

Great. Thank you.

Thanks, Heath.

Thank you. Our next question comes from Edward Yruma with KeyBanc Capital Markets. Your line is now open.

Hey, good afternoon guys and thanks for taking my questions. I guess, first on promoted listings, maybe talk a little bit more about the opportunity there. It seems like we’ve heard some sellers complain that you're not completing their budget. So kind of what inning are you in with implementing Promoted Listings or maybe offering inventory? And then second, you gave some interesting statistics around repeat buyers. I guess you used to give the adage that the majority of customers, only about once a year. Kind of where are you on that continuum and for your most frequent customers how often are they buying? Thanks so much.

Do you want me answer or you …?

Let me start with the Promoted Listings question. So it's -- you're correct, that we will only -- we take a budget from our sellers and we will only spend it if we can get them to a return on ad spend that is a reasonable range. And so to some extent we only utilize a percentage of their budget. Now we’ve increased our optimization of our bidding algorithm and so we’ve been able to improve that utilization rate. So that's good news number one, and we will continue to build in more optimization that click through rate improves listings, like including contact specific ranking in the results because they serve up a much more relevant result even when it's in a Promoted Listing ad. And so the click through rate increases, which theoretically increases demand for that. The conversion rate goes up and we’ve a nice optimization of the bidding. The second thing I will say is just to point out as long as you’re asking about Promoted Listings is that we just anniversaried an inventory, we increased inventory 1-year-ago, so that anniversary happened in this quarter. And so we’ve continued to see very nice growth rates in Promoted Listings, but we're hitting a place where it's on a same-store sales basis, it's going to be harder and harder to continue to get that growth. Yes, we’ve not -- this is the third point I will make is we’ve not implemented Promoted Listings inventory everywhere. So right now it's in a limited number of places. So for or instance we don't put a Promoted Listings at on the sellers listing detail page. We don't put them -- they’re in very few places today. So there's still opportunity for us to expand inventory and promoted listings going forward. Josh, do you want to add?

Yes, so there's kind of three things you could do for Promoted Listings. You can get more sellers to adopt it and give you more budget. You can make it, you can add inventory, you can put Promoted Listings in more places, and then you can improve the algorithm, so that you’ve showed the right ad at the right time. I think that we’ve said about 15% of sellers have adopted Promoted Listings, they’re disproportionately sellers who are high-volume and likely to succeed. And so there's still some upward opportunity there for sure, but we've got a good number of sellers who are giving us quite a lot of budget. And so -- and to your point, yes, there is -- they’re actually willing to give us a lot more budget than we are able to spend right now. But we want to make sure we’re very responsible and we only spend the money in a way that delivers a good return for the sellers, we think that's critical. So we did expand a lot of inventory last year. We are now lapping that as Rachel pointed out. There may be other opportunities to expand inventory, well I have to step our way into that thoughtfully on the site. You could think about Google shopping as sort of promoted listings off-site, right. We don't need to limit ourselves only to inventory on Etsy. We give sellers have the opportunity to give us money to invest on their behalf, we can buy them visits on other sites. But the third area where I think we're still early is algorithm improvements. The better our search relevance algorithms get for Promoted Listings, the more we show the right ad at the right time, that really uses the inventory we have better. And just like, I think, we're in early days of improving our search algorithms. I think we're in similarly early days and in fact we’re using very similar technology to power Promoted Listings. And over time, I'm optimistic our -- about our ability to do better there. Oh, frequency, sorry Ed. Frequency. So -- that the -- we are seeing gains in frequency and we are very encouraged by that on a base of 36 million buyers, very small improvements can have meaningful impact. So I don’t think we’ve updated this sort of stat of 60% of people are shopping once a year. I don’t think we publish something more recently on that. What I would say is that if you can move that 36 million number of small amount, it makes a pretty big difference for Etsy and over time we think we could move that number by a meaningful amount.

And we did say on this call that 83% of our GMS is coming from repeat buyers, which grew 23% year-over-year. So you could start to sort of infer from that that we’re starting to get not only more repeat purchase, but some repeat frequency green shoots, we’re calling them, that’s starting to pick up.

Great. Thanks so much guys.

Thanks, Ed.

Thank you. Our next question comes from our Mark Mahaney with RBC Capital Markets. Your line is now open.

Hi, it's Shwetha for Mark. Quick question. You’re expecting $75 million of GMS impact from new initiatives that you talked about. If we were to isolate that like how much do those initiatives have had an impact on conversion rate?

So, I think what we said last quarter was that we had $75 million experiments that created on an annualized basis, incremental GMS growth. And that was from last quarter's experience. We didn't give you that number this quarter, but we have given you guidance for GMS which implies growth in GMS. That comes from our baseline organic growth. So if we all went home and didn’t do any more work at all, there will be a certain amount of GMS we will continued to get. There is the initiatives that we've already implemented from 2017 and the first half of 2018 that continue to keep contributing to the GMS growth. And then there's initiatives that we're working on for the second half of the year that will continue -- that will contribute incremental GMS this year and annualized will continue to give GMS growth next year, but we didn’t break those numbers out for you on this call.

Okay. That’s helpful. Thanks. How would you sort of categorize the impact on conversion rates that you’ve seen the improvements on the platform for seller tools as well as search experience and through the years so far?

So the experiments that we've talked about on search and discovery and trust and reliability are mainly pushing on the conversion rate metric. Our initiative that when we talk about marketing services that's mainly pushing on visit growth metrics, so those are other two of the three metrics that drives GMS. And then we've done less on the moving of the needle on average order value with the exception of the multi-shop checkout which we’ve talked about and we talked about just anniversarying that this quarter as well. And that allowed people to put more than one item in cart and checkout just once instead of multiple times. And I think Josh even said in his prepared remarks that there's a lot more. We've delivered on the things that we set out to deliver, so we really worked hard. We've been working hard, we will continue to work hard on growing conversion rate and visit growth. And we had less of a focus on that third one, which was average order value, but we see a lot of things in our roadmap that could impact that third metric. But primarily the search and discovery and trust and reliability initiatives and we've given examples of those on last four calls that those are the initiatives, that are the things that are impacting conversion rate the most.

Okay. That’s helpful. Thank you. Thank you both.

Thank you.

Thank you. Our next question comes from Scott McConnell with DA Davidson. Your line is now open.

Great. Thank you. So we think the team has done a really great job of refining Etsy's go-to-market strategy since taking over, including, more recently, the -- with the changing take rate. So you touched on some of the opportunity so far, but what remains for you to continue to refine the go-to-market strategy? And then how should we think about the potential of those efforts to sales growth from today’s level?

So we’ve talked in the past about our TAM and we said that the -- just the online segments of our business and our top six categories and our top six markets is $155 billion. So here is, I guess, how I would think about it. If you were to go shopping for home furnishings, we’ve said home furnishings is one of our top three categories, take your favorite site and go shopping for home furnishings, then come to Etsy and see if you can find a product that is more interesting at better value. I think if you're willing to invest an hour, you will. But it takes an hour. It's too hard to find that product, but we actually have beautiful products. Go shopping for jewelry anywhere on any of your favorite sites, then come to Etsy and see if you can find a better more interesting product that expresses yourself better and is great value. I think you’re going to be delighted by what you find, but it takes a while. It's too hard. Same for clothing. If you look at our top categories, if we sold only home furnishings nobody would be asking us how big can you be if you're -- if we're only doing $3.5 billion or so of sales, right. So it's up to us to make it easier to expose that gorgeous product that already exists on our site in these categories that are each in and of themselves, massive. And then when we do that better job, we've got to communicate that while to the world starting with our existing buyers, retraining habits on when to think of Etsy and how often to think of Etsy, is hard and takes time. We've got to retrain 36 million people to think of us more often and understand the breadth and depth of our inventory and then we’ve got to communicate with the people who've never shopped on Etsy and help them to understand that opportunity as well. So I think that there's a lot of opportunity ahead of us. I think we are going to have to unlock it kind of as we go. I don't know that it's always going to be this smooth upward trajectory one could wish, but I wouldn't expect that that will be the case forever into the future. But I think with patience and perseverance and focus, I think we can continue to see meaningful growth on this platform over time.

Okay, great. That’s really good. So the second question is on Google's changing their algorithm earlier this year, that places more emphasis on mobile? That’s always been a strong area for Etsy and it sounds like it was really strong this quarter. But to what extend does the algorithm change positively or negatively affect your SEO effort?

So we gave you some mobile metrics on the call that mobile has been extremely strong for us, it always has been, but mobile continues to grow significantly. Mobile was 55% of our overall GMS which that’s a 400 basis point improvement year-over-year and grew 32% year-over-year. And we've also focused a lot of our product work on mobile, so that we see the -- mobile conversion rates continue to improve as well. And so it's for us mobile has been a bright spot in a lot of our growth.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from Darren Aftahi with ROTH Capital Markets. Your line is now open.

Yes, thanks for taking my questions. Just two, if I may. Can you talk a little bit more on the retargeting service you guys are offering to sellers and kind of what attach rates you’re seeing and then I guess where you in terms of marking that your bay? And then, the second question is just I know you formally have announced it, I think at the end of the quarter, but just kind of the impact you’re seeing a month and half in from the DaWanda kind of transition? Thanks.

Sure. So the first one, we call that targeted offer. So the idea is how do we take people already interacted with the sellers shop and let that seller reach out to them with, let's say, a promotion or an offer to get them to come back and engage more. And its early days in that, but I would say we're pleased in achieving the projections that we hoped. I don't think we've broken out or given any specific data on that. That’s a brand-new product in the first couple of months of its lifecycle, but over time we think that one is interesting and it's also great for buyers, it's great for growing GMS, and it's a way for sellers to take their destiny into their own hands even more which we think is important. The second question was on DaWanda and that DaWanda decided that that they will be shutting down operations and so that's just been announced to the market relatively recently. So we're now doing is trying to make it easy for their sellers to get started on Etsy, if they weren't already on Etsy. I mean get their listings up and running, and so we've created tools for sellers to migrate listings and to make that smooth and we're pleased with the adoption of those tools and the early results we're seeing in migrating listings over to Etsy. The next step would be for DaWanda to actually cease taking new orders and redirect the buyer traffic to Etsy. And until the buyer traffic were redirected, you really wouldn't expect a meaningful impact on GMS and that’s not [technical difficulty] expected until the end of August.

Thanks.

Thank you.

Thank you. Our next question comes from Laura Champine with Loop Capital. Your line is now open.

Good afternoon. Thanks for taking my question. Josh, if we focus in on frequency, have you seen much progress in improving existing frequency? And what do you think has been the most effective tool so far in improving that metric?

We are -- again, its early days but we are seeing progress there. And what we are hearing more and more from buyers, it just feels like a cleaner more well organized buying experience. It's easier to find the stuff you like and it's easier to buy it once you find it. And I know that sounds kind of basic, but basic is good. So we're delivering on the basics better. We are doing more things. One of the areas that I think there's a big opportunity, in addition to a lot of room to continue to do better on the basics, which I don't want to undersell, because I think it's incredibly important. Doing a better job on our CRM systems and email, I think is really important so that we can communicate better to our buyers and remind them of the great things that we have on offer and send them more personalized. We are now sending much more personalized emails than we used to. Things like sales and promotions can be an excuse to come back and check us out during a time of the year when you might not have thought to come to us. Using retargeting technologies, so in performance marketing how can we find people that are lapsed buyers and speak to them when they’re maybe on Google doing a product search is an opportunity in area that we don't do a lot of today. And I think we can get better at and build traction. Another thing that we're seeing is, there's a fair number of people come to Etsy just to have fun without a particular buying educate -- a buying occasion in mind. How do we allow them to have a great fun experience and leave some breadcrumbs comes to come back to and so really thinking about activities like favoriting and how do we make favoriting more prominent and more frequent as a way to build a look book on Etsy, if you will, that you come back to is something that we've been investing in and seeing some progress on.

You know, I’m going to add just two more, because we talked a lot about on our call, so it's right into your question, Laura, that marketing -- our investment in marketing and our investments in shipping, I think are two larger sort of bets that we would make, let's say, getting to be more of a habit and be more top of mind for our potential and existing buyers out there is one thesis we want to prove out. We don't know yet if that kind of national brand campaign is going to be effective or not, but we -- the thesis is it will. And the second one is shipping that we’ve got a lot of friction in the shipping in the process right now with both shipping prices that are higher than people are accustomed to on other sites, even some that range to the, what we'd call egregious. And then getting returns that you're buying something on Etsy, you don’t -- if you’re buying clothing on another site you know you can easily return often times for free. So getting the return part of the process if needed to also be frictionless are areas where I think we will improve. Remove friction and improve the repeat frequency.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from Ronald Bookbinder with IFS Securities. Your line is now open.

Good afternoon and thank you for taking my questions. You touched on the sales tax, new rolling. Well, it doesn't affect the majority of your sales, it does affect some. And I was wondering, is this an opportunity for you to create additional Seller Services for the merchants on your sites in handling the sales tax for them?

Yes, thanks. Hey, thanks for the question. I appreciate it. So we definitely have our sellers back and providing tools that make this easier for them and improve reducing the burden is something that we think is really important and something that we’re investing in. I do want to take a sec. let's take a look at this consortium of states just as an example where it's hundred thousand dollars in sales or 200 items sold in any one state, that includes online or off-line sales across any platform. So I would argue that it is impossible for any platform to know and be able to truly comply with precision to that law. That’s why we think this is bad law. No one could apply, could comply with this law perfectly all the time. So we will give our sellers tools and we will do the best of our ability to make this as low friction as we can, but really we need to work with the federal legislature to try and state legislatures to try to get to better law that achieves the needs of the states to collect tax revenue and does it in a way that also encourages innovation and free commerce. And that's what we’re going to work to do. What I would point out in the meantime is that this is not an existential threat to Etsy. It's friction its work it's not ideal, but we’re going to have our sellers back and it's something of a headwind in the near-term and we will get through it.

Okay. And secondly, on the television test in the three cities, will you be able to have those test results to be able to attack Good Friday/holiday in a meaningful way, or will that still be in a testing period and that will be something that we can use next year in marketing?

So it's actually six cities, so its two, three tests, and we hope to -- we are using a media buying firm that's very quantitative. So they -- we set ourselves with them that we get very good performance metrics with only a very slight lag. But it takes a little bit of time, you have to let it run. We are trying to get enough reach and frequency within a period of time to get specifically significant results and be able to draw conclusions from them. It's possible that you see such immediate result favorable or unfavorable that you get -- you can make a decision at that point on whether to do more of it on a national basis and time for holiday or not. But right now we've -- we’re very -- we are trying very much to emphasize that this is all experimental and we are using it to learn and it really will guide our further investments into 2019.

Okay, great. Thank you very much. Good luck in the new quarter.

Thank you.

Thank you. I show no further questions. So I’d like to thank everybody for joining today’s conference. This does conclude the conference and you may now disconnect. Have a wonderful day.

Thank you very much.