ETSY Inc (ETSY) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Etsy, Inc.

third-quarter 2015 financial results conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to Jennifer Beugelmans.

Please go ahead.

Thank you, Sabrina, and good afternoon.

Welcome to Etsy's third-quarter earnings conference call.

Joining me today are Chad Dickerson, CEO; and Kristina Salen, CFO.

Before we get started, just a reminder that our remarks today include forward-looking statements relating to our financial performance, results of operation, business strategy, outlook, mission, and potential future growth.

Our actual results may be materially different.

Forward-looking statements involve risks and uncertainties, which are described in our press release today and in our 10-Q filed with the SEC on August 6, 2015.

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 will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which you can find on our website -- our investor relations website.

A link to the replay of this call will also be available there, and if you would prefer to access the replay via phone, you can find that information in the press release as well.

With that, I will turn the call over to Chad.

Chad?

Thanks, Jennifer, and thanks to each of you joining us today.

We are excited to talk with you about the progress we made at Etsy in the third quarter.

Etsy's third-quarter 2015 results showed continued strength in the business.

This quarter, Etsy grew in its key metrics: GMS was up nearly 22%, and Etsy's revenue growth was approximately 38% year over year.

Our number of active sellers increased approximately 19% to more than 1.5 million, and our number of active buyers increased approximately 25% to 22.6 million.

As we've shared before, we're focused on four key areas: making Etsy an everyday experience, building local marketplaces globally, offering high impact seller services, and expanding the Etsy economy.

First up is our focus on making Etsy an everyday experience, which is all about mobile.

We believe it's our most important strategic initiative, and that's why we talk about it first every quarter.

As we shared previously, we are quite proud of Etsy's mobile offerings, and in fact, during the third quarter, we saw 60% of our visits and 44% of our GMS come to Etsy through a mobile device.

Most of this mobile traffic comes to us through mobile web, which generally converts at a significantly lower rate than desktop, and both of these channels convert at a lower rate than mobile apps.

So with the shift in traffic patterns that's occurred over the past several quarters, a majority of our traffic that previously came into Etsy through the desktop experience now comes to us through mobile web.

Our strategy has been and continues to be to drive traffic from the lower-converting mobile web experience into our higher-converting app experience.

We measure our progress in the narrowing of the gap between mobile visits and mobile GMS.

In fact, it is one of the most important metrics for tracking our progress in mobile.

In the third quarter, I'm excited to report that we narrowed the gap between mobile visits and GMS more than we have in any single quarter in our history.

We also continue to grow our mobile app downloads, which increased to more than 30 million this quarter, and drove a significant increase in smart phone GMS -- app GMS -- compared with last year.

Our continued progress with mobile at Etsy is the fruit of the long-term investments we've made in building a mobile-first company, with particular strength in product design and engineering, along with our investments in technologies like deep-linking and app indexing, two technologies that drive usage from the lower converting mobile web to the higher converting mobile apps.

We also continue to build uniquely engaging mobile features like ShopUpdates, a social marketing tool that enables sellers to share engaging, behind-the-scenes photos and updates across their social networks to buyers on and off Etsy.

This vibrant content is intended to drive purchase activity by inspiring new and repeat buyers to come to Etsy to explore updates from their favorite sellers.

To date, approximately 30,000 shops have used this feature, and this number continues to grow.

We believe that there is no single silver bullet that will lead to the ultimate win on mobile, and that our continued success will be based on many steps forward, like these, that collectively illustrate that our long-term investments are working.

Turning now to building local marketplaces, globally.

We're focused on building on Etsy's global foundation by developing local markets in key countries outside the US, where we see both local buyer and seller activity, and where we can generate [strong] network [FX].

During the third-quarter, Etsy's international GMS was approximately 29% of our total GMS, a decline from last year, and about flat with the second quarter.

While we think we're continuing to face headwinds created by the strong US dollar, we also think we can improve our performance by continuing to apply the strategies that have led to signs of success in our key markets.

In the UK, our largest and fastest growing international market, we continued to see the positive results of our localization efforts during the third quarter.

We saw greater than 60% year-over-year increase in purchases by UK buyers from UK sellers.

Similar to the second quarter, this growth rate remained nearly 5 times the rate of growth for goods imported into the UK this quarter.

Our build-local-marketplaces-globally strategy is ultimately about helping our sellers make more sales by meeting buyer needs and expectations around the world.

For example, internal Etsy purchase data and our research show that buyers in the UK and Australia often prefer to purchase items from sellers in their own countries.

Based on this data and research, which is further supported by our success in the UK, we've recently begun testing a new search experience that makes locally made items for buyers in the UK and Australia more prominent to buyers, while still offering a global inventory.

We hope that making domestic shops more prominent in the results will generate more sales for our sellers in the UK and Australia, and improve the buyer experience in those countries.

Let's turn now to high-impact seller services.

As we've talked about before, seller services let Etsy sellers spend more time doing the work they enjoy most: making, designing, and curating; and less time on the administrative task of running their shops.

Currently we provide three seller services that generate revenue for Etsy: promoted listings, direct checkout, and shipping labels.

Over time, Etsy's goal is to increase usage of these three seller services, expand their geographic reach, and launch new ones.

During the third quarter, seller services represented approximately 49% of total revenue.

I'd like to highlight one recent enhancement added to direct checkout that demonstrates our focus on reducing friction in the marketplace.

As of October 27, we fully integrated PayPal payments into direct checkout, which enables our sellers to accept PayPal on the Etsy platform and reach more buyers.

This integration expands the number of sellers that accept PayPal and makes it easier for them to accept and manage various payment methods.

For our buyers, this new feature expands their payment options, and delivers a more seamless purchase experience on the Etsy platform, no matter what payment method they choose.

We are excited about this launch, and believe that this new feature further demonstrates that direct checkout is the best way for buyers and sellers to transact on Etsy.

Finally, I want to update you on our progress expanding the Etsy economy.

We've had several new developments this quarter, and I would like to highlight one of them.

We are very excited about the recent launch of Etsy Manufacturing.

Etsy's mission is to reimagine commerce in ways that build a more fulfilling and lasting world, and with Etsy Manufacturing, we're reimagining manufacturing.

During our 10 years of working with sellers, we've heard again and again that finding the right team to help expand a creative business is a real challenge.

With manufacturing in particular, designers strive to build direct relationships with partners they can trust and who value their craft as much as they do.

Our new manufacturing marketplace reimagines manufacturing by connecting Etsy designers and manufacturers to form responsible partnerships.

The range of manufacturers is exciting, with everyone from individual Etsy sellers who have excess making capacity, to emerging startups, to decades-old family-run factories.

One of these manufacturers is Voodoo Manufacturing, a four-person 3-D printing operation here in our home town of Brooklyn.

Co-founder Patrick Dean describes his participation in the marketplace this way: we're helping other people realize their dreams, and to me that's something I'm proud to be a part of.

Another manufacturer is Sarah Mandell.

Her Etsy shop is called Once Again Sam, and she's been an Etsy seller since 2009.

Sarah says: people who are already selling on Etsy get the community.

We all understand what's involved in each other's businesses.

Being able to offer our services to each other is just another way of collaborating and sharing in that community.

We want to provide our sellers with the help they need to grow their creative businesses on their own terms in a way that is aligned with Etsy's core values, while creating an opportunity for more people to participate in the Etsy economy.

We are excited to be working with our community on this long-term bet to reimagine manufacturing with this new marketplace that we will be building over time.

We are really excited about our competitive position as we head into the fourth quarter and holiday season.

I think this year's holiday campaign is our strongest holiday effort to date.

We're rolling out a rich holiday experience across desktop, mobile, and app, as well as a fully integrated online/offline marketing strategy focused on driving users to Etsy as a unique holiday shopping experience.

We remain focused on building and strengthening the characteristics that have always differentiated Etsy from other marketplaces, like our relationship with our community, our commitment to our artisans, and our values.

Serving this special community of creative entrepreneurs is our singular focus at Etsy, and we couldn't be more excited to work with this community every day.

We know from our decade of working alongside our seller community that more than 50% of our sellers already sell through other channels like craft fairs, their own websites, and other online marketplaces, but that Etsy is the largest source of income to these sellers.

Based on what we've seen in the market, we don't expect this to change.

We believe that we are executing the right long-term strategy, and that our four key areas of focus -- making Etsy an everyday experience, building local market places globally, offering high-impact seller services, and expanding the Etsy economy -- will allow us to deliver results to our shareholders, support our vibrant community, and build a successful business for the long-term.

We appreciate the opportunity today to report our progress, and with that, I'll hand it over to Kristina to go over our financial results in more detail.

Thanks, Chad, and hello to everyone joining us today.

Just to note, unless I say so, all comparisons I'll be referencing here are on a year-over-year basis.

Let's start with GMS.

During the third quarter of 2015, the Etsy marketplace generated $568.8 million in GMS, up 21.7%.

Growth in GMS was driven by growth in active sellers and active buyers.

At the end of the third quarter, Etsy had 1.5 million active sellers, up 19.4%.

As a reminder, an active seller is one who has incurred at least one charge from us in the last 12 months.

Also at the end of the third quarter, Etsy had 22.6 million active buyers, up 24.9%.

And also as a reminder, active buyers are those who have bought on Etsy at least once in the past 12 months.

Etsy's third quarter results demonstrate our continued year-over-year progress in narrowing the gap between mobile visits and mobile GMS, and highlighted the results of continued improvement in our mobile offerings.

Approximately 60% of our visits come to us from a mobile device, which is up 500 basis points year over year, and flat quarter over quarter.

This growth continued to outpace the rate of growth on desktop.

More importantly, about 44% of our GMS came from a mobile device, up 600 basis points year over year, and 100 basis points quarter over quarter.

Etsy's international business continued to expand, with international revenue growing 36.6% in the third quarter.

However, percent international GMS declined to 29.3% in the third quarter, compared with 31.6% last year, and 30.2% in the second quarter.

As a reminder, percent international GMS is the percent of total GMS from transactions where either the buyer or the seller is outside of the US.

We continue to believe that we can grow percent international GMS over time to represent 50% of our total GMS.

Currency exchange rates, however, have continued to directly and indirectly affect Etsy's overall GMS growth rates and percent international GMS.

Based on the direct impact of currency translation of our non-US dollar-denominated GMS, and based on our assumptions surrounding the indirect impact of currency exchange rates on buyer behavior outside of the US, we believe that we saw a 3 to 5 percentage point drag on our overall GMS growth rate in the third quarter from currency.

Turning to revenue.

During the third quarter, total revenue was $65.7 million, up 37.9%, driven by growth in seller services, and, to a lesser extent, growth in the market place revenue.

Marketplace revenue grew 19.7%, primarily due to growth in transaction fee revenue, and, to a lesser extent, growth in listing fee revenue.

Seller services was up 66.7%, and revenue from each of our three services grew faster than GMS and faster than market place revenue.

This growth was primarily due to growth in revenue from promoted listings, which continued to benefit from the relaunch of the product late in the third quarter of 2014, as well as from overall improvements to promoted listings' ad quality.

Shipping labels revenue growth was driven by a combination of enhancements to the product and an increase in the overall number of orders shipped.

And finally, direct checkout revenue growth was driven by increased adoption and overall GMS growth.

Gross profit for the third quarter was $41.5 million, up 40.7%, and the gross margin was 63.2%, up 120 basis points.

Similar to the first and second quarters, in the third quarter gross profit grew faster than revenue.

This is because of the leverage we achieved in the cost of revenue for employee-related costs.

This is also because of the growth of promoted listings, which, you may recall, is a higher-margin revenue stream, and which outpaced the growth of direct checkout, a lower-margin revenue stream.

Turning now to operating expenses, Etsy's total third quarter operating expenses were $43.2 million, up 32.6%.

Total operating expenses, as a percent of revenue, declined to 65.8% in the third quarter, compared with 68.4% last year.

Reported marketing expenses totaled $16.5 million, up 87.8%, representing 25% of total revenue, versus 18% last year, and 25% in the last quarter.

The increase in marketing expenses continues to be driven primarily by increased spending on Google product listing ads, and on higher employee-related expenses within our seller development and brand design cost centers.

Growth in reported marketing expenses in the third quarter was also impacted by business changes and reorganizations that occurred in September, 2014.

At the time of these changes, we moved certain expenses, such as brand design, brand research, and seller development into marketing expenses, most of which had previously been recorded in product development expenses.

Excluding the impact of these changes, comparable marketing expenses in the third quarter grew 74%.

As we've shared with you before, unique to an Internet company our size, roughly 90% of our traffic comes from organic sources, so it can be difficult, externally, to see the positive impact of our marketing investment on GMS growth strictly on a quarterly basis.

Digital marketing expenses in the third quarter increased approximately 95% year on year, and generated positive ROI based on our global attribution model, resulting in a paid GMS growth rate that, similar to our first and second quarters, was more than double our reported GMS growth rate.

It's important to keep in mind that, while digital marketing expenses nearly doubled in the third quarter year over year, this is off of a very small base.

During the third quarter our digital marketing expense, which is mainly spent on Google product listing ads, search engine marketing, and affiliate marketing, was approximately $10 million.

And, as you may have read in our press release, we expect year-over-year growth of digital marketing expenses to decelerate in the fourth quarter compared with the third quarter.

Reported product development expenses totaled $11.4 million, up 13.2%, representing 17% of total revenue versus 21% last year and 16% last quarter.

The increase in reported product development expenses was driven by higher employee-related expenses, as we continue to grow our products and engineering staff.

Similar to reported marketing expenses growth, year-over-year comparisons for reported product development expenses are also affected by the 2014 business changes and reorganizations that I just mentioned.

Excluding the impact of these changes, comparable product development expenses grew 18.3%.

G&A expenses totaled $15.3 million, up 11.4%, representing 23% of total revenue versus 29% last year and 29% last quarter.

The increase in G&A expenses primarily resulted from an increase in employee-related and professional services expenses.

Headcount at the end of the quarter was 804, compared with 757 as of June 30, 2015, and 685 as of December 31, 2014.

Non-GAAP adjusted EBITDA was $6.2 million, up 46.5%.

This resulted in an adjusted EBITDA margin of 9.5%, up 60 basis points year over year.

Third-quarter net loss was $6.9 million, compared with a net loss of $6.3 million last year.

Etsy's net loss was impacted by a $4.1 million tax provision.

This compares with a $4.9 million tax provision last quarter, and a $2.1 million tax provision last year.

During the quarter, we generated $5.4 million in cash from operations, compared with $5.1 million last year.

As of September 30, 2015, we had cash, marketable securities, and short-term investments totaling $286.8 million.

To close, I'd like to highlight a few factors you should consider when thinking about Etsy's fourth quarter of 2015.

Although we won't be providing quantitative quarterly guidance, we will continue, from time to time, to highlight qualitative factors to keep in mind that could impact a specific quarter.

For the fourth quarter of 2015, I'd like to highlight two.

First, from an overall business perspective, as Chad mentioned, we are excited about our competitive position as we head into the fourth quarter, our biggest of the year, and the upcoming holiday season.

We have a great holiday campaign planned.

Some of it is already visible on our site, and we believe this campaign is our strongest holiday effort to date.

We're confident that Etsy will be the shopping destination for unique items with a personal connection to the maker.

Even so, just like we conveyed in the first and second quarters of 2015, and as we have pointed out in our third-quarter results, if currency exchange rates remain at current levels, then they will negatively impact our year-over-year GMS growth rate.

The second qualitative factor I'd like to highlight is that, from a modeling perspective, the operating leverage that we achieved in the third quarter will not repeat in the fourth quarter for three key reasons.

Number one is that we don't expect our gross margins to expand year over year in the fourth quarter as it has during the last three quarters of this year.

This is because promoted listings is anticipated to grow more slowly than direct checkout in the fourth quarter after three consecutive quarters of growing at least two times as fast.

I'd remind everybody that the fourth quarter will be the first full quarter following the anniversary of the relaunch of promoted listings.

As such, we expect the year-over-year revenue growth rate for this service to decelerate the significantly when compared to the first three quarters of 2015.

We also expect direct checkout growth to accelerate, following our recent integration of PayPal.

So, in short, we anticipate that this shift in seller services revenue growth drivers will be a drag on our gross margins.

The number two reason we won't show the same operating leverage is, as we have in the first three quarters of the year, we plan to spend more on marketing in absolute dollars in the fourth quarter compared with the third quarter of 2015 and the fourth quarter of 2014.

Therefore, we expect marketing expenses to continue to grow faster than our revenue in the fourth quarter.

That being said, we do expect the year-over-year growth rate for marketing expenses to decelerate in the fourth quarter, compared with both the third quarter of 2015 and the fourth quarter of 2014, as our marketing spend growth begins to plateau.

Finally, the number three reason we won't show the same operating leverage, as has been the case in the first three quarters of the year, we expect our number of net hires in the fourth quarter to be greater, year over year, but flat, quarter over quarter.

And with that I'd like to turn it back to our operator, Sabrina, to open up the call for Q&A.

Thanks.

Thank you.

(Operator Instructions)

Heath Terry, Goldman Sachs

Kristina, I was wondering if you give us a bit of an update on the progress in building out local sellers in some of the key markets that you've been working in as a way to offset the impact of FX on the dollar based sellers that you have, cross-border transactions?

And then to the extent that you are exploring same-day delivery here in New York around the holiday season, realize it's way too early to say anything specifically about how -- what kind of impact that's having, but curious as to the response from sellers to the rollout of that?

What sign-up has been like?

And what the interest level has been like from sellers outside of New York City?

Heath, I'm going to jump in.

This is Chad speaking, obviously.

The local marketplaces, as I mentioned in my remarks, one of the things that we've learned from talking to our sellers - and our buyers, I mean, in the UK and Australia for example, and again, the UK is the strongest market, is that those buyers tend to prefer buying local goods in those markets.

So as I mentioned, we've been running tests in search to feature local merchandise, domestic merchandise in those markets more prominently to really meet those buyer needs and expectations.

We're just testing that right now, but that's one way that, through the search experience which drives a lot of traffic and transactions, to drive that local marketplace.

On ETSAP, it's very much a test at this point.

What we noticed in the last holiday season was a lot of local activity here in New York City.

So as the days go on and it gets closer to Christmas or Hanukkah, we noticed that buyers in the New York area were buying from local sellers even through our normal system.

We're just piloting that out.

It's one of the many tests that I think -- what we're really focused on there is, it's more about buying local and promoting that local community.

I think it's important to note to those of you on the call who live in the New York area, on Wall Street, that we deliver to you.

So, please take advantage of it.

And Heath, I just will add a couple of quantitative points to Chad's comments.

With regard to international seller, as we talked in the past about the different buckets of GMS, US seller to international buyer being the biggest bucket of international GMS, but international seller to US buyer continuing to grow nicely, and of course as we mentioned on the call, local international seller to international buyer is doing very well.

We continue to see great health in our international sellers.

And a lot of it has to do with the kinds of efforts that we're making, Chad mentioned on the product side, and also continued grassroots effort to attract sellers to the platform.

On the question of ETSAP.

I think it is important to note, it is a pilot.

The sellers who are in it were hand-picked, so we're not expecting sellers it to sign up for the program.

Because it's a pilot, it's a small group of sellers who are participating.

But still, a lot of nice inventory, and I encourage you to go to the site and look at what we're offering in ETSAP right now, on the platform.

Great.

Thank you.

Brian Nowak, Morgan Stanley

The first one, on the lifetime value and way we're evaluating the ad spend, can you just help us better understand how you're quantifying in the global attribution model, the positive ROI, and what's the best way, externally, for us to get an understanding for the ROI on your ad spend.

Then the second one, I would just be curious.

Any impact all since Amazon launched Handmade, and how you think about the seller overlap, and any impact from the sellers moving onto Amazon at all so far?

Thanks.

We will take the second one, first.

The question about Amazon Handmade.

As I've said before in other venues, we know our sellers extremely, extremely well.

We have been working with them for a decade, and we believe that Etsy is the best platform for them to be creative entrepreneurs and build businesses on their own terms.

We also know and have talked about before on these calls that half of our sellers sell in multiple venues, and that Etsy is the primary source of income for those sellers who sell in multiple venues.

So we really, based on what we're seeing and our conversations with our sellers, we have no reason to believe that any competitors are having an impact on our seller business right now.

Brian, to follow up on your marketing question.

I'm really glad you asked this question.

I think there's been some analysis done out there that doesn't capture our marketing spend accurately, and so this gives us a chance to talk openly about it.

As we noted in our prepared comments, year-over-year growth in marketing spend during the first three quarters of the year has been impacted by business changes and reorg that were put in place in September, 2014.

So, it's actually not comparable.

As we noted in this particular quarter, it was up 74% year-over-year on a comparable basis, 57% in the second quarter on a comparable basis, when we reported 77%.

And in the first quarter, it was up 45% on a comparable basis when we reported 63% growth.

So making a quarterly connection between our marketing spend and its efficiency is disconnected from our global attribution model because our LTV is a two-year LTV.

So, when we're looking at a positive ROI, we're looking at a dollar in and dollar out over a two-year basis.

For example when you look at quarterly marketing spend, we don't take into account any seasonal spend, and you'll be able to see this when you look at the fourth quarter, which is our biggest quarter, but from a year-over-year growth rate perspective, starts to taper down.

Another reason that marketing spend divided by active buyer is not so accurate for us is because it includes a number of expenses that go beyond direct new buyer acquisition costs.

We're only paying for -- [speak in quotes] -- for a small minority of those active buyers.

It's another reason why the massive marketing spend over a net ad number doesn't work.

We're not spending money to acquire each of our active buyers.

And when you look at our marketing expense, at a growth level, it contains many other things.

PR, seller development, brand design, brand research, and not just our digital marketing dollars.

And the last thing that is important to keep in mind is that 90% of our GMS comes from organic sources.

So only 10% of it is a result of our paid marketing dollars.

And paid GMS, as we pointed out, has grown nearly 2.5 times our reported GMS growth rate in the first three quarters of the year, and has -- that paid GMS has made an outsized contribution to our new buyer growth.

That's why we feel confident, when we look on a quarterly basis, that our digital marketing dollars that are being put in place are performing well.

And the second layer to that of course is the positive ROI model.

And we've committed to remaining ROI positive at the aggregate corporate level.

Great.

Thank you.

One more, just on the manufacturing marketplace Chad talked about.

How should we think about cadence of go to market and pushing that out fuller?

Is it a 2016 event, or is it something you are going to look to do in the fourth quarter?

It's important to note that this is a slow rollout.

We are still working out the business model for it.

If you recall, for example, we launched Wholesale a little over a year ago, and Wholesale is still very much a contained product for us that we're still fine-tuning.

What I would say is not to think of it, even from a 2016 perspective, as a significant contributor.

Really think of it for us, it's just the beginning.

It's just the first inning of Etsy manufacturing.

What we think is a great long-term opportunity for Etsy.

Great.

Thanks.

Thanks, Brian.

James Cakmak, Monness, Crespi, Hardt.

I appreciate all the color you have provided on the marketing side.

Just so I understand correctly, if I look at just a snapshot here for the third quarter.

You spend about $10 million on search and product ads, and about 10% of your traffic is paid.

So is the math looking at $10 million to acquire about 100,000 new buyers this quarter, is that the way to think about the customer acquisition cost?

Then Chad, on the organic growth in buyers, the search is one of the things that you guys have really talked about, and I want to understand, what exactly is being done on the back-end to work with that, to create a structured dataset which can potentially even further improve your organic traffic?

So I will take the marketing question, first, then Chad can answer your search question.

James, just to be clear, we are talking about 10% of our GMS, our paid GMS, comes from our marketing spend.

So we disclosed that we spent about $10 million in the quarter between GPLA, SEM, and affiliate marketing, and if you take out 10% of our GMS, that would be -- it's not directly correlated in the quarter because of our two-year LTV, but if you insisted on doing a quarterly comparison, that would be your best comparison as to what that $10 million generated.

Great.

And then on the search side, I'll talk about it in two different ways.

We obviously have -- the question was about organic search.

We continue to make investments in SEO.

Over the past quarter, we have launched a new category browsing system on Etsy that you'll see if you look at the homepage.

We believe that this is more SEO friendly and more search engine friendly, but really early days of that.

On the on-site search, we talked a bit about this in the last quarter, but we've been live now for a few months with exploratory search, which is really leveraging all the investments that we've made in big data and data analysis to create, out of all of the unstructured data on Etsy, over 30 million listings, a very structured shopping experience that is useful and satisfying to a typical commerce buyer.

So we continue to invest on both sides of the organic search, via outside search engines but also our search engine on Etsy.

Okay.

Thank you and just one follow-up.

How important is it for you to maintain growth in active buyers that outpaces the growth of active sellers?

Is it going to be more about making sure that flywheel is going?

Because we have seen the growth rates begin to increasingly converge, or is that more about gaining more and more wallet share from your existing base?

Thank you.

Sure, James.

First thing I'd say is, we don't actively connect active seller growth with active buyer growth.

So, it's distinct initiatives for us.

On the active seller side, what we've said consistently is we don't believe we have an inventory problem.

The opportunity we have is to connect our amazing 1.5 million active sellers with more and more buyers, over time.

And so, when we think about active seller growth, that active seller growth that you see is largely organic.

We don't have plans in place or significant initiatives in place to acquire sellers proactively.

So we get really excited when we see our active seller growth, because it is a testament to the power of the platform.

On the active buyer side, we are certainly, through our paid channels and our organic channels, whether it's engaging our existing buyers or acquiring new ones.

We're certainly focused on proactively focused on growing active buyers.

When we look at the current growth rate in this quarter, what I'd like to point out, with regard to active buyer growth, is two things.

The first is that, in this quarter we anniversary ALM, the acquisition of A Little Market, which represents about 2 percentage points to 3 percentage points of active buyer growth.

And the second thing I'd like to point out, also in the international realm, is to remember that our US seller to international buyer GMS, which is our biggest bucket of international GMS.

That GMS declined 12% year on year.

When compared to 6% decline in the second quarter, flat in the first quarter, and then up double digits in both the fourth quarter and third quarters of last year.

So what that means is that our international buyer activity has been contracting in the quarter, and that impacts the active buyer growth.

The active buyer represents a buyer who has purchased from us in the last 12 months.

Thank you.

(Operator Instructions)

Gil Luria, Wedbush Securities

Thank you.

You mentioned your seller growth.

It looks like the seller net adds in the quarter were the lowest you've reported, and were significantly down year-over-year.

What do you ascribe that to?

Gil, as we've said before, we don't really think about it in terms of net adds.

When we look at active seller growth, it's active seller growth over the course of a 12 month period, and from an active seller perspective, we're not looking to add on a quarterly basis.

So from our perspective, we look our active seller growth and we're really excited about it.

It represents largely organic growth, and points to the power of our platform.

Got it.

And then you mentioned the shift to integrating PayPal into direct checkout.

It sounds like you're no longer -- that now direct checkout is mandatory for any new store.

Could you remind us when you started that, and when that anniversaries next year?

We launched it on October 27.

So, it's actually a fourth quarter launch, not a third quarter launch.

So we will anniversary on October 27 of 2016.

Got it.

Thank you.

Thank you.

Thomas Forte, Brean Capital

The first one I had was on the Etsy manufacturing marketplace.

What gives you confidence you will be able to roll out this initiative and basically protect your brand?

Basically meaning, forge agreements with manufacturers that are true to the way that Etsy does business?

And then second, just so I'm clear, you sort of answered this question, but when did you begin experiencing the pressure on the international FX exchange rates on buyer behavior, so we can know when you are going to anniversary that next year?

Thanks.

I will take the first one, and Kristina will take the second one.

On Etsy manufacturing, I think it's really important to understand that the network that we're building is very, as I mentioned, we're reimagining manufacturing and it's more human, it's smaller scale, and what we're seeing in the early days of the launch of our marketplace -- it's been out a few weeks, now -- is that the range of participants are, as I said in my earlier remarks, range from Etsy sellers, we've seen a lot of Etsy sellers who are offering their excess capacity to other sellers, to very small operations, like I mentioned the four person 3-D operation, up to family-owned factories.

So in terms of the brand, we think that we're really proving this re-imagination of commerce via the product, and showcasing manufacturers in a way that is very consistent with the brand, very transparent, and very values aligned.

We think over time, we are just proving it with the product and the participants in the marketplace.

We're being very selective and very careful in who we allow.

Up until now, we've had about 600 manufacturers apply in the marketplace, to give you a sense of scale at this point.

Tom to answer your FX question, I think our international buyer to US seller activity mirrored global currency.

So if you were to look at the Euro, for example, which is the currency we're most exposed to -- we are also exposed to the Australian dollar.

The euro has started to very gradually slide in the fourth quarter and the beginning of the first quarter.

But it really took a dive in the second half of March of this year.

If you go back and look at euro to US dollar charts, you'll see what I mean.

And so from our perspective, we start to anniversary this in a significant way in the second half of March of 2016.

Great.

Thank you very much.

You bet.

And ladies and gentlemen, this does conclude the program for today.

Thank you for participating.

You may all disconnect.

Everyone, have a great day.