ETSY Inc (ETSY) 2016 Q2 法說會逐字稿

Operator^ Good day, ladies and gentlemen, and welcome to your Etsy Second Quarter Financial Results Conference Call. (Operator instructions.) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Jennifer Beugelmans. Ma'am, you may begin.

Thank you, Esther, and good afternoon, and welcome to Etsy's second 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 and results of operations, business strategy, outlook, mission, products, 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 May 5, 2016. 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 a replay via phone, you can find that information in the press release, as well.

With that, I'll turn the call over to Chad. Chad?

Thanks, Jennifer, and good afternoon to everyone joining. We're excited to talk with you today about our second quarter results, which included 39% revenue growth year-over-year, 23% year-over-year GMS growth, which was an acceleration compared with the first quarter, and 246% adjusted EBITDA growth that resulted in a 16.5% adjusted EBITDA margin.

Our vibrant community expanded to almost 1.7 million active sellers and 26.1 million active buyers. Based on our strong performance to date and our expectations for the remainder of the year, we are raising our 2016 guidance. Kristina will provide you with more color on our financial performance and updated outlook after my remarks.

Before providing some detail on our progress during the second quarter, I want to take a moment to reflect on Etsy's evolution over the past 11 years and our long-term plans for the future. Etsy began as on online marketplace that connected thoughtful consumers with creative entrepreneurs around the world. Today, our business is so much more than our marketplace. Over the past five years, we expanded Etsy's business from a simple marketplace to include a seller services platform that helps our community of creative entrepreneurs making money by following their passion. We now offer a robust suite of high-impact seller services, tools, and other features that address our sellers' pain point.

In the second quarter of 2016, [four] (corrected by company after the call) seller services represented 55% of Etsy's revenue, and we believe we have exciting opportunities ahead to introduce additional services to support Etsy sellers in new ways. Etsy buyers tell us that they come to Etsy to find products that they can't find anywhere else. In a world where most retailers are competing to provide commodity goods at the lowest price with the fastest shipping, Etsy's unique inventory and our vision for a more human, personal, and global approach to commerce helps us and our sellers stand apart.

Aside from the range and uniqueness of the items from our sellers, we've made it easy for Etsy sellers and Etsy buyers to seamlessly connect online and offline on any device in 10 languages around the world. We're able to do this because Etsy is fundamentally a technology company that can innovate quickly and deliver products and services that work for Etsy sellers and Etsy buyers on a global scale.

Looking ahead, we believe we've built a strong foundation, one that will allow us to tap into new opportunities, further scale our business, reach new audiences, and move closer to realizing our mission to re-imagine commerce. To do this, we'll continue to execute our strategies to grow our marketplaces and seller services platform.

As we work on driving growth in our marketplaces, one of our most important initiatives is Etsy Every Day, our focus on making Etsy a daily habit. Over the past 18 months, you've heard me talk about mobile, and how mobile is integrated into everything we do.

Over the past several months, we launched several products that made it easier for buyers to come to Etsy, sign in, search, connect, and transact across all devices. We continue to optimize the buyer experience on etsy.com across mobile and desktop, and, in doing so, we've been able to drive conversion rate gains across the board over the past year.

We believe that this work has helped us achieve sustained active buyer growth and will remain an important focus for Etsy. We also believe however, that increased engagement and frequency can become long-term growth drivers. For example, better connecting our existing base of active buyers to the more than 35 million items for sale on etsy.com, research enhancements, we're successfully encouraging the 53% of Etsy buyers who made just one purchase in 2015 to come back to Etsy more frequently are two areas of opportunity.

In recent months we've taken a close look at our brand definition and positioning, and we've been exploring ways to raise awareness of Etsy as a go-to shopping destination. From special occasions to unique items that express your style and individuality in your daily life, we want to show that there's something for everyone, every day, on Etsy. We plan to bring this point of view to life in our 2016 Holiday campaign, which we believe will be our strongest yet. We're excited to share more details in the coming months.

Turning to our international strategy, we believe we've just scratched the service when it comes to realizing our global potential. Our ability to scale internationally is driven in part by our powerful technology platform. One example of this is our innovative use of machine translation, which helps localize the Etsy experience by making it easier for Etsy sellers and Etsy buyers to transact when they don't share the same native language. With this advanced technology, we support Etsy sellers and Etsy buyers from different parts of the world who would normally be separated by language as they message each other, search, and browse listings and reviews. Machine translating listings in particular dramatically increases the items available to non-English speakers.

In the second quarter we applied this technology to promoted listing searches. We used proprietary data and our [own] machine learning techniques to optimize and fine-tune the quality of translations across our site on an ongoing basis to help enhance the overall experience for our global community.

We also continue to foster local communities and marketplaces in five key geographies - Australia, Canada, France, Germany, and the UK. Over the long-term, our goal is to grow international to represent 50% of our GMS. Our current priorities are to create more seamless connections between local Etsy sellers and Etsy buyers by tailoring content, supporting local events, elevating our brand awareness, and listening and responding to the unique needs of our sellers in their respective markets.

During the second quarter, we continued to organize Etsy seller meetups and educational events, hosted our annual Craft Party in dozens of cities around the world, and we expanded Apple Pay to Canada and Australia. We also launched localized search in France and Germany, expanding this from the UK and Australia. Localized search makes listings and local Etsy sellers more prominent to Etsy buyers within their respective country. During the quarter, we saw GMS growth between French buyers and French sellers, and between German buyers and German sellers, accelerate significantly year-over-year and sequentially, and we believe that local search encouraged this activity.

The UK continues to serve as a powerful example of our emerging success in fostering local communities in our key international markets. For the first time ever, more than half of UK GMS was from UK buyers purchasing from UK sellers. In addition, the growth rate of GMS between UK sellers and buyers accelerated in the second quarter to more than 75% year-over-year and continues to grow significantly faster than GMS between UK buyers and sellers in other countries. We believe all of this hard work has had a particularly positive impact on GMS growth between international buyers and sellers in the same country, and we've seen year-over-year GMS growth in this category accelerate for three consecutive quarters.

Let's turn now to seller services, which delivered 58% revenue growth in the second quarter. As we've discussed before, our strategy for growth in seller services involves expanding the geographic reach and functionality of existing services and launching new ones that help our sellers address their most critical business pain point.

In the second quarter, we made enhancement to promoted listings and shipping labels, which we believe will make our sellers more successful. We added new inventory to promoted listings on mobile web and desktop to create more opportunities for sellers to advertise their items. And we also added FedEx as our newest shipping label carrier, so that US sellers have another option for purchasing and printing labels directly from Etsy.

Early in the second quarter, and as we discussed in our first quarter call, we launched a new paid seller service called Pattern by Etsy. Pattern enabled Etsy sellers to create their own custom website in just minutes, leveraging all the work that they've already put into their Etsy shop. Pattern has the same marketplace business model as etsy.com, and it's supported by our Direct Checkout and shipping label services.

As a reminder, we don't expect any material contribution from Pattern this year, but we're pleased with the response it's received from our sellers. Early data suggest a healthy rate of conversion following the 30-day free trial period. Since launch, we've further optimized Pattern, and we've made a series of updates to improve its functionality. Some of the updates include expanded search capabilities, new design templates, the ability to preview mobile sites, improved SEO across all pages, and Pinterest verification. In addition to these new services and features, I also want to emphasize our commitment to service as a reliable and trusted platform for our sellers.

Last month, an issue with our third-party processor, Worldpay, led to delays in the processing of payments for purchases made on Etsy using Direct Checkout. Although Etsy engineered a work-around so that transactions could be processed and the issue has now been resolved, we still recognize the frustration and the inconvenience that it caused Etsy sellers and buyers.

We're working to make the platform even stronger, adding redundancy and resiliency, and we're 100% committed to making sure a checkout on Etsy remains reliable, convenient, and secure.

We believe we have a long runway for growth of our services platform in the coming years, and we'll continue to look for opportunities to introduce more tools, features, and paid services that support creative entrepreneurs wherever they chose to pursue commerce.

In addition, we also want to support Etsy sellers as they grow and scale their business by bringing new constituents into what we call the Etsy economy. Two great examples are Etsy Wholesale, which offer a new sales channel for Etsy sellers, and Etsy Manufacturing, which enables Etsy sellers to find partners so they can scale their production responsibly.

We're excited about our upcoming open call event, which is part of our wholesale program. Open call gives a group of Etsy sellers the opportunity to meet, interact, and showcase their products to our retail partners and dozens of small boutique owners. The event will be connecting Etsy sellers with our newest retail partners, Cooper Hewitt, Paper Source, and Giggle, as well as existing partners Whole Foods and Macy's Herald Square.

In closing, as I look across the business, we're excited about the progress we've made over the past 11 years, but we're even more excited about the significant opportunities that lie ahead. We have a strong technology platform and a robust product roadmap focused on optimizing our existing marketplaces and services, making Etsy accessible to an even wider group of people, increase engagements, and creating new channels for growth. We also have a world-class team that is incredibly excited about building the next chapter for Etsy.

With that, I'll turn the call over to Kristina to walk you through our financial results and our revised guidance. Kristina?

Thanks, Chad, and hello to everyone. 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 second quarter of 2016, the Etsy marketplace generated $670 million in GMS, up 22.6%, driven by growth in active sellers and active buyers. At the end of the second quarter, Etsy had almost 1.7 million active sellers, up about 12%. As a reminder, an active seller is one who has incurred at least one charge from us in the past 12 months.

At the end of the second quarter, Etsy had 26.1 million active buyers, up slightly over 20%. Also as a reminder, active buyers are those who have bought on Etsy at least once in the past 12 months.

This quarter, roughly 64% of our visits came to us from a mobile device, which is up 400 basis points from last year, continuing to outpace the rate of growth on desktop. Slightly more than 47% of our GMS came from a mobile device, also up roughly 400 basis points.

During the second quarter, we saw conversion rates increase on desktop, mobile web, and mobile app. In addition, desktop conversion rates expanded at a pace similar to overall mobile conversion rates, and therefore the gap between mobile visits and mobile GMS remain constant when compared with last year.

As a reminder, we measure the change in the mobile gap by comparing the yearly change in percent mobile GMS with the yearly change in percent mobile visits. We narrow the gap when mobile GMS grows at a faster pace than mobile visits. Overall, we're pleased with the progress we've made in mobile. Year-over-year mobile GMS grew 34% and accelerated compared to last quarter.

Etsy's international business continued to expand, with international revenue growing roughly 54% in the second quarter, and we achieved healthy marketplace growth in each of our key focus markets. Percent international GMS expanded to 30.7%, which was up 50 basis points compared with last year and up 40 basis points compared to the first quarter of this year.

This is the first year-over-year improvement we've seen in this metric since 2014. 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. This includes both cross-border transactions and transactions where both the buyer and the seller are located outside of the US.

The improved international performance this quarter was largely driven by three factors. First, excluding our French marketplace, ALM, three out of four international GMS categories were growing robustly. We have seen continued GMS growth between US buyers and international sellers, international buyers and sellers in the same country, and international buyers and sellers in different countries. These three international categories have each grown faster than overall GMS.

Second, although GMS between US sellers and international buyers was down 8% this quarter, this metrics has improved for two consecutive quarters. We continue to believe that this year-over-year decline is indicative of the indirect impact of fluctuating global currency exchange rates on international buyer behavior, although the exact impact is difficult to estimate.

Finally, third, the pace of GMS growth between international buyers and sellers in the same country has continued to accelerate and has grown 67% year-over-year. In fact, GMS growth between international buyers and sellers in the same country accelerated for the third consecutive quarter. This has been the fastest-growing category of international GMS for the past few quarters, to the point that it is similar as a percentage of total GMS to cross-border GMS between US sellers and international buyers, and GMS between international buyers and sellers in different countries.

While still the smallest category of international GMS, the continued acceleration in its growth demonstrates the progress we're making on our strategy to build local marketplaces globally.

Currency exchange rates continue to have a direct, albeit waning, impact on Etsy's overall GMS growth rate and percent international GMS. Excluding the direct impact of currency translation of GMS from non-US dollar denominated goods, GMS growth would have been 0.5 percentage points higher, or slightly more than 23% this quarter.

This currency drag is an improvement compared to both last year and last quarter. Although we are encouraged by the small improvement in the percent international GMS this quarter, given currency and other geopolitical events, it's still too early to draw any conclusions about whether this improvement is sustainable.

Finally, with regard to currency in our international business, I want to touch on Brexit. Like most other companies with global businesses, we are watching this situation closely. While it's still very early, in the second quarter we didn't see an impact specifically attributed to Brexit. We will continue to monitor developments in the UK and Greater Europe, and stay focused on executing our strategy to build local marketplaces globally, which we believe may help mitigate the impact of currency fluctuations and other macro developments in the future.

Turning to revenue, during the second quarter, total revenue was $85.3 million, up 39%, driven by both growth in seller services revenue and accelerated growth in marketplace revenue. Marketplace revenue grew 23% primarily due to growth in transaction fee revenue and, to a lesser extent, growth in listing fee revenue.

Seller services revenue was up 58% and was driven primarily by revenue growth in Direct Checkout, which continued to benefit from our integration of PayPal. Seller services revenue also benefited from the growth in promoted listings and shipping labels, which each grew faster than marketplace revenue.

Our new seller service, Pattern, also contributed to our revenue growth this quarter. But, as a reminder, we only expect a modest contribution from this service over the next three years.

Gross profit for the second quarter was $56.3 million, up 43%, and gross margin was 66%, up 160 basis points. Once again, gross profit grew faster than revenue. This was due to the leverage we achieved in our technology infrastructure and employee-related costs.

Turning now to operating expenses, Etsy's total second quarter operating expenses were $51.6 million, up approximately 19%. Total operating expenses as a percent of revenue declined to about 60% in the second quarter compared with approximately 71% last year. Operating expenses declined as a percent of revenue due primarily to leverage in digital marketing expenses and, to a lesser extent, employee-related costs.

Marketing expenses totaled $17.2 million, up nearly 11%, representing about 20% of total revenue versus roughly 25% last year and roughly 19% in the last quarter. The increase in marketing expense was driven by higher employee-related costs. For comparison purposes, it's important to remember that marketing expenses grew approximately 77% in the second quarter of last year. In the second half of this year, we expect growth in marketing expenses to accelerate compared with the first half of this year as we ramp up our most significant annual Holiday campaigns.

Digital marketing expenses in the second quarter declined roughly 7% year-over-year, but continued to generate strong returns for Etsy and a positive ROI based on our global attribution model. Similar to the last few quarters, this resulted in a paid GMS growth rate that was close to triple our reported GMS growth rate.

Product development expenses totaled $11.8 million, up about 18%, representing nearly 14% of total revenue versus about 16% last year, and about 15% last quarter. The increase in product development expenses was driven by higher employee-related costs as we continued to grow product and engineering staff.

G&A expenses totaled $22.5 million, up about 28%, representing roughly 26% of total revenue versus roughly 29% last year and roughly 23% last quarter. The increase in G&A expenses was driven by higher employee-related costs, overhead related to new office locations, including depreciation related to our new Brooklyn headquarters, and expenses associated with Sarbanes-Oxley compliance.

Headcount at the end of the quarter grew to 921 people compared with 852 as of March 31, 2016, which was an accelerated rate of growth when compared with the first quarter. In the second half of 2016, we expect the pace of hiring to continue at a pace similar to the first half of 2016.

Second quarter net loss was $7.3 million compared with a net loss of $6.4 million last year. Etsy's net loss included interest expense associated with the build-to-suit lease accounting related to our new Brooklyn headquarters, a $6.4 million foreign exchange loss, and an income tax provision of $4.3 million. All three were primarily non-cash.

Non-GAAP adjusted EBITDA was $14 million, up roughly 246%. This resulted in an adjusted EBITDA margin of 16.5%, up from 6.6% in the second quarter of 2015. This increase was driven by high-margin incremental revenue growth and, to a lesser extent, leverage in digital marketing expenses and employee-related costs.

During the quarter we recorded positive cash flow from operations of $17.2 million. This compares with $4.7 million in cash from operations generated last year. The year-over-year increase in net cash provided by operating activities for the quarter was mainly due to revenue growth and leverage in operating expenses.

To date we've invested $32 million on the buildout of our new Brooklyn headquarters, and, as we've said before, we intend to invest up to $50 million for the buildout by the end of 2016. As of June 30, 2016, we had cash, marketable securities, and short-term investments totaling approximately $278 million.

To wrap it up, we had a strong first half of 2016, and we're raising our full-year guidance for GMS revenue and adjusted EBITDA margin. We're also reiterating our three-year guidance.

For GMS, we're raising our 2016 growth outlook to a range at 15% to 17% growth from the midpoint of our original 13% to 17% guidance range. At this time, we don't expect the payment processing issues early in the third quarter to have a material financial impact on our future results, and our updated guidance reflects this.

For revenue growth, we are raising our 2016 outlook to a range of 25% to 28%, up from the high end of a 20% to 25% guidance range previously. We continue to expect 2016 gross margin in the 64% to 65% range. However, in 2016, we now expect to gain leverage in total operating expenses for the full year.

We continue to expect marketing expense as a percent of revenue to decline, and G&A expense to increase due to overhead associated with our new Brooklyn headquarters. We continue to expect to recognize, on average, $3 million of additional depreciation and interest expense per quarter for the duration of our lease for our new Brooklyn headquarters.

Finally, we are increasing our 2016 adjusted EBITDA margin guidance to a range of 13% to 14% from a range of 10% to 11% previously based on our higher expectations for revenue growth and operating leverage. This means that, at the midpoint of our updated revenue guidance, adjusted EBITDA will grow about two times revenue. As a reminder, historically, adjusted EBITDA margin in the fourth quarter is seasonally higher than adjusted EBITDA margin in the third quarter.

And with that, I'd like to turn the call back over to the operator, Esther, to open up for Q&A. Thanks.

Thank you. (Operator instructions.) Heath Terry, Goldman Sachs.

Great, thanks. Kristina, you touched on the impact that in-country sellers had on the quarter. Can you give us a sense of sort of where you are in terms of building out that network? Are we second inning, third inning in terms of the impact that we could reasonably expect that to have on the business?

And then, when you're thinking about sort of guidance for this year, clearly given the acceleration that we saw in Q2, the guidance that you've provided implies a pretty significant deceleration. Is there anything beyond just sort of pragmatism behind that that we should be thinking about in terms of maybe putting that into context?

Sure, Heath. So, just a clarification on your first question, when you said in-seller, you meant GMS between local buyers and sellers, like UK seller to UK buyer?

Exactly, the initiative that you guys have had in the five countries.

Yes. So, in the UK, as we mentioned, we're above -- 50% of our GMS generated in the UK is between local buyers and sellers, and we're super-excited about that. But, when we look at our other key focus countries, Australia, Canada, France and Germany, none are close to that 50%, so we're still in early days in other countries. I would say Australia is probably the closest, but it's where the UK was a couple of years ago. So, I wouldn't want to walk away with the assumption that we have this [pipeline] rolling in over the next couple of months, but I think what it points to is a long-term opportunity to drive growth in [this] category.

With regard to guidance, I think you're right. On the revenue front, it points to a deceleration in the second half from the perspective of revenue growth. I think there's a couple of things to note. First of all, we're super-excited about 40% revenue growth in the first half of this year, and we don't want to take away from that great achievement.

But, historically, as you know, Heath, we've seen deceleration in revenue growth as we move into the second half of the year. Our guidance does not extrapolate the first half into the second half, and that's because -- just as a reminder, what supports our revenue growth guidance assumption. And what you've seen in the first half [doesn't move] us to increase our assumption in the second half. And what are those things? Remember, underlying our growth is the assumption that the piece of the narrowing of the mobile gap will continue as it had in 2015.

Well, as you just saw in the most recent quarter, we were able to sustain that gap. We didn't narrow it. And so, there's reason to be overly ambitious about that in the second half. What we've also said is underlying our guidance is the expectation that percent international GMS in 2016 remains flat with 2015, and we're really excited about what we saw in the second quarter, the first quarter since 2014 where we actually saw an expansion in that.

But, maybe I'm pragmatic, but one quarter does not a trend make. And given what we've seen in global currency fluctuations just in the last few months, as well as geopolitical events, we don't think there's any reason to deviate from our guidance, which is flat (inaudible) international GMS year-over-year.

And finally, our guidance -- underling our revenue guidance is continued penetration of our existing seller services and modest contribution from our new seller service. When you think about our existing seller services, we talked about very positive developments in promoted listings and shipping labels that drove growth in the second quarter, and there's no reason to expect that they won't drive growth in the second half.

But, I would remind you that we start to anniversary the integration of PayPal at the end of October of this year, so that's something to consider. And remember that Direct Checkout is our largest contributor to seller services revenue just in terms of size. And I would also add then, with regard to our new seller service, we're very excited (inaudible). We're very excited in the trends that we're seeing in terms of conversion from free trial and just the general up (inaudible) of our sellers, but that doesn't cause us to change our expectation that the contribution will still be modest relative to the rest of seller services.

Got you. Thanks, Kristina, that's really helpful.

Andrew Bruckner, RBC Capital.

Thank you, and great quarter. I'm wondering if you can talk a little bit about what you're seeing on the mobile front in terms of mobile visits and mobile GMS, the gap closing there, and if [it's] any initiatives that you've done, or if it's just kind of behavior on the whole? Thank you.

Yes. Thanks, Andrew, for the question. So, I think it's really important to understand that, when you're narrowing that gap with mobile visits and GMS, it's really the accumulation of a lot of different types of work. We talked about the work that we've done on sign-in and search and checkout and other areas of the business. So, it's really -- and I mentioned that we've driven conversion increases across the board over the past year.

So, I think our mobile success has largely been due to many of those initiatives on the core buyer experience really resulting in a great mobile experience for buyers and for sellers. And Kristina, did you have something to add there on the numbers?

I just wanted to point out that what we've highlighted since the beginning with regard to narrowing the gap is it won't be a straight line up and to the right. It's a long-term strategy, and we feel like we're still in the early innings of narrowing that gap. Indeed, we've only narrowed it a little bit over the past few quarters, so it's really a long game as opposed to something we expect to see every single quarter in narrowing of that gap.

Understood, and thank you.

Mark Kelley, Citi.

Hi, thanks for taking the question. I guess now that you've added FedEx as an option for shipping labels, can you talk about how you expect that to impact the growth for that segment in isolation? Maybe there's something you can draw on from when you added the seller services categories in the past, like adding PayPal and Direct Checkout.

And then, second, the Worldpay issues, I know is not impacting much, if anything, but is there a way for us to think about what percent of transactions use that service? Thanks.

Sure. On the FedEx point, we just rolled out FedEx this quarter. Really, our goal with sellers is to provide -- and buyers to provide as much choice as possible, and that's only in the US. So, we don't expect any significant contribution from FedEx.

And I would just add to that, just to underscore it, we don't expect FedEx to have anywhere near the impact of an integration like -- something like PayPal, for example. FedEx is just -- it's a great partner, but is one of many shipping label services that our sellers could use.

And the second question is about?

Transactions.

Yes. So, in Etsy, we run transactions through PayPal and through Direct Checkout, and PayPal is embedded in Direct Checkout. So, our credit card transactions run through Worldpay, and that's why we had the issues that we described with the credit card transaction.

Great, thanks.

Brian Nowak, Morgan Stanley.

Hi, this is Michael Constantino on for Brian. Chad, can you please expand a little bit more on the improved conversion rates you're seeing on both desktop and mobile in the quarter? Specifically, what change did you make to the site, and did you make these changes globally? And how should we think about that in terms of impacting buyer growth and GMS per buyer, looking ahead?

Sure. So, as I noted in my remarks, we've seen conversion increases across the board on all platforms, desktop, mobile web, and mobile apps. And our success there is really just very focused product development and improving the core experience, everything from sign-in to browse to search. We talked about exploratory search a couple of quarters ago, but that's still going quite well, and finally with Checkout.

So, the mobile experience, as well as the desktop and on the mobile side, the app and mobile web, have all improved, and we continue to improve that day after day after day. So, it's really -- in baseball terms, it's really about having a lot of base hits consistently, and that's what we've been doing over the past year.

Thanks.

Tom Forte, Maxim Group.

Great, thanks for taking my questions, and great quarter. So, when you talk about PayPal being a tough comparison, and when you talk about adding FedEx to your shipping options, is what make PayPal a tough comparison that you're seeing both increased adoption and you have better economics on PayPal versus some of your other payment options? And then, is it possible then to think that, if you could get higher conversion rates for FedEx and higher price point, that that also could then, over time, be beneficial to your shipping seller services?

So, I think it'd be helpful, Tom, just to take a step back before we dive a little deeper and just remind everybody that just the relative size of these revenue bucket.

So, remember that Direct Checkout is the largest of the seller services, promoted listings is a solid number two, and shipping labels is a distant three. And shipping labels, recall that it's booked net of the costs associated with providing the shipping labels. Typically we receive volume discounts from our partners, and we pass nearly 100% of those savings on to our sellers.

So, shipping labels is a welcome seller service. It adds great value to our sellers, saves her a ton of time and money. It also is 100% incremental margin, which as a CFO I love those businesses. But, from a contribution perspective, these are -- Direct Checkout business is just significantly larger than shipping labels.

And then one other quick follow-up, then. So, you've talked historically about the percent of listings that are dollar-denominated as a way to gauge the effective currency changes. Can you update that number?

It hasn't changed materially from what we've discussed previously, which is a high single-digit, low-low-low-low double-digit percent of our GMS is in non-US dollar denominated good. In other words, the majority of the transactions on our platform are US dollar-denominated goods. Even if the seller is located in another country, she chooses to list her items in US dollar term for the most part.

Thank you.

James Cakmak, Monness Crespi Hardt.

Hi, thanks. The first one, can you just delve a little bit deeper into promoted listings, how that's trending? I know that you guys are adding more inventory there, and [that] there's other things that you can do on that front. And then, secondly, since Amazon Handmade has come on board, obviously you guys are growing solidly through that. Can you just talk about the growth in selection and improvements in collection that you have seen even with greater competition in this space? Thanks a lot.

Sure. So, I'll chime in on promoted listings, and then I'll hand it over to Chad to talk about Handmade.

So, promoted listings, I think it's important to note that, even though we did expand inventory in the quarter, that was really a secondary driver of promoted listings growth. What's really growing promoted listings growth is improvements in click-through rate, and that points to some of the improvements that Chad talked about in his remarks in order to make a promoted listing more relevant to a buyer search. So, we're very excited about those improvements in promoted listings. And Handmade, Chad?

Yes. In Amazon Handmade, we haven't seen any impact to date. Our marketplace, we have 35 million unique items in the marketplace, so we're really -- we feel great about the scale of our inventory. And also, just as a reminder, our surveys have told, and we've reminded investors that more than 50% of our sellers sell on other platforms, but for that group, the multi-channel sellers, Etsy is their largest source of sales.

Thank you.

Darren Aftahi, Roth Capital Partners.

Good afternoon. Thanks for taking my questions. Can you talk more about the machine learning -- excuse me, the machine translation and the impact that's having on your cross-border transactions? And then, secondly, beyond on the cost side of the equation the second half of the year, beyond increased assumption in marketing, what other kind of big items are going to be increasing first half to second half that kind of gets you to a lower [blend] margin from where you were trending to in the first half of the year? Thanks.

Yes, thanks for the question. So, as I mentioned, Etsy's very much a technology company. And one of the things that we're doing that's really exciting, we have been doing for some time, is machine translation of listings in order to increase inventory in the marketplace.

So, to kind of give you an example of how that works, if a French seller is selling and they want to sell to English-speaking sellers, then we'll machine-translate the French listing so that it shows up in English to other buyers. And we do machine translation of messages and that sort of thing.

So, what machine translation really allows us to do is it increases the inventory for non-English speakers, but it also allows us to conduct transactions between people we normally wouldn't be able to conduct transactions. So, underneath the machine translation, we have a machine learning framework that we use to update the dictionary to use Etsy-specific terms. So, it's just one of many things that we've done. Again, I spoke earlier about the many things that we've done to drive growth, and I think that increasing the inventory through machine translation is one of the things that helps us do that. And it's very -- from a technology perspective very difficult, so we're really proud of that.

And with regard to cost and expenses in the second half, Dan, I'd point you first towards our embedded assumption that revenue decelerates [from] the second half of the year -- revenue growth excuse me, that Heath and I talked about at the beginning of this call.

Our incremental revenue is a high incremental margin. So, first half relative to second half, probably the biggest driver is the revenue assumption. I'd also point you to the number of hires. If I were to look at the biggest delta between our (inaudible) margin guidance in the second quarter versus what we've delivered, the first thing I'd point to is that our revenue growth exceeded our guidance, and again our revenue growth is (inaudible) [from this margin].

The second thing I'd say is where we'd expected a number of hires to be evenly paced throughout the quarter, most of them came in towards the end of the quarter. And so, we'll be bringing all those hires into the third quarter and fourth quarter, but what we've also have said that we expect to hire at the similar pace in the second half as we did in first half. And by the way, most of those hires will come in in the third quarter because hiring really does tend to slow down as you move into the Holiday season.

And then, finally, the last thing I would highlight, to your point, we do expect marketing expense growth to accelerate compared to the first half. Now, in the first half, marketing expense growth was roughly 19.5%, so we're going to accelerate from there as we move into the second half. So, those are the three things I'd focus on, the revenue growth rate, assumptions around employee hires and when they hit, and third, assumptions around marketing expense growth.

Great thank you.

Ladies and gentlemen, that does conclude our Q&A session. Thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.