ETSY Inc (ETSY) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined the Q3 2017 Etsy Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Vice President of Investor Relations, Ms. Jennifer Beugelmans.

Ma'am, you may begin.

Thank you, Haseeb.

Good afternoon, and welcome to Etsy's third quarter earnings conference call.

Joining me today are Josh Silverman, CEO; and Rachel Glaser, CFO.

Before we get started, just a reminder that our remarks today include forward-looking statements relating to our financial performance and results of operations, our outlook, our business strategy and mission, market size, cost-savings initiatives, guidance, mission, product roadmap and potential future growth.

Our actual results may differ materially.

Forward-looking statements involve risks and uncertainties, which are described in our press release today and in our 10-Q filed with the SEC on August 7, 2017, and subsequent reports that we file with the SEC.

Any forward-looking statements that we make on this call are based on our beliefs and our 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 press release, which you can find on the Investor Relations website.

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

Finally, for your reference, we have posted 2 presentations through our IR website today.

We have a short deck that highlights our third quarter progress and which we'll be referencing on our call today, and an updated more robust deck that shares additional detail about our story.

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

Josh?

Thanks, Jennifer, and good afternoon, everyone.

I want to update you on our progress against the strategy and operating plan we outlined last quarter and give you some highlights of our priorities heading into the holiday season.

I'll also talk about our new mission statement and perhaps most importantly, I'll give you proof points of how we're driving operational excellence and focused execution across our organization to deliver growth.

On our second quarter call in August, I described why we believe Etsy is uniquely positioned to own special.

I told you we believe we have a $155 billion market opportunity, and I laid out the 4 key initiatives that we believe we need to get right in order to win.

We also laid out near-term guidance for GMS, revenue and adjusted EBITDA, the goalposts by which to measure our progress.

First, we committed to stabilizing GMS growth.

In this quarter, as shown on Slide 3, we delivered 13.2% GMS growth, a 140 basis point acceleration compared to Q2.

We enhanced the buying and selling experience and reversed the GMS deceleration of the past few years.

We also committed to growing revenue significantly faster than GMS.

Our results in Q3 were solid here as well.

Revenue grew 21.5% year-over-year and accelerated compared with the 19.1% growth we reported in Q2.

I also shared my belief that a key to unlocking success is to focus and do fewer things better.

We took actions in Q2 to streamline our organization and ensure clarity of accountability and reduce bureaucracy.

These changes have had an immediate and powerful impact on our velocity.

We are moving faster and with far more focus and efficiency.

They've also helped us to materially improve our bottom line.

As a result, in Q3, we delivered adjusted EBITDA margins of 21.4%, our highest ever as a public company.

This focus has allowed us to significantly increase our experiment velocity since May.

And while not every experiment is a success, we're getting up to bat a lot more, and we're hitting our fair share of singles, and even some doubles.

In fact, we've launched dozens of products since May that have had a positive impact and generated incremental GMS nearly every week.

Additionally, our buyer Net Promoter Score was substantially higher at the end of the third quarter versus the second quarter, which we believe is a positive response to the recent product changes.

Let me provide some color on the progress we made in Q3, executing against our 4 key initiatives.

First, trust and reliability.

This is especially important for Etsy where we offer over 45 million unbranded items from 1.9 million unbranded sellers.

This quarter, for example, we created a new structured return policy and added a bestseller badge to some of our most popular items to provide social validation for our buyers, highlighted on Slide 4 of our deck.

Second, enhancing search and discovery.

We launched scarcity badges to alert buyers when items are only available in limited quantities.

By creating a sense of urgency, we can leverage our unique inventory and nudge buyers along the shopping journey.

We think scarcity badges are a particularly powerful tool for Etsy given that so much of our inventory is made up of unique, special items that, by nature, are scarce.

It also responds to a common buyer frustration, finding an item and favorite-ing it only to come back later and find that it has already been sold.

So scarcity badges reinforce the specialness of our marketplace, and we believe there is significant room for continued optimization with these kinds of buyer nudges.

In September, we introduced a major search improvement called the context specific search ranking, or CSR.

CSR uses query and user-level information to rank results in real time.

As a first step, we are leveraging transaction data to fuel our machine-learning technology to create more relevant search results.

To give you a better sense of the difference, Slide 5 includes some before-and-after images to illustrate how this technology can deliver a better search experience for our buyers.

We've already seen a conversion lift from this launch, and we think that this is just the beginning of what we can do with CSR.

In total, the successful search and discovery products we've launched since May are expected to deliver nearly $100 million in annualized GMS, further evidence that improving search on etsy.com can move the needle and meaningfully impact our business.

Third, building world-class marketing capabilities.

We hit some important milestones in the third quarter that contributed to GMS' growth and gave us insights that will inform our strategy to attract, engage and retain buyers.

We were excited to support 2 promotional events over the past few months.

Starting with Labor Day, when we hosted our first ever site-wide sale.

This sale would not have been possible without the tool we launched in August that empowers our sellers to run their own sales and promotions.

By bringing together our search and discovery, seller tools and editorial teams, we were able to showcase more than 7 million sale items and give buyers a reason to think of Etsy for their back-to-school, end-of-summer and other occasions when they may not have previously thought of Etsy as a shopping destination.

As shown on Slide 6, we saw a significant boost in sales for sellers who participated in the event, and even sellers who didn't participate benefited from the incremental traffic attributable to the sale.

We followed up this milestone with a 3-day Etsy-sponsored e-mail promotion designed to build retention.

This event rewarded buyers with gift cards after a qualifying purchase, and early results from this promotion are highly encouraging.

The promotion runs for 90 days, and as of last Friday, over 50% of participating buyers have returned to the site and made another purchase.

Sales and promotions are a time-tested way to drive customer engagement, retention and overall excitement.

As we've discussed with you previously, we're in the midst of migrating our e-mail system to a new CRM system.

The CRM platform supports our e-mail promotion by allowing us to send more personalized, targeted e-mails to shoppers, just like we did with our e-mail promotion.

We believe we can drive frequency, retention and new buyer growth through e-mail, and we look forward to updating you on our progress.

Our fourth strategic initiative is providing sellers with best-in-class tools and services to grow their business.

Today, we offer 2 tools to support our sellers' efforts in this area: Promoted Listings, an on-site ad product that allows sellers to pay to have their listings surface prominently in the Etsy Marketplace; and Google Shopping, which allows sellers to give Etsy a budget to buy ads on Google to drive traffic directly to their shops.

While we launched Promoted Listings about 6 years ago, we just launched Google Shopping in late 2016, and in the third quarter of this year, GMS coming from Google Shopping ads was about $20 million.

We also continued to enhance Promoted Listings with new, relevant ad inventory, and we're pleased that Promoted Listings' growth accelerated for the second consecutive quarter.

Previously, we only surfaced Promoted Listings ads within the results generated by a keyword search.

During the third quarter, we included Promoted Listings on the Similar Items section of the landing page which is automatically generated with every keyword search.

This creates new ad inventory, and as we optimize our algorithms, we can offer sellers ad space on higher-traffic nonsearch pages.

This additional inventory and our ability to do an even better job of surfacing the right ad to the right buyer at the right time will be long-term drivers for Promoted Listings revenue growth.

Last week, we introduced a feature to help our 1.9 million creative entrepreneurs around the world leverage their social networks and the networks of their followers to drive sales.

Slide 7 highlights our new switch social media tool that lets sellers easily post the listings on Facebook, Instagram, Twitter and Pinterest.

We're excited to give our sellers the tools they need to help drive traffic, increase retention and drive awareness for their brands as well as the Etsy brand.

We're proud of our focused execution across each of our 4 initiatives and encouraged by the solid growth that we delivered in the third quarter.

We hope to carry this momentum into the busy 2017 holiday season and our 2018 planning cycle.

So let me turn to the work we have underway to prepare for the holiday season and share a few thoughts about 2018.

Our focus is on delivering marketplace features that our sellers need to have a successful holiday season.

Over the past few years, we believe 3 important trends have increasingly impacted holiday shopping behavior.

First, sales and promotions at retailers have carried over to online marketplaces, and in recent years, have become so prevalent that shoppers have begun to believe that they're overpaying if an item is not on sale.

Second, free shipping during the holiday season has become ubiquitous, and we believe is increasingly a deciding factor for shoppers.

Third, the shopping season is lengthening.

Each year, it has crept closer and closer to Christmas as confidence in on-time deliveries and online shopping overall increase.

In prior years, our sellers lacked an easy way to offer sales and promotions and have had to fight against the perception of high shipping prices.

Moreover, many sellers didn't have the tools to highlight items to last-minute shoppers that would arrive in time for Christmas.

As a result, historically, Etsy's holiday season has started to wind down in mid-December just when other e-commerce players were gearing up for some of the busiest shopping days of the year.

We believe we can do better for our sellers.

So here's our plan.

This November and December, we believe Etsy can be the place where buyers can win at gifting.

We believe Etsy can be the destination for buyers to find the largest assortment of special items they can't get anywhere else.

And we believe that creating the best shopping experience at a very important time of the year will make buyers want to return in the future.

So here's where we're focused.

First, building on the success and learnings from our Labor Day sale, we plan to run a coordinated holiday sale.

Second, there are high expectations when it comes to fast and affordable shipping around the holidays, so we're launching a new seller tool that lets sellers easily designate items in their inventory for free shipping.

We're also providing buyer-facing functionality that allows buyers to shop for items with free shipping.

Third, we're increasing transparency around shipping to help buyers make better purchase decisions based on ready-to-ship items.

Fourth, the finishing touches matter.

We're providing sellers with a new tool so they can offer add-ons like gift wrapping, personalized cards and options such as sending gifts directly to the recipient.

Fifth, we recently launched a holiday gift finder.

It goes beyond the typical for moms or for dads to offer expertly curated collections for all of the different people on your gift list, be it a pet parent, fledgling chef, coffee lover or fashionista.

These collections are built on data from our most popular searches and the expertise of our in-house merchandising team.

Curation is essential to an engaging discovery experience, and our goal is to build a world-class experience on Etsy, leveraging the very best of both human and machine-curation techniques.

Finally, we are excited to partner with American Express to support Shop Small this holiday season.

Together, we are launching several initiatives to help small businesses participate in Small Business Saturday and Shop Small campaigns.

We are looking forward to helping our sellers compete this season, and we'll update you on our progress during our fourth quarter call.

Now let's turn to our thoughts heading into 2018.

Our product roadmap for 2018 will continue to focus on driving material gains across our 4 key initiatives: trust and reliability; search and discovery; marketing capabilities; and seller tools and services.

We expect our 2018 plan to continue to include a balanced portfolio of evolutionary product improvements that we intend to launch at a steady cadence throughout the year.

We also plan to work on a few bigger, more revolutionary ideas that will help us own special shopping occasions in a new way.

For example, I've tasked our teams with developing bolder, more innovative and immersive discovery experiences on Etsy.

With so many consumers coming to Etsy simply to browse and seek inspiration, over the long term, we believe that there's a huge opportunity for us to create experiences that engage buyers in new and exciting ways.

Speaking of cool ways to engage and inspire our core audience, I'm thrilled to announce that NBC has decided to launch a new primetime series called Making It, co-hosted by Amy Poehler and Nick Offerman, which will feature our very own resident trend expert, Dayna Isom Johnson, as a judge.

Scheduled to launch in January, Making It is a reality competition celebrating the joy of making and creativity.

This show will bring the Etsy name into homes across the U.S. We're so proud of Dayna and excited for the opportunity this broadcast brings to Etsy.

You should also be on the lookout for exciting new content on our site about Making It as part of the Etsy experience.

We hope you'll tune in when the series premieres in January.

We believe our wins this quarter demonstrate our ability to execute with increased focus, speed and ultimately, results.

We are strengthening our rigor around the use of data to drive our decision-making processes, and we are rapidly identifying both opportunities and challenges.

And when results don't favorably match up to our expectations, we are mobilizing to course-correct immediately.

Just as focus and execution are the keys to unlocking our growth potential.

They are also essential for our social impact work.

Etsy's business model is a virtuous circle, so driving great business results and having a positive impact on our community go hand-in-hand.

But again, it's about doing fewer things better.

We recently introduced a new impact strategy that concentrates our efforts on just our key focus areas.

Slide 8 outlines both the goals and related KPIs that we will use to measure our success.

By creating impact goals that align with and support our business objectives, we believe we can create more economic opportunity for sellers, foster diversity in our workforce and reduce our carbon footprint.

In short, we intend to grow the pie for everyone.

With complementary business and impact strategies in place, I believe that Etsy is positioned to accomplish something that perhaps no other commerce company can: Keep Commerce Human, which is our new mission featured on Slide 9. Our new mission to keep commerce human is simple yet powerful.

It reminds us that in a world of commoditization and automation, Etsy is preserving creativity and human connection, and that these 2 concepts can and should coexist.

We have a significant opportunity to fill a unique role in commerce and in people's lives.

I believe we are well on our way to seizing this opportunity to own special.

We believe we can support our vibrant community and deliver positive results to our shareholders and create value for all of our stakeholders.

I look forward to updating you again in the coming months.

And with that, I'll turn the call over to Rachel.

Thank you, Josh, and hello, everyone.

Q3 was a quarter of many financial accomplishments, and I am very pleased to spend a few minutes on this call walking you through our results.

At a high level, we have a leaner organization focused on a smaller portfolio of the most important initiatives.

We are also fostering a culture of fiscal discipline that is centered on ROI.

With this solid foundation in place, we were able to accelerate both GMS and revenue growth and deliver our highest-ever adjusted EBITDA margin as a public company.

So let me tell you how our disciplined approach drove our third quarter results and give you some insight into the remainder of the year.

My remarks today will cover 3 areas: First, I will update you on our key operating metrics for the third quarter.

Second, I will review the financial results that we covered in our earnings release.

Finally, I will provide an update on our 2017 financial outlook.

Unless I say so, all numbers presented are rounded for ease of reference and the comparisons I'll be referring to are on a year-over-year basis.

So let's start with key operating metrics of GMS first.

During the third quarter of 2017, Etsy generated $766 million in GMS, up 13.2%.

GMS from pay channels, which was roughly 13%, continued to grow faster than overall GMS.

At the end of the third quarter, Etsy had 32 million asset buyers, up 17% and over 1.9 million active sellers, up 11%.

Growth in both active buyers and active sellers demonstrate that our vibrant two-sided marketplace continues to grow at a healthy rate.

Roughly 67% of our visits came to us from a mobile web or app device this quarter.

This was up 200 basis points year-over-year and continued to outpace the rate of growth on desktop.

Mobile Web visits were approximately 47% of overall visits and 69% of mobile visits this quarter.

Mobile web continued to be the largest driver of both overall visit growth and mobile GMS growth in the third quarter.

Mobile GMS represented 52% of our overall GMS, up 300 basis points and has grown from approximately 30% in 2013.

Mobile GMS grew 21% year-over-year, demonstrating the impact of the ongoing improvements we have made to our mobile shopping experience.

Mobile web conversion rates were up this quarter versus last year and helped us sustain overall conversion rate that was flat year-over-year despite a little softness in both mobile app and desktop conversion rates.

As we accelerate the pace of product launches and continue to make enhancements to the overall shopping experience through search and removing friction from the buying process, we believe we can drive conversion rate improvements across all devices.

Etsy's international revenue grew 43% in the third quarter.

Percent international GMS was 34%, up 400 basis points compared to last year and increased for the third consecutive quarter.

Percent international GMS was driven by growth in sales between international buyers and international sellers in the same country and a little benefit from a U.K. currency tailwind.

Net international GMS growth accelerated to 25% and grew faster than overall GMS growth for the sixth consecutive quarter.

We look forward to continuing to make focused investments in our international opportunities and believe that the dynamics in our core geographies provide significant headroom for growth.

With these operational metrics in mind, let me now turn to their impact on our financial results.

During the third quarter, total revenue was $106 million, up 21%, driven by growth in Seller Services and growth in markets revenue.

Seller Services revenue was up 31% and represented 60% of total revenue.

Markets revenue grew 11%, primarily due to growth in transaction fee revenue and to a lesser extent, growth in listing fee revenue.

You may have noticed that our markets revenue growth was a bit below our GMS growth and that usually these 2 growth rates are more closely aligned.

This divergence represents an investment we made in our international strategy in part to support our efforts to transition ALM sellers to the Etsy platform.

Among our efforts was a program to offer free listings to our ALM sellers.

In total, we provided approximately 2 million free listings, and we're pleased to see that total listings at our Etsy France marketplace more than tripled compared with June 30 when ALM and Etsy France were operated as separate marketplaces.

Seller Services revenue growth was driven primarily by growth in Etsy Payments.

The share of GMS processed through our Etsy Payments platform was 87% in the third quarter, up from 78% in the third quarter of 2016 and 85% last quarter.

Q3 is the first full quarter following the mandate that requires virtually all sellers in eligible countries to use our Etsy payments platform.

We continue to see additional opportunities to expand the utility and geographic reach of Etsy Payments by adding currencies and countries.

Promoted Listings revenue growth accelerated for the second quarter in a row due to an improved fixed fee rates and a launch of new inventory on more landing pages that Josh spoke to you about earlier.

We believe enhancements to both of these Seller Services will enable us to continue to drive revenue growth, and we expect Seller Services revenue to continue to grow faster than markets revenue and GMS for the remainder of the year.

Gross profit for the third quarter was $70 million, up 20%, and gross margin was 66%, down 70 basis points due to increased fees from our Etsy Payments platform resulting from the higher payment volume.

Excluding the positive impact on Q3 2016 growth margin from a onetime payment from a third-party payment processor, Q3 2017 growth margin would have expanded 50 basis points year-over-year.

Turning now to operating expenses.

Etsy's third quarter operating expenses were $63 million, up 13%.

Total operating expenses as a percent of revenue contracted to 59% in the third quarter compared with 63% in the third quarter of 2016 and 66% last quarter, excluding costs incurred as a result of the restructuring.

The decrease in operating expenses as a percent of revenue is primarily due to the reduction in employee-related expenses which was offset by approximately $2 million in additional restructuring and other exit costs related to severance and compensation.

Marketing expenses in the third quarter totaled $24 million, up 26%, representing 22% of total revenue compared to 21% last year.

The majority of our marketing spend remains focused on digital acquisition marketing.

The increase in marketing expense as a percent of revenue was primarily driven by both increased spend on search engine marketing and Google Product Listing Ads.

Product development expenses totaled $17 million, up 14%, representing 16% of total revenue compared to 17% last year and 21% last quarter.

Product development as a percent of revenue was down approximately 550 basis points following the restructuring last quarter and 100 basis points compared to last year.

Product development expenses up year-over-year, driven by approximately $2 million in additional expenses related to the acquisition of Blackbird Technologies.

G&A expenses totaled $22 million, up about 1%, representing 21% of total revenue compared to 25% last year.

We expect to continue to manage back-office expenses and that they will grow at a slower rate than revenue on a sustained basis.

Headcount at the end of the quarter decreased to 789 people compared with 877 as of July 26, 2017.

While the lower headcount level partially stem from the organizational restructuring we executed earlier this year, we have also seen an increase in voluntary attrition that we are watching carefully.

Third quarter net income was $26 million compared with a net loss of $2 million last year, and diluted earnings per share was $0.21 compared with a net loss per share of $0.02 last year.

Etsy's net income includes an $8 million foreign exchange gain, an income tax benefit of $13 million, and interest expense of $2 million related to our Brooklyn headquarters, primarily noncash.

FX fluctuations related to intercompany debt is the biggest driver of quarter-to-quarter volatility, and we are beginning to explore ways to mitigate this.

Operating income, which excludes benefits from FX, taxes and net interest expense, was $7 million.

Non-GAAP adjusted EBITDA was $23 million.

This resulted in an adjusted EBITDA margin of 21.4% compared with last year's adjusted EBITDA margin of 14.9%.

The additional $2 million in restructuring and other exit costs is reflected in the third quarter, and as a reminder, restructuring and other exit costs that I mentioned earlier are an add-back to adjusted EBITDA.

During the quarter, we recorded net cash provided by operating activities of $17 million.

This compares to $10 million in the third quarter of 2016.

The year-over-year increase in net cash provided by operating activities for the quarter was primarily driven by revenue growth and savings in employee-related and other costs associated with the actions to streamline our organization in Q2.

As of September 30, 2017, we had cash, marketable securities and short-term investments totaling $311 million, an increase of $23 million compared to last quarter as a result of improved operating income.

Lastly, shown on Slide 11, we are reiterating our full year 2017 guidance for GMS revenue and adjusted EBITDA margin.

We continue to expect GMS growth to be 12% to 14% year-over-year; revenue growth to be 18% to 20% year-over-year; and adjusted EBITDA margin to be 16% to 18%.

Our guidance implies that we expect to deliver strong growth in the fourth quarter.

Slide 12 features our Q4 assumptions, and based on the midpoint of our 2017 GMS guidance and year-to-date results, we expect GMS growth in the fourth quarter to be around 13% year-over-year, relatively flat compared to Q3.

Based on historical trends, the fourth quarter is our lowest GMS growth quarter of the year, so staying flat on a sequential basis is further evidence of improvement in our GMS growth trajectory.

Based on our expectations for the fourth quarter and year-to-date results, we now expect to achieve revenue growth at the high end of our full year guidance range and continue to expect revenue growth to outpace GMS growth in the fourth quarter.

Lastly, if you consider our year-to-date results and the midpoint of our full year revenue and adjusted EBITDA guidance, this guidance implies a Q4 margin of approximately 22%, a significant improvement compared to last year and the highest margin in Etsy's public company history.

As a reminder, historically, Q4 margins are typically the highest margin quarter of the year.

That said, we intend to maintain fiscal discipline headed into 2018 and expect to benefit from the annualized impact of our 2017 restructuring.

Before I wrap up, let me point out a few more things to help your models.

First, adjusted EBITDA was higher in the third quarter due to higher-than-expected attrition, giving us even lower compensation costs than we had planned in our new organizational design, and we are actively recruiting to replace certain positions.

Second, we are planning to migrate our data centers to the cloud.

We believe that moving to the cloud will help accelerate our search and machine-learning capabilities, better support our pace of experimentation and deployment of new features and enhance our overall infrastructure.

While this initiative is underway, we will incur implementation costs while also maintaining our current infrastructure and related costs.

We expect this initiative to commence in Q4 and to last about 2 years.

In addition, as you know, cloud computing arrangements are expensed through the P&L rather than capitalized on the balance sheet and depreciated over time.

One last note, we will complete our assessment of the new revenue recognition standard during the fourth quarter but we do not expect a material effect on our ongoing revenue recognition after implementation.

In closing, as we execute against our 4 initiatives, work towards our new mission and efficiently allocate resources while making smart investments to drive growth, we are confident we can capitalize on a large market opportunity ahead of us and deliver value to all our stakeholders.

We are excited about the holiday season, and we look forward to speaking to you in the coming days and weeks.

Thank you all for joining us today.

I will now turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from the line of Mark Kelley of Citi.

The first one is on the Labor Day sale.

Some of the tools and initiatives you talked about for this upcoming holiday season sounds pretty incremental to last year.

So I'm just curious, were all sellers invited to participate?

Or was that just a test you ran with a smaller set of sellers?

And the second question is, you talked about a little bit more attrition than you were expecting and you're actively recruiting some folks, are there any other areas -- or are there any areas, rather, that are more impacted than others?

Yes, hey, Mark.

So first, I'm not aware that we'd run a sale in the past, so I'm not sure what you mean by incremental to last year.

This is a new capability that we launched in August that allows sellers to actually put items on sale and then they show up on the site as being on sale.

So there would be the old price and a strikethrough showing the new price which we have seen in other places and experienced for ourselves drives incremental traffic.

It also gives people a reason to come to the site, and when you think about engaging our existing base of buyers, we've talked a lot about getting them to come more often, it gives people a reason to come back and re-experience what they loved about Etsy the last time they bought.

So we feel really good about what happened over Labor Day as something new, and we think that doing it again over Christmas is something that's going to be really helpful for our sellers and our buyers in the site.

And this is -- Mark, it's Rachel.

And then your second question about the headcount and attrition.

It's been -- I'd say, there's no one particular area where the attrition has been impacting us.

Of course, it matters more in product and engineering and so we've got pipelines built and we've got additional recruiters on board and we're actively addressing it.

Our next question comes from Sam Kemp of Piper Jaffray.

First on talking about the revolutionary product improvements that you're implying in 2018.

First, can you talk a little bit more specifically about the direction of the product that you're thinking about?

Are you thinking more towards like a Pinterest-style experience or more like an Instagram-style experience.

And then from an operating margin or an EBITDA margin perspective, can you talk about any impacts on the P&L?

And then separately, Rachel, can you call out the specific impact of FX on your Q3 results and how that differed from the guidance that you'd given previously?

Let me start first with revolutionary and evolutionary.

We have a long list of insights that have come from our buyers and sellers about ways that we can improve the product experience, and we're acting with urgency to get those in market and they're showing results.

And we're talking about hitting singles and some doubles.

A lot of these things are things that we can execute relatively quickly that will make incremental improvements and we're seeing the results of that.

We're going to keep doing that.

What I like about that ad is that it provides a steady cadence of improvements that we can count on as a team, so we're not swinging for the fences every time we get up to bat.

And again, we should be swinging for the fences every now and then.

So we are in the process of looking at 2018 and coming up with a portfolio of bats, including some more swing for the fences.

So one thing I talked about is discovery.

And the key insight there is that there's a whole lot of buyers who show up on Etsy, not with a particular purchase occasion in mind but just because they have half an hour and they want to have fun and they want to be inspired.

And frankly, I think we could meet that occasion better with the amount of really amazing inventory for sale on Etsy.

I think there's a bunch of ways we can come up with really exciting curated experiences.

So if you want to think about things that Spotify does, for example, or Pinterest does or others, it's that kind of challenge we have given the team of how would sites like that think about it but what my expectation is that our team's going to come up with novel innovative ways, that's the point of sort of revolutionary bats is to give the team the flexibility to think more broadly and boldly about how they'd attack it.

What I think is important for us to think about though is we have a portfolio.

I think about this as a portfolio of bats with some more near-end, more certain things we're doing and then some more far-out things that can have a bigger impact with less certainty, and we're going to make sure we manage our investments in that way.

And then the second part of that question I think was about the EBITDA impact.

So of course, we may expect revolutionary investments would have impact on GMS, maybe over a longer period of time than some of the singles that we're hitting right now.

We do capitalize a little bit of our web development depending on if they hit certain investment thresholds that I would say that's not material.

So I wouldn't necessarily expect revolutionary to have a significant bigger EBITDA impact than any of the other product engineering investments that we make.

On your question on FX, only about 10% of our GMS is coming from non -- is non-U.

S. dollar GMS, so it's not material, maybe last year, there would have been a little bit post-Brexit, potentially a little bit of a tailwind this quarter from the U.K. import impact on GMS, but we don't think it's material.

If you're talking about our GAAP P&L, we did talk about an FX gain from our intercompany loan, so that did drive some of our positive net income, but we also had real positive net income in addition to that FX gain.

Our next question comes from Jim Shaughnessy of RBC Capital Markets.

Just 2 questions, if I may.

Maybe the first on the incremental savings that you're going to see year-over-year from the restructuring.

Can you -- are you willing to discuss any investments you'll be making sort of outside of (inaudible) investments relative to the incremental savings?

And then maybe if you could characterize how much you will be spending on cloud in '18, it would be great.

I'm not sure I caught the whole question.

So we had said that we had about $35 million in annualized savings from the restructuring that we did in Q2, and that was about $20 million of impact in 2017.

So we were not -- we haven't moved off those numbers.

We also talked about a little bit of incremental upside in Q3, which actually, some of us would consider downside from unwanted attrition, and we mentioned that because we don't want you to model that going forward.

We're planning to fill our pipeline and backfill most of those roles.

So it's still the $35 million annualized savings was the number that we've continued to recite.

And then the cloud numbers we haven't communicated externally, that potentially is something what we'll talk about on the next quarter.

At least, put some color to what that investment might look like.

But that's not something that we've talked about so far.

And we -- just the idea that we're moving to the cloud and then, of course, that's going to hit the P&L on a GAAP basis, that would be net neutral to our GAAP P&L.

Got it.

And maybe one more on the holiday sale ramp up.

How soon -- are the sellers -- I guess how soon in advance were sellers made aware about the new sale?

And when does it really start to ramp?

Yes, so for the Labor Day sale, we -- you're right to ask that.

We go out several weeks in advance and give the sellers warning and ask them to sign up and think about putting things on sale.

That gives them time to prepare for it.

So by the time we go out and communicate to sellers.

We already have millions of items on sale and can bring -- by the time when we communicate to buyers, sorry, we already have millions of items on sale and can bring buyers to an experience that's robust.

So we learned a lot in Labor Day, and we plan to apply that as we move forward into Cyber Week and beyond.

Our next question comes from Thomas Forte of D.A. Davidson.

I wanted to take this opportunity to ask you for your current thoughts on the competitive landscape including Amazon Handmade effort?

Yes, sure.

Thanks for the question.

So first, when I talked about last earnings call, we think that Etsy is really uniquely positioned to own Special, to be the place to go when you're looking for things you're not going to find everywhere else.

And what we think is so exciting about that position is the places you go for all of your everyday items that you're in day-in and day-out to buy the products you need, for your batteries or socks or whatever it is you need, is not the place you think to go when you wanted to feel special, almost by definition, if you're there every day to buy the commodities, it doesn't feel necessarily special.

So we think we're uniquely positioned from a brand.

But if you also look at the traditional levers of retail, there's 3 levers, right, it's price, selection and convenience.

And if you think about how mass retailers have gained leverage on price -- let's start with price.

Typically, what they do is they buy in large quantities and then pass along the savings to buyers.

Well, if you're talking about unique items, they're not mass-produced.

So buying in large quantities is not a strategy that actually works to create price advantage.

The second lever we talked about is selection.

Etsy has over 45 million items from 1.9 million sellers.

There's no one in the market that's even within an order of magnitude of that for the type of product that we offer.

So we think we've got a really unmatched advantage in selection.

And the third lever is convenience.

And for resellers that have built wonderful convenience offerings based around logistics and warehousing, that requires products that can be made in advance and stored in a warehouse.

For our products which are often made to order and again, unique, warehousing is not a strategy that actually is very effective.

So the traditional advantages that other people have had in the past may transfer less well into our space.

But beyond all of that, again, I think brands mean something.

I think buyers come to experiences to find a curated set of selection and to have a shopping experience that they think is different or relevant for them.

And so the mission we talked about Keeping Commerce Human, I think at times in people's lives, not every time, but many important times in their life, they want to have a shopping experience that feels special and that feels more human.

And I think there's no one better positioned than us to attack that.

(Operator Instructions) The next question comes from the line of Darren Aftahi of Roth Capital Partners.

It's 2, if I may.

First on the free program for the sellers on ALM and they migrated.

Just -- could you kind of quantify how big of an impact that had on international GMS?

And then my second question is as you kind of ramp up the sales promotion within your install base, can you kind of give us a sense -- it looked like on one of the slides, it said 7 million sale items for the Labor Day sale.

I'm just kind of curious how much more prevalent that will be across your install base for the holiday season?

We don't think the impact on the free listing had much of a material impact on international GMS.

The reason we mentioned it was because this was -- we normally raise the GMS relative to market revenue growth -- are you more in line and the difference this time was that a certain portion of our GMS -- a certain portion of our listings were given away for free.

So the -- you see that in the difference in revenue from the GMS there.

And I build on that with ALM, just level up for a second, and say, we were running 2 marketplaces side-by-side in France.

And what we did over the last past few months was consolidate those to one marketplace and with a two-sided marketplace like ours, bigger is usually better, it builds more vibrancy over time.

So in general, we were very pleased with how that consolidation went, and we feel like we're seeing more success from the sellers and sellers coming over and then buyers having a better experience.

And so we're optimistic about how that's going to look going forward.

Darren, and can you repeat your second question?

Just the general impact, I think on one of the slides, it showed 7 million sale items during the Labor Day and was just sort of curious, has that become more prevalent as you move into the holiday season and I guess, that's roughly, what, 15% of items listed, how you kind of see that impacting kind of your percentage of sellers having that type of a capability in the coming quarter?

Yes, thanks for the question.

So we launched the new capability in August, and this Labor Day sale was a kind of way to kick it off.

And definitely, items on sale spiked.

Sellers took advantage of it.

What you saw the sellers who took advantage of it really benefited and even the sellers who didn't take advantage of it benefited.

Now after the Labor Day sale, some of those people chose to keep their items on sale but not all of them.

The number of sale items declined after the Labor Day sale, but as we head into the holiday season, we intend to again run another coordinated sale where we expect more of them to take advantage.

And one other point about the holiday, what we're doing with holiday that's different than we did at Labor Day is we've now also given the ability for sellers to mark their item as free shipping, whether they choose to bake that into the item price or not.

And then we can curate all items that have free shipping, which is a very sort of common promotional device particularly in the sort of very busy fourth quarter.

So that's sort of a new feature for this selling season than it was in the third quarter.

Our next question comes from Aaron Turner of Wedbush Securities.

Two, if I may as well.

So international GMS looks to be very strong.

It looks like the offset though is domestic GMS.

So it looks as like you've decelerated again, just making sure that I'm seeing that correctly.

And then if so, any color on what you're seeing in that region and when you think domestic GMS may reaccelerate?

And then second question is on the core take rate.

You've been in the job now for about 6 months, and in that time, have you thought about the core take rate at all and if you have any pricing cover in that core take rate?

Let me start with the take rate.

Our focus has really been, first, let's make sure that we've really driving a lot of value for sellers by improving the buyer and the seller experience, and we're very, very focused on doing that.

And we think we've shown some progress in this call and we continue to be optimistic about our ability to do that.

We're also really pleased with the value-added services that we've offered to sellers and how the uptake on that and the incremental revenue and margins coming from that are material.

But we will continue to look over time as we're adding value to the ecosystem, what's our fair share of that, and we'll -- our guide star in that always will be what are the things we're going to do that are going to make the marketplace stronger, and as we do that, our fair share.

On the second part of your question is domestic GMS.

So yes, I think your guess -- you're observing that, right.

The domestic U.S. was slightly decelerating this quarter and -- versus overall GMS.

And I think that's just potentially the law of big numbers.

We've got tremendous growth in the U.S. and it's growing a little slower and a lot -- and our international GMS is growing faster, it's contributing more to our overall GMS (inaudible).

But we're very optimistic.

Again, we think we have a very large opportunity in the U.S. as well as international.

We're making progress, and we feel good about the progress we've made and the -- what the future is going to hold.

And as there are no further questions in queue, that does conclude the Q&A portion of our call and the call for today.

And thank you so much for your participation, and have a wonderful day.

You may disconnect your lines at this time.

Thank you.