ETSY Inc (ETSY) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Etsy, Inc.

Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Head of Investor Relations, Ms. Jennifer Beugelmans.

Please go ahead.

Thank you, Andrew.

Good afternoon, and welcome to Etsy's Fourth Quarter and Full Year 2017 Earnings Conference Call.

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

Before we get started, just a reminder that our remarks today include forward-looking statements relating to our outlook, business strategy, market size, financial guidance and key drivers thereof, our ability to execute on our strategy to own special purchase occasions, the impact of our key initiatives, our product roadmap and potential future growth.

Our actual results may differ materially.

Forward-looking statements involve risks and uncertainties, which are described in our press release, our 10-Q filed with the SEC November 8, 2017, and our 2017 10-K that we expect to file with the SEC in the coming days.

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.

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

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

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

Josh?

Thanks, Jennifer, and good afternoon, everyone.

Today, I want to recap the important progress we made in 2017, and specifically highlight our execution in the second half of the year.

I'll also talk about the strength we saw during the holiday season and walk you through our core areas of focus for 2018.

We're excited to continue building on our momentum and demonstrating that we can drive growth through innovation and focused execution.

In a sea of sameness, Etsy stands for something special and the world needs that now more than ever.

In fact, we estimate that our total market opportunity is over $155 billion, and this estimate encompasses just the online portion of our top 6 GMS categories in our core 6 geographies.

We believe we have a long runway for growth, and we're acting with urgency to move faster.

On our last 2 calls, we said our efforts to unlock this growth would focus on 4 key initiatives: trust and reliability, search and discovery, marketing capabilities, and best-in-class tools and services for our sellers.

We exceeded guidance on every metric in 2017.

In Q4, and as shown on Slide 4, GMS grew 17.8%, a 460-basis point acceleration compared to Q3.

Revenue growth also accelerated to nearly 23.6%, and our adjusted EBITDA margins of 25.6% were the highest we've ever reported.

Ultimately, what this performance really means is that we have materially improved the buyer experience, helped our sellers have a great holiday season, and have begun to demonstrate that our efforts are bending the curve on GMS growth.

We've accomplished a lot since last May.

Slide 5 features some highlights in 2017.

First, we enhanced our leadership team by bringing on Rachel as CFO; Mike Fisher as CTO; and many other key leaders across the company.

They joined a talented team and together, are leading the charge to create a better shopping experience for Etsy buyers and to drive sales growth for Etsy sellers.

Second, we outlined our strategy to gain market share and began executing on our 4 key initiatives that we believe we need to conquer in order to win.

And with this greater focus, and a streamlined organizational structure, we dramatically accelerated the velocity of our product and marketing enhancements.

Within trust and reliability, we bolstered trust in both our platform and in the Etsy brand.

This means that we removed friction from the buying experience and improved our relationship with our buyers.

Throughout the second half of 2017, you've heard us speak about a variety of enhancements we've launched, including 7 simple words, multi-shop checkout and Best Seller Badges, which have helped Etsy offer an easier, more reliable and more compelling buying experience from start to finish.

Within search and discovery, we remained focused on helping buyers find exactly what they want from among the more than 50 million special items in our marketplace.

Our goal is to help those buyers who arrived knowing exactly what they're looking for, and also to delight those just seeking fun, inspiration and serendipity.

New developments in AI and machine learning offer the potential for step function improvements in our ability to deliver these experiences.

And while we believe we've made meaningful progress in these areas over the past few quarters, we're still in the very early stages of leveraging these capabilities to their full potential.

For example, in the fourth quarter, we continue to build on our context-specific search ranking, or CSR foundation, by applying its power to our market pages, which led to conversion rate in GMS wins.

We also created personalized recommendations on the homepage for each buyer, and improved recommendations based on items placed in their cart.

In 2017, we made steady progress improving our marketing capabilities, our third initiative.

We brought new buyers to the marketplace and continued to engage with existing buyers.

In fact, during Q4, paid GMS attributable to our marketing efforts grew 45%, and the marketing team, in collaboration with our product team, utilized our recently launched sales and promotions tool to curate and market our first-ever site-wide sales during Labor Day and Cyber Week, events which generated incremental GMS, but more importantly, helped to increase relevance with our buyers.

The improvements we make deeper in the funnel, for example, by improving conversion rate, or buyer LTV, also help us to generate higher returns per visit.

So improvements in our marketing capabilities and improvements in our buyer experience can create a virtuous cycle.

Within our fourth initiative, seller tools and services, we worked hard in 2017 to provide sellers with best-in-class resources to help them start, manage and scale their businesses.

We're listening closely to what our sellers are telling us they want and we're laser focused on executing a product strategy to deliver what they need to succeed.

It's worth pausing for a moment to show how our work in 2017 helped our sellers win during the important holiday season.

As I mentioned, we built a tool that allowed our sellers to offer discounts and sales during the fourth quarter and we organized a Cyber Week sale that positioned Etsy to compete more effectively during those key shopping days.

With regard to shipping, shipping price and timing have become a deciding factor for many shoppers.

In the past, because of insufficient transparency, unexpected shipping dates, the holiday season has been shorter for Etsy than most other e-tailers.

So we launched a tool that gives buyers the ability to filter items that were ready to ship within 1 to 3 days and items offering free shipping.

In addition, we launched a holiday gift guide, which helped to inspire shoppers, and a gift wrap tool that allowed sellers to ship wrapped gifts directly to gift recipients, saving buyers more time.

There's still much work to do to improve the shipping experience on Etsy, and this will be an area of strong focus in 2018.

However, we believe the work we did this holiday season, while not material to our quarterly results, laid important groundwork for improving our shipping experience as well as the overall buying experience for all gifting occasions.

We're excited about the long runway for continued growth that we believe is still ahead of us.

Since May 2017, we launched approximately 350 product enhancements, with more than 20% having a measurably positive impact on GMS.

These wins are not just financial wins.

We believe they're laying the foundation for a better shopping experience and reflect the progress we've made in building a culture of excellence.

We feel confident that we can continue to launch product enhancements at a rapid pace and improve the overall buyer and seller experience in ways that positively impact GMS.

We're proud of the work we've accomplished in a relatively short period of time, and believe we've begun to bend the curve on GMS growth, our most important metric.

One thing I admire about marketplace models is that they get better as they get bigger.

And with Etsy, we believe we have much more room to grow.

The table is set for 2018, and we've entered the year on strong footing, with a clear strategy and a product roadmap that we believe will support the long-term success of Etsy and our sellers.

Now let me provide more color on our plans and product roadmaps for 2018.

We will continue to execute on our strategy to own special purchase occasions throughout the year, grow our Etsy.com marketplace in our 6 core geographies through focusing on our 4 key initiatives.

In 2018, our product roadmap tracks our 4 key initiatives.

We expect that many of our new products and features will deliver steady and reliable improvements to the buyer and seller experience, while several are bolder events that could move the needle more, but are more experimental and less predictable.

Let me briefly touch on each of our 4 key initiatives, starting with trust and reliability.

In 2018, we plan to make it easier to shop for and find unique items by making the buying process better and more transparent.

We will focus on bolstering Etsy's reputation and track record as a reliable and safe place to shop by making clear how each seller handles returns and exchanges, and by clarifying expectations around shipping.

We also plan to collect more structured data from our sellers in order to provide buyers with the information they need to make a better purchase decision.

We believe that success in these launches and others will remove friction from the browsing and buying experience, helping to convert views into purchases.

But first, shoppers need to be able to find items they love from within our vast marketplace of over 50 million items for sale.

Hence, our second pillar, search and discovery.

In 2018, our focus here will remain on leveraging advances in artificial intelligence and machine learning and combining it with our expertise in human curation, in order to create unique discovery experiences that help buyers find exactly what they're looking for, inspire their imaginations and elevate the browsing experience to make it more intuitive, more fruitful, and more fun.

We also want to take the complexity out of sifting through millions of special items to help buyers land on that one item that is special for her.

For example, we plan to continue to optimize listings to provide buyers with the information they need to make better purchase decisions.

And by leveraging our machine learning and AI capabilities, we will continue to gather data from browsing activity and transactions to deliver timely recommendations and make a more personalized search experience.

We believe our efforts in this area will help buyers discover items that fit their unique styles, drive conversion rates and support GMS growth.

Our third initiative is building world-class marketing capabilities.

In 2018, we plan to focus on bringing buyers to Etsy and getting them to return more frequently.

We believe we can do a better job of integrating our performance marketing efforts with the marketing efforts of our sellers in order to drive traffic and growth that benefits both Etsy and our sellers.

For example, our goal is to leverage more sophisticated automated solutions for product listing ads and to scale our marketing investments.

We plan to leverage our new e-mail platform in order to send more personalized and targeted e-mails and push notifications to buyers to give them a reason to come back to Etsy more frequently.

And to get buyers engaged and excited about coming to our site, we intend to utilize the Etsy community more, to curate the shopping experience and make it more engaging.

Our fourth strategic initiative is to provide best-in-class seller tools and services.

We know that our sellers want to grow their sales, and it's our job to give them the tools and services they need to be successful.

In 2018, we plan to enhance existing products and launch new capabilities tailored to seller needs at key stages in their journey.

We aim to give sellers meaningful marketplace insights, expanded marketing and brand-building capabilities and opportunities to improve the Etsy buyer experience.

Etsy sellers want to attract more buyers, improve customer satisfaction and grow a loyal fan base.

We expect to help guide seller marketing decisions through powerful analytics, improve Etsy's shipping and order management tools and offer capabilities for building lasting buyer relationships.

In 2018, our goal is to give our sellers more control over their business growth than ever before.

By the end of the year, we'll know we've been successful in executing across these initiatives if we've made progress addressing key buyer and seller opportunities shown on Slide 6. So, at the end of 2018, we'll be asking ourselves: first, have we encouraged more buyers to come to Etsy and shop for special items?

Second, have we made the browsing experience better?

Is it easier for our buyers to search for and find exactly what they're looking for?

And have we created urgency for shoppers to buy now?

And lastly, have all of these culminated in driving GMS growth up for our sellers?

We're encouraged by our execution so far across our 4 key initiatives and believe we are well-positioned to make significant headway in 2018.

In closing, we're excited about the progress we made in 2017.

As I mentioned in my opening remarks, Etsy stands for something special in a sea of sameness.

I'm grateful to Etsy sellers for partnering with us, Etsy buyers for shopping with us, and our employees for all their hard work in helping to support our vibrant community.

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

Thank you, Josh, and hello, everyone.

We ended the year on a strong note, delivering one of our best-ever holiday seasons for our sellers and over $1 billion in GMS in Q4.

This quarter, we accelerated both U.S. domestic and international GMS growth sequentially, accelerated revenue growth sequentially and posted our highest-ever adjusted EBITDA margins as a public company.

This provides a solid foundation from which to continue to execute on our strategy and improve the platform for Etsy sellers and buyers.

Please refer to Slide 7, which illustrates these 2017 achievements.

My remarks today will cover 4 areas: first, I will update you on our key operating metrics for the fourth quarter; second, I'll give you a quick recap of our latest 4-year cohort data; third, I will review the financial results; and finally, I will provide 2018 guidance.

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

Let's start with key operating metrics with GMS first.

During the fourth quarter of 2017, Etsy generated $1 billion in GMS, up 17.8%, and representing our first-ever $1 billion quarter.

At the end of the fourth quarter, Etsy had 33.4 million active buyers, up 17%, and over 1.9 million active sellers, up 11%.

Growth in both active buyers and active sellers demonstrate that our vibrant, 2-sided marketplace continues to grow at a healthy rate, and we're particularly pleased that the total GMS grew even faster than active sellers, signifying an increase in average GMS per seller.

Our efforts to accelerate GMS in the past few quarters were primarily focused on growing visits and conversion rate.

Let's take a look at visit growth first.

Mobile web continues to be a large part of our growth story as a significant driver of both GMS and visits in the quarter.

Mobile web visits were approximately 46% of overall visits this quarter, and roughly 67% of our visits came to us from a mobile web or app device this quarter.

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

The vast majority of our visits came to us from organic searches.

However, our paid marketing efforts have also contributed to visit growth in recent quarters.

In addition to our paid channels, we are also focused on providing tools for our sellers to drive visit growth through their own efforts.

For example, we believe the social media tool we launched last quarter will eventually help drive referral traffic from social channels.

Mobile GMS grew 27% year-over-year, increasing as a percentage of total GMS to approximately 52%, up from approximately 49% last year.

Growth in mobile GMS was driven in part by several product launches, including the introduction of scarcity badges and nudges, which leverage our unique inventory, and nudge buyers along the shopping journey, improvements to listing pages, and the implementation of Guest Checkout on mobile web.

We have also seen success in improving conversion rates.

Mobile web traffic converts at about 1/2 the rate of desktop traffic, and during the fourth quarter, we saw improvements in desktop and mobile web conversion rate versus prior year.

This strength allowed us to move our aggregate conversion rate up this quarter despite softness in our mobile app conversion rate.

Several product launches impacted aggregate conversion rate.

For example, our efforts to enhance search and discovery were particularly helped by context-specific search ranking, which improved the relevancy of search results for each individual shopper.

AOV has remained relatively stable in the past couple of years and improved modestly in 2017 compared to 2016.

Following the launch of multi-shop checkout in early 2017, the number of items sold per transaction grew slightly.

User recommendations on the homepage and buyer nudges that create urgency signals also contributed.

Turning to international GMS.

For 2017, we achieved our first billion-dollar year, with slightly over $1 billion in international GMS.

As a reminder, international GMS is defined as any transaction in which the buyer or the seller is not in the U.S. In the fourth quarter, percent international GMS grew 300 basis points to 33%.

International GMS growth accelerated to 28% and continued to grow faster than overall GMS.

The strength in our international business was driven by healthy activity between international buyers and sellers as well as a strong contribution from U.S. buyers making purchases from international sellers.

In the fourth quarter, we also narrowed the conversion rate gap for our core international geographies versus the U.S. We believe that closing this conversion rate gap represents a large potential growth opportunity.

We are also leveraging our technology to drive international growth.

Our international progress was supported by several product launches and initiatives, including broader local search boosts, context-specific search ranking and an increase in local listing inventory.

Overall, this contributed to strong new buyer growth and higher conversion rate.

On an annual basis, we shared data about the health of our marketplace and the loyalty of our sellers and buyers.

The full update can be found in our 2017 10-K, which will be filed in the next few days, but I will share some brief highlights here.

For the 2014 seller cohort, 32% of 2014 active sellers remained active in 2017, and their average GMS in 2017 was approximately 3x higher than it was in 2014.

In our 2013 seller cohort data, 32% of the sellers were also still active in 2016, and their average GMS was nearly 4x higher than it was in 2013.

Our 2014 buyer cohort behaved similarly to our 2013 cohort, with 39% of our 2014 active buyers remaining active through 2017, compared with 41% for the 2013 cohort who remained active through 2016.

The average annual GMS was $169 for our 2014 cohort and $174 for our 2013 cohort.

Keep in mind that during 2013, we began to scale our digital marketing efforts.

Our model assumes that buyers from these paid channels behave differently and generally worse than buyers who come to us through organic channels.

This suggests that we're doing a good job of acquiring high-value sticky buyers to look more similar to organic buyers.

In 2017, GMS from new buyers represented approximately 19% of overall GMS, decreased slightly compared to last year.

As we bring new buyers to Etsy, we believe that increasing purchase frequency has the potential to generate an ecosystem that accelerates growth.

Buyers with higher frequency can be more valuable to Etsy, and their lifetime value could allow us to invest more to acquire them.

We measure frequency in purchase days, and the percent of buyers who made purchases on multiple days in 2017 was approximately 40%, more or less flat compared to 2016.

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

During the fourth quarter, total revenue was $136.3 million, up approximately 24%.

Revenue growth accelerated for the third consecutive quarter, driven by both growth in Seller Services and, to a lesser extent, marketplace revenue.

Etsy's international revenue grew 42% in the fourth quarter, led by greater adoption of Seller Services and GMS growth.

Seller Services revenue was up 33% and represented 60% of total revenue.

Marketplace revenue accelerated to 16%, primarily due to growth and transaction fee revenue and, to a lesser extent, growth in listing fee revenue.

As we saw in the third quarter, our marketplace revenue growth was a bit slower than our overall GMS growth, mainly due to the free listings promotions we ran to stimulate local inventory in our international markets.

Despite this, marketplace revenue growth accelerated sequentially for the first time since Q2 2016.

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

While we now have broad coverage for payments, we continue to see incremental opportunities to expand utility and geographic reach of Etsy Payments by adding more currencies and countries.

Promoted Listings was our fastest-growing Seller Service, and revenue growth accelerated for the third quarter in a row due to improved click-through rates and more available inventory on the platform.

We expect Seller Services revenue, driven largely by Promoted Listings, to continue to grow faster than marketplace revenue and GMS through 2018.

Next, I'd like to discuss the usage of our Seller Services shown on Slide 8, which we disclose annually.

During 2017, approximately 54% of our active sellers used at least 1 Seller Service compared with 52% last year.

Approximately 50% of our active sellers used Etsy Payments, compared with 46% last year, and approximately 85% of our GMS was processed through Etsy Payments compared with 78% in 2016.

As a reminder, during May 2017, we transitioned nearly all eligible sellers to Etsy Payments because we believe it is the best way to transact on our platform.

Approximately 15% of our active sellers used Promoted Listings, compared with 16% last year.

Although Promoted Listings' usage ticked down a bit, revenue continued to grow robustly, driven both by higher click-through rates and new inventory.

In fact, active sellers grew 11% in 2017 versus 2016.

So on an absolute basis, Promoted Listings usage by actual sellers was up approximately 4%.

As a product, Promoted Listings requires that our sellers be ROI positive in aggregate, and we're working on ways to better educate sellers on the value that this product can create for their businesses.

Approximately 28% of our active sellers in the U.S. and Canada, where we offer Shipping Labels, used that service compared with 26% last year.

As Josh mentioned, there is much more we can do to improve shipping and as we continue to drive growth in our Shipping Labels Seller Service, we will think about expanding the geographic reach or adding more delivery options.

And finally, 2.5% of our active sellers use Pattern, which was flat compared to last year.

Within our strategy, one of our initiatives is to provide best-in-class seller tools and services and we're encouraged by the increase in the percent of active sellers that used at least 1 Seller Services in 2017 compared to last year.

In the fourth quarter, we ran an Etsy-funded seller promotion that incentivized sellers to use Google Shopping.

The cost of this incentive was reported as contra-revenue in our other revenue line.

We recorded $28 million in GMS, generated from people shopping, up 43% this quarter compared to the third quarter.

This contra-revenue is the primary reason for the negative $300,000 in other revenue.

Gross profit for the fourth quarter was $92 million, up 26%, and gross margin was 68%, up 110 basis points.

Gross margin expanded primarily because of the lower fees we negotiated with one of our third-party payment processors.

Turning now to operating expenses.

Etsy's fourth quarter operating expenses were $74 million, up only 6%, and represented 54% of total revenue, down from 63% last year.

Marketing expenses in the fourth quarter totaled $35 million, up 14%, representing 25.4% of total revenue compared to 27.6% last year.

The majority of our marketing spend is related to digital acquisition marketing, but also includes the expenses related to our marketing and communication staff, whose efforts are focused on PR, e-mail and social media, amongst other things.

Our digital marketing spend is primarily on Google Product Listing Ads and search engine marketing and continues to generate a positive ROI based on our attribution model.

During 2017, we achieved a payback period of 1 quarter, an improvement compared to our 2-quarter payback in 2016, and well ahead of our 8-quarter payback model.

While we have an attribution model that we believe adequately captures appropriate buyer lifetime value, we're in the process of assessing other inputs, like synergies, between our efforts and those of our sellers and a behavior of buyers on the platform.

Product development expenses totaled $18 million in the fourth quarter, up 10%, representing 13% of total revenue compared to 15% last year.

G&A expenses totaled $18 million in the fourth quarter, down about 19%, representing 13% of total revenue compared to 21% last year.

Headcount at the end of the quarter decreased to 744 people compared with 1,043 last year.

We have a number of product and engineering roles to fill, and we have added recruiters to more rapidly fill these critical positions.

Fourth quarter net income was $45 million compared with a net loss of $21 million last year.

Diluted earnings per share was $0.36 compared with a net loss per share of $0.19 last year.

Operating income, which excludes benefits from FX, taxes and net interest expense, was $18 million in the fourth quarter.

Next, I'd like to update you on the impact of the recent U.S. tax reform legislation on our business.

In fourth quarter results, we recorded a tax benefit for the impact of the new legislation of approximately $26 million, which was primarily driven by the downward adjustment of our deferred tax liabilities.

This adjustment is the result of the reduction in the U.S. statutory corporate tax rate from 35% to 21%.

Non-GAAP adjusted EBITDA was $35 million.

This resulted in an adjusted EBITDA margin of 25.6% compared with last year's adjusted EBITDA margin of 13.9%.

Adjusted EBITDA performance this quarter was driven by revenue growth and lower employee-related expenses, including voluntary attrition that we expect to backfill.

Approximately $1.3 million of adjusted EBITDA year-over-year was due to voluntary attrition.

During the quarter, we recorded net cash provided by operating activities of $35 million.

This compares to $20.1 million in the fourth quarter of 2016.

The year-over-year increase in net cash provided by operating activities for the quarter was primarily driven by revenue growth and savings in employee-related expenses.

During the quarter, we repurchased 586,000 shares, which have been retired for a total cost of approximately $10.3 million.

As of December 31, 2017, we had cash, marketable securities and short-term investment totaling approximately $341 million, an increase of $58 million compared to December 31, 2016, driven by improved operating income.

Now let me walk you through our 2018 guidance as shown on Slide 9. We expect GMS growth to be in the range of 14% to 16% year-over-year; revenue growth to be in the range of 21% to 23% year-over-year; and we expect our 2018 adjusted EBITDA margin to be in the range of 20% to 22%.

The key factors impacting revenue and GMS growth in 2018 are: first, continued visit growth; second, conversion rate growth, which we expect to benefit from product launches focused on enhancing the buying experience.

We also expect continued growth in international GMS and expect it to grow faster than overall GMS driven by global product enhancements and international domestic marketplace activity.

Finally, our outlook includes continued Seller Services revenue growth, which we expect to grow at a faster pace than the marketplace revenue growth.

We expect Promoted Listings to be the primary driver of Seller Services revenue growth in 2018.

In addition to the key factors impacting revenue and GMS, we anticipate that the key factors impacting adjusted EBITDA margin in 2018 are lower operating expense as a percent of revenue from changes we made to our operating structure in 2017, which created approximately $35 million in annualized savings.

We expect to gain the most leverage in G&A, followed by product development.

We will partially offset these expense savings with expenses related to our planned migration to Google Cloud.

We initiated this migration in Q4 and we expect it to take approximately 2 years to complete.

We expect to spend approximately $10 million to $15 million in 2018 related to this migration.

Throughout the first few phases of the migration, we will maintain some of our existing data center infrastructure to ensure reliability of our platform.

So this [class] won't completely go away this year.

That said, compared with 2017, we expect to reduce capital expenditures related to maintaining our existing data center infrastructure by $4 million to $5 million in 2018.

Once we have fully migrated to the cloud, we expect our total cash cost will decrease compared to our stand-alone data center infrastructure.

In 2017, both the increase in our stock price and our actions to reduce headcount triggered option exercises, which led to a tax benefit for Etsy and created a net operating loss in 2017 that we can carry forward to partially offset our 2018 tax liability.

We expect to pay less than $3 million in cash taxes in 2018, slightly more than what we paid in 2017.

Overall, we believe that tax reform legislation positively impacts net income in 2018.

In conclusion, we are excited about the year ahead and are looking forward to supporting the success of our sellers with new product enhancements that make the shopping experience on Etsy even more fun for our buyers.

As we continue to execute, we think we can grow the pie for everyone and we look forward to updating you on our progress throughout the year.

Before we open the line to questions, I want to thank and acknowledge Jennifer Beugelmans, our VP of Investor Relations, who will be leaving Etsy early next month.

Jennifer has been a superb steward of our Investor Relations strategy at Etsy, and she has had a significant impact on our business overall.

On behalf of everyone here at Etsy, we thank Jennifer for all her contributions and wish her the best in her next chapter.

With that, we would now like to open the line for questions.

(Operator Instructions) And our first question comes from the line of Heath Terry with Goldman Sachs.

Josh, wondering if you could help unpack for us a little bit the drivers behind the GMS acceleration?

I know you guys provided some level of detail, but I'm particularly interested in how much you feel like some of the technology improvements that you guys made, particularly around AI and machine learning as well as search functionality, contributed to the acceleration?

And then as we look at initiatives like the Google ad spend, partnerships with your sellers on the platform, how much of an impact do you feel like that can have, particularly outside of the holiday season, I guess, just in terms of scale?

If you can provide any color there, that would be helpful.

Heath, on the first one, we made progress in improving the buyer experience that I think did have a material impact on the fourth quarter.

If you think about what we need to do for buyers: first, when they come to the site, are we helping them to find things that they like and are excited to buy?

And improvements in our search algorithms using machine learning and AI, particularly things like context-specific search, helped materially to improve the buying experience.

So more people are finding something they like.

Next, are they actually converting that into a purchase?

And we've made progress in removing friction from the buyer funnel so that they did.

If you think about reasons why someone finds something they like and don't buy, the #1 reason they state is they're just not ready to buy yet.

So by providing more signals like Best Seller Badges or there's only one of these items left, we provide more urgency for buyers, and that's in response to something we've heard from buyers actually, that they say, "I'm not ready to go to buy," and then they come back 2 weeks later and are disappointed to find that, that item is already sold.

Recognizing that many of our items are one-of-a-kind, providing more of those signals to buyers is helping to drive urgency and therefore, conversion rate.

We also did things like improved transparency of shipping and other things that really helped to provide better information to buyers so that they can make a better-informed buying decision and buy with more confidence.

Improving our return policies is another example.

Because it's the fourth quarter, the holiday season looms large.

We also did some things that are very holiday-season specific this year, so most e-commerce sites in the holiday season are running cyber sales, and in the past, we have not.

So this year, we ran a cyber sale, and that puts us on equal footing with all of the other e-commerce players.

So people coming to Etsy expecting to find deals do, in fact, find deals.

And sales and promotions and some of the other things we did like what are items that are available to be shipped on short notice, helped to put us on equal footing in the holiday season.

So I'd say a couple of things we did were important for the holiday season and then a number of things we did were important for all-year-round.

You asked specifically around buyer acquisition and paid marketing, and we're also making progress there.

So there's a number of levers we have to improve that in our marketing capability: One is the sophistication of our bidding algorithms, and those are improving.

And as our bidding algorithms get better, we can get better ROI with the same spend or spend more and maintain our ROI.

It's also true that as things like conversion rate and buyer LTV go up, you can actually invest more and maintain good ROI.

So there's a virtuous cycle there.

What I'd point to in our paid marketing in general, and I think this gets to your second question, is what we're very focused on is the marginal return of the next dollar spent.

So we're always looking at, for the next dollar we spend in performance marketing: are we delivering a good ROI that delivers good value to our shareholders?

We're making progress there, but we think there's still more room to go in improving our capabilities to allow us to invest more profitably.

I don't foresee step function increases in those investments.

I think we're going to make steady progress, but we're going to keep our eye on the prize and to the extent that we can invest in a way that delivers really good returns for shareholders, we're going to do that.

And our next question comes from the line of Dylan Haber with RBC Capital Markets.

Given the success you've seen with the Labor Day and holiday sales, what additional seasonal sales, if any, would you plan on adding in 2018?

And how frequently should we expect to see these platform-wide sales initiatives on Etsy?

That's something that we're going to test and learn.

I think sales are tried and true tool of retail that have worked for the past couple hundred years.

And what we are not is a discounter that's always in the business of discount.

However, many great retailers run occasional sales and promotions, and what I find I like about that for Etsy is it's a reason for buyers to think about us again and discover that we're relevant more often throughout the year.

We have over 30 million buyers, and they have had very positive experiences on Etsy in general.

The Net Promoter Scores are very high.

But we need to retrain their habits to have them think about us more often.

And sales and promotions is one tool we have to give them an excuse or rationale to come back more often and try us for other times here when they might not always.

So there's obvious seasonal periods when that could make sense: Christmas or the holiday season is one; Valentine's Day is another.

And then there might be things during the year that we could do that are unique to Etsy that nobody else is doing, and you should keep an eye out for that.

We are paying a lot of attention, though, to the fact that they need to happen at an appropriate cadence, so we're not a discount site by nature, which we aren't.

And our next question comes from the line of Edward Yruma with KeyBanc.

This is Matt on for Ed.

So we think it's fair to say that sellers and employees push back, at least initially, on a lot of changes that you guys put in place the past year, but given the past year was so successful, do you see any increased enthusiasm from your sellers to try new things?

And if you do see some momentum with sellers, how do you view your take rate level moving forward?

We're focused on growing the pie for everyone, and GMS is the best measure for how big the pie is for everyone.

And so that's what we do.

As a platform, our job is to make the experience better for all of our buyers and sellers.

On any given day, there will be individual winners and losers because that's the nature of the marketplace.

Is the product that particular seller is selling, is it in fashion or not?

How is it resonating with the marketplace?

That's up to each of our sellers.

We've got to create the best platform we can to give all of them the best chance to compete and win.

And we're seeing a lot of progress in that and we are really excited about that.

As we continue to focus on driving value for everyone, we'll look at what levers make the platform better and make the platform even healthier.

That's always going to be the thing that we focus on.

Then we can think about the right share of value, and as we're driving more value for others, what's the right share for us.

But the main thing is how do we make the pie bigger.

And our next question comes from the line of Sam Kemp with Piper Jaffray.

So, Josh, last quarter you talked about planning on rolling out a new user experience or new user interface sometime in the second half of 2018.

I was wondering, can you give us an update on the direction that you're thinking that, that's going to go and what the users can kind of experience outside of just the changes that you're already making inside search and recommendations?

And then Rachel, there's a lot going on at the margin line in your guidance right now.

But if I'm normalizing for the restructuring benefit and adding back the $15 million for the cloud transition costs, it looks like at the high-end of your guidance range, you're looking for somewhere around on the range of 350 basis points of kind of, if you will, core margin expansion.

Can you just talk about what the driving components are there, whether it's the renegotiated lower Etsy Payments cost or the higher mix of paid Seller Services or just kind of foregone operating expense growth?

Sure, I'll take the first, and then Rachel will take the second.

So I don't recall specifically talking about a brand-new UI, but I think maybe what you're referring to -- we've got a very balanced portfolio of product roadmap initiatives for 2018 that I'm really excited about.

And here's how I think about those.

We want to study cadence of things that we have high confidence are going to improve the buyer and seller experience, and we feel like we've got a really robust roadmap of ideas to do that.

These are things that are perhaps best practices already used in other parts of the web that we haven't yet adopted or things that we think have a high likelihood to succeed across each search and discovery and trust and reliability, et cetera.

And we've got a good pipeline of those.

We also want to make sure that we're stretching ourselves and we're thinking about bolder, bigger bets, that we have less confidence will work, but will move the needle if they work.

And having a good portfolio that encompasses both of those in the right levels is how we're thinking about 2018.

I do think what's important for us, and what you'll hear me come back to again and again, is velocity.

The more we can ship product enhancements, the quicker we learn and the quicker things get better.

So we feel great about the fact that, since May, we've launched more than 350 product and marketing enhancements, and this idea that we go quickly from idea to testing and market and improving the experience for our customers and generating more learnings, is really important and something that we continue to focus on.

On the -- Sam, on the margin question, so let me see if I can break it down for you.

So first, we talked about annualized savings of about $35 million, and then that is offset, by some expense increase while we're migrating to the cloud, because we'll have some fuel expense during that 2-year period of time that the migration happens.

The third component we gave is that we did have a slightly lower cost in headcounts in the fourth quarter because of higher attrition.

And we put a number on that of about $1.3 million of favorable impact in the fourth quarter.

So we're sort of guiding you to add that back when you're thinking about our margins.

And then we have, of course, higher GMS and roughly -- continued GMS and revenue growth in our guidance, and you're seeing a higher flow through of that to EBITDA as we scale our business.

So we've taken cost out in 2017.

But those fixed costs are growing at a slower rate in 2018.

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

How should we think about your long-term margin potential?

When Etsy first went public, prior management suggested a long-term adjusted EBITDA margin target in the high teens and low-20s.

One of your strengths since taking over the helm has been to do more with less.

How does that translate into your long-term margin potential?

So marketplace businesses are wonderful businesses.

They are really hard to build, and if you can build them, they have wonderful economic architectures.

And I see no reason why our margin potential won't look like other good marketplaces over time.

We're very focused on growing the pie for everyone.

And so our directive is to grow.

It's not always true that throwing more money at the problem makes it better.

So what you've seen us do is focus on doing fewer things better in order to move faster and with more focus and in order to deliver more growth.

And that's what we said several months ago, and I hope that we're starting to deliver proof now that we meant it.

This is really about growth.

And as we grow, we do think the margins will look very attractive and in line with other marketplace companies.

And our next question comes from the line of Darren Aftahi with Roth Capital Partners.

This is Dillon on for Darren.

I was wondering if you could talk a little bit to some of the new seller tools that you might be implementing, sort of the roadmap as to when those could go live.

And do they go live for all sellers?

Or do you test them across certain markets first?

And then as it relates to some of the margins, is there room to increase the marketing spend if you see traction in digital acquisition or paid marketing efforts like you talked about through those e-mail initiatives?

Yes.

So on the first one, look, I don't have anything to announce right now, specifically around the seller marketing roadmap or our seller tools roadmap.

But what I will say is, sellers are looking for ways to understand, manage, and grow their business.

And so you should expect to see us focus on tools that help them do exactly that.

I talked about in my prepared remarks, for example, analytics that can help them get a better understanding of what's actually driving their business.

One of the things that our sellers really want is the opportunity to invest behind their own growth.

And so Rachel talked about our Google Shopping initiative and how we're really -- we ran some promotions to help them understand the value of Google Shopping.

This is a great way that they can invest in us driving traffic to their listings, so they leverage our experience with paid marketing and all of our great marketing capabilities in a way that puts more control directly in their hands.

And those kinds of things, I think, are very exciting.

Our sellers really like them and it helps them to drive their success.

We're going to continue to invest behind it.

And then, I guess, the second part of the question, one of the things we said in the call was that we achieved a 1-quarter payback on our marketing spend, which would imply that we could be spending more.

So we're constantly -- and it indicates, as we said, that we've really optimized our bidding.

And so we're looking at ways to be able to deploy our capital on even higher -- continued higher ROI marketing initiatives.

However, we are also looking at the synergies between ourselves and our sellers.

So we have an attractive community of almost 2 million sellers that also can use their own muscle and their networks to drive social traffic, for instance, and we've given them tools to be able to do just that.

So there's a combination of paid and free methods of marketing that we're trying to deploy in equal measure.

And ladies and gentlemen, that does conclude our Q&A session for today.

With that said, thank you for participating in today's conference.

That concludes the program and you may all disconnect.

Everyone have a wonderful day.