Q4 2016 Real-Time Call Brief

Highlights

We strengthened our existing services as well by extending direct checkout to sellers in 14 new countries and added redundancy and resiliency to our payment system. This along with other hardware generated strong 2016 financial results, which exceeded our guidance including GMS of $2.8 billion, up 19% year-over-year, revenue of $365 million, up 33% compared to last year and adjusted EBITDA margin of 15.7%.

Throughout 2016, our community continued to grow and as of December 31, 2016 we had 1.7 million active sellers and 28.6 million active buyers.

In terms of raising brand awareness, research studies show that perception among existing buyers is that etsy.com is a shopping destination just for special occasions. This couldn't be further from the truth with nearly 45 million items across more than 50 retail categories, there's something for everyone.

In fact, some markets saw triple digit percent increases.

International GMS were either the buyer or seller or both are outside of the U.S., with 30.4% of GMS in the fourth quarter.

The craft supply market is enormous. Approximately $44 billion in the U.

We believe that we can elevate our best offering of 8 million craft supply items among existing and new buyers, offer current craft supply buyers a more tailored experience, and help drive sales for existing craft supply sellers and attract new creative entrepreneurs to our market.

Over the past five years we build and launched four great paid services, which grew to 55% of our total revenue in 2016.

We want to be the first place people go when they want to turn a creative passion into a business. So just $0.20 and an idea an Etsy seller can list an item that reaches a global audience of nearly 30 million active buyers.

About 81% of Etsy sellers that they want to grow their business and we want to help them scale.

During the fourth quarter of 2016, Etsy's markets generated $865.2 million in GMS, up nearly 17%.

For the full-year of 2016, our markets generated approximately $2.8 billion in GMS, up nearly 19%.

At the end of the fourth quarter, Etsy had 1.7 million active sellers, up 11.8% and 28.6 million active buyers, up nearly 19%.

Also average GMS for 2012 active seller was $4,557 in 2015 and that was 4x higher than it was in 2012.

For the 2013 seller cohort, 32% of active sellers remained active in 2016 and their average GMS in 2016 was $4,620, approximately 4x higher than it was in 2013.

Our 2013 buyer cohorts behave similarly to our 2012 cohort with 41% of our 2013 active buyers remaining active through 2016 compared with 43% for 2012 active buyers.

In addition, the average annual GMS for 2013 active buyer was $174 in 2016 or nearly 81% higher compared to 88% higher for the 2012 active buyers.

We measure frequency in purchase days and the percent of buyers who made purchases on multiple days in 2016 was 41% compared with 40.6% in 2015.

Approximately 65% of our visits come to us from mobile device in the fourth quarter, which is up 400 basis points year-over-year and flat compared to last quarter.

Approximately 49% of our GMS came from a mobile device, up 500 basis points year-over-year and flat quarter-over-quarter.

Etsy's international business continue to expand with international revenue growing nearly 40% in the fourth quarter.

Percent international GMS was roughly flat at 30.4% compared with the third quarter of this year, and up from 29.2% in the fourth quarter of last year.

While international GMS grew 27.6% faster than both overall Etsy GMS as well as U.S domestic GMS, we did see an increased direct impact from currency exchange rates this quarter.

As a result, currency exchange rates were headwinds that create a 1.5 percentage point drag on our overall GMS growth rate.

During the fourth quarter of 2016, international GMS growth was largely driven by continued robust GMS growth between U.S buyers and international sellers, between international buyers and sellers in the same country, and between international buyers and sellers in different countries.

With international buyers and sellers in the same country growing the fastest at 44% year-over-year.

GMS between U.S sellers and international buyers continue to decline and was down 8% this quarter.

During the fourth quarter, total revenue was $110.2 million, up 25% driven by growth in seller services revenue and to a lesser extent growth in markets revenue.

Revenue for the full-year was approximately $365 million, up 33.4% compared to 2015.

Markets revenue grew 17.9% in the fourth quarter, primarily due to growth in transaction fee revenue and to a lesser extent growth in listing fee revenue.

Seller services revenue was up 30.7% and was driven primarily by an increase in revenue from Direct Checkout, which continued to benefit from our integration of PayPal through the fourth quarter of 2016.

During 2016, approximately 52% of our active sellers used at least one seller service compared with 48% last year.

Approximately 46% of our active sellers use Direct Checkout compared with 40% last year and approximately 78% of our GMS was processed through Direct Checkout compared with 62% in 2015.

Approximately 26% of our active sellers in the U.S and Canada where we offer shipping labels, used that service compared with 24% last year.

Approximately 16% of our active sellers used promoted listings compared with 17% last year, and finally 2.5% of our active sellers used Pattern, because Pattern launched in April 2016, this usage only include eight-months of data.

Gross profit for the fourth quarter was approximately $73.2 million, up approximately 27% and gross margin was 66.4%, up 80 basis points.

Etsy's total fourth quarter operating expenses were $69.8 million, up 42%.

Total operating expenses as a percent of revenue increased to 63% in the fourth quarter compared with 56% last year and 63% in the third quarter.

For the full-year 2016, operating expenses as a percent of revenue declined to 61% compared to 65% in 2015.

Marketing expenses totaled $31 million, up 38% representing 28% total revenue versus 26% last year and 21% in the third quarter.

During the fourth quarter, digital marketing expense, which excludes brand marketing related to spend on digital channels such as YouTube and Facebook, increased 8.4% year-over-year and continued to generate positive ROI based on our attribution model.

Product development expenses totaled $16.1 million, up 44% representing 15% of total revenue versus 13% last year.

G&A expenses totaled $22.6 million, up 45% representing 21% of total revenue versus 18% last year.

Headcount at the end of the quarter was 1,043 compared with 979 as of September 30, 2016 and 819 as of December 31, 2015.

Fourth quarter net loss was $21.4 million compared with a net loss of $4.2 million last year.

Etsy's net loss included interest expense of $2.1 million related to the build to suit lease accounting for our new Brooklyn headquarters, a foreign exchange loss of $18 million and an income tax provision of $4.8 million, all three of which are primarily non-cash.

Non-GAAP adjusted EBITDA was $15.3 million, up 9%. This resulted in an adjusted EBITDA margin of 13.9%, down 210 basis points year-over-year driven by higher employee related expenses associated with the acquisition of Blackbird Technologies.

During the quarter, we generated $18.5 million in cash from operations compared with $10.2 million last year.

As of December 31, 2016, we had cash, marketable securities, and short-term investments totaling $282.1 million.

Based on our results in 2016 and our expectations for 2017 and 2018, we now expect to achieve a 2016 through 2018 GMS CAGR in the 16% to 17% range, up from a range of 13% to 17% and a 2016 to 2018 revenue CAGR between 23% and 25%, up from a range of 20% to 25%.

In 2017, we expect GMS growth to range from 15% to 17% and revenue growth to range from 20% to 22%.

We continue to expect to exit 2018 with a full-year gross margin that is in the mid 60% range and we expect 2017 gross margin to be in the mid 60% range as well.

We continue to expect to exit 2018 with a high teens adjusted EBITDA margin driven by leverage across our operating expense structure during the 2016 to 2018 period that our guidance covers.

In 2017, we expect adjusted EBITDA margin to be between 12% and 14%.

Throughout the year, we expect to invest approximately $20 million in brand marketing, up from approximately $6 million in 2016.

Finally with regard to guidance, last quarter we mentioned that we've completed the build out of our new Brooklyn headquarters in which we invested approximately $40 million, our largest CapEx to date.

Now that the build out is complete, we expect CapEx in 2017 to return to more normalized levels like we saw in 2014 when CapEx was approximately 5% of full-year revenue.