Etsy's (ETSY) CEO Chad Dickerson on Q4 2015 Results - Earnings Call Transcript

| About: Etsy, Inc. (ETSY)

Etsy Incorporated (NASDAQ:ETSY)

Q4 2015 Earnings Conference Call

February 23, 2016 05:30 PM ET

Executives

Jennifer Beugelmans - VP, IR

Chad Dickerson - CEO

Kristina Salen - CFO

Analysts

Brian Nowak - Morgan Stanley

Blake Harper - Topeka Capital

Darren Aftahi - Roth Capital

Operator

Good day, ladies and gentlemen and welcome to the Etsy Fourth Quarter and Full Year 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Jennifer Beugelmans, Vice President of Investor Relations. You may begin ma’am.

Jennifer Beugelmans

Thank you. And welcome to Etsy fourth quarter and full year 2015 earnings conference call. Joining me today are Chad Dickerson, CEO, and Kristina Salen, CFO.

Before we get started, just a reminder that our remarks today include forward-looking statements relating to our financial performance and results of operations, business strategy, guidance, mission, product roadmap and potential future growth. Our actual results may be materially different. Forward-looking statements involve risks and uncertainties which are described in our press release today and in our 10-Q filed with the SEC on November 03, 2015. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today and we don't have any obligation to update them.

Also during the call, we'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 our Investor Relations Web site. 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.

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

Chad Dickerson

Thanks, Jennifer, and good afternoon everyone. So I am excited to talk to you about the progress Etsy’s made in 2015, our plans for 2016 and our financial goals through 2018. In the fourth quarter, our GMS was more than $741 million and our revenue was nearly $88 million. For the full year GMS reached nearly $2.4 billion and revenue was more than $273 million.

We believe our strong results reflect the vitality of Etsy’s community and our team’s strong execution. Throughout 2015, our community continued to grow and we ended this year with more than 24 million in active buyers and nearly 1.6 million in active sellers. In 2015 we continue to put the building blocks in place that we believe will set us up for sustainable long-term growth.

Buyers on Etsy’s platform remain uniquely loyal to the brand. In 2015, 81% of our GMS came from repeat purchases made by new, retained, and reactivated buyers. This was up from 78% in 2014. Also in 2015, approximately 47% of our active buyers made two or more purchases in the previous 12 months, up slightly from 2014. We believe that these two data points shed important light on our long-term growth opportunity. First, we know that Etsy buyers are loyal and have continued to make repeat purchases over a long period of time.

Second, with fewer than 50% of our active buyers making multiple purchases in a single year over the long-term we believe we’ve made or we have substantial opportunity to drive engagement which ultimately should lead to increased purchase frequency. Our community of sellers and buyers who are so important to our long-term success continue to show their loyalty to Etsy. Kristina will provide you with new 2012 seller and buyer cohort data that further demonstrate their commitment to our platform.

With approximately 90% of our traffic coming from organic channels, Etsy’s brand clearly resonates with buyers. During our third quarter earnings call we talked about our strategy to implement a multichannel holiday campaign to grow brand awareness beyond our organic channels and to drive engagement throughout the fourth quarter holiday season. We ran a coordinated campaign across paid and non-paid channels that helped our sellers to have a great holiday season. We saw strong returns on our digital marketing budget and as Kristina will describe, paid GMS growth that significantly outpaced organic GMS growth.

More importantly, our overall GMS growth accelerated as we moved through the holiday season in November and December evidence of the successful brand campaign. For the first time ever, we ran a global holiday campaign that featured merchandised pages and gift guides across key categories and was coordinated across mobile apps, desktop and global Web. We ran a cost effective video ad on Facebook and YouTube and were featured on Ellen Degeneres Show’s 12 days of Christmas segment.

We complement our brand campaign with a robust e-mail and social media effort that included nearly 20 million push notifications nearly 900 million e-mails and Facebook and Instagram social media campaigns. 2015 was a strong year of growth for Etsy and I believe we're executing the right strategy to build sustainable growth for the long-term. So let me take the next few minutes to talk about what we have recently achieved in each of our key initiatives and some of the upcoming milestones that will be indicative of our continued forward progress.

Let's start with Etsy every day, mobile is at the heart of this initiative and in just one year we improved the Etsy mobile experience from end-to-end. We developed products and tools that allow our buyers and sellers to connect and transact more seamlessly across multiple devices, countries and currencies. Our top focus in 2015 was to help buyers find and use our beautiful Etsy apps and connect them directly to an easier and more fun than ever mobile experience. We believe this foundational work improved the experience across the buyer journey and contributed directly to our apps GMS growth which grew well over 50% in 2015.

Our first step included the work we did around deep linking and app indexing which allows us to connect shoppers directly to our apps. Once in the app we made it easy to get started with social sign up and sign in via Facebook and Google. We also introduced an important update called exploratory search, this enhancement helps buyers to more easily find the items they're looking for on Etsy by making search results and navigation more intuitive to buyers, who can now browse by category, feature or product type.

Finally, we expanded the checkout experience using Etsy’s direct checkout platform which now offers integrated Apple Pay, Google Wallet, PayPal and Express Checkout payment options. We believe these core improvements and others led to our 4.5 star rating in the Apple app store up from roughly 2.5 stars prior to this work and also contributed to the continued growth of app downloads which reached 31.8 million as of December 31st. While we're still in the early innings on mobile we believe that we've made an important progress in a relatively short period of time. The impact of this work is best seen in the year-over-year narrowing of the gap between mobile visits and mobile GMS.

We began to see this in the third quarter and it continued in the fourth quarter. In the fourth quarter 61% of our visits and 44% of our GMS came to Etsy through a mobile device. We believe we can continue to close the gaps between mobile visits and mobile GMS and benefit from the emerging trends in mobile commerce. Our efforts in mobile in 2015 moved the ball forward for Etsy and provided strong momentum as we head into 2015. This year we plan to launch even more mobile products, tools and services that address the needs of our diverse community of sellers and buyers. As our teams continue to execute on our exciting 2016 product road map, you should expect to see more enhancements to help Etsy sellers or Etsy buyers connect with sellers in new ways and enable them to more easily find a unique item they're searching for, at just the right time.

Turning to our international initiatives to build more local marketplaces globally, we made our first international sale in our first week of business over a decade ago and Etsy global business has grown since then. Even with that growth we believe we're only at the beginning when it comes to our international strategy. In the fourth quarter 29.2% of our GMS with some international sales roughly flat with the third quarter, as we've discussed in previous quarters, currency has a direct translational impact on our results and we believe an indirect impact on the behaviour of international buyers. We're working hard to offset these macro currency challenges by building local marketplaces and ecosystems.

Our continued strong growth in the UK reflects the early success of this strategy. In the fourth quarter in nearly half to GMS in the UK works on UK buyers purchasing from UK sellers, evidence that we're building a local marketplace within the country. To give you some prospective in the U.S. our most mature market for approximately 78% of GMS is from transactions between U.S. buyers and sellers. Purchases by UK buyers and UK sellers grew more than 69% year-over-year nearly 7 times the growth rate of purchases made by UK buyers and sellers outside of the UK in the quarter.

We believe that new enhancements like the boost of domestic items within search which we launched in the UK in the fourth quarter encouraged the factor being of particularly helpful during the holiday season. GMS between international buyers and sellers in the same country is one of our smallest GMS buckets, so we believe we have substantial Greenfield opportunity to grow in local marketplaces internationally.

In 2016 we'll continue to invest in local marketing content and program tools to expand our international community and broaden on our global platform. Great examples of these efforts are already underway are programs like Etsy Resolution and Etsy Made Local. Etsy Resolution is our seller acquisition campaign aimed at driving new seller growth in our international markets. We've launched this four week mentoring program at the end of January and more than 26,000 participants signed up within the first week. Etsy Made Local was a series of local markets organized by Etsy seller teams, our Etsy Made Local events in Australia were particularly successful and attracted 65,000 people across the country.

Turning now to our high impact seller services, which represented 54% of our revenue in the fourth quarter, you may recall that we launched the first of our three seller services late in 2011 and in less than five years our three services now make up the majority of our revenue base. We believe this rapid growth demonstrates our ability to address the pain points that sellers encounter whether they’re just starting out and are trying to grow. We intend to continue to grow seller services revenue by expanding the geographic reach of existing services, enhancing the functionality of our existing services, and building new services.

We have two recent examples that demonstrate our execution on this strategy. At the end of October we enhanced the functionality of direct checkout by fully integrating PayPal into our service and making it even easier for buyers and sellers around the world to seamlessly transact. Following this integration, we saw direct checkout revenue growth accelerate in the fourth quarter. And in early 2016, we enhanced direct checkout even further by scanning into an additional 12 countries and integrating Apple Pay into our express checkout option.

As we look ahead to 2016, we intend to launch a new seller service. While we’re not announcing the specifics of this new service today, we remain focused on helping our sellers with the business related task such as inventory management, shipping, customer service, marketing and accounting. As we outlined in our IPO perspectives for every hour an Etsy seller spends making her product, she spends another on these tasks and we want to help our sellers find more time to create. So our product roadmap is focused on services that will help her manage these types of tasks, increase velocity of our marketplace and at scale provide an attractive profit opportunity for Etsy which we can reinvest back into our business and our community.

As we think about our longer term roadmap for seller services, we’re looking at opportunities to support our sellers wherever and however they chose to bring their products to market. As we said before, based on our surveys and research, we know that more than 50% of our sellers sell in channels other than Etsy even though Etsy is their largest source of income. Other channels include craft fair, their own Web sites and retail outlets just to name a few. In the same way that these other channels provide new opportunities for them to seller their products, they also add to the administrative workload. We believe we can develop tools and services to help our sellers better manage these multiple sales channels. Overtime this presents a significant opportunity for Etsy to enhance the value of our platform for our sellers and to expand our addressable market opportunity.

Finally, I want to touch on our efforts to expand the Etsy economy which focused on broadening the impact of our platform by bringing new constituents into our community. We talked to you before about Etsy Manufacturing and Etsy Wholesale and our long-term vision for their contributions to our ecosystem. As we announced last quarter we launched Etsy Manufacturing in direct response to feedback from our sellers who told us they wanted to grow their businesses they were having difficulty finding production partners with similar values. Through our platform these sellers can now connect with values aligned manufacturers that range from individuals to emerging start ups to decade old family run factories. It’s still early days and to-date we have received around 700 applications from manufacturers to join the marketplace. Approximately 25% of those applicants have actually been from current Etsy sellers who are offering to help other sellers produce their products.

Throughout 2015, we also reached core milestones that we believe will help make Etsy Wholesale an important tool for our sellers in the years to come. First, we exited 2015 with nearly 11,000 retailers and more than 4,500 sellers signed up to participate in Wholesale. Our goal is to make Wholesale more accessible to creative entrepreneurs and to support these smaller independent retailers as creative business owners. Second, we introduced the Etsy Wholesale retailer commitments with our larger retail partners. Land of Nod, Lou & Grey, Whole Foods and our newest partner Macy's Herald Square with whom we launched the new Etsy shop on January 28th. These commitments are focused on supporting our seller community by reducing the operational and financial challenges they face when working with larger retailers.

While I am proud of what we’ve accomplished to-date the Etsy team and I are really focused on execution and excited about the opportunities and milestones yet to come. We believe we have the right strategy in place and passionate leaders to execute on it. We’ve made prudent investments to maximize the impact of this strategy. We also believe that we have an unrivaled understanding of the needs of creative entrepreneurs which will allow us to grow with each of them, supporting their individual needs. All of these factors give us confidence in our long-term growth potential and our ability to deliver value to all of our stakeholders.

In 2016 to recap this means the roadmap that includes products that will continue to encourage buyers to engage, browse, search, and discover unique items platform enhancements that will make it even easier for buyers and sellers to seamlessly and quickly transact and the new seller service that solves the pain point and moves us down the path toward our longer term goal of supporting our sellers wherever they put ecommerce. We’ll also be launching new tools and products to continue to support our international strategy to build local marketplaces and expand the Etsy economy.

So with that I’ll turn it over to Kristina to walk you through our 2015 results, and provide you with a bit more context on our three year financial guidance. Kristina?

Kristina Salen

Thanks Chad and hello to everyone joining us today. Just to note, unless I say so, all comparisons I’ll be referencing here are on a year-over-year basis.

Let’s start with GMS. During the fourth quarter of 2015, the Etsy marketplace generated $741.5 million in GMS up 21%. Growth in GMs was driven by growth in active sellers and active buyers. As Chad mentioned we had a very strong holiday season with GMS growth accelerating throughout the period. For the full year 2015 the Etsy market generated approximately $2.4 billion in GMS up nearly 24% year-over-year. At the end of the fourth quarter Etsy had 1.6 million active sellers up 15.5% and 24 million active buyers up 21%. Our community of sellers and buyers continues to grow at a healthy rate and we are releasing new cohort data that we believe demonstrates the stickiness of our platform.

So let me take a minute to remind you of how our cohorts work, staring with our seller cohort. In our IPO perspectives we told you that if we had 100 active sellers in 2011, 32% of these sellers would still have been active in 2014 four years later. In addition we also told you that the average GMS for 2011’s active sellers was $4,299 five times higher in 2014 than in 2011. We are pleased to see that these trends have continued in our 2012 seller and buyer cohorts. We would also note that year five data for our 2011 cohort is consistent with year four trends and early data indicates that our 2013 cohorts are behaving similarly.

The 2011 and 2012 data will be in our 10-K but let me walk you through the highlights for our 2012 cohorts. For the 2012 seller cohorts 32% of active sellers remained active four years later and their average GMS was $4,557 four times higher than it was in 2012. Our 2012 buyer cohort is also behaving in line with our 2011 buyer cohorts. Recall that at the end of 2014 45% of our 2011 active buyers remained active. In addition the average annual GMS for 2011 active buyer in 2014 was $195 or nearly 90% higher than it was in 2011. For the 2012 cohorts nearly 43% of our 2012 active buyers remained active in 2015 and their average GMS was $181 also up nearly 90% versus 2012.

As Chad mentioned in 2015 improved our mobile offering from end to end and we believe as a direct result we are now in the gap between mobile visits and mobile GMS. During the fourth quarter approximately 61% of our visits came to us from a mobile device which is up 500 basis points year-over-year and 100 basis points quarter-over-quarter. This growth continued to outpace the rate of growth on desktop. More importantly about 44% of our GMS came from a mobile device up to 600 basis points year-over-year and flat quarter-over-quarter.

Etsy’s international business continued to expand with international revenue growing nearly 31% in the fourth quarter. However percent international GMS was roughly flat at 29.3% in the fourth quarter compared with the third quarter of this year and down from 30.6% in the fourth quarter of last year. As a reminder percent international GMS is a percent of total GMS from transactions where either the buyer or the seller is outside of the U.S. We continue to believe that we can grow percent international GMS overtime to represent 60% of our total GMS.

As we have discussed with you before we believe that currency exchange rates are directly and indirectly effecting Etsy's overall GMS growth rate and percent international GMS. During the fourth quarter GMS from international buyers purchasing from U.S. sellers declined approximately 13% year-over-year this is flat with the approximate 13% year-over-year decline we saw in the third quarter and informed our analysis of the impact of currency translation on international buyer behaviour. Based on the direct impact of currency on our non-U.S. dollar denominated GMS and on our assumptions surrounding the indirect impact of currency exchange rates on international buyer behaviour we believe that we saw a drag of approximately 2 percentage points on our overall GMS growth rate in the fourth quarter from currency.

Turning now to revenue during the fourth quarter total revenue was $87.9 million up 35% driven by growth in seller services revenue and to a lesser extent growth in marketplace revenue. Revenue for the full year was $273.5 million up nearly 40% compared to the 2014. Marketplace revenue grew 19.5% in the fourth quarter primarily due to the growth in transaction fee revenue and to a lesser extent growth in listing fee revenue. Seller services revenue was up 54% in the fourth quarter and revenue from each of our services grew faster than GMS and marketplace revenue.

This is primarily due to growth in revenue from direct checkout promoted listing. Promoted listings has continued to grow robustly and revenue growth in the fourth quarter in promoted listings was driven by higher click volume and overall improvements to promoted listings ad quality. We're also very pleased with the growth of direct checkout which benefited from our integration of Paypal into our payment service, and therefore as Chad mentioned sales growth rate accelerated in the quarter.

Following the integration at the end of October we saw a significant increase in the usage of direct checkout by our sellers, and notably direct check out grew slightly faster than promoted listing for the first time in 2015. Closing out the seller services discussion shipping labels revenue growth was driven by a combination of enhancements to the product and an increase in the overall number of orders shipped.

I now want to update you on the usage of our seller services during 2015. During 2015 48.1% of our active sellers used at least one seller service, 40.2% of our active sellers used direct checkout. 23.9% of our active sellers in the US and Canada where we offer shipping labels used that service and 16.7% of our active sellers used promoted listing. These stats reflect continued adoption of direct checkout and shipping labels and a slight tapering promoted listings usage which is what we expected. We think the tapering of promoted listings usage reflects the impact of our relaunch of the product and our move to a bided ad model that unlocks greater pricing potential and support both healthier seller ROI and a better buyer experience. We plan to continue to refine our advertising services to help a broader base of sellers over time.

Turning now to margins, gross profit for the fourth quarter was approximately $58 million, up 37% and the gross profit margin was nearly 65.6% up 70 basis points. As in the first three quarters of the year in the fourth quarter gross profits grew faster than revenue. This is due to the leverage we achieved in employee related and hosting and bandwidth cost, as well as continued robust growth of promoted listings which you may recall is a higher margin revenue stream.

Turning now to operating expenses, Etsy's total fourth quarter operating expenses were approximately $49 million up 17% year-over-year. Total operating expenses as a percent of revenue declined slightly to 56% in the fourth quarter compared with 65% last year.

We gained leverage on our operating expenses as a percent of revenue primarily due to reduced G&A expenses that we don't expect to repeat in the first quarter of 2016, and I'll discuss that further in a minute. For the full year 2015 operating expenses as a percent of revenue declined slightly to 65% compared with 66% in 2014.

Marketing expenses totaled $22.5 million up 54% representing 26% of total revenue versus 23% last year and 25% in the third quarter. This year-over-year growth in marketing spend decelerated meaningfully from the year-over-year growth in spend we reported for the third quarter of 2015 as well as compared with the fourth quarter of last year. It reflects the plateauing of growth in our digital marketing spend that we forecasted to you all last quarter.

As in previous quarters the growth in marketing expenses continued to be driven by digital marketing, which is primarily focused on Google product listing ads. During the fourth quarter digital marketing expenses were roughly $15 million up 86%. As we expected this was less than the approximate 95% growth in spending we saw in the third quarter. During the fourth quarter digital marketing spend continued to generate positive ROI based on our global attribution model and our paid GMS growth rate actually accelerated to 68% more than triple our reported GMS growth rate and favorably comparing to 59% paid GMS growth rate in the third quarter,

As we've shared with you before unique to an internet company archives [ph] approximately 90% of our traffic comes from organic channel. So it can be difficult externally to see the positive impact of our marketing investment on GMS growth strictly on a quarterly basis. Our marketing investments are guided by our two year lifetime value global attribution model, in which we make conservative assumptions about how paid traffic will perform compared with organic traffic. Since 2014 we have achieved a payback period of five quarters and we remain committed to achieving positive two year ROI at the aggregate company level on our marketing spend.

For the full year 2015 marketing expenses grew 68% a significant deceleration when compared to the 122% growth 2014.

Moving on, product development expenses totaled $11.2 million up 15% representing 13% of total revenue versus 15% last year. The increase in product development expenses was driven by higher employee related expenses as we continued to grow product and engineering staff. G&A expenses totaled $15.6 million, down 11% representing 18% of total revenue versus 27% last year. The decrease in G&A expenses primarily resulted from reduced stock based compensation and lower bad debt expense. Excluding these items, G&A expenses would have increased 13%. Headcount at the end of the quarter was 819 compared with 804 as of September 30, 2015 and 685 as of December 31, 2014. Looking ahead to 2016, we expect to continue to hire at a robust pace.

Non-GAAP adjusted EBITDA was $14 million, up 51%. This resulted in adjusted EBITDA margin in the quarter of 16%, up 170 basis points year-over-year. Fourth quarter net loss was $4.2 million compared with the net loss of $5.4 million last year. Etsy’s net loss in the fourth quarter of 2015 was impacted by a foreign exchange loss and by our income tax provisions. We recorded $6 million of foreign exchange losses in the fourth quarter of 2015 largely made up of a non-cash currency loss related to Etsy’s revised global corporate structure that we implemented on January 1, 2015.

We also recorded a $6.3 million tax provision in the fourth quarter compared to a tax provision of $3.1 million last year. Our tax provision in the fourth quarter was driven by non-cash charges primarily related to the aforementioned revised global corporate structure. Our tax provision also reflects the benefit from an R&D tax credit. During the quarter, we generated $10.2 million in cash from operations compared with $0.1 million last year. The increase in net cash provided by operating activities for the quarter was mainly due to the timing of payments to certain vendors which will happen in the first quarter of 2016. As of December 31, 2015, we had cash, marketable securities and short terms investments totaling $292.9 million.

To wrap it up, I’d like to discuss our three year growth expectations from a financial perspective. From the many meetings, Chad and I have had with our investors since we went public, it has become clear to us that an additional long-term guidance would be helpful to our investor community and would provide a clear picture of how we believe our strategic initiatives will translate into long-term financial result. We are as committed as ever to delivering long-term sustainable growth. And over the next three years we believe we can continue to achieve solid revenue growth combined with leverage in our cost structure to expand our adjusted EBITDA margins.

Specifically, we expect our three year revenue CAGR to be in the 20% to 25% range and our three year GMS CAGR to be in the 13% to 17% range. Please note though that our guidance assumes currency remains stable compared to average levels in December of 2015. In 2016, we expect revenue growth to be at the high end of our three year range and that GMS growth will be near the midpoint of our three year range. We anticipate that the key factors impacting revenue and GMS growth over the next three years include; number one, the further narrowing of the gap between mobile visits and mobile GMS; number two, stable percent international GMS; number three, continued revenue growth in our existing seller services, driven by both adoption and product enhancements; and finally, number four, modest contributions from new product launches and new seller services.

We expect to exit 2018 with a full year gross margin that is in the mid-60s percent range and that the 2016 gross margins will be in the 64% to 65% range. We anticipate the key factors impacting our gross margin forecast over the next three years, include; number one, continued revenue growth from our existing seller services driven by both adoption and product enhancements; number two, the impact from new seller services that we intend to launch. I would also note that at this point we don’t anticipate launching any new seller services in the next three years that would be dilutive to our gross margins. We also expect to gain leverage in our operating cost structure over the next three years, particularly within marketing spend.

In fact in 2016 we expect marketing expense as a percent of revenue to decline. However, overall marketing expenses as a percent on revenue were increased driven by expenses associated with our new headquarter here in Brooklyn and with Sarbanes-Oxley compliance.

Finally, from an adjusted EBITDA margin perspective, we estimate that our margin in 2016 will be comparable to 2015 in the 10% to 11% range and that it will expand to the high teens range exiting 2018. Over the next three years, this translates to overall adjusted EBITDA growth that will be more than two times faster than revenue.

And with that, I'll thank you for listening. I'd like to turn the call back over to the operator to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brian Nowak from Morgan Stanley. Your line is now open.

Brian Nowak

It sounds like that the holiday trends of pretty strong, GMS is accelerating, just a curious, why guide to a GMS slowdown, it seems that the trends are so strong I think the comps actually are getting a little bit easier throughout 2016. So just being curious for that. And then as we think about the sources of leverage in the model over the three year period, can you just talk about R&D versus sales and marketing and sources of leverage? Thanks.

Kristina Salen

Sure, Brian, thanks for your question. When we think about GMS growth, we think -- it's important to remember some of the factors that impacted GMS in 2015 and how we're thinking about those factors as we move in to 2016. Most importantly is to consider and the impacts of currency and our guidance assumes that currency remain stable compared to December 2015 average levels. While we can calculate that direct translation pretty clearly, it's really difficult to estimate its impact on international buyer behaviour. So, our GMS estimate does not incorporate -- our guidance is not incorporate significant rebound in international buyer behaviour.

On the question with regards of leverage, you were specifically asking about marketing leverage. I think, when we look at our three year basis, we expect operating leverage in each of our three key expense line items, product development, marketing and G&A and as I mentioned with regard to 2016 guidance specifically, we expect leverage and marketing expense, we actually expect it to go down on the year-over-year basis, and as a percent of revenue, while still growing however, just not as fast as revenue. But as I mentioned we expect operating expenses as -- in total as a percent of revenue to increase and that's really due as I mentioned to our new headquarter which we're moving into in 2016 and Sarbanes-Oxley compliance most of those expenses Brian will follow into the G&A category.

Operator

And our next question comes from the line of Blake Harper from Topeka Capital. Your line is now open.

Blake Harper

I wanted to ask you about the promoted listing with only 16% of your [indiscernible] was using them, but you did called them out as having driving higher strength. I wanted to see if you can talk more about that, is it a specific segmentation with different searches or better targeting and maybe what you see as the potential there as far as the number of your sellers that would use them and what the potential for that category to be

Kristina Salen

Thanks for your question. So, promoted listings 16.7% of our active sellers in 2015, used the service, that was down roughly 100 basis points versus last year. And as I mentioned that was expected and that was despite really robust growth impacted listing year. This is a remainder to our investors, about the changes that we implemented in promoted listings, at the end of 2014 moving into 2015, we moved from static pricing model, meaning everything was quite sustained in promoted listing to a bided model, meaning that prices reflected demand. The way that we've railed that promoted listings product is that it’s ROI positive to the seller, so it prevent the seller from bidding at extremely high prices to simply drive traffic that doesn't convert into growth sales for that seller, but it did increase pricing in certain categories as a keyword that ultimately priced out some sellers.

As I mentioned in my remarks, our goal is over the longer term to focus on creating advertising services that target a broader spectrum of our sellers, but as it stands today when you think about promoted listings and you think about the hundreds of millions of search page views that occurred on Etsy on an annual basis, our promoted listings product which put the top three relevant products in the search at the top of the page, drive a significant amount of volume.

So they're really for our sellers who can handle that level of volume, however we have a lot of sellers who are interested in advertising services, in fact it's our number one requested service and we think there's a lot we can do over time in the long term to add to our advertising services product. Thanks for your question Blake.

Operator

[Operator Instructions] And our next question comes from the line of Darren Aftahi from Roth, your line is now open.

Darren Aftahi

First on your long term guidance I know you said you have an unannounced new seller services for '16. What is your GMS and revenue growth assumptions, I assume in terms of the number of seller services you're offering sort of exiting that period, and then number two Kristina if my math is correct, is that G&A swing you said is non-recurring is that roughly about $4 million?

Kristina Salen

To answer your first question Darren, with regard to our guidance as we said, our guidance assumes very modest impact from both new product and seller service. So it's very modest in the guidance that we've provided. With regard to your second question I'm not prepared to quantify it, but there'll be more detail about the G&A swing in our 10-K.

Operator

[Operator Instructions] And I'm not showing any further questions I would now like to turn the call back to management for any further remarks.

Chad Dickerson

Just wanted to thank everyone for tuning into the call today and thanks for your question.

Operator

Ladies and gentlemen thank you for participating in today's conference, this concludes the program you may now all disconnect. Everyone have a great day.

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