Etsy's (ETSY) CEO Chad Dickerson on Q4 2016 Results - Earnings Call Transcript

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Etsy, Inc. (ETSY) Q4 2016 Earnings Conference Call February 28, 2017 5:30 PM ET

Executives

Jennifer Beugelmans - VP of IR

Chad Dickerson - CEO

Kristina Salen - CFO

Analysts

Mark Kelley - Citigroup

Heath Terry - Goldman Sachs

Andrew Bruckner - RBC Capital Markets

Tom Forte - Maxim Group

Sam Kemp - Piper Jaffray

Michael Costantini - Morgan Stanley

Darren Aftahi - ROTH Capital Partners

Blake Harper - Loop Capital

Operator

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

I'd now like to turn the call over to your host, Ms. Jennifer Beugelmans, VP of IR and FP&A. Ms. Beugelmans, you may begin.

Jennifer Beugelmans

Thank you and welcome to Etsy's fourth quarter and full-year 2016 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 [technical difficulty] and potential future growth. Our actual results may be differ materially. Forward-looking statements involve risks and uncertainties which are described in our press release and our 10-K filed with the SEC today February 28, 2017. 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 as well as our 10-K, 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. Thanks for joining us to talk about our fourth quarter and full-year 2016 financial results. I’m excited to walk you through our 2016 results and it was such a productive year. We made it easier for buyers to search for and find unique items.

We kicked off our first ever global brand marketing campaign to highlight the range of items available in the etsy.com market. We also acquired Blackbird Technologies so that going forward we will be able to deliver more personalized search recommendations through more sophisticated use of AI and machine learning.

During the holiday season, we experimented with promotional offers and other search engine activities to encourage new buyers to explore the market during the time of the year most critical to many of our sellers.

Within our services platform, we supported sellers as they started, manage and scale their businesses. Last year we launched a new paid seller service, a custom Web site builder pattern by Etsy, launched our Google Shopping tool to help sellers advertise their goods in Google search and partner with Intuit to make accounting and taxes easier.

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%.

Etsy's growth reflects the success of the creative entrepreneurs to use our platform. We succeed when they succeed. 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.

Our business is well positioned for a strong 2017, as well as long-term success. We will remain focused on growing our markets and services with the unique focus on supporting creative entrepreneurs around the world.

Our strategy for 2017 is simple. We want to create the best shopping experience for our buyers of unique creative goods, and for our seller services we want to support creative entrepreneurs wherever they choose to pursue commerce.

Let me first talk about our thinking about growing our markets, which is all about growing GMS globally. You might notice that I'm using the term markets, because looking ahead Etsy, Inc. the company is becoming more than just etsy.com. Etsy.com is our flagship and remains critical to our strategy, but we're also excited about the new craft supplies market we will launch in April Etsy Studio.

I will talk in more detail about Etsy Studio in a moment, but we see it as a significant opportunity for Etsy to participate in a very large market. Looking ahead, we’re focused on growing GMS in our markets, which means driving sales for our community of sellers. We believe we have two significant opportunities to do this by bringing new buyers to Etsy and by encouraging existing buyers to make more frequent purchases.

To do this, our market strategy includes: first, raising brand awareness of etsy.com as an everyday shopping destination. Second, making enhancements that encourage purchase frequency, and finally connecting sellers and buyers locally as we continue to scale globally.

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.

As I mentioned in 2016, we launched our Difference Makes Us global brand campaign, which highlights the breadth and depth of items available on Etsy. The videos received more than 138 million views between the launch in mid-September and the end of the year.

These brand marketing efforts have already begun to move the needle for our overall brand awareness and we're pleased with the early results. For example, in the U.S., and our five key international markets which are the U.K., Canada, Australia, France, and Germany, we saw an increased number of searches for Etsy among users who view the ads. In fact, some markets saw triple digit percent increases.

Overall, in 2016, we saw a slight increase in frequency compared with 2015 and we're happy to see this moving in the right direction. But what's important to highlight is that we’ve a lot of room to drive this metrics higher. Over the past few years, we focused our spending primarily on digital acquisition marketing and Difference Makes Us is really just the first foray in the shaping brand perceptions.

We are proud of our work today and we intend to invest more and expand our marketing mix in 2017 to include other digital channels and brand marketing. We believe that maturing our marketing mix in this way is a natural and logical evolution for the Company.

We’ve not invested significantly in brand marketing in past years, but plan to in 2017, because we see shaping brand perception as a critical component of driving long-term growth. Next is making enhancements that encourage purchase frequency.

In addition to our marketing efforts, we will continue to leverage our historical strength as a product and technology company. We want the Etsy shopping experience to be fun, engaging and seamless across all devices and our work continue to pay off in 2016 as we increase conversion rates across-the-board on desktop, mobile app, and mobile web.

Now we’re adding structured data to our listings that will allow sellers to tag key item attributes creating more filter in search choices and ultimately making it easier for buyers to find what they want. Add to this work, the machine learning capabilities we’ve gained through our Blackbird acquisition, we will be able to deliver even more personalized search results and recommendations tailored specifically to buyers based on purchase history and other key signals.

We are also enhancing the checkout experience. Buyers can now complete purchases from multiple sellers in one quick transaction with our new multi-shop checkout feature that we launched earlier this year and we will be adding guests checkout in the coming months.

Our third area of focus within our market strategy is connecting sellers and buyers locally, while scaling globally. Etsy's markets are global and we continue to drive our international business with a focus on expanding local markets, while further extending our global scale.

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. As we’ve discussed in the past, our technology platform transcends geographic borders and allows buyers and sellers to connect and transact even if they don't speak the same language or use the same currency.

In 2016, we extended our use of machine translation and machine learning across the etsy.com market including applying our proprietary techniques to promoted listings, and we also expand a Direct Checkout so that it now reaches a total of 36 countries. Within our five key focus markets, we also continue to nurture the local ecosystem by encouraging domestic connections between sellers and buyers.

As we continue to grow etsy.com, I also want to talk more about our plans to launch Etsy Studio. The craft supply market is enormous. Approximately $44 billion in the U.S alone according to the Association for Creative Industries and it hasn't seen much innovation through the years.

In fact the vast majority of sales still take place off line. This is the category that’s meant to enable creative expression and we see an opportunity to do a lot better. Craft supplies have longed [ph] in a part of etsy.com and through conversations in research with our buyers and sellers, we've learned a lot about the unique challenges of selling and shopping for items within this category.

Applying their feedback and our deep knowledge, we see a significant opportunity to shake up the space. 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.

We believe Etsy Studio will allow us to participate in the large addressable craft market by offering a differentiated buyer experience. First, the current process for envisioning a DIY project and then buying the necessary craft supplies is disconnected and time-consuming. Many crafters look up inspiration or direction for project on various Web sites and then they go elsewhere to source materials. With Etsy Studio buyers will be able to browse tutorials and instructional content and then purchase all of the relevant materials without ever leaving the page. We believe this cohesive and engaging experience will make buyers want to return again and again.

Second, we tailored Etsy Studio buyer journey specifically for craft supplies. From category specific search filters to a quick checkout process, each step is optimized for finding and purchasing everything you'll need for your next project. Third, Etsy Studio will offer a vast range of materials and supplies that craft supplies buyers may not be able to find in other venues. Among the millions of items, buyers will find everything from deeds, paint and knitting needles to more unique items like hand dyed fabric, hand-carved weaving looms and original DIY kits.

Etsy Studio leverages all of the platform investments we've made over the past 12 years. And like etsy.com this new market will be global and optimized for mobile web. Sellers can also take advantage of Direct Checkout and shipping labels at launch. We also plan to introduce promoted listings on Etsy Studio within the next several months and we're exploring opportunities to build a native app.

Naturally we will also continue to invest in product enhancements and marketing initiatives to build this brand going forward. We’ve already received great feedback from sellers who participated in a limited prototype and we're really excited to begin scaling this new market.

Over the next several weeks, all craft supply sellers will gain access to the market to begin setting up their shops ahead of our launch in April. So we don't expect Etsy Studio to contribute to our GMS or revenue results in 2017, we're very excited about its long-term growth opportunities.

I look forward to sharing more updates on our progress in the coming months. With Etsy Studio coming online this spring, we're really excited about the idea of having multiple markets driving long-term growth in our business.

Let's turn now to seller services. Over the past five years we build and launched four great paid services, which grew to 55% of our total revenue in 2016. Each of these services addresses a specific seller pain point. Continuing to enhance and expand this line up remains a key priority. At the same time, we see an opportunity to building connect services for creative entrepreneurs and to support them wherever they want to sell.

We envision Etsy as decentralized hub and go to resource for creative entrepreneurs. We want to be the best destination for sellers to find cohesive offerings that address every aspect of starting, managing, and scaling a creative business.

Let's talk about our 2017 strategy to address these three aspects of running a business. First, starting a business. 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.

We also offer a wealth of educational resources and community support like Etsy Teams that offer new entrepreneurs both advice and encouragement. This year we're focused on making it easier than ever before for both new and existing sellers to quickly and accurately list and categorize their items through a series of enhancements, especially through the work we’re doing with structured data.

Next we want to make it easier for Etsy sellers to run their businesses so that they can devote more time to making or designing. We want to help our sellers address pain points with our services and tools, such as Direct Checkout, Shipping Labels, and our partnership with Intuit. These all reduce the amount of time that a seller spend on administrative tasks.

Recently we rolled out a new inventory management tool that enable sellers to manage inventory across their Etsy channels and give their customers a better view of everything that shop has for sale. Third, about 81% of Etsy sellers that they want to grow their business and we want to help them scale. In 2016, we launched Pattern, so that sellers could market and brand themselves beyond the Etsy.com market.

We continue to make monthly updates to this custom Web site builder in response to requests from sellers. Recently we made improvement to SEO, so that Pattern site show up more prominently in search engine results. Marketing is the area where sellers most frequently asked us for help, so we continue to explore opportunities to create a more robust suite of marketing services.

Our Google shopping tool that we launched in the fourth quarter is a great example of our success in creating easy effective advertising options for our sellers. Finally, we want all of these great tools and services to be easy to access and use and to help sellers seamlessly manage multiple sales channels. We recently launched a significant enhancement that brings many of our existing services and tools in the one convenient place.

Shop Manager is a streamlined dashboard that provides sellers with one entry point to track orders, manage inventory, view metrics and stats and have conversations with their customers across all Etsy channels. We’ve already received positive feedback from sellers saying that Shop Manager has dramatically improved their daily workflow. This is an important milestone in our goal of supporting sellers wherever they sell and we’ve an ambitious roadmap ahead.

In closing, we’ve entered 2017 on strong footing with a clear strategy and with several launches that open-up new long-term growth opportunities for Etsy and our sellers. We look forward to investing in brand marketing to drive frequency and increase overall awareness across our markets, launching our new market Etsy Studio, creating a more seller friendly cohesive and sticky services platform, and becoming the centralized hub for creative entrepreneurs to start, manage, and scale their businesses.

All of our work will be powered by our innovative technology and supported by our passionate talented employees. Our team remain focused on advancing our mission to re-imagine commerce and continuing to fuel the Etsy economy by providing local and global markets for our creative entrepreneurs and connecting thoughtful consumers with unique items from our sellers. As we do this, we will continue to support our sellers and look to create long-term value for all of our stakeholders.

With that, I'll turn it over to Kristina to walk you through our results and our 2017 and revised three year outlook. 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 2016, Etsy's markets generated $865.2 million in GMS, up nearly 17%. Growth in GMS is driven by growth in active sellers and active buyers. As Chad mentioned, we had a strong year of performance and our results exceeded both our full-year and fourth quarter guidance.

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%. Our community of buyers and sellers continue to grow at a healthy rate and we're releasing updated cohort data that we believe demonstrate the stickiness of our platform.

As a reminder, in our 2015 10-K, our cohort data indicated that if we had 100 active sellers in 2012, 32 of those sellers would still have been active in 2015, four years later. Also average GMS for 2012 active seller was $4,557 in 2015 and that was 4x higher than it was in 2012. We're pleased to see that these trends have continued into our 2013 seller and buyer cohorts.

We'd also note that our five-year data for our 2012 cohorts are consistent with year four trends and early data indicate that our 2014 cohorts are behaving similarly as well the 2013 data, our A&R [ph] 2016 10-K. But let me walk you through the highlights. 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.

Before we talk about our buyer cohort, I want to remind everyone that during 2013, we started to scale our digital marketing effort. So this cohort contains the first meaningful contribution from acquired buyers. 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.

This sustained strong performance indicate that we're successfully acquiring buyers to behave similarly to buyers to come to Etsy organically. 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.

As Chad highlighted in his remarks, expanding our overall base of buyers will always be important to us, but we also believe that driving frequency among our loyal and engaged buyer base is a considerable growth opportunity. 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. This growth continue to outpace the rate of growth on desktop. Approximately 49% of our GMS came from a mobile device, up 500 basis points year-over-year and flat quarter-over-quarter.

During the fourth quarter, the year-over-year growth in mobile GMS outpace the rate of growth in mobile visits, resulting in a slight narrowing of the gap between mobile visits and mobile GMS. The vast majority of our mobile traffic come to Etsy through mobile web. As we discussed with you in the past, mobile web convert at the lowest rate for us. Mobile app is the highest and desktop is in between. As a result, our sizable mobile web traffic base is a headwind to overall conversion rate expansion.

In 2016, we made several enhancements to our mobile experience from both the app and web. Following these enhancements, mobile web conversion rates began to increase. In fact, throughout 2016, year-over-year conversion rates increased across desktops, mobile web, and mobile app every quarter. While mobile web continue to be a headwind, we’re pleased with the progress in driving overall conversion rate increases.

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. As a reminder, percent international GMS is the percent of total GMS from transactions where either the buyer or the seller is outside the U.S.

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.

These three international categories each continue to grow faster than overall GMS. With international buyers and sellers in the same country growing the fastest at 44% year-over-year. This category has grown from our smallest international category just three years ago to the second largest in the fourth quarter. This growth demonstrates our ability to build local communities and make local connections globally.

GMS between U.S sellers and international buyers continue to be -- continue to decline and was down 8% this quarter. It is now, however, our smallest category of international GMS, down from the second largest just three years ago. We continue to believe that decline in this category is indicative of the indirect impact of fluctuating currency exchange rates on international buyer behavior. Given the size of GMS between U.S sellers and international buyers relative to other GMS categories, the in direct impact is less of a headwind to our GMS growth.

Finally, I’d like to touch on the macro environment. Like many other global e-commerce companies, we are continuing to monitor the post-election sentiment in the U.S and around the world. While there is not yet entirely clear how global political regulatory changes might impact the business, we're watching developments here in the U.S., as well as around the globe evaluating any potential impact to the business as they unfold.

Turning to revenue. 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.

This has been a substantial driver of seller services revenue growth and as we fully anniversary the integration, we expect Direct Checkout and seller services revenue growth to decelerate. Seller services revenue also benefited from growth in promoted listings and to a lesser extent shipping labels, which each grew faster than markets revenue. Pattern also contributed to our revenue growth this quarter, but we continue to expect only a modest contribution from this service through 2018.

We disclose usage of our seller services on an annual basis. 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.

We are encouraged by the increase in the percent of active sellers that used at least one seller service in 2016 compared to last year and the continued adoption of Direct Checkout in shipping label. Promoted listings experienced a slight tapering compared to last year. Although promoted listings usage was lower, revenue growth was up year-over-year mainly due to higher click through rates and additional inventory on mobile and desktop.

As we’ve discussed with you in the past, promoted listings is not for all sellers. It is really a service that best serves those sellers who can handle high visit volume [technical difficulty] shop. All of our sellers, however, continue to tell us that marketing remains one of their biggest pain point and we see opportunities to introduce a fleet of marketing services and tools that can be used by a wider range of sellers.

For example, we launched Google Shopping, which simplifies very complex process, setting up a Google ad campaign that allows sellers to advertise off the IT platform. We will continue to explore new tools and services that allow us to help our sellers drive sales through their own efforts.

Gross profit for the fourth quarter was approximately $73.2 million, up approximately 27% and gross margin was 66.4%, up 80 basis points. Once again, gross profit grew faster than revenue, a trend we've seen since 2014 mainly due to the leverage we achieved in tech infrastructure and employee related costs.

Turning now to operating expenses. 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. The increase in operating expenses as a percent of revenue was primarily due to an increase in employee related expenses associated with our acquisition of Blackbird technologies and marketing expense related to our brand campaign. 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. The increase in marketing expense as a percent of revenue was driven by brand marketing spend associated with the investment in our global brand campaign, and to a lesser extent digital marketing related to buyer acquisition and employee related expenses. For the full-year, growth in marketing spend decelerated meaningfully compared with a year-over-year growth rate in 2015, and as forecasted marketing as a percent of revenue decreased.

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.

During 2016, we achieved the payback period of two quarters, an improvement compared with the five quarter payback period we achieved in 2015 and well ahead of our eight quarter LTV model. This return suggests we're successfully executing on our marketing investment strategy and that we have -- we may have more room for investment digital marketing in 2017 and beyond. We're also looking at opportunities to further expand our marketing investment into other digital channels.

Product development expenses totaled $16.1 million, up 44% representing 15% of total revenue versus 13% last year. The increase in product development expenses was driven by higher employee related expenses and the expenses associated with the acquisition of Blackbird technology.

G&A expenses totaled $22.6 million, up 45% representing 21% of total revenue versus 18% last year. The increase in G&A expenses was primarily driven by increased employee related expenses and to a lesser extent a favorable impact from a 2015 mark-to-market adjustment of stock-based compensation related to ALM, depreciation expense related to our new headquarters and professional services spend mainly related to Sarbanes-Oxley compliance. 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.

Our tax provision in the fourth quarter was primarily driven by non-cash charges related to our revised global corporate structure. 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. The increase in net cash provided by operating activities for the quarter was mainly due to revenue growth. As of December 31, 2016, we had cash, marketable securities, and short-term investments totaling $282.1 million.

Next I'd like to discuss our 2017 guidance and our revised outlook for 2016 through 2018. 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%. The key factors impacting revenue and GMS growth through 2018 will be conversion rate gains across mobile and desktop that reflect improvement in our search and recommendation capabilities, a digital marketing ROI that continues to outperform our two-year LTV model, further narrowing of the gap between mobile visits and mobile GMS driven by mobile GMS performance, international GMS that grows faster than U.S GMS driven by our efforts to build local communities and foster local connections, and an assumption that currency remains stable compared to average levels in December 2016. And I know that this is a different point of view than what we had going into 2016 when we expected U.S and international GMS to grow at similar rates through 2018.

Continued seller services revenue growth albeit at a slower pace than we achieved in 2016 driven by both adoption and product enhancements. And finally modest contributions from recently launched seller services and tools, including Google Shopping and Pattern by Etsy.

Turning to margin, 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 anticipate that the key factors impacting our gross margin forecast over our 2016 to 2018 guidance period will include: revenue growth from our existing seller services driven by both adoption and product enhancements, and new seller services such as Pattern by Etsy. This means that we don't believe that any of our recent or upcoming launches will be dilutive to our gross margin between now and 2018.

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%.

In 2017, we expect operating expense as a percent of revenue to increase, driven by our investment in brand marketing and an increase in product development expenses stemming from our acquisition of Blackbird Technologies. These increases will be partially offset by G&A expense, which we expect to decline as a percent of revenue in 2017.

Throughout the year, we expect to invest approximately $20 million in brand marketing, up from approximately $6 million in 2016. Excluding our brand marketing expense, adjusted EBITDA margin in 2017 would be approximately flat compared with 2016. We believe elevating the Etsy brand will not only allow us to further penetrate a large addressable market of untapped buyers, but will also encourage existing buyers to make more frequent purchases. Even at the expense of lower margins in the near-term, we're committed to our investment in brand marketing because we believe it will position us for sustainable future growth.

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. During the build out, the associated costs were a significant portion of our total CapEx spend. 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.

To wrap it up, today is a bittersweet moment for me, as this will be my last earnings call at Etsy. I've learned so much during my time here and these last four years has been nothing short of amazing. Etsy looks a lot different today than it did when I first started. We're a public company. We've scaled our business along with our employees and we’ve even built a new headquarters. I couldn’t have achieved these milestones without my amazing team and I know that Etsy will be in great hand after my departure. I want to thank everyone at Etsy for making my time here fulfilling and for giving me memories that I will never forget.

And with that, I'd like to turn the call back over to Chad.

Chad Dickerson

Thanks, Kristina. Since this is your last call at Etsy, I want to sincerely thank you for your immense contributions over the past four years. I really appreciate it. Many of you know that Kristina has not only served as a trusted partner to me, but to many leaders here at Etsy. And we will certainly miss her, but I can't wait to see what she will be doing next.

In terms of recruiting her successor, we’ve been actively betting and speaking with candidates over the past several months. And I'm confident that through this process we will identify the right person to help lead Etsy's next phase of growth and advance our mission. I look forward to providing further updates in the near future.

Over the past several months, Kristina, the rest of the management team, and I’ve been working closely with the finance and accounting teams to ensure a smooth and seamless transition upon Kristina's departure next month. We’ve a deep bench of senior talent across the organization and I'm confident that we won't miss a beat.

With that, I'd like to open the call-up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Mark Kelley with Citigroup.

Mark Kelley

Hi, great. Thanks a lot. Just a question on the $44 billion market you outlined tonight and Chad you talked about on your blog when Etsy Studio was announced. It’s a big opportunity. I’m just curious how much overlap if any do you think there is between a flagship marketplace and Etsy Studio? And it sounds like there isn't a lot data [technical difficulty] guide for that opportunity? And a second, is it too early to you gauge the benefits that multi-shop checkout can have on spend per visitor, per buyer? What’s the right way for us to think about positive [indiscernible]? Thank you.

Chad Dickerson

Sure. I will start with Etsy Studio. I think the first thing that’s important to understand we're really excited about the market opportunity and again $44 billion adjustable market, a lot of that is actually on or offline. When we look at that against all the other categories on Etsy, it's important to understand that no single category on Etsy is more than single digits in terms of the percent of sales. So craft has been an important category in Etsy, but we really believe that launching Etsy Studio will give us the opportunity to attract a whole new set of buyers and a whole new set of sellers to really expand the opportunity there. So we're super excited about that. On multi-shop, it is too early to comment, but I think the important thing to note is I would point you back to what we said about our success in conversion rate improvements over the past five quarters. We believe that things like multi-shop are incredibly important in making it easier for our buyers to transact on Etsy. So it's just part of our overall plan to improve the buying experience.

Mark Kelley

Helpful. Thank you very much and Kristina good luck with the next phase of your career. Thanks.

Kristina Salen

Thanks so much, Mark.

Operator

Thank you. Our next question comes from Heath Terry with Goldman Sachs.

Heath Terry

Great. Thanks. Chad, just curious if you could give us a little bit more detail behind the guidance, particularly the reacceleration that’s implied for 2018? Are there specific products like Pattern that are behind that or is it more a function of the investments in marketing that you're making this year, having a delayed impact?

Kristina Salen

So, Heath, just a clarifying point and I’m happy to go through the math in more detail, but at the midpoint there it does not imply a reacceleration in our GMS growth. And just to use this as a reminder for what our guidance -- the purpose of our guidance here is when we launched guidance in 2016 it was the first year that we get it and we launched guidance to really underscore the opportunity in our core business. And what we've said in 2016, it was repeated again in 2017 is that our guidance only includes a very modest contribution from new services like Pattern as Chad said in his remarks, even that Etsy Studio is not expected to contribute GMS or revenue in 2017. And so, there is nothing to read into our guidance other than this -- a great opportunity in our core business, a predictability of that growth rate and the baseline for what we think we can do in 2017 and 2018.

Heath Terry

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Andrew Bruckner of RBC Capital Markets.

Andrew Bruckner

Thank you. And Kristina, it's been great working with you, so best of luck.

Kristina Salen

Thanks, Andrew.

Andrew Bruckner

Thinking about the narrowing that mobile gap even further, what levers do you have to kind of push people greater towards the app, and app downloads been an area where you’ve been investing? And then secondly, just a quick modeling question. Q1 last year, as you had kind of a bump from gift cards. Should we expect a similar thing this year?

Kristina Salen

I can take the last question first and then I will pass it over to Chad to talk about our strategy to narrow the gap, with the mobile gap. The quick answer is no, and I'm glad that you highlighted the gift card revenue benefit that we achieved in the first quarter, and I'd also add that there was one other benefit that we achieved in the third quarter as it related to a one-time payment from a third-party payment processor. Although these things we've said are margin on our reported market and adjusted EBITDA margin in 2016, by approximately one percentage point. And Chad, do you want to talk about our mobile gap strategy.

Chad Dickerson

And in terms of continue to narrow the mobile gap, just to review really quickly our highest converting environment is the mobile app, followed by desktop and then mobile web. As I mentioned, over the last five quarters we’ve improved conversion across all platforms. So we feel really, really good about that. So we continue to grow app, mobile web, and desktop and we do drive people from mobile web and through the app environment. But I think for operating in a world where we’ve to improve on all three at all times. So I think the [indiscernible] we've been doing a great job, improving conversion across all those channel.

Andrew Bruckner

Thank you.

Operator

Thank you. Our next question comes from

Question comes from Tom Forte with Maxim Group.

Tom Forte

Great. Thanks for taking my question. Kristina, best of luck [technical difficulty] endeavor. You talked a lot about the local initiatives to drive local buyers and sellers and how in the U.K when you hit 50% of your volume, you saw an acceleration in sales growth. Can you update us on other markets where you’re doing that, and do we have to wait for 50% penetration to see an acceleration of sales growth or they’re possibly like to occur earlier? Thank you.

Kristina Salen

So what we said in the past is we are really excited about the accomplishment in the U.K of 50% of GMS in that market is domestic, making us a truly local player in the U.K. What we've also said is the strategies that we applied in order to do that in U.K., we started those the earliest in 2013 and we were able to take the U.K from call it a high teens domestic market to U.S 50% plus domestic market in roughly four years. That being said, the market that’s closer to the U.K is Australia, it's still behind however -- its roughly 30% and so we still have ways to go in our other -- our four other key focus countries outside the United States. But we're seeing really strong growth in domestic GMS coming from those countries which is why see the 40% plus growth in what we call international domestic, which is international GMS between buyers and sellers in the same country. So we’re just very excited with what we've seen. We’re continuing to apply what works in the U.K into the other focus countries and we're continuing to see results.

Tom Forte

Thank you.

Kristina Salen

You’re welcome.

Operator

Thank you. Our next question comes from Sam Kemp with Piper Jaffray.

Sam Kemp

Thanks for taking the question. I guess, on Etsy Studio first, have you guys considered potentially establishing relationships with suppliers directly so that you could sell through a one deep platform on Etsy Studio? And then secondly, Instagram obviously has been doing a lot to [indiscernible] monetization efforts and one those that goes through shop now button. Can you talk about any potential integration that you’ve looked to do between Pattern and Instagram to take advantage of that traffic? Thanks.

Chad Dickerson

Sure. First on Etsy Studio, we’re bringing 8 million unique items into the marketplace from Etsy and we’ve a network of sellers today who are selling craft supply, so that’s really our focus out of the gate. In terms of Pattern and social networks, we're really always looking at social network activity and where our sellers are living in advertising promoted, so that’s something that we keep an eye on, but we don’t have any specific plans to announce.

Sam Kemp

Great. Thanks.

Operator

Thank you. Our next question comes from Brian Nowak with Morgan Stanley.

Michael Costantini

Hi this is Michael Costantini for Brian. Just a quick one on marketing, please. Despite the ad spend and the margin contraction you’re forecasting this year, you’re still targeting high teen EBITDA [ph] margin for 2018. So, just curious what gives you the confidence that you can or will pull back on ad spending in 2018? Thanks.

Kristina Salen

It's important to note few of the other buckets of operating expense that we have with regard to product development and G&A. As you know, our product development this past year has been impacted in 2016 and in 2017 will be impacted by the acquisition of Blackbird Technologies and the associated employee related expenses. And G&A has been impacted not only by the new headquarters here in Brooklyn, but also by increased professional services spend mostly related to Sarbanes-Oxley, which you'll see in our 10-K, our disclosure around our Sarbanes-Oxley compliance which is something that the finance team and the engineering teams have worked very hard to accomplished this year. So those expenses will taper off as well with regard to all of it though it's that revenue growth and when you look at our highest mentor [ph] margin revenue growth that’s embedded in our guidance combined with gross margin roughly in the mid 60s, there is an opportunity to continue to spend and grow our spend in a number of different ways whether its marketing or G&A or product development and still are paying significant leverage from where we’re today.

Michael Costantini

That’s clear. Thank you.

Kristina Salen

You’re welcome.

Operator

Thank you. Our next question comes from Darren Aftahi from ROTH.

Darren Aftahi

Thanks for taking the question. I offer my best wishes to you Kristina in your endeavors. Just quickly if I may on growth and operating expenses, what assumptions are built in terms of investments this year for Etsy Studio and is there going to be any attraction in terms of revenue embedded guidance, but if you could give any clarity on that, that will be helpful. Thanks.

Kristina Salen

So our marketing spend guidance include marketing spend for Etsy Studio, but it is not what I would call a material significant portion of our marketing spend at all. And Etsy Studio in terms of product development is not at all an expensive endeavor from an R&D perspective. So, it is de minimis in the impact there. The only place that you will see it is in marketing spend and again it does not represent a significant portion of the increase in marketing spend. Chad you may add…?

Darren Aftahi

Great. Thanks.

Chad Dickerson

I just want to -- I wanted to add and reemphasize what I said in my remarks. Etsy Studio is really built on all the platform investments that we’ve been making over the past 12 years. So direct checkout, shipping labels, search all of those things are baked in and as Kristina said it's not a material investment in that term.

Darren Aftahi

Great. Thank you.

Operator

Thank you. And our final question is from Blake Harper with Loop Capital.

Blake Harper

Hi. Thanks. Kristina, just want to say it was great to work with you and best of luck as well.

Kristina Salen

Thanks, Blake.

Blake Harper

Two questions. First of all, on the -- your comments about promoted listings tapering off there. Was it -- is it possibly that it's been cannibalized some by the GPLAs, and just wanted to try to reconcile some of your comments there about the promoted listings, little bit later, but so having one of the largest deals [ph] from your sellers being marketing services. And then secondly, maybe for Chad, are there other categories and see how some type of critical math that could benefit from being broken out and have a dedicated platform the way you just did with Studio?

Kristina Salen

I will take promoted listings and then Chad can answer the categories question. It's important to remember that promoted listings sold out every single quarter, every single week. And so we're still seeing significant revenue growth from promoted listings. As I said in my prepared remarks, promoted listings revenue growth exceed markets revenue growth, so there are still significant demand from our sellers who used promoted listings to use it. So, what we’re focused on is making sure that promoted listings continue to provide that high ROI positive experience for our sellers, number one. And then number two, create new marketing services and tools, Google Shopping as an example which we highlighted that serve a broader spectrum of our sellers. Promoted listings is for sellers who can handle high-volume and that doesn't represent the majority of our sellers. So we are really pleased with the performance of promoted listings, including the penetration and we're really excited about the new opportunities that we have in marketing services overall.

Chad Dickerson

And on the second question about categories, I think the important thing to understand is, as I was saying a bit earlier, we've made a lot of investments in platform over the years, and Etsy Studio really represents our first category market. And as I said earlier, we were able to leverage all of the platform investments that build that market really quickly. So I think as a Company, we’re really well positioned with Etsy Studio, but also to be nimble potentially with other opportunities in the future.

Blake Harper

Okay. Thanks a lot.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.

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