Good day, ladies and gentlemen, and welcome to the Etsy Second Quarter 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. As a reminder, this I would now like to introduce your host for today's conference, Jennifer Buegelman, VP of Investor Relations. Ma'am, please begin.
Thanks, Liz, and good afternoon, everyone, and welcome to SE's 2nd quarter earnings conference call. Joining me today are Chad Dickerson, CEO and Christina 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, outlook, mission 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 and in our 10 Q filed with the SEC on May 22, 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 earnings press release, which you can find on our Investor Relations website. A link to the replay of this call will also be available there. And if you'd prefer to access 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?
Thanks, Jennifer, and thanks to everyone joining us today. We're eager to talk to you about the progress we made at Etsy in the Q2. Our Q2 2015 results demonstrate the strength of our overall business. This quarter Etsy achieved growth in our key metrics. GMS was up nearly 25% and Etsy's revenue growth was approximately 44% year over year.
We saw our number of active sellers increase approximately 25 percent to 1,500,000 buyers increased approximately 32% to 21,700,000. We also continue to expand our mobile presence and saw 60% of our visits and 43% of our GMS come to us through a mobile device in the second quarter, but at the same time, we recognize that we must make continued investments in both mobile and growth in international markets. As we've shared before, we're focused on 4 key areas, making Etsy an everyday experience, building local marketplaces globally, offering high impact seller services and expanding the Etsy economy. So let me give you an update on the progress that we've made recently in these areas. First up is our focus on making Etsy an everyday experience, which is all about mobile.
We've talked to you before about how we're leveraging our already strong mobile presence to increase engagement with Etsy buyers and enhance the Etsy seller experience. As of June 30, our mobile apps have been downloaded nearly 28,000,000 times compared with approximately 25,000,000 as of March 31. We continue to make progress on mobile and we still have lots of opportunity to improve by launching new products and enhancements. We're focused on creating a seamless experience on Etsy in order to attract new buyers to our platform, encourage engagement and support relationships between buyers and sellers. To do this, we continue to introduce exciting new features and I'd like to highlight a few of these launches for you now.
Just last week, we introduced an important update to search on desktop and mobile web. This update, which we call exploratory search, can now help buyers more easily find the items they're looking for on Etsy. One of Etsy's key advantages is that we have more than 30,000,000 unique items that buyers can't find anywhere else. With no product SKUs, we're continually working on ways to improve our search capabilities and drive engagement across the marketplace, building on our deep technology expertise and capabilities with big data. Put simply, exploratory search makes search results, navigation and browsing more intuitive to buyers, allowing them to more easily browse by category, such as home or wedding, feature or product type.
While still early, we're encouraged by the results of the tests we've run so far, which has shown increased engagement on both desktop and mobile. In our experiments, we saw more than a 10% overall increase in key search engagement metrics, like listing click through rates, with an even more pronounced effect on mobile web. Speaking of engagement, we know that our mobile apps offer a better shopping experience than mobile web. So we're taking advantage of 2 key technologies that drive usage from the lower converting mobile web experience to higher converting mobile apps: Google App Indexing and deep linking. As many of you may have already heard, we were early adopters of Google App Indexing We worked closely with Google during 2014, and we continue to improve app indexing on our own throughout this year.
App indexing means that users running organic Google searches on mobile web on their phones will go directly into the Etsy Android app clicking on search results. We also launched our own deep linking efforts late in Q1. Deep linking seamlessly and automatically transitions buyers with our mobile apps from the mobile web experience to the mobile app when they encounter deep linking quickly take Etsy buyers using mobile web to the best and most productive experience for them, our mobile apps. Last quarter, we also told you that we plan to launch our first ever app download campaign. To support both our paid efforts and discovery of the Etsy app and organic app store searches, we revamped the Buy on Etsy App Store listing.
This work is enabling us to optimize the presence and relevancy of our app, encourage downloads in both the iOS and Android app stores and improve our category and search rankings. We're already seeing results in the U. S. App Stores only weeks after making these changes. So for example, in the U.
S. IOS App Store, we recently ranked in the top 10 for 18 of our target keywords compared with just 8 before the revamp. And in the U. S. Google Play Store, we recently ranked in the top 10 for 5 keywords versus only ranking for the keyword Etsy previously.
We intend to localize this work to our key global markets. We believe we can continue to drive app downloads and usage building on our already strong foundation. So turning now to building local marketplaces globally. We're focused on building Etsy's global foundation by developing local markets in key countries outside the U. S, where there are early signs of both local buyer and seller activity and where we can generate strong network effects.
During the Q2, Etsy's international GMS was approximately 30% of our total GMS, a decline from last year and about flat with the Q1. While we think we're continuing to face headwinds created by the strong U. S. Dollar, we also think we can improve our performance by continuing to invest in the strategies that have led to early successes. So for example, this quarter, we once again saw strength in the U.
K. Market as we continue to roll out additional localization efforts. We saw a greater than 76% year over year increase in purchases by U. K. Buyers and U.
K. Sellers. This growth rate was nearly 5 times the rate of growth for goods imported into the U. K. This quarter.
So we intend to apply the same types of localization efforts in our core international markets because we believe these activities sellers to Etsy, stimulate the local marketplace by connecting local sellers to buyers and expand Etsy's brand awareness. Let's turn now to high impact seller services. As we talked about before, seller services let Etsy sellers spend more time doing the work they enjoy most, making, designing and curating and less time on the administrative task of running their shops. Currently, we provide 3 seller services that generate revenue for Etsy: Promoted Listings, Direct Checkout and Shipping Labels. Over time, Etsy's goal is to increase usage of these 3 seller services, expand their geographic reach and launch new ones.
During the Q2, seller services represented approximately 49% of total revenue. I'd like to highlight one enhancement added to Promoted Listings that demonstrates how we can help our sellers market their shops on Etsy. This feature is called search term analytics and allows sellers to use Promoted Listings to see the search term shoppers used that led to the seller's Promoted Listing being shown. We're also providing sellers with the search terms that generate higher clicks and orders than average. We believe this feature will help sellers learn more about what brings buyers to their shops.
Finally, I want to update you on our progress expanding the SE economy. While the projects and pilot programs that we are highlighting are small, they provide a path forward to bring new members into the Etsy community beyond our current active sellers and buyers. In July, we launched a pilot program in partnership with Lionsgate to allow sellers to create and sell licensed items based on the Divergent series, Insurgent movie. 11 sellers were selected to participate in the pilot in conjunction with the home entertainment release of the movie last month. The feedback we've received from Lionsgate is that this partnership is a wonderful way for the entrepreneurs who sell on Etsy to create merchandise that is inspired by fans and made for fans.
We believe that partnerships like this demonstrate our strong relationships with brands and we look forward to exploring other opportunities like this in the future. Before I turn the call over to Christina, I want to acknowledge another significant milestone that we reached this past quarter, our 10 year anniversary. Etsy was born out of a simple idea that an online marketplace should exist to connect creative entrepreneurs with buyers in search of unique goods. As we continue to execute on our mission to reimagine commerce, Etsy has come to represent a powerful alternative to traditional commerce and a different people centered model for doing business. We're continuing to build for the long term and we believe that Etsy will continue to have a positive impact on our global community in the years decades ahead.
To celebrate our 10th year, in mid June, we organized a mass volunteer mobilization event for Etsy employees. And in total, Etsy employees volunteered over 600 hours company wide. We're proud of the positive impact Etsy employees have had on our global community over the past 10 years. We remain focused on creating positive and sustainable results for our entire community, including our shareholders. We believe our 4 key areas of focus making Etsy an everyday experience, building local marketplaces globally, offering high impact seller services and expanding the Etsy economy will allow us to build a successful business and community for the long term.
We appreciate the opportunity today to report our progress. And with that, I'll hand it over to Kristina to go over our financial results in more detail.
Thanks, Chad, and hello to everyone joining us today. Just to note, unless I say so, all the comparisons I'll be talking about here are on a year over year basis. So let's start with GMS. During the Q2 of 2015, the Etsy marketplace generated $546,200,000 in GMS, up 24.6%. Growth in GMS was driven by growth in active sellers and inactive buyers.
At the end of the second quarter, Etsy had 1,500,000 active sellers, up 24.6 percent from 1,200,000 last year. And as a reminder, an active seller is one who's incurred at least one charge from us in the past 12 months. Also at the end of the second quarter, Etsy had 21,700,000 active buyers, up 31.6 percent from 16,500,000 last year. Also as a reminder, active buyers are those who have made at least one purchase in the last 12 months. Etsy's 2nd quarter results demonstrate our continued year over year progress in narrowing the gap between mobile visits and mobile GMS and highlighted the results of continued improvements in our mobile app offerings.
Approximately 60% of our visits came to us from a mobile device. This continued to outpace the rate of growth on desktop and was up 700 basis points year over year and 100 basis points quarter over quarter. About 43% of our GMS came from a mobile device, also up 700 basis points year over year, but flat quarter over quarter. Etsy's international business continued to expand with international revenue growing 57.5% in the 2nd quarter. However, percent international GMS declined to 30.2% in the Q2 of 2015 from 30.9% last year and was roughly flat quarter over quarter.
As a reminder, percent international TMS is the percent of TMS from transactions where either the billing address of the Etsy seller or the shipping address of the Etsy buyer is outside of the United States. We continue to believe that we can grow percent international GMS over time to represent 50% of our total GMS. However, currency exchange rates have continued to affect SC's GMS growth in 2 ways that impact both overall GMS growth rates and percent international GMS. The first way, currency exchange rate fluctuations have a direct impact on the translation of our non U. S.
Dollar denominated GMS. Approximately 9% of our GMS is from items that are listed in non U. S. Dollars. And as a result, these items are subject to the impact of currency exchange rate fluctuations.
On a currency neutral basis, GMS growth in the 2nd quarter would have been 1.9 percentage points higher or 26.5% growth compared to the 24.6% growth we reported. And the second way, we believe currency exchange rate fluctuations have an indirect impact on buyer behavior as well. We believe local currencies in key international markets continue to dampen the demand for U. S. Dollar denominated goods.
For example, during the second quarter, GMS from international buyers purchasing from U. S. Sellers declined approximately 6% year over year. This compares with approximately 43%, 23% and 0.3% year over year growth in the Q3 of 2014, the Q4 of 2014 and the Q1 of 2015 respectively. In contrast, excluding our French subsidiary ALM, GMS from international buyers making purchases from sellers in their just a small percentage of our overall GMS, we're encouraged by this growth, which significantly outpaced the growth of our overall GMS this quarter.
Based on the direct impact of currency translation of our non U. S. Dollar denominated GMS and our assumptions surrounding the indirect impact of currency exchange rates on buyer behavior outside of the U. S, we believe that we saw a low single digit drag on our overall GMS growth rate in the 2nd quarter. Turning to revenue.
During the 2nd quarter, total revenue was $61,400,000 up 44.4 percent, driven by the growth services revenue and to a lesser extent growth in marketplace revenue. Marketplace revenue grew 23%, primarily due to the growth in transaction fee revenue and to a lesser extent growth in listing fee revenue. Seller services revenue continues to grow faster than GMS, up 79.5%. This growth was primarily due to growth in revenue from Promoted Listings, which continued to benefit from the relaunch of the product late in Q3 of 2014. Shipping labels revenue growth was driven by a combination of increased adoption, enhancements to the product and an increase in the overall number of orders shipped.
Direct checkout revenue growth was driven by increased adoption and GMS growth overall. Gross profit for the 2nd quarter was $39,500,000 up 56.8 percent and the gross margin was 64.3 percent, up 5 10 basis points. Similar to the Q1, in the second quarter gross profit grew faster than revenue. This was because of the leverage we achieved in the of revenue for employee related and hosting and bandwidth costs. This was also because of the growth of Promoted Listings, which you may recall is a higher margin revenue stream and which outpaced the growth of direct checkout, which as you may recall is a lower margin revenue stream.
Turning now to operating expenses. SC's total 2nd quarter operating expenses were 43 totaled $15,500,000 up 77.3 percent, representing 25% of total revenue versus 21% last year and 21% in the last quarter. The increase in marketing expenses continues to we have a measured and balanced marketing strategy. We make conservative assumptions about how paid traffic will perform compared with organic traffic and we remain committed to achieving positive ROI at the aggregate company level on our marketing spend. Finally, of note in our marketing expenses in the Q2 were approximately $300,000 in IPO related marketing expenses that were not deductible from our IPO proceeds and that we disclosed in our last quarter.
Product development expenses totaled $10,100,000 up 14.6% year on year, representing 16% of total revenue versus 21% last year and 17% last quarter. The increase in product development expenses was driven by higher employee related expenses as we continue to grow product and engineering staff. G and A expenses totaled $17,600,000 up 54.7%, representing 29% of total revenue versus 27% last year and 35% last quarter. The increase in G and A expenses primarily resulted from an increase in employee related expenses and the one time $300,000 cash contribution we made to sc.org in the 2nd quarter. Headcount at the end of the quarter was 757 compared with 717 as of March 31, 2015 and 685 as of December 31, 2014.
Non GAAP adjusted EBITDA was $4,100,000 up 18.3%. This resulted in an adjusted EBITDA margin of 6.6 percent, down 150 basis points year over year. The adjusted EBITDA margin was impacted by the increases in marketing and employee related expenses that I just talked about. 2nd quarter 2015 net loss was $6,400,000 compared with a net loss of $3,200,000 last year. Last quarter, we discussed 2 non cash, non operating expenditures, intercompany debt and our tax As a reminder, the revised corporate structure was implemented to more closely align with our global operations and future expansion plans outside of the U.
S. This quarter Etsy's net loss was again impacted by these same factors. Regarding the intercompany debt, net loss was actually favorably impacted by a 5,800,000 dollars non cash non operating currency exchange gain. This compares to a currency exchange loss of 20 $900,000 last quarter. However, largely offsetting this non cash non operating gain, we recorded a $4,900,000 tax provision, of which $2,000,000 was non cash.
This compares with a $10,700,000 tax provision last quarter. We expect that in absolute dollars, the 1st quarter tax provision of $10,700,000 will be the highest of 2015. During the quarter, we generated 4,700,000 dollars in cash from operations compared with $700,000 in the Q2 of 2014. As of June 30, 2015, following the successful completion of our initial public offering, we had cash and marketable securities totaling 200 and $68,200,000 To close, I'd like to highlight a few factors we should consider when thinking about Etsy's Q3 of 2015. Although we won't be providing quantitative guidance, we will continue from time to time to highlight qualitative factors to keep in mind that could impact a specific quarter.
For the Q3 of 2015, I'd like to highlight 4 items, most of which we've discussed previously. First, just like we conveyed in the Q1 of 2015, if currency exchange rates remain at current levels, GMS growth related to goods that are lifted in non U. S. Dollars will be directly and negatively impacted by currency translation. We also believe that currency exchange rates would continue to have an indirect impact on GMS growth by affecting the behavior of buyers outside the U.
S. And dampening their demand for U. S. Dollar denominated goods. 2nd, similar to what we conveyed in the first and second quarters, we plan to spend more on marketing in absolute dollars in the 3rd quarter compared with both the Q2 of 2015 and the Q3 of 2014.
Etsy's digital Etsy's digital marketing spend will continue to be focused on search engine marketing, primarily Google product listing ads. I think it's important to remind everyone that while we are deliberately increasing our marketing spend, unique to an Internet e commerce company of our size, we have spent relatively few dollars on marketing historically. In fact, even today, roughly 90% of our traffic comes to us directly from organic sources. 3rd, also similar to the Q2, we expect to increase the pace of hiring in the 3rd quarter compared with both the Q2 of 2015 and the Q3 of 2014. As a reminder, our hiring tends to increase as we move throughout the year and it's also increasing year over year to support the anticipated needs of the business.
And finally, we'd like to remind investors that by the end of Q3 2015, we'll mark the anniversary of the full relaunch of Promoted Listings, which has been the biggest driver of seller services year over year revenue growth this year. As we approach this anniversary, we for listening. And I'll turn the call back to our operator, Liz, to open it up for questions.
Our first question comes from the line of Heath Terry with Goldman Sachs. Your line is now open. Please go ahead.
Great. Thanks. You've talked a bit in
the past about the effectiveness of the initial investments that you've been making in marketing. And I was wondering if you could just give us a bit of an update on the where the ROI that you're seeing there is falling. You mentioned the incredibly strong organic traffic that you're seeing, wondering where the rest of that is coming from and how those efforts are shaping up relative to your expectations?
Great. Hi Heath. So as you point out, organic traffic continues to be a significant percentage, 90% of our traffic. And that is a high class problem, so to speak, and very different from most of the e commerce companies that are out there. When we look at the GMS spend that generated some organic traffic, I think it's safe to assume that that also represents the vast, vast majority of our GMS.
Pay GMS, the GMS that is generated from these direct marketing efforts It is growing faster than organic GMS, a multiple of organic GMS, which we take as a positive sign of the returns of our marketing dollars. One of the things that I would remind everyone of is prior to 2014, we hardly marketed at all. Indeed, the percentage that we spent on marketing as a percent of revenue was in the low teens. Beginning in 2014, we started to amplify that. And in reality, the growth rate of our marketing spend is decelerating from a triple digit percentage growth in 2014.
That being said, we continue to apply the conservative attribution model that we use to allocate every single marketing dollar that we spend. That assumes that paid traffic has lower returns than organic traffic. It assumes a very conservative 2 year return rate and that's conservative because historically we've been much more to be ROI positive at the aggregate level for the company, meaning that our total marketing dollars are ROI positive, even if in one country you might be breakeven or slightly negative. So all of that rigor has been maintained with the increase in marketing spend, both in this quarter, in last quarter and we'll continue to maintain it in future quarters.
Great. Thank you. That's really helpful. And then I guess one more.
Given the growth that
you're seeing in seller services, can you update us
a bit on the breakdown of mix there between direct checkout and product listings and shipping?
Past. We aren't breaking it down between the 3 specifically. We'll likely provide annual updates in terms of penetration.
Okay.
But the information that we've given in the past with regard to the breakdown remains. Shipping labels is the smallest because it's booked net. Direct checkout and Promoted Listings are very similar in terms of their contribution to overall seller services revenue.
Okay, great. Thanks, Christina.
You bet.
Our next question comes from the line of Brian Nowak with Morgan Stanley. Your line is now open.
Thanks for taking my questions. I have 2. The first one on the buyer growth. I think this sequential absolute buyer growth around $860,000 was the fewest we've seen. Understanding that you're committed to generating positive ROI and kind of remain disciplined in the marketing spend, Can you just talk to us about how you think about kind of accelerating this buyer growth going forward?
Or is that not something that we should think about in the model in the near future? And I have one
follow-up. Thanks, Brian. So your question is, should we think about accelerating our active buyer growth and specifically linking that back to marketing. I think it's important to remember, again, I'll just reiterate the point of our majority GMS coming from organic, the vast, vast, vast majority. And so as we think about active buyers, we're thinking about activating or increasing the engagement of our existing buyers and then yes, bringing on new buyers through paid acquisition.
So when we think about the active buyer growth rate number, we don't have as an explicit goal to accelerate active buyer growth. What we're focused on is increasing the engagement of our existing buyers and bringing in high quality new buyers, which fits that ROI matrix that I laid out. But what I would also highlight is it's important to think about our active buyer activity from quarter to quarter in terms of seasonality. And so historically, if you look at Q3 and Q4, those tend to be, I guess, for obvious reasons, given holidays, tend to be more active from an active buyer perspective, whether it's an existing buyer and her level of engagement or new buyer acquisition.
Great. And then as a follow-up, I appreciate the color again on the international buyers purchasing from U. S. Sellers, down 6%. Just a couple.
What percentage of international GMS is that at this point? And how fast did that grow in 2Q 2014? Thanks.
Sure. We haven't disclosed the breakdown of all of the buckets. But what I would say just to give some more color on that point is that our largest bucket of GMS by far is U. S. Buyer to U.
S. Seller. And that intuitively it makes sense. Our largest community is buyers, 21,700,000 active buyers. And we've disclosed in the past that the majority of them are U.
S.-based. And then we look at our seller community, 1,500,000 active sellers and we've disclosed that the majority of them are U. S. Based. So you put that together and U.
S. Seller to U. S. Buyer is the vast majority of our GMS. If you look at the smallest bucket, the smallest bucket of the 5 that we look at is international seller to international buyer in the same country.
And that's the piece that we're really trying to grow with our build local marketplaces globally. It is the smallest by far and it's growing the fastest. So we're very encouraged by the growth rate that we're seeing as signs that our international strategy is working. But all of the other buckets, relative to the big bucket of U. S.
Buyer to U. S. Seller. And then to answer your last question, Q2 2014 growth rate of the metric that you referenced was in line with the 4th quarter range, similar to 4th quarter and third quarter.
Okay, great. Thank you.
Our next question comes from the line of Gil Loria with Wedbush Securities. Your line is now open.
Thank you. I wanted to follow-up on that question. You were very helpful in giving us the growth rates for international to international and international from the U. S. Would you mind giving us the complement, so U.
S. To U. S. And U. S.
Buyer from international seller?
No, I'm sorry, Gil. We're not breaking out all of the individual growth rates of the 5 buckets of GMS. We're breaking out that U. S. Seller to international buyer to highlight that indirect impact to try to get some color around what we think that indirect impact is on our overall GMS growth rate, and to help investors better understand how to think about the impact of FX going forward.
Got it. Thank you.
You're welcome.
Our next question comes from the line of Tom Forte with Beren Capital. Your line is now
open. Can
I ask you a couple of questions on some initiatives you launched during the quarter and what they might mean to the business near term and longer term? The first is you launched a crowdfunding effort and then wanted to see where you are on your small batch manufacturing certification for lack of a better way of putting it, basically giving your sellers the opportunity to work with small batch manufacturers that you've certified as a way to expand their businesses? And then I had a follow-up question after that.
Sure. Thanks, Tom. So starting with the crowdfunding Fund on SE initiative, that initiative is so incredibly early at this point that we don't have specific results to report very much a pilot program, but something that we're watching really closely. The second question around responsible manufacturing, at this point, we have 4,007 100 sellers in that program and 7,900 manufacturers. And it's important to note that 85% of those relationships are between sellers and manufacturers in the same country.
So, our manufacturing program is largely a local phenomenon when it comes to country.
Great. And then I recognize that a lot of your advertising efforts have been focused on product listing ads in Google, but you're starting to see more and more social networks like Pinterest launch buy buttons. And I would think you're a natural to leverage that opportunity. How should we think about Etsy's ability to leverage those buy buttons on a go forward basis?
Sure. So we see buy buttons as a great potential advertising channel for our sellers. And we've been talking to all the major platforms, learning about what possible integrations might look like. I think the buy button ecosystem at large is still very early and everyone has kind of a different standard. One of the things that we're trying to figure out is, when we look at Etsy, one of the most important aspects of Etsy is the person to person connection.
And we find that many of our transactions on Etsy involve conversations between the buyer and seller. So that's something that buy buttons really don't make possible. So it's something we're thinking about. We did run a pilot test with Tumblr, where you could buy within Tumblr. That generates some conversion.
But it's a fairly small pilot. But it's something that we're watching really closely and continuing to talk to the various platform partners. But overall, we think it's a great opportunity potentially for our sellers.
Great. Thank you very much.
I'm showing no further questions on