UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2015
	OR
¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from  to

Commission File Number 001-36911

_________________________

ETSY, INC.

(Exact name of registrant as specified in its charter)

_________________________

Delaware	20-4898921
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
55 Washington Street, Suite 512, Brooklyn, NY	11201
(Address of principal executive offices)	(Zip code)

(718) 855-7955

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer x(Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding as of October 15, 2015 was 112,101,830.

Etsy, Inc.

Table of Contents

Note Regarding Forward-Looking Statements

		Page
	Part I - Financial Information	4
Item 1.	Consolidated Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of December 31, 2014 and September 30, 2015	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2015	6
	Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2014 and 2015	7
	Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity as of September 30, 2015	8
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2015	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
	Part II - Other Information	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
	Signatures	58
	Exhibit Index	59

Unless the context otherwise requires, we use the terms “Etsy,” the “company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q, or Quarterly Report, to refer to Etsy, Inc. and, where appropriate, our consolidated subsidiaries.

See Prospectus Summary-Glossary, which we incorporate by reference, in the prospectus filed with the U.S. Securities and Exchange Commission on April 16, 2015 for the definitions of the following terms used in this Quarterly Report: “community,” “ecosystem,” “member,” “platform” and “visit."

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements involve substantial risks and uncertainties that may cause actual results to differ materially from those that we expect and are contained principally in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements include information related to our possible or assumed future results of operations and expenses, our mission, business strategies and plans, business environment and future growth. Forward-looking statements include all statements that are not historical facts. In some cases, forward-looking statements can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements are not guarantees of performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Those risks include those described in “Risk Factors.” Given these uncertainties, you should read this report in its entirety and not place undue reliance on any forward-looking statements in this report.

Forward-looking statements represent our beliefs and assumptions only as of the date of this report. We disclaim any obligation to update forward-looking statements.

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

Etsy, Inc.

Consolidated Balance Sheets (Unaudited)

(In thousands except share and per share data)

	As of December 31, 2014		As of September 30, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	69,659	$	266,283
Short-term investments	19,184		20,474
Accounts receivable, net of allowance for doubtful accounts of $1,841 and $2,402 as of December 31, 2014 and September 30, 2015, respectively	15,404		15,976
Prepaid and other current assets	12,241		8,773
Deferred tax assets—current	2,932		3,134
Deferred tax charge—current	—		17,605
Funds receivable and seller accounts	10,573		17,069
Total current assets	129,993		349,314
Restricted cash	5,341		5,341
Property and equipment, net	75,538		94,655
Goodwill	30,831		28,366
Intangible assets, net	5,410		3,483
Deferred tax charge—net of current portion	—		55,711
Other assets	2,022		1,751
Total assets	$	249,135	$	538,621
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,231	$	3,200
Accrued expenses	12,852		32,861
Capital lease obligations—current	1,755		4,431
Funds payable and amounts due to sellers	10,573		17,069
Deferred revenue	3,452		4,128
Other current liabilities	4,590		7,925
Total current liabilities	41,453		69,614
Capital lease obligations—net of current portion	3,148		6,483
Warrant liability	1,920		—
Deferred tax liabilities	3,081		66,227
Facility financing obligation	50,320		51,804
Other liabilities	1,913		21,699
Total liabilities	101,835		215,827

4

Etsy, Inc.

Consolidated Balance Sheets (Unaudited)

(In thousands except share and per share data)

	As of December 31, 2014			As of September 30, 2015
Commitments and contingencies
Convertible preferred stock:
Series A and A-1 convertible preferred stock ($0.001 par value, 2,363,786 shares authorized as of December 31, 2014; 2,363,786 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $808 aggregate liquidation preference as of December 31, 2014)	808			—
Series B convertible preferred stock ($0.001 par value, 1,128,431 shares authorized as of December 31, 2014; 1,128,425 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $903 aggregate liquidation preference as of December 31, 2014)	865			—
Series C convertible preferred stock ($0.001 par value, 1,234,084 shares authorized as of December 31, 2014; 1,222,282 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $3,263 aggregate liquidation preference as of December 31, 2014)	3,361			—
Series D and D-1 convertible preferred stock ($0.001 par value, 4,240,120 shares authorized as of December 31, 2014; 4,215,610 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $27,949 aggregate liquidation preference as of December 31, 2014)	27,870			—
Series E convertible preferred stock ($0.001 par value, 401,450 shares authorized as of December 31, 2014; 396,727 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $6,300 aggregate liquidation preference as of December 31, 2014)	6,201			—
Series 1 convertible preferred stock ($0.001 par value, 203,399 shares authorized as of December 31, 2014; 203,399 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $1,312 aggregate liquidation preference as of December 31, 2014)	1,322			—
Series F convertible preferred stock ($0.001 par value, 11,594,203 shares authorized as of December 31, 2014; 11,594,203 shares issued and outstanding as of December 31, 2014 and no shares issued and outstanding as of September 30, 2015; $40,000 aggregate liquidation preference as of December 31, 2014)	39,785			—
Total convertible preferred stock	80,212			—
Stockholders’ equity:
Common stock ($0.001 par value, 120,000,000 and 1,400,000,000 shares authorized as of December 31, 2014 and September 30, 2015, respectively; 44,180,939 and 111,992,315 shares issued and outstanding as of December 31, 2014, and September 30, 2015, respectively)	44			112
Preferred Stock ($0.001 par value, 25,000,000 shares authorized as of September 30, 2015)	—			—
Additional paid-in capital	103,355			398,639
Accumulated deficit	(32,377		)	(82,208		)
Accumulated other comprehensive (loss) income	(3,934		)	6,251
Total stockholders’ equity	67,088			322,794
Total liabilities, convertible preferred stock and stockholders’ equity	$	249,135		$	538,621

The accompanying notes are an integral part of these consolidated financial statements

5

Etsy, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
Revenue	$	47,634		$	65,696		$	130,679		$	185,604
Cost of revenue	18,115			24,165			50,854			66,783
Gross profit	29,519			41,531			79,825			118,821
Operating expenses:
Marketing	8,808			16,542			25,042			44,295
Product development	10,077			11,406			26,911			31,487
General and administrative	13,686			15,250			34,299			53,339
Total operating expenses	32,571			43,198			86,252			129,121
Loss from operations	(3,052		)	(1,667		)	(6,427		)	(10,300		)
Other income (expense):
Interest expense and amortization of deferred financing costs	(177		)	(512		)	(355		)	(1,056		)
Interest and dividend income	12			59			30			117
Net unrealized gain (loss) on warrant and other liabilities	35			3			(239		)	(3,136		)
Foreign exchange loss	(1,014		)	(679		)	(1,014		)	(15,727		)
Total other expense	(1,144		)	(1,129		)	(1,578		)	(19,802		)
Loss before income taxes	(4,196		)	(2,796		)	(8,005		)	(30,102		)
Provision for income taxes	(2,075		)	(4,095		)	(1,880		)	(19,729		)
Net loss	$	(6,271	)	$	(6,891	)	$	(9,885	)	$	(49,831	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.15	)	$	(0.06	)	$	(0.25	)	$	(0.59	)
Weighted average common shares outstanding:
Basic and diluted	43,015,151			111,329,917			39,258,879			84,195,227

The accompanying notes are an integral part of these consolidated financial statements

6

Etsy, Inc.

Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
Net loss	$	(6,271	)	$	(6,891	)	$	(9,885	)	$	(49,831	)
Other comprehensive (loss) income:
Cumulative translation adjustment	(2,589		)	(235		)	(2,756		)	10,177
Unrealized gains on marketable securities, net of tax	6			3			—			8
Other comprehensive (loss) income	(2,583		)	(232		)	(2,756		)	10,185
Comprehensive loss	$	(8,854	)	$	(7,123	)	$	(12,641	)	$	(39,646	)

The accompanying notes are an integral part of these consolidated financial statements

7

Etsy, Inc.

Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Unaudited)

(In thousands except share and per share data)

	Series A and A-1 Convertible Preferred Stock					Series B Convertible Preferred Stock					Series C Convertible Preferred Stock					Series D and D-1 Convertible Preferred Stock					Series E Convertible Preferred Stock					Series 1 Convertible Preferred Stock					Series F Convertible Preferred Stock					Common Stock			Addi- tional Paid- in Capital		Accum- ulated Deficit			Accu- mulated Other Compre- hensive(Loss) Income			Total
	Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares	Amount
Balance as of December 31, 2014	2,363,786		$	808		1,128,425		$	865		1,222,282		$	3,361		4,215,610		$	27,870		396,727		$	6,201		203,399		$	1,322		11,594,203		$	39,785		44,180,939	$	44	$	103,355	$	(32,377	)	$	(3,934	)	$	67,088
Stock-based compensation expense	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		6,901		—			—			6,901
Exercise of vested options	—		—			—		—			—		—			—		—			—		—			—		—			—		—			841,565	1		2,284		—			—			2,285
Common stock issued through public offering	—		—			—		—			—		—			—		—			—		—			—		—			—		—			13,333,333	14		194,347		—			—			194,361
Contribution to Etsy.org	—		—			—		—			—		—			—		—			—		—			—		—			—		—			188,235	—		3,200		—			—			3,200
Stock expense-acquisitions	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		851		—			—			851
Conversion of preferred stock upon public offering	(2,363,786	)	(808		)	(1,128,425	)	(865		)	(1,222,282	)	(3,361		)	(4,215,610	)	(27,870		)	(396,727	)	(6,201		)	(203,399	)	(1,322		)	(11,594,203	)	(39,785		)	53,448,243	53		80,159		—			—			80,212
Conversion of warrants upon public offering	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		5,070		—			—			5,070
Excess tax benefit from the exercise of stock options	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		2,472		—			—			2,472
Other comprehensive income	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		—		—			10,185			10,185
Net loss	—		—			—		—			—		—			—		—			—		—			—		—			—		—			—	—		—		(49,831		)	—			(49,831		)
Balance as of September 30, 2015	—		$	—		—		$	—		—		$	—		—		$	—		—		$	—		—		$	—		—		$	—		111,992,315	$	112	$	398,639	$	(82,208	)	$	6,251		$	322,794

The accompanying notes are an integral part of these consolidated financial statements

8

Etsy, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended   September 30,
	2014			2015
Cash flows from operating activities
Net loss	$	(9,885	)	$	(49,831	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation expense	4,212			6,559
Stock-based compensation expense-acquisitions	1,796			3,158
Contribution of stock to Etsy.org	—			3,200
Depreciation and amortization expense	12,492			14,041
Bad debt expense	1,037			1,473
Foreign exchange loss	1,014			15,727
Amortization of debt issuance costs	40			122
Net unrealized loss on warrant and other liabilities	239			3,136
Loss on disposal of assets	76			476
Amortization of deferred tax charges	—			15,093
Excess tax benefit from exercise of stock options	(716		)	(2,472		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(2,853		)	(1,967		)
Funds receivable and seller accounts	(2,956		)	(6,710		)
Prepaid expenses and other current assets	(1,712		)	535
Other assets	(1,631		)	152
Accounts payable	236			(3,530		)
Accrued liabilities	6,378			17,719
Funds payable and amounts due to sellers	2,901			6,710
Deferred revenue	638			671
Other liabilities	680			(5,255		)
Net cash provided by operating activities	11,986			19,007
Cash flows from investing activities
Acquisition of businesses, net of cash acquired	(4,688		)	—
Purchases of property and equipment	(881		)	(9,524		)
Development of internal-use software	(6,019		)	(7,329		)
Purchase of U.S. Government and agency bills	(17,209		)	(18,552		)
Sale of marketable securities	16,846			17,270
Net increase in restricted cash	(5,341		)	—
Net cash used in investing activities	(17,292		)	(18,135		)
Cash flows from financing activities
Proceeds from public offering	—			199,467
Proceeds from the issuance of common stock	35,000			—
Proceeds from exercise of stock options	7,585			2,285
Excess tax benefit from the exercise of stock options	716			2,472
Payments on capitalized lease obligations	(1,051		)	(2,262		)
Deferred payments on acquisition of business	(75		)	—
Payments relating to public offering	(1,160		)	(2,919		)
Net cash provided by financing activities	41,015			199,043
Effect of exchange rate changes on cash	(1,305		)	(3,291		)
Net increase in cash and cash equivalents	34,404			196,624
Cash and cash equivalents at beginning of period	36,795			69,659
Cash and cash equivalents at end of period	$	71,199		$	266,283

9

Etsy, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended   September 30,
	2014		2015
Supplemental non-cash disclosures
Equipment acquired under capital lease obligations	$	3,288	$	8,273
Stock-based compensation capitalized in development of capitalized software	$	162	$	342
Non-cash additions to development of internal-use software and property and equipment	$	1,174	$	797
Non-cash addition to construction in progress related to build-to-suit lease and facility financing obligation	$	47,279	$	6,608
Non-cash addition to capitalized public offering costs	$	—	$	969
Fair value of common stock issued in acquisition	$	27,723	$	—

The accompanying notes are an integral part of these consolidated financial statements

10

Etsy, Inc.

Notes to Consolidated Financial Statements

Note 1—Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Etsy, Inc. (the “Company” or “Etsy”) was incorporated in Delaware in February 2006. Etsy operates a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. The Company generates revenue primarily from transaction and listing fees, Promoted Listings, Direct Checkout fees, and Shipping Label sales.

Initial Public Offering

On April 21, 2015, the Company completed an initial public offering (the "IPO") in which it issued and sold 13,333,333 shares of common stock at a public offering price of $16.00 per share. The Company received net proceeds of $194.4 million after deducting underwriting discounts of $13.9 million and other offering expenses of approximately $5.1 million. These expenses were recorded against the proceeds received from the IPO.

Certain selling stockholders sold an additional 5,833,332 shares of common stock in the IPO. The Company did not receive any proceeds from the sale of shares sold by the selling stockholders.

Upon the closing of the IPO, all outstanding shares of preferred stock of the Company converted into 53,448,243 shares of common stock. In addition, all outstanding warrants for preferred stock converted into warrants for 203,030 shares of common stock.

Basis of Consolidation

The consolidated financial statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain items in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation reflected in these interim financial statements. Specifically, the Company reclassified $4.6 million previously included in accrued expenses and other current liabilities on the consolidated balance sheets for 2014 to conform to the current period presentation.

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of September 30, 2015, the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2015, the consolidated statements of cash flows for the nine months ended September 30, 2014 and 2015, and the consolidated statement of changes in convertible preferred stock and stockholders’ equity for the nine months ended September 30, 2015 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2015, results of operations for the three and nine months ended September 30, 2014 and 2015, and cash flows for the nine months ended September 30, 2014 and 2015. The financial data and the other information disclosed in these notes to the consolidated financial statements related to these three and nine-month periods are unaudited. These unaudited interim financial statements should be read in conjunction with the Company’s prospectus filed with the Securities and Exchange Commission on April 16, 2015 (the "Prospectus").

There have been no material changes in the Company's significant accounting policies from those that were disclosed in the Prospectus.

11

Etsy, Inc.

Notes to Consolidated Financial Statements

Reverse Stock Split

The Company effected a 1-for-2 reverse split of its common stock on March 25, 2015. The reverse split combined each two shares of the Company’s issued and outstanding common stock into one share of common stock and correspondingly adjusted the conversion prices of its convertible preferred stock. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded down to the nearest whole share. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the reverse stock split.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition, income taxes, website development costs and internal-use software, purchase price allocations for business combinations, valuation of goodwill and intangible assets and stock-based compensation. The Company evaluates its estimates and judgments on an ongoing basis and revises them when necessary. Actual results may differ from the original or revised estimates.

Income Taxes

The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. The Company updates its estimate of the annual effective tax rate each quarter and makes cumulative adjustments if its estimated annual tax rate changes.

The Company's quarterly tax provision and quarterly estimate of its annual effective tax rate are subject to significant variations due to several factors, including variability in predicting its pretax and taxable income and the mix of jurisdictions to which those relate, changes of expenses or losses for which tax benefits are not recognized, and changes in the laws, regulations and administrative practices of the jurisdictions in which the Company operates.

Business Combinations

On April 29, 2014, the Company completed the acquisition of Jarvis Labs, Inc., owners of the “Grand St.” online technology marketplace. Total consideration for the acquisition was approximately $3.2 million, consisting of $1.0 million in cash and 212,552 shares of the Company’s common stock with a fair value of $2.2 million on the acquisition date. Additionally, the Company issued 328,580 shares of common stock, with a fair value of $3.4 million on the acquisition date, which are tied to continuous service with the Company as an employee or consultant and are being accounted for as post-acquisition stock-based compensation expense over the three-year vesting period. Because the Company was not publicly traded at the time of the acquisition, the Company utilized equity valuations based on comparable publicly-traded companies, discounted cash flows, an analysis of the Company’s enterprise value and any other factors deemed relevant in estimating the fair value of its common stock for purposes of calculating the fair value of the purchase price.

On June 18, 2014, the Company completed the acquisition of Incubart SAS, a societe par actions simplifiee organized under the laws of France, which operates the online marketplace A Little Market (“ALM”). Total consideration for the acquisition was $30.8 million, consisting of $5.3 million in cash, of which $4.2 million was paid on the closing date, $0.3 million was paid on March 31, 2015 and $0.8 million is due to be paid on February 16, 2016, and 2,439,847 shares of the Company’s common stock with a fair value of $25.5 million on the acquisition date. Because the Company was not publicly traded at the time of the acquisition, the Company utilized equity valuations based on comparable publicly-traded companies, discounted cash flows, an analysis of the Company’s enterprise value and any other factors deemed relevant in estimating the fair value of its common stock for purposes of calculating the fair value of the purchase price. The terms of the purchase agreement provide for the sale of put options to certain of the former shareholders of ALM. The put options enable the holders of the options to sell up to all of their shares back to the Company, subject to certain vesting and restrictions, at fair value, but not to exceed $8.26 per share and not less than $4.00 per share. The put right terminates with respect to a share on the earlier of one year from when such share is

12

Etsy, Inc.

Notes to Consolidated Financial Statements

vested or the liquidation date, as defined in the agreement containing the put option. The holders of the options paid an aggregate of $0.1 million cash to the Company at the date of acquisition and the Company recorded a $0.1 million liability for the fair value of the put options at that time. Additionally, the Company issued 599,497 shares of common stock, with a fair value of $6.3 million on the acquisition date, which are tied to continuous service with the Company as an employee or consultant and are being accounted for as post-acquisition stock-based compensation expense over the three-year vesting period. Since the put options relate in part to these shares, these restricted shares will be recorded as liability-classified stock awards as earned.

The following pro forma financial information presents the combined operating results of the Company, Grand St. and ALM as if each acquisition had occurred as of January 1, 2014. The pro forma financial information includes the accounting effects of the business combinations, including adjustments to the amortization of intangible assets and professional fees associated with the acquisition. The unaudited pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results.

The pro forma financial information is presented in the table below for the nine months ended September 30, 2014 (in thousands except per share amounts):

	Nine Months Ended
	September 30, 2014
Revenue	$	132,483
Net loss	$	(10,887	)
Basic and diluted net loss per share	$	(0.27	)

During the second quarter of 2015, the Company recognized changes to assets and liabilities impacting the associated purchase price allocations of ALM and Grand St. at their respective dates of acquisition. These adjustments resulted in a decrease to the initial purchase price allocation of goodwill for ALM and Grand St. of $0.4 million and $0.2 million, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting standards update that replaces existing revenue recognition guidance. The new guidance is effective for the annual and interim periods beginning after December 15, 2017. Among other things, the updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

In August 2014, the FASB issued an accounting standard update under which management will be required to assess an entity’s ability to continue as a going concern and provide related disclosures in certain circumstances. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or disclosures.

In April 2015, the FASB issued an accounting standard under which customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. The new standard is effective for annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

In August 2015, the FASB issued an accounting standard update to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The guidance affirms the Company's treatment of such costs, which is to defer and present the debt issuance costs as an asset and subsequently amortize the costs over the term of the line-of-credit arrangement. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or disclosures.

13

Etsy, Inc.

Notes to Consolidated Financial Statements

In September 2015, the FASB issued an accounting standard update that eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements or disclosures.

Note 2—Debt

Credit Agreement

In May 2014, the Company entered into a $35.0 million senior secured revolving credit facility pursuant to a Revolving Credit and Guaranty Agreement with several lenders (the “Credit Agreement”). The Credit Agreement will mature in May 2019. The Credit Agreement includes a letter of credit sublimit of $10.0 million and a swingline loan sublimit of $15.0 million.

Borrowings under the Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.00% to 0.25% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.00% to 1.25%. Swingline loans under the Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the total leverage ratio for the preceding four-fiscal-quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee and fees associated with letters of credit. The Credit Agreement also permits the Company, in certain circumstances, to request an increase in the facility by an amount of up to $50.0 million (and in minimum amounts of $10.0 million) at the same maturity, pricing and other terms.

The Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, investments, mergers, dispositions, transactions with affiliates and dividends and other distributions. These restrictions do not prohibit a subsidiary of the Company from making pro rata payments to the Company or any other person that owns an equity interest in such subsidiary. The Credit Agreement contains a financial covenant that requires the Company and its subsidiaries to maintain a total leverage ratio (defined as net debt to adjusted EBITDA) not to exceed 3.50 to 1.00.

The Credit Agreement includes customary events of default, including a change in control and a cross-default on the Company’s material indebtedness. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company and its subsidiaries’ assets, and its obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries.

In March 2015, the Company amended the Credit Agreement (the “Amended Credit Agreement”) to increase the senior secured revolving credit facility to $50.0 million. The Amended Credit Agreement contains the same pricing covenants and other material terms as the Credit Agreement. At September 30, 2015, the Company did not have any borrowings under the Credit Agreement.

Note 3—Stock-based Compensation

The Company's 2015 Equity Incentive Plan (the "2015 Plan") was adopted by its board of directors and approved by stockholders in March 2015. The 2015 Plan became effective immediately upon adoption although no awards were made under it until the effective date of the IPO. The 2015 Plan replaced the 2006 Stock Plan, and no further grants were made under the 2006 Stock Plan as of the effective date of the IPO.

The 2015 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs") and performance cash awards to employees, directors and consultants. The number of shares available for issuance under the 2015 Plan may be increased annually commencing January 1, 2016 by an amount equal to the lesser of 7,050,000 shares of common stock, 5% of the outstanding shares of common stock as of the last day of the

14

Etsy, Inc.

Notes to Consolidated Financial Statements

immediately preceding fiscal year, or such other amount as determined by the Company's board of directors. Any awards issued under the 2015 Plan that are forfeited by the participant will become available for future grant under the 2015 Plan.

The number of shares of the Company’s common stock initially reserved for issuance under the 2015 Plan equaled the sum of 14,100,000 shares plus up to 12,653,075 shares reserved for issuance or subject to outstanding awards under the 2006 Stock Plan. At September 30, 2015, 15,068,816 shares were authorized under the 2015 Plan, and 14,377,502 shares were available for future grant.

In the nine months ended September 30, 2015, we granted incentive stock options, nonqualified stock options and RSUs to eligible participants. Options were generally granted for a term of 10 years and vest 25% after the first year of service and ratably each month over the remaining 36-month period contingent on continued employment with the Company on each vesting date. RSUs generally vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant, and then vest ratably each quarter over the remaining 12-quarter period contingent on continued employment with the Company on each vesting date.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the inputs below. Prior to the IPO, the Company utilized equity valuations based on comparable publicly-traded companies, discounted free cash flows, an analysis of the Company's enterprise value and any other factors deemed relevant in estimating the fair value of its common stock. Subsequent to the IPO, the Company has used the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from market comparisons of certain publicly traded companies and other factors. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The requisite service period is generally four years from the date of grant. The fair value of RSUs is determined based on the closing price of the Company's common stock on Nasdaq on the grant date.

The Company granted 102,313 stock options in the three months ended September 30, 2015 at a weighted average grant date fair value of $6.70. The Company granted 1,512,324 stock options in the nine months ended September 30, 2015 at a weighted average grant date fair value of $7.10.

The Company granted 146,727 RSUs in the three months ended September 30, 2015 at a weighted average grant date fair value of $16.63. The Company granted 201,875 RSUs in the nine months ended September 30, 2015 at a weighted average grant date fair value of $16.53.

The fair value of options granted in each year using the Black-Scholes pricing model has been based on the following assumptions:

	Three Months Ended   September 30,		Nine Months Ended   September 30,
	2014	2015	2014	2015
Volatility	45.9% - 48.0%	44.1% - 44.7%	45.9% - 49.0%	40.4% - 45.0%
Risk-free interest rate	1.9% - 2.0%	1.7% - 1.9%	1.7% - 2.0%	1.3% - 1.9%
Expected term (in years)	5.7 - 6.1	6.0 - 6.1	5.5 - 6.1	5.5 - 6.1
Dividend rate	—%	—%	—%	—%

15

Etsy, Inc.

Notes to Consolidated Financial Statements

Total stock-based compensation expense included in the consolidated statements of operations is as follows (in thousands):

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2014		2015		2014		2015
Cost of revenue	$	357	$	149	$	731	$	681
Marketing	59		120		131		349
Product development	333		756		995		1,981
General and administrative	1,998		1,898		4,151		6,706
	$	2,747	$	2,923	$	6,008	$	9,717

The total stock-based compensation expense in the three months ended September 30, 2014 and 2015 includes $1.4 million and $0.7 million in acquisition-related stock-based compensation expense, respectively.

The total stock-based compensation expense in the nine months ended September 30, 2014 and 2015 includes $1.8 million and $3.2 million in acquisition-related stock-based compensation expense, respectively.

Note 4—Income Taxes

In January 2015, the Company implemented an updated global corporate structure to more closely align with its global operations and future expansion plans outside of the United States. The new structure changed how the Company uses its intellectual property and implemented certain intercompany arrangements. The Company believes this may result in a reduction in its overall effective tax rate and other operational efficiencies. The revised structure resulted in the setup of a deferred tax liability in the amount of $67.8 million on the taxable gain created in the transaction. A deferred charge was recorded for the same amount representing the future income tax which will be amortized into income tax expense over five years. During the three and nine months ended September 30, 2015, $3.7 million and $11.3 million was recorded to income tax expense, respectively.

The amount of unrecognized tax benefits, included within “Other liabilities” on the consolidated balance sheets, increased $20.4 million in the nine months ended September 30, 2015, from $0.4 million at December 31, 2014 to $20.8 million at September 30, 2015. The increase was primarily in connection with the implementation of the updated global corporate structure. During the three and nine months ended September 30, 2015, $1.1 million and $3.4 million was recorded to income tax expense, respectively, for the implementation. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $5.5 million at September 30, 2015. A deferred charge of $20.2 million was recorded representing the future income tax which will be amortized into income tax expense over five years. Additionally, the Company recognized $4.5 million of tax benefit for a research and development tax credit during the three months endedSeptember 30, 2015.

Note 5—Fair Value Measurements

The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the investment. Investments recorded in the accompanying consolidated balance sheet are categorized based on the inputs to valuation techniques as follows:

Level 1—These are investments where values are based on unadjusted quoted prices for identical assets in an active market that the Company has the ability to access.

Level 2—These are investments where values are based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.

16

Etsy, Inc.

Notes to Consolidated Financial Statements

Level 3—These are liabilities where values are derived from techniques in which one or more significant inputs are unobservable.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and September 30, 2015 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2) and significant unobservable inputs (Level 3) (in thousands):

	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
Asset
Cash equivalents:
Money market funds	$	20,288	$	—	$	—	$	20,288
U.S. Government bills	2,426		—		—		2,426
	22,714		—		—		22,714
Short-term investments:
U.S. Government and agency bills	19,184		—		—		19,184
	$	41,898	$	—	$	—	$	41,898
Liability
Put option classified as liability	$	—	$	—	$	16	$	16
Acquisition–related contingent consideration classified as liability	—		—		3,374		3,374
Warrants classified as liability	—		—		1,920		1,920
	$	—	$	—	$	5,310	$	5,310

	As of September 30, 2015
	Level 1		Level 2		Level 3		Total
Asset
Cash equivalents:
Money market funds	$	19,778	$	—	$	—	$	19,778
U.S. Government bills	1,160		—		—		1,160
	20,938		—		—		20,938
Short-term investments:
U.S. Government and agency bills	20,474		—		—		20,474
	$	41,412	$	—	$	—	$	41,412
Liability
Put option classified as liability	$	—	$	—	$	3	$	3
Acquisition–related contingent consideration classified as liability	—		—		5,680		5,680
Warrants classified as liability	—		—		—		—
	$	—	$	—	$	5,683	$	5,683

Level 1 instruments include money market funds and Corporate Certificates of Deposit and AAA-rated U.S. Government and agency securities, which are valued based on inputs including quotes from broker-dealers or recently executed transactions in the same or similar securities.

Level 3 instruments include contingent consideration classified as liability in connection with the acquisition of ALM and convertible warrants classified as liability. The contingent consideration is classified as liability due to its affiliation with a related put option, which will expire in the fourth quarter of 2015, and its fair value is determined based on the fair value of the Company's common stock at the period-end reporting date. The fair value of the warrants classified as liability is determined using the period-end fair value of the Company's common stock, the risk-free rate for periods within the contractual life of the warrant based on the U.S. Treasury yield curve in effect at the time of grant, implied volatilities from market comparisons of certain publicly traded companies and the contractual term. On the date of the IPO, the warrants converted from warrants for preferred stock to warrants for common stock and as a result are no longer classified as liability or subject to further fair value adjustments.

17

Etsy, Inc.

Notes to Consolidated Financial Statements

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):

	Nine Months Ended   September 30,
	2015
Balance at beginning of period	$	5,310
Acquired	—
Changes to liability-classified stock awards	2,964
Settled	—
Conversion of warrants to equity	(5,070		)
Net increase in fair value	2,479
Balance at end of period	$	5,683

Note 6—Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per share for periods presented (in thousands, except share and per share data):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
Net loss	$	(6,271	)	$	(6,891	)	$	(9,885	)	$	(49,831	)
Basic and diluted shares:
Weighted average common shares outstanding	43,015,151			111,329,917			39,258,879			84,195,227
Net loss per share attributable to common stockholders:
Basic and diluted net loss per share applicable to common stockholders	$	(0.15	)	$	(0.06	)	$	(0.25	)	$	(0.59	)

The following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:

	Three Months Ended   September 30,		Nine Months Ended   September 30,
	2014	2015	2014	2015
Stock options	10,743,878	11,904,577	11,329,156	11,914,369
Restricted Stock Units	—	148,188	—	60,204
Warrants	203,030	203,030	203,030	203,030
Convertible preferred stock	53,448,243	—	53,448,243	21,731,703
Total anti-dilutive securities	64,395,151	12,255,795	64,980,429	33,909,306

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Note 7—Segment and Geographic Information

Revenue by country is based on the billing address of the seller. The following table summarizes revenue by geographic area (in thousands):

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2014		2015		2014		2015
United States	$	37,311	$	51,593	$	104,119	$	145,326
International	10,323		14,103		26,560		40,278
Revenue	$	47,634	$	65,696	$	130,679	$	185,604

No individual international country’s revenue exceeded 5% of total revenue.

Note 8—Contingencies

Tax Contingencies

The Company had reserves of $3.5 million and $2.6 million at December 31, 2014 and September 30, 2015, respectively, for certain non-income tax obligations, representing management’s best estimate of its potential liability.

The Company could also be subject to examination in various jurisdictions related to income tax and non-income tax matters. The resolution of these types of matters, if in excess of the recorded reserve, could have an adverse impact on the Company’s business.

Legal Proceedings

On May 13, 2015, a purported securities class action complaint (Altayyar v. Etsy, Inc., et al., Docket No. 1:15-cv-02785) was filed in the United States District Court for the Eastern District of New York against the Company and certain officers. The complaint is brought on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company's common stock from April 16, 2015 through and including May 10, 2015. The complaint asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false or misleading statements and omissions with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement and actions taken by third-party brands against Etsy sellers for trademark or copyright infringement. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On October 22, 2015, the court appointed a lead plaintiff and lead plaintiff’s counsel. The Company and the named officers intend to defend themselves vigorously against this action. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

On July 21, 2015, a purported securities class action complaint (Cervantes v. Dickerson, et.al., Case No. CIV 534768) was filed in the Superior Court of State of California, County of San Mateo against the Company, certain officers, directors and underwriters. The complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933.  As in the Altayyar litigation, the complaint alleges misrepresentations in the Company’s Prospectus with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement.  The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On August 20, 2015, the Company removed the case to the United States District Court for the Northern District of California (Case No. 4:15-cv-03825-PJH). On October 21, 2015, the court granted plaintiff’s motion to remand the case to the Superior Court of California, San Mateo County. The Company and the named officers and directors intend to defend themselves vigorously against this action. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

In addition, from time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation, regardless of their success, could have an adverse effect on the Company’s consolidated results of operations or cash flows in the period the claims or litigation are resolved. As of September 30, 2015, the Company does not believe that there are any material litigation exposures relating to these other claims.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this report and with the audited consolidated financial statements included in our prospectus filed with the Securities and Exchange Commission on April 16, 2015, or the Prospectus.

Overview

We operate a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. Handmade goods are the foundation of our marketplace. Whether crafted by an Etsy seller herself, with the assistance of her team or with an outside manufacturer in small batches, handmade goods spring from the imagination and creativity of an Etsy seller and embody authorship, responsibility and transparency. We believe we are creating a new economy, which we call the Etsy Economy, where creative entrepreneurs find meaningful work and both global and local markets for their goods, and where thoughtful consumers discover and buy unique goods and build relationships with the people who sell them.

We operate a platform for third-party sellers. Our business model is based on shared success: we make money when Etsy sellers make money. We do not compete with Etsy sellers, hold inventory or sell goods. Our revenue is diversified, generated from a mix of marketplace activities and the services we provide Etsy sellers to help them create and grow their businesses. Marketplace revenue includes the fee an Etsy seller pays for each completed transaction and the listing fee an Etsy seller pays for each item she lists. Seller Services revenue includes fees an Etsy seller pays for services such as prominent placement in search results via Promoted Listings, payment processing via Direct Checkout and purchases of shipping labels through our platform via Shipping Labels. Other revenue includes the fees we receive from a third-party payment processor.

We completed our initial public offering (the "IPO") of our common stock on April 21, 2015.

Key Operating and Financial Metrics

We collect and analyze operating and financial data to evaluate the health of our ecosystem, allocate our resources (such as capital, time and technology investments) and assess the performance of our business. In addition to revenue, net (loss) income and other results under GAAP, the key operating and financial metrics we use are:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
	(in thousands, except percentages)
GMS	$	467,202		$	568,787		$	1,320,507		$	1,646,899
Adjusted EBITDA	$	4,248		$	6,224		$	13,783		$	16,958
Active sellers	1,284			1,533			1,284			1,533
Active buyers	18,102			22,603			18,102			22,603
Percent mobile visits	55		%	60		%	53		%	60		%
Percent mobile GMS	38		%	44		%	37		%	43		%
Percent international GMS	31.6		%	29.3		%	31.1		%	30.0		%

GMS

Gross merchandise sales, or GMS, is the dollar value of items sold in our marketplace within the applicable period, excluding shipping fees and net of refunds associated with cancelled transactions. GMS does not represent revenue earned by us. GMS relates only to Marketplace activity and does not reflect Seller Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our marketplace, we believe that GMS is an indicator of the success of Etsy sellers, the satisfaction of Etsy buyers, the health of our ecosystem and the scale and growth of our business.

Adjusted EBITDA

Adjusted EBITDA represents our net (loss) income before interest expense, net, (benefit) provision for income taxes and depreciation and amortization, adjusted to eliminate stock-based compensation expense, net unrealized loss (gain) on warrant and other liabilities, foreign exchange loss (gain), acquisition-related expenses and our contributions to Etsy.org. We have

20

included Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans and assess the health of our ecosystem. As our Adjusted EBITDA increases, we are able to invest more resources in our community. We also believe that Adjusted EBITDA provides a useful measure for period-to-period comparisons of our business as it removes the impact of non-cash items and certain variable charges. See “Non-GAAP Financial Measures” for information regarding the limitations of using Adjusted EBITDA as a financial measure and for a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated in accordance with GAAP.

Active Sellers

An active seller is an Etsy seller who has incurred at least one charge from us in the last 12 months. Charges include transaction fees, listing fees and fees for Direct Checkout, Promoted Listings, Shipping Labels and Wholesale enrollment. An Etsy seller is a member who has created an account and has listed an item in our marketplace. An Etsy seller is identified by a unique e-mail address; a single person can have multiple Etsy seller accounts. We succeed when Etsy sellers succeed, so we view the number of active sellers as a key indicator of the awareness of our brand, the reach of our platform, the potential for growth in GMS and revenue and the health of our ecosystem.

Active Buyers

An active buyer is an Etsy buyer who has made at least one purchase in the last 12 months. An Etsy buyer is a member who has created an account in our marketplace. An Etsy buyer is identified by a unique e-mail address; a single person can have multiple Etsy buyer accounts. We succeed when Etsy buyers order items from Etsy sellers, so we view the number of active buyers as a key indicator of our potential for growth in GMS and revenue, the reach of our platform, awareness of our brand, the engagement and loyalty of Etsy buyers and the health of our ecosystem.

Mobile Visits

A mobile visit is a visit that occurs on a mobile device, such as a tablet or a smartphone. Etsy sellers are increasingly using mobile devices to manage their listings and track their business performance on our platform. In addition, Etsy buyers increasingly use mobile devices to search, browse and purchase items on our platform. We began tracking mobile visits in 2013. We view percent mobile visits as a key indicator of the level of engagement of our members on our mobile website and mobile apps and of our ability to sustain GMS and revenue.

Mobile GMS

Mobile GMS is GMS that occurs on a mobile device, such as a tablet or a smartphone. Mobile GMS excludes orders initiated on mobile devices but ultimately completed on a desktop. We began tracking mobile GMS in 2013. We believe that mobile GMS indicates our success in converting mobile activity into mobile purchases and demonstrates our ability to grow GMS and revenue.

International GMS

International GMS is GMS from transactions where either the billing address for the Etsy seller or the shipping address for the Etsy buyer at the time of sale is outside of the United States. We believe that international GMS shows the level of engagement of our community outside the United States and demonstrates our ability to grow GMS and revenue.

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Results of Operations

The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. For more information regarding the components of our results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Components of Our Results of Operations” in the Prospectus, which we incorporate by reference.

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
	(in thousands)						(in thousands)
Revenue:
Marketplace	$	26,917		$	32,232		$	75,421		$	92,852
Seller Services	19,392			32,329			51,812			89,378
Other	1,325			1,135			3,446			3,374
Total revenue	47,634			65,696			130,679			185,604
Cost of revenue	18,115			24,165			50,854			66,783
Gross profit	29,519			41,531			79,825			118,821
Operating expenses:
Marketing	8,808			16,542			25,042			44,295
Product development	10,077			11,406			26,911			31,487
General and administrative	13,686			15,250			34,299			53,339
Total operating expenses	32,571			43,198			86,252			129,121
Loss from operations	(3,052		)	(1,667		)	(6,427		)	(10,300		)
Other expense, net	(1,144		)	(1,129		)	(1,578		)	(19,802		)
Loss before income taxes	(4,196		)	(2,796		)	(8,005		)	(30,102		)
Provision for income taxes	(2,075		)	(4,095		)	(1,880		)	(19,729		)
Net loss	$	(6,271	)	$	(6,891	)	$	(9,885	)	$	(49,831	)
	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2015			2014			2015
Revenue:
Marketplace	56.5		%	49.1		%	57.7		%	50.0		%
Seller Services	40.7			49.2			39.6			48.2
Other	2.8			1.7			2.6			1.8
Total revenue	100.0			100.0			100.0			100.0
Cost of revenue	38.0			36.8			38.9			36.0
Gross profit	62.0			63.2			61.1			64.0
Operating expenses:
Marketing	18.5			25.2			19.2			23.9
Product development	21.2			17.4			20.6			17.0
General and administrative	28.7			23.2			26.2			28.7
Total operating expenses	68.4			65.8			66.0			69.6
Loss from operations	(6.4		)	(2.5		)	(4.9		)	(5.5		)
Other expense, net	(2.4		)	(1.7		)	(1.2		)	(10.7		)
Loss before income taxes	(8.8		)	(4.3		)	(6.1		)	(16.2		)
Provision for income taxes	(4.4		)	(6.2		)	(1.4		)	(10.6		)
Net loss	(13.2		)	(10.5		)	(7.6		)	(26.8		)

22

Comparison of Three Months EndedSeptember 30, 2014 and 2015

Revenue

	Three Months Ended September 30,						Change
	2014			2015			$			%
	(in thousands, except percentages)
Revenue:
Marketplace	$	26,917		$	32,232		$	5,315		19.7	%
Percentage of total revenue	56.5		%	49.1		%
Seller Services	$	19,392		$	32,329		$	12,937		66.7	%
Percentage of total revenue	40.7		%	49.2		%
Other	$	1,325		$	1,135		$	(190	)	(14.3	)%
Percentage of total revenue	2.8		%	1.7		%
Total revenue	$	47,634		$	65,696		$	18,062		37.9	%

GMS increased $101.6 million, or 21.7%, to $568.8 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

During the three months ended September 30, 2015, mobile GMS increased as a percentage of total GMS to approximately 44%, up from 38% for the three months ended September 30, 2014, as a result of increased mobile traffic and, to a lesser extent, improvements in our mobile offerings for Etsy buyers.

For the three months ended September 30, 2015, international GMS decreased as a percentage of total GMS to 29.3%, from 31.6% for the three months ended September 30, 2014. We continue to believe that we can grow international GMS, over time, to represent 50% of total GMS, and that the impact of currency exchange rates contributed to the year-over-year decline in percent international GMS.

In the three months ended September 30, 2015, approximately 9% of GMS was from goods that were not listed in U.S. dollars and, as a result, was impacted by currency exchange fluctuations. On a currency-neutral basis, GMS growth for the three months ended September 30, 2015 would have been 23.5%, or approximately 1.8 percentage points higher than the reported 21.7% growth. In addition, we believe weaker local currencies in key international markets continued to dampen the demand for U.S. dollar-denominated goods during the three months ended September 30, 2015, impacting both GMS growth and percent international GMS. In light of these factors, we estimate that the impact of currency translation on goods not listed in U.S. dollars and the impact of currency exchange rates on international buyer behavior reduced our year-over-year GMS growth rate by approximately three to five percentage points for the three months ended September 30, 2015.

Etsy sellers have historically experienced increased sales and used more Seller Services during the fourth-quarter holiday shopping season. This has resulted in increased revenue for us during the fourth quarter of each fiscal year, which can compare to lower revenue in the first quarter of the following fiscal year. While we expect these trends to continue in the fourth quarter of 2015, if currency exchange rates remain at current levels, currency translation will continue to negatively affect reported GMS growth for goods that are not listed in U.S. dollars and will also continue to dampen the demand for U.S. dollar-denominated goods from buyers outside of the United States.

Revenue increased $18.1 million, or 37.9%, to $65.7 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, of which 49.1% consisted of Marketplace revenue and 49.2% consisted of Seller Services revenue.

Marketplace revenue increased $5.3 million, or 19.7%, to $32.2 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This growth corresponded with a 21.7% increase in GMS to a total of $568.8 million for the three months ended September 30, 2015. As our GMS increased, our Marketplace revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue. Active sellers increased 19.4% to 1.5 million and active buyers increased 24.9% to 22.6 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Seller Services revenue increased $12.9 million, or 66.7%, to $32.3 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The growth in Seller Services revenue was primarily driven by an increase in revenue from Promoted Listings, as well as increases in Direct Checkout and Shipping Labels revenue. The increase

23

in Promoted Listings revenue was due to the re-launch of the product at the end of the third quarter of 2014. The increase in Direct Checkout revenue reflects an increase in the number of Etsy sellers using the service and the increase in overall GMS. The increase in Shipping Label revenue reflects a combination of an increase in the number of Etsy sellers using the service and enhancements to the product. The fourth quarter of 2015 will be the first full quarter following the anniversary of the re-launch of Promoted Listings. We expect the year-over-year revenue growth rate for Promoted Listings to decelerate significantly compared to the three months ended September 30, 2015 to a level that is below that of Direct Checkout, which is a lower-margin revenue stream. Further, we expect Direct Checkout revenue to benefit from our recent integration of PayPal. We expect this shift in Seller Services revenue growth drivers to result in a negative impact on our gross margin during the fourth quarter.

Other revenue decreased 14.3% to $1.1 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Cost of Revenue

	Three Months Ended September 30,						Change
	2014			2015			$		%
	(in thousands, except percentages)
Cost of revenue	$	18,115		$	24,165		$	6,050	33.4	%
Percentage of total revenue	38.0		%	36.8		%

Cost of revenue increased $6.1 million, or 33.4%, to $24.2 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily as a result of additional costs to support the increase in Direct Checkout revenue. To a lesser extent, the increase was due to an increase in employee-related expenses, depreciation and amortization and hosting and bandwidth costs associated with ongoing maintenance of our technology infrastructure. Cost of revenue decreased as a percentage of revenue due to moderate growth in costs related to our technology infrastructure as compared to the growth in higher-margin revenue streams such as Promoted Listings.

Operating Expenses

There were 804 total employees on September 30, 2015, compared with 757 on June 30, 2015. We expect our number of net hires in the fourth quarter of 2015 to be comparable to the three months ended September 30, 2015 and higher than the three months endedDecember 31,2014.

Marketing

	Three Months Ended September 30,						Change
	2014			2015			$		%
	(in thousands, except percentages)
Marketing	$	8,808		$	16,542		$	7,734	87.8	%
Percentage of total revenue	18.5		%	25.2		%

Marketing expenses increased $7.7 million, or 87.8%, to $16.5 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily as a result of an increase in spending on product listing ads and employee-related expenses in our marketing team, which includes our public relations, communications and seller development teams. The increase in marketing expenses was also impacted by business changes and reorganizations that occurred in September of 2014, moving certain teams that were previously focused on product-related projects into marketing. Excluding the impact of these changes, comparable marketing expenses in the three months ended September 30, 2015 grew 74.0% compared to the three months ended September 30, 2014. We plan to spend more on marketing in absolute dollars in the three months ended December 31, 2015 compared to both the three months ended September 30, 2015 and the three months endedDecember 31, 2014. Additionally, we expect overall marketing expenses to continue to increase at a higher rate than revenue in the three months ended December 31, 2015. However, we expect the growth rates for overall marketing expenses to decelerate in the three months ended December 31, 2015 compared to both the three months ended September 30, 2015 and the three months endedDecember 31, 2014 and for digital marketing expenses to increase at a slower rate year-over-year for the three months ended December 31, 2015 compared to the three months ended September 30, 2015.

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Product development

	Three Months Ended September 30,						Change
	2014			2015			$		%
	(in thousands, except percentages)
Product development	$	10,077		$	11,406		$	1,329	13.2	%
Percentage of total revenue	21.2		%	17.4		%

Product development expenses increased $1.3 million, or 13.2%, to $11.4 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily as a result of an increase in employee-related expenses in our product and engineering teams. The increase in product development expenses was also impacted by business changes and reorganizations that occurred at the end of the third quarter in 2014, moving certain teams to marketing that were previously focused on product-related projects. Excluding the impact of these changes, comparable product development expenses in the three months ended September 30, 2015 grew 18.3% compared to the three months ended September 30, 2014.

General and administrative

	Three Months Ended September 30,						Change
	2014			2015			$		%
	(in thousands, except percentages)
General and administrative	$	13,686		$	15,250		$	1,564	11.4	%
Percentage of total revenue	28.7		%	23.2		%

General and administrative expenses increased $1.6 million, or 11.4%, to $15.3 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily driven by an increase in employee-related expenses and an increase in consulting fees, mainly related to the expansion of new and existing office locations.

Other Expense, net

	Three Months Ended September 30,						Change
	2014			2015			$		%
	(in thousands, except percentages)
Other expense, net	$	(1,144	)	$	(1,129	)	$	15	(1.3	)%
Percentage of total revenue	(2.4		)%	(1.7		)%

Other expense, net decreased 1.3% to $1.1 million in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Provision for Income Taxes

	Three Months Ended September 30,						Change
	2014			2015			$			%
	(in thousands, except percentages)
Provision for income taxes	$	(2,075	)	$	(4,095	)	$	(2,020	)	97.3	%
Percentage of total revenue	(4.4		)%	(6.2		)%

Our income tax provision for the three months ended September 30, 2015 was $4.1 million. Drivers of the income tax provision include the recognition of $4.8 million of tax expense related to our updated corporate structure, $4.5 million of tax benefit for an R&D tax credit, forecasted pretax income, the mix of income and losses in jurisdictions with a wide range of tax rates and the amount of non-deductible stock-based compensation expense.

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Our income tax benefit for the three months ended September 30, 2014 was $2.1 million. The primary drivers of the income tax benefit are the mix of income and losses in jurisdictions with a wide range of tax rates, including the inability to benefit from losses in certain jurisdictions, the amount of non-deductible stock-based compensation expense and the unrealized loss on our warrant liability.

26

Comparison of Nine Months EndedSeptember 30, 2014 and 2015

Revenue

	Nine Months Ended   September 30,						Change
	2014			2015			$			%
	(in thousands, except percentages)
Revenue:
Marketplace	$	75,421		$	92,852		$	17,431		23.1	%
Percentage of total revenue	57.7		%	50.0		%
Seller Services	$	51,812		$	89,378		$	37,566		72.5	%
Percentage of total revenue	39.6		%	48.2		%
Other	$	3,446		$	3,374		$	(72	)	(2.1	)%
Percentage of total revenue	2.6		%	1.8		%
Total revenue	$	130,679		$	185,604		$	54,925		42.0	%

GMS increased $326.4 million, or 24.7%, to $1.6 billion in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

During the nine months ended September 30, 2015, mobile GMS increased as a percentage of total GMS to approximately 43%, up from 37% for the nine months ended September 30, 2014 as a result of increased mobile traffic and, to a lesser extent, improvements in our mobile offerings for Etsy buyers.

For the nine months ended September 30, 2015, international GMS decreased as a percentage of total GMS to 30.0%, from 31.1% for the nine months ended September 30, 2014.We continue to believe that we can grow international GMS, over time, to represent 50% of total GMS, and that the impact of currency exchange rates contributed to the year-over-year decline in percent international GMS.

In the nine months ended September 30, 2015, approximately 9% of GMS was from goods that were not listed in U.S. dollars and, as a result, was impacted by currency exchange fluctuations. On a currency-neutral basis, GMS growth for the nine months ended September 30, 2015 would have been 26.5%, or approximately 1.8 percentage points higher than the reported 24.7% growth. In addition, we believe weaker local currencies in key international markets continued to dampen the demand for U.S. dollar-denominated goods during the nine months ended September 30, 2015, impacting both GMS growth and percent international GMS. In light of these factors, we estimate that the impact of currency translation on goods not listed in U.S. dollars and the impact of currency exchange rates on international buyer behavior reduced our year-over-year GMS growth rate by approximately three to five percentage points for the nine months ended September 30, 2015.

Etsy sellers have historically experienced increased sales and used more Seller Services during the fourth-quarter holiday shopping season. This has resulted in increased revenue for us during the fourth quarter of each fiscal year, which can compare to lower revenue in the first quarter of the following fiscal year. While we expect these trends to continue in the fourth quarter of 2015, if currency exchange rates remain at current levels, currency translation will continue to negatively affect reported GMS growth for goods that are not listed in U.S. dollars and will also continue to dampen the demand for U.S. dollar-denominated goods from buyers outside of the United States.

Revenue increased $54.9 million, or 42.0%, to $185.6 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, of which 50.0% consisted of Marketplace revenue and 48.2% consisted of Seller Services revenue.

Marketplace revenue increased $17.4 million, or 23.1%, to $92.9 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This growth corresponded with a 24.7% increase in GMS to a total of $1.6 billion for the nine months ended September 30, 2015. As our GMS increased, our Marketplace revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue. Active sellers increased 19.4% to 1.5 million and active buyers increased 24.9% to 22.6 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Seller Services revenue increased $37.6 million, or 72.5%, to $89.4 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The growth in Seller Services revenue was primarily driven by an increase in revenue from Promoted Listings, as well as increases in Direct Checkout and Shipping Labels revenue. The increase

27

in Promoted Listings revenue was due to the re-launch of the product at the end of the third quarter of 2014. The increase in Direct Checkout revenue reflects an increase in the number of Etsy sellers using the service and the increase in overall GMS. The increase in Shipping Label revenue reflects a combination of an increase in the number of Etsy sellers using the service and enhancements to the product. The fourth quarter of 2015 will be the first full quarter following the anniversary of the re-launch of Promoted Listings. We expect the year-over-year revenue growth rate for Promoted Listings to decelerate significantly compared to the nine months ended September 30, 2015 to a level that is below that of Direct Checkout, which is a lower-margin revenue stream. Further, we expect Direct Checkout revenue to benefit from our recent integration of PayPal. We expect this shift in Seller Services revenue growth drivers to result in a negative impact on our gross margin.

Other revenue decreased $0.1 million, or 2.1%, to $3.4 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Cost of Revenue

	Nine Months Ended   September 30,				Change
	2014		2015		$		%
	(in thousands, except percentages)
Cost of revenue	$	50,854	$	66,783	$	15,929