10-K 1 etsy1231201610k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-K
_________________________
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
 
 
 
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.)
 
 
 
117 Adams Street, Brooklyn, NY
 
11201
(Address of principal executive offices)
 
(Zip code)
 
(718) 880-3660
(Registrant's telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  x 

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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x 

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 x Accelerated filer ¨
Non-accelerated filer ¨ (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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $1,067,009,418.

The number of shares of common stock outstanding as of February 24, 2017 was 116,129,719.

Documents Incorporated By Reference
Portions of the registrant’s Proxy Statement for its 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2016, are incorporated by reference in Part III of this Annual Report on Form 10-K.





Etsy, Inc.
Table of Contents

Note Regarding Forward-Looking Statements
 
 
Page
 
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Consolidated Financial and Other Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2015 and 2016
 
Consolidated Statements of Operations for the years ended December 31, 2014, 2015 and 2016
 
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2015 and 2016
 
Consolidated Statement of Changes in Convertible Preferred Stock and Stockholders' Equity for the years ended December 31, 2014, 2015 and 2016
 
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2015 and 2016
 
Notes to Consolidated Financial Statements
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
 
Signatures
 
Exhibit Index
Unless the context otherwise requires, we use the terms “Etsy,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K, or Annual Report, to refer to Etsy, Inc. and, where appropriate, our consolidated subsidiaries.
See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsKey Operating and Financial Metrics” for the definitions of the following terms used in this Annual Report: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” “mobile visits” and “mobile GMS.”




NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information related to our possible or assumed future results of operations and expenses, our outlook, our mission, business strategies and plans, business environment, market size, product capabilities and release timing 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” and elsewhere in this report. Given these uncertainties, you should read this report in its entirety and not place undue reliance on any forward-looking statements in this Annual Report on Form 10-K.

Moreover, we operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements made in this report. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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.

Item 1. Business.
Overview

Etsy offers markets, services and technology that empower creative entrepreneurs and shape a positive future for business. Our mission is to reimagine commerce in ways that build a more fulfilling and lasting world. As of December 31, 2016, our platform connected 1.7 million active Etsy sellers and 28.6 million active Etsy buyers, in nearly every country in the world.

We believe we are creating a new economy, which we call the “Etsy Economy.” The Etsy Economy is where creative entrepreneurs find meaningful work and access to both global and local markets for their goods, and where thoughtful consumers discover and buy unique goods and build connections with the people who sell them. Our community is made up of these creative entrepreneurs and thoughtful consumers as well as the Etsy employees who maintain our platform and build innovative technology, the retailers who participate in our Etsy Wholesale offering, the production partners who offer manufacturing assistance to Etsy sellers and the shareholders who have invested in our commitment to our mission.

Supporting creative entrepreneurs is the heart and soul of Etsy. We have a seller-aligned business model: we make money when our Etsy sellers make money, so we continue to invest in building the platform they depend on.

Our markets provide creative entrepreneurs with access to thoughtful consumers around the world. Buyers come to Etsy.com to find what they are looking for among nearly 45 million unique items across more than 50 retail categories. We also offer a wide range of Seller Services and tools that are specifically designed to help creative entrepreneurs start, manage and scale their businesses.

In 2016, Etsy sellers generated Gross Merchandise Sales (“GMS”) of $2.8 billion, of which approximately 48% came from purchases made on mobile devices. We are a global company and 30.4% of our 2016 GMS came from an Etsy seller or an Etsy buyer outside of the United States.

Our revenue is diversified, generated from a mix of market activities and the Seller Services we provide to Etsy sellers to help them start, manage and scale their businesses. Our largest market is Etsy.com. In 2017, we plan to launch a dedicated craft supplies market called Etsy Studio. We also own A Little Market, or ALM, a handmade and supplies market for sellers and buyers in France. Markets revenue is primarily made up of two components: the 3.5% transaction fee an Etsy seller pays for each completed transaction on Etsy.com and the $0.20 listing fee she pays for each item she lists on Etsy.com. Seller Services revenue includes the fees Etsy sellers pay us for services, which include Direct Checkout, our payment processing service; Promoted Listings, our ad service for prominent placement in on-site search results; Shipping Labels, which allow Etsy sellers to directly purchase shipping labels through our platform; and Pattern by Etsy, launched in April 2016, which enables Etsy sellers to easily create their own custom website. Other revenue typically includes revenue generated from commercial partnerships.

Etsy was founded in June 2005 in Brooklyn, New York. On April 21, 2015, we completed our initial public offering (the “IPO”) and our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “ETSY.”
Values and Impact

At Etsy, values are not a nice-to-have; they’re an integral part of how we do business. We work hard to ensure that our values guide our decision making and are integrated into every aspect of our business and operations. Our values help drive our business forward as a force for good and help us build the Etsy Economy.

We believe that a growing number of consumers consider the environmental and social impact of their purchases. We also believe that consumers will demand more of the businesses they support and that the companies best positioned to succeed will build win-win solutions that are good for people, the planet and profit. As such, we believe that values and impact alignment is critical to growing our business sustainably and positioning us for success in the future.

In 2016, we formed our Values Aligned Business (“VAB”) team, whose mandate is to ensure that Etsy’s mission, values and impact goals are embedded in all aspects of our culture, products, services, business and leadership. The VAB team is conducting a review process to ensure that our values continue to live up to these ideals. We are committed to the spirit of our

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current values as we focus on ways to deepen our impact and continue to: incorporate and build human connection in commerce, act with courage, serve our community, be accountable and drive diversity and inclusion.

We are a mindful, transparent and humane business. We believe that business interests and social and environmental responsibility are interwoven and aligned and that the power of business should be used to strengthen communities and empower people. To demonstrate our commitment, we monitor our efforts to minimize the harm and maximize the benefit that we have on people and the planet and then publish an annual Progress Report to publicly report our results.

We plan and build for the long term. We want to build a company that lasts, and we plan to measure our success in years and decades. Etsy sellers in particular depend on us and on our platform to grow their businesses, so we will strive to make decisions that are best for the long-term health of our ecosystem. Our ecosystem consists of Etsy and the people and communities around the world who benefit from our platform.

We value craftsmanship in all we make. Craftsmanship is the marriage of skill and passion. We are an engineering-driven company, and we think of our code as craft: we are makers of the products and services that members of our community use, and we approach the work we do with the same care and inspiration as do Etsy sellers.

We believe fun should be part of everything we do. Our mission includes fostering a world in which personal fulfillment and purpose is a key element of success. We believe that this way of working is connected and joyful.

We keep it real, always. We have the courage and the will to do business in ways that are unconventional and impactful. When we believe that we are not being true to our values or our mission, we are not afraid to change course.

We are also dedicated to creating a net positive environmental, social and economic impact through our business. For example, in 2016 we established our goal of running Etsy.com as a carbon neutral market. We took steps toward this aspiration with the launch of Etsy Solar, a program which helps our seller community in the United States go solar and creates carbon offsets for our Etsy.com market. We also committed to power our offices and data centers with 100% renewable electricity by 2020 and currently have onsite solar at our Brooklyn and Hudson (New York) offices.
Our Community
Our community includes Etsy sellers, Etsy buyers, Etsy employees, our partners and investors.
Etsy Sellers: Creative Entrepreneurs
Etsy sellers join our community to participate in our vibrant markets to express their creativity and turn their passion into a business while connecting to thoughtful consumers around the world. As of December 31, 2016, there were 1.7 million active sellers on our platform, 15.2% of which have been selling on Etsy.com for more than four years.
activesellers.jpg
Etsy Sellers


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We support a diverse group of artists, makers, designers and collectors from around the world—from the solo artisan to the full-time jewelry maker with staff; from the antique furniture collector to the textile graphic designer partnering with a small-batch manufacturer.
We survey our sellers every two years and in November 2016, we conducted a survey of Etsy sellers who made a sale in the preceding 12 months. The 2016 seller survey, which included responses from 5,000 sellers, reveals a unique population of creative entrepreneurs who are building businesses on their own terms—prioritizing flexibility, independence and creativity. Digital platforms and mobile devices make it increasingly easy for these entrepreneurs to reach a global audience and for them to conduct business whenever and from wherever they'd like. Etsy sellers range from hobbyists to professional merchants, and have a broad range of personal and professional goals. The 2016 seller survey showed some Etsy sellers are looking for extra pocket money, while others depend on their shops to support themselves and their families. According to our 2016 seller survey, among Etsy sellers:
 
87% identify as women;

73% consider their Etsy shop to be a business;

33% use their creative business as their sole occupation;

97% run their shops from their homes;

81% aspire to grow their sales in the future; and

62% started their Etsy shop as a way to supplement income.
Etsy Buyers: Thoughtful Consumers
Etsy buyers visit Etsy.com to discover a broad selection of unique goods that are hard to find elsewhere, with items ranging from a $5 ornament, to a $50 hand-knit sweater, to a $2,000 custom-made table. In a 2016 survey of Etsy.com buyers, 91% agreed that Etsy offers products they cannot find elsewhere. We believe many Etsy buyers are motivated by more than simply price and convenience; we believe they also value craftsmanship, artistry, uniqueness, authenticity and sustainability. In our markets, Etsy buyers can enjoy a personalized shopping experience and build relationships through direct interactions with Etsy sellers. Etsy buyers can also purchase customized items, bespoke goods or unique and unexpected craft supplies from Etsy sellers. By buying in our markets, Etsy buyers are supporting creative entrepreneurs in their local communities and around the world. As of December 31, 2016, there were 28.6 million active buyers on our platform.
Etsy Employees
We too are members of our community. Whether drafting our policies, talking with Etsy sellers and Etsy buyers in our online forums, enhancing search functionality to help buyers better find what they're looking for or building new services and tools that help sellers start, manage and scale their businesses, our employees create genuine and lasting connections in our community. Etsy employees build personal relationships with Etsy sellers by visiting their shops, inviting them to our offices for lunch or celebrating with them at in-person events. In addition, our employees, including management, are encouraged to perform support rotations to foster connections with Etsy sellers and Etsy buyers and to help us better understand their needs.
We pride ourselves on our values-based and purpose-driven work culture. We focus on maximizing our employees’ professional and personal well-being. We evaluate employee performance on traditional business metrics and on adherence to our mission and values.
We believe employee engagement comes from fulfilling work focused on serving the needs of our sellers and buyers and from ample personal and professional growth opportunities. We invest heavily in employee development by offering coaching, skills workshops and training. We actively encourage personal education through arts and crafts workshops and employee-taught classes called “Etsy School,” covering subjects ranging from screen printing to Python programming. We also offer our employees paid time off to volunteer so that they can support the causes and organizations they are passionate about. In 2016, we introduced a 26-week gender-blind parental leave policy that is available to all Etsy employees globally. Through this policy we aim to support and enable parents to play equal roles in building successful companies and nurturing their families. Fortune magazine has recognized us as a great place to work every year since 2013.
Etsy engineering is widely known for its thought-leading approaches to software development as well as its unique engineering culture. Our engineering team coined the phrase “Code as Craft” to describe our love for building software and our melding of

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engineering discipline and individual craftsmanship. We believe our engineers have the skills, practices and experience needed to embrace the change the future inevitably brings.
As of December 31, 2016, we had 1,043 employees worldwide, with 648 in our offices in Brooklyn, New York. Of those employees, we had 319 in engineering, 124 in product, 187 in member operations, 276 in corporate and 137 in marketing.
We believe that a diverse workforce makes us a better company, and we strive to create opportunities for underrepresented groups to join, thrive and advance at Etsy. For example, we proactively work and recruit to improve the gender balance at all levels of our company. As of December 31, 2016, 56% of employees identified as female. As of December 31, 2016, 58% of managers and 36% of product, engineering and technical operations employees identified as female. We are committed to improving the diversity within our workforce, and we publish an annual Progress Report that details our progress toward this goal.
Our Partners

Our community also includes retailers who participate in our Etsy Wholesale offering and production partners who assist Etsy sellers who want to scale their businesses through our Etsy Manufacturing offering. Within Etsy Wholesale, retailers, nearly all of which are local boutiques, use our platform to connect directly with Etsy sellers and to add unique and distinctive items to their store offerings. As of December 31, 2016, there were 25,000 retailers on the platform. Etsy Manufacturing helps Etsy sellers who want to grow their business and connect directly with production partners. For example, an Etsy seller might work with a cut-and-sew shop to make clothes she has designed, a casting house that casts wax models for her jewelry designs or a digital printer that prints her photographs on household items.
Investors

We consider investors important stakeholders in our business. We strive to maintain transparent and open communications with the investment community, as appropriate, and appreciate those who support and believe in our long-term mission to reimagine commerce.
Our Opportunity

We believe that the nature of commerce is changing: people are choosing to purchase goods online or from a mobile device, consumers are looking for unique items rather than mass produced goods and more people than ever are seeking employment outside of the traditional nine-to-five workplace. We believe that these trends create a strong, long-term market opportunity for Etsy allowing us to continue to expand our markets globally by attracting buyers who want something different than a conventional, mass-produced retail shopping experience and sellers who are engaging in their creative passion, working for themselves and defining success on their own terms.

The retail landscape continues to change as more people around the world choose to purchase goods online or from a mobile device. eMarketer, a market research company, estimated that worldwide retail ecommerce sales were $2 trillion in 2016, up from $1.5 trillion in 2015. They expect worldwide retail ecommerce to generate double-digit growth each year through 2020, and sales to reach $4 trillion by the end of the four-year period. (Source: eMarketer - Worldwide Retail Ecommerce Sales: The eMarketer Forecast for 2016.) Whereas most large retailers emphasize efficiency and scale and pressure their suppliers to reduce their costs in order to offer goods produced at volume at the lowest-possible prices, our approach to commerce is fundamentally different and based on human connections. We believe that many consumers want to purchase goods that are unique and that reflect their personality and style, not simply mass-produced, generic goods. Finding these goods can be difficult, as markets for such goods have historically been highly fragmented across boutiques, consignment stores and other venues and marketplaces. Etsy sellers offer goods in over 50 retail categories, including furniture, jewelry, stationery, clothing, home goods, craft supplies and vintage items.

Two of our largest opportunities are to raise awareness among potential and existing buyers about the breadth and depth of items available on Etsy.com and to encourage them to make more frequent purchases. Given the more than 50 retail categories in which Etsy sellers have offerings, we believe we can establish Etsy.com as a shopping destination not just for gifts and special occasions, but also for goods buyers use in their everyday lives. We also believe that this perception shift and our efforts to make the shopping experience easier for Etsy buyers through technological enhancements to our capabilities in areas such as search and recommendations will encourage buyers to make more frequent purchases in our markets. In addition, we believe that our new market, Etsy Studio, will help us serve our craft supplies sellers better and reach a broader audience of craft supplies buyers around the world. According to the Association for Creative Industries, creative products is an approximately

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$44 billion market in the United States. However, the vast majority of sales currently take place offline (Source: Association for Creative Industries - 2016 Creative Products Size of the Industry Study.) Etsy Studio offers a differentiated buyer experience that combines shopping and inspiration in one destination, which we believe creates a unique online opportunity for Etsy within this large addressable market.

The nature of work also continues to shift and more people than ever are choosing employment outside of traditional nine-to-five jobs. According to a McKinsey Global Institute study (the “Mckinsey Study”), 20-30% of the working-age population, or up to 162 million people, currently engage in independent work in the U.S. and E.U.-15. The McKinsey Study notes that 30-45% of the working-age population in these countries say they would like to earn either primary or supplemental income through independent work and consider themselves at least somewhat likely to pursue the option, implying the number of independent workers in the U.S. and the E.U.-15 could grow to up to 267 million. (Source: McKinsey Global Institute - Independent work: Choice, Necessity, and the Gig Economy.) We believe that our base of Etsy sellers reflects these changing dynamics. Active sellers on Etsy grew at 18% CAGR between 2013 and 2016 as more and more people chose to start a business. Additionally, our 2016 seller survey found that 33% of sellers in our markets have their creative business as their sole occupation, compared to 30% in our 2014 seller survey, reflecting an increasing number of people that are choosing to focus on independent work full time. As more and more people around the world choose to pursue their passions, we are focused on providing creative entrepreneurs with a global base of millions of buyers and a cohesive suite of services and tools specifically designed to support them as they start, manage and scale their businesses.
Our Platform

Etsy leverages technology to connect people around the world through commerce. Our platform includes our markets, our services and our technology, which help foster a loyal, engaged community of sellers and buyers. Our commitment to transparency and integrity underpins our platform and establishes trust within our markets and our community.
componentsofplatform.jpg
Key Components of Our Platform

Our Markets

Our markets offer an engaging way for an Etsy buyer to find millions of unique handmade and vintage goods as well as craft supplies.

Launched in 2005, Etsy.com is our largest market and it supports people buying and selling in nearly every country in the world. It offers buyers nearly 45 million unique listings of handmade and vintage goods and craft supplies. We believe that that the breadth and depth of the items available help to position Etsy.com as a go-to shopping destination for more than just special occasions. We plan to launch Etsy Studio in 2017, which will serve as a dedicated craft supplies market. We believe our ability to leverage our prior investments in Etsy.com, including search technology, payments, advertising and shipping, to launch and scale Etsy Studio will give us a competitive advantage in this market and any other markets we may launch. We also own ALM, a handmade and supplies market for sellers and buyers in France.
To help Etsy buyers discover and purchase items that they love, we focus on providing a number of tools and features within our Etsy.com market:

Personalized search and discovery.  Our platform is engineered to provide a personalized experience to each Etsy buyer, adjusting in real time based on her interactions within it. An Etsy buyer may search for an item using our search tool bar and filter the results by color, price, location or other characteristics. Additionally, she may browse through items, creating an activity feed by “favoriting” items that catch her eye and by following shops and tastemakers. We glean insights from Etsy buyers’ purchases and other interactions within our platform through our machine learning

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algorithms, cookies and other techniques. Knowing and understanding each buyer's individual tastes and interests allows us to personalize each experience, whether a buyer comes to simply browse our site or app or to search for specific items. Improvements that we made to search in 2015 enable buyers to more easily browse, filter for and buy that perfect item, particularly on a mobile device, even when they do not have a specific item in mind. In 2016, we made additional enhancements to search and acquired Blackbird Technologies, Inc., or Blackbird, a privately-held company that had developed proprietary machine learning technology to deliver superior search relevance and recommendations. We believe we have several opportunities to further enhance our search capabilities and plan to leverage our technology to power a range of search capabilities including more personalized search, ranking, spelling correction and predictive type-ahead to deliver a personalized shopping experience.

Connected experience across all devicesmobile and desktop. We want to engage Etsy buyers wherever they are and to provide an enjoyable and accessible shopping experience no matter how they come to Etsy. Our Etsy.com website and iOS and Android mobile apps include search and discovery, curation, personalization and social shopping features. We offer a connected experience through each channel, desktop, mobile web, and mobile app, ensuring that no matter what device she uses she will have the best possible experience. To optimize our mobile experience, we use deep linking to automatically transition Etsy buyers from mobile web to the mobile app when they encounter a link to an Etsy shop or item. Buyers can sign-up and sign-in to Etsy through Facebook and Google and our payment and digital wallet options include Apple Pay, Google Wallet and others. Our mobile apps have been downloaded approximately 41 million times as of December 31, 2016.

Global reach combined with local scale. There are people using our platform to buy and sell in nearly every country in the world. Our platform makes it easy for Etsy buyers and Etsy sellers to connect across borders even if they do not speak the same language and wish to transact in different currencies. We use innovative machine translation technology to translate listings, reviews, product ads, and conversations between Etsy buyers and Etsy sellers. Our payments platform makes it easy for Etsy sellers to offer Etsy buyers a wide range of payment options. In addition to providing buyers with access to global inventory, we are also building local communities and fostering local connections. For example, our localized search feature, which is available in the U.K., Australia, France, and Germany, surfaces local items more prominently in search results so that buyers can easily connect with and purchase from sellers within their respective countries. In 2016, 33.3% of Etsy sellers were located outside the United States, and 30.4% of our GMS involved an Etsy seller or Etsy buyer outside of the United States.
Direct communication between sellers and buyers. We believe human connection is central to Etsy buyers’ engagement. Etsy buyers and Etsy sellers use the Conversations tool on our platform to communicate, person to person, about their orders, to request custom goods or personalization of goods or simply to have a conversation about the product or the process. In 2016, 56% of our active buyers sent or received a conversation and 67% of active sellers sent or received a conversation using our Conversations tool. In addition to our Conversations tool, we encourage engagement between Etsy buyers and Etsy sellers in a variety of ways, whether it be through sharing reviews on social media or connecting offline through the Etsy Local feature on our mobile app.


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Our Services

Our platform makes it easy for an Etsy seller to open a shop and operate her business. According to our 2016 seller survey, for every hour that an Etsy seller spends making her products, she spends almost another hour doing business-related tasks, including inventory management, marketing, shipping, customer service and accounting.

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How an Etsy Seller Spends Her Time
 
We are creating a cohesive platform of Seller Services and tools that help Etsy sellers start, manage and scale their businesses. Our services platform includes the following:
Seller Services. We offer a variety of services to help Etsy sellers build their personal brands, engage potential customers and complete transactions. We currently have four Seller Services, all of which were developed in-house:
Direct Checkout. Direct Checkout allows Etsy sellers to accept various forms of payment such as credit cards, debit cards, PayPal, Google Wallet, Apple Pay and Etsy Gift Cards. Once an Etsy buyer makes payment, the Etsy seller receives the funds in her own bank account and in her local currency. As of December 31, 2016, Direct Checkout was available in 36 countries and 12 currencies, compared to 22 countries and 10 currencies as of December 31, 2015. During 2016, 45.5% of active sellers used Direct Checkout.
Promoted Listings. Promoted Listings enables Etsy sellers to pay a cost-per-click based fee to feature and promote their goods in search results generated by Etsy buyers on our platform. This service allows Etsy sellers to target Etsy buyers who are specifically searching for goods similar to those she offers for sale. During 2016, 15.9% of active sellers used Promoted Listings.
Shipping Labels. Shipping Labels allows Etsy sellers to purchase United States Postal Service, FedEx and Canada Post shipping labels through our platform with the appropriate amount of postage. The ability to print shipping labels at home reduces the cost and time it takes Etsy sellers to ship goods to Etsy buyers globally. During 2016, 26.3% of active sellers in the United States and Canada used Shipping Labels.
Pattern by Etsy. With Pattern, Etsy sellers can create their own custom websites in minutes through our platform. Pattern imports listings and content from Etsy shops, syncs inventory and orders and utilizes our Direct Checkout and Shipping Label services. Since launching the service in April 2016, we have continued to introduce new features and enhancements, including additional layouts and themes, new search and image display options, guest checkout functionality and the ability for Pattern users to host a blog or send newsletters. Since the launch, 2.5% of active sellers used Pattern (includes eight months of paid seller activity).
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Use of Seller Services in 2016

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Seller Tools. In addition to our paid Seller Services, we provide a wide range of tools and features to support Etsy sellers run the administrative side of their businesses, including marketing and taxes. For example, our Google Shopping tool, which is complementary to our Promoted Listings service and the Google advertising we do on behalf of Etsy sellers, enables Etsy sellers to reach a broader audience by advertising their listings in Google search results. Through our partnership with Intuit, Etsy sellers in the United States and United Kingdom can simplify their accounting and bookkeeping by seamlessly exporting their Etsy.com sales and expenses to QuickBooks Self-Employed. To easily monitor orders and track sales and analyze visits and listings, Etsy sellers can use our online dashboard. Etsy sellers can also access analytics on the dashboard, on our website or on our “Sell on Etsy” mobile app. Of our 2016 active sellers, 50.6% used the Sell on Etsy mobile app in 2016. In early 2017, we launched Shop Manager which will serve as a centralized hub for Etsy sellers to track orders, manage inventory, view metrics and statistics and have conversations with their customers across all of their Etsy shops. This tool makes it easier for creative entrepreneurs to run multi-channel businesses on Etsy and moves us closer to our long-term goal of supporting Etsy sellers wherever they choose to pursue commerce.

Education. We provide extensive educational resources to teach Etsy sellers how to start, manage and scale their businesses on our platform, including blog posts, video tutorials, the Etsy Seller Handbook (available on Etsy.com), Etsy.com online forums and insights from Etsy.com support teams. In addition to our own educational resources, Etsy sellers connect through self-organized Etsy Teams to build supportive personal relationships with other Etsy Sellers, collaborate, educate and support each other as they build their independent creative businesses.

Our Technology 

Our widely respected engineering team has built a sophisticated platform that enables millions of Etsy sellers and Etsy buyers to smoothly transact across borders, languages and devices. Our team is at the forefront of the software engineering practice of continuous deployment. We update the code that runs the Etsy website as often as every 20 minutes, and deploy code to various systems as often as 70 times per day. To enhance the performance of our platform, we collect and analyze a large volume of data. For example, we currently capture more than one billion user-generated events every day to produce personalized recommendations, improve our search experience and utilize A/B test features on our site.

Our use of machine learning algorithms creates an engaging shopping experience and also helps Etsy sellers and Etsy buyers connect across our platform. We apply proprietary machine learning to the search and discovery process, enabling shoppers to more easily browse, filter for and buy that perfect item, even when they may not have something specific in mind.

Machine translation and machine learning also play an important role in making it easy for Etsy sellers and Etsy buyers to connect even if they don’t speak the same language. We translate listings within our Etsy.com market into 10 languages and plan to translate listings on Etsy Studio into several key languages. Translating listings significantly increases the inventory available to non-English speaking Etsy buyers and gives Etsy sellers access to a truly global audience. We also translate conversations and reviews and, in 2016, began to apply machine translation to Promoted Listings.

We are a mobile-first company, meaning mobile is integrated into everything that we do. In recent years, we have focused on expanding our mobile capabilities. We developed our “Sell on Etsy” mobile app to help the Etsy seller operate her shop and manage orders. Our mobile website and our “Buy on Etsy” mobile app for Etsy buyers, which we developed to keep Etsy buyers engaged wherever they are, include search, discovery, curation, personalization and social shopping features, optimized for the mobile experience.

For the year ended December 31, 2016, approximately 64% of our visits and approximately 48% of our GMS were generated on a mobile device. This is a solid improvement compared with 2015, during which 60% of our visits and 43% of our GMS were generated on a mobile device. We are focused on continuing to narrow the gap between mobile visits and mobile GMS.

Our Passionate, Engaged and Loyal Etsy Sellers and Etsy Buyers
Etsy sellers and Etsy buyers are passionate, engaged and loyal—not only to us, but to each other—building a strong community.
 
Our active sellers and active buyers remain so for multiple years. For example, 32.3% of active sellers and 42.5% of active buyers as of December 31, 2012 continued to be active sellers and active buyers through their fourth year on the platform and 31.5% of active sellers and 41.1% of active buyers as of December 31, 2013 continued to be active sellers and active buyers through their fourth year on the platform. In addition, as of December 31, 2016, 15.2% of active sellers

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have been selling on Etsy for more than four years. Likewise, as of December 31, 2016, 17.4% of active buyers have been Etsy buyers for more than four years.

Repeat purchases demonstrate the loyalty of Etsy buyers. In 2016, approximately 41.0% of our active buyers made purchases on two or more days in the previous 12 months, up from 40.6% in 2015.

Unlike many other online commerce companies, the vast majority of visits come to Etsy from organic or direct sources. In 2016, 88% of visits came to Etsy.com from direct, organic or email sources. A visit represents activity from a unique browser or mobile app. A visit ends after 30 minutes of inactivity.

Etsy sellers and Etsy buyers engage with each other often. In 2016 56% of our active buyers sent or received a conversation and 67% of active sellers sent or received a conversation using our Conversations tool. As of December 31, 2016, approximately 20.1% of active sellers belong to a self-organized Etsy Team, developing supportive personal relationships with other Etsy sellers as they build their independent creative businesses. Currently, nearly 14,000 Etsy Teams have formed around the world.

Ensuring that buyers can find and purchase the exact items they are looking for each time they come to Etsy is an important part of fostering engagement and loyalty. In 2016, conversion rates increased across desktop, mobile web and mobile app compared to 2015, demonstrating our ability to continuously optimize the shopping experience.

The passion and loyalty demonstrated by Etsy sellers and Etsy buyers is the foundation for the continued growth and current scale of our platform. See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsKey Factors Affecting Our PerformanceGrowth and Retention of Active Sellers and Active Buyers” for more information.
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Active Buyers by Purchase Type

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visitsbysource.jpg 
Visits Contribution by Source Type

Commitment to Integrity and Transparency

Members of our community rely on us to maintain trusted markets. Our policies are designed to encourage transparency and clearly outline the rights and responsibilities of Etsy sellers, Etsy buyers, Etsy Wholesale partners and production partners participating on our platform. Most fundamentally, we require that goods listed in our markets be handmade, vintage or craft supplies. In 2017, we clarified our policies on Etsy.com to make it easier for sellers and buyers around the world to understand how we define handmade.

Transparency within our community helps to support our trustworthiness. For example, we publish an annual Progress Report that details progress toward our ideals and shares our hopes for the years to come. We also publish an annual Transparency Report, which, among other things, describes the steps we take when items that do not meet our guidelines are listed on Etsy.com, or when listed items are alleged to infringe third party rights. In 2016, we closed 4,525 Etsy.com shops that were subject to repeat notices of intellectual property infringement and closed 263,315 Etsy.com accounts for non-IP policy violations.

We strive to give the Etsy buyer comfort that she is purchasing unique goods from a shop that adheres to certain principles. Etsy buyers have a high degree of insight into Etsy sellers’ business practices. Our policies ask Etsy sellers to be transparent about themselves, their businesses and the goods they sell. We also have dedicated teams and sophisticated tools to help enforce our policies. For example, our Integrity team uses a combination of machine learning, automated systems and community-generated flags to review items and shops that may violate our policies. Our Trust and Safety team helps to prevent and detect fraud through human review and automated tools and algorithms.We also recognize that sometimes transactions don’t go as planned. When that happens, our online Case System provides a way for Etsy sellers and Etsy buyers to communicate with each other to resolve disputes.  

We also establish trust by emphasizing the person behind every transaction. We deepen connections between Etsy sellers and Etsy buyers through our direct communication tools, seller stories on our website and apps and in-person events, highlighting personal relationships as a key part of the Etsy experience. For example, Etsy sellers are encouraged to share their stories to reach Etsy buyers on our platform and on social media. The trustworthiness of Etsy.com and the connections among people in our community are cornerstones of our business.

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Our Strategy: The Path Ahead

Our seller-aligned business model means that we succeed when our sellers succeed. We are focused on helping sellers grow their sales within our markets and building a cohesive services platform to help them start, manage and scale their businesses.

Our Markets

The power of human connection is central to the Etsy experience and we connect creative entrepreneurs to thoughtful consumers around the world. We continue to nurture Etsy.com and are also launching Etsy Studio to better serve craft supplies sellers and to broaden our reach to craft supplies buyers around the world. We want to create the best shopping experience for Etsy buyers. Our markets strategy is to expand our overall base of buyers and drive frequency with existing buyers. We plan to accomplish this strategy through three main initiatives:

Raise brand awareness of Etsy.com as an everyday shopping destination: With nearly 45 million listings within Etsy.com, there are unique items available for nearly every personality, style, occasion and budget. We are investing in initiatives to shape perceptions and highlight the breadth and depth of items available. Over time, we believe that raising awareness of Etsy.com as a go-to shopping destination, not just for special occasions, will help us attract a larger audience and also encourage existing buyers to make more frequent purchases. We launched our first global brand marketing campaign, called “Difference Makes Us,” in September 2016 to showcase this positioning, and plan to increase this investment in marketing in the future. We also plan to invest in paid advertising and marketing campaigns to attract new craft supplies buyers to Etsy Studio in 2017.

Make enhancements that encourage purchase frequency: We want to offer an engaging way for Etsy buyers to discover and purchase Etsy sellers’ unique goods. We believe that making enhancements to personalized product recommendations for Etsy buyers and helping them to better find the exact items they are looking for are our largest near-term opportunities. We are continuing our work to augment our existing capabilities within search and recommendation on Etsy.com. We also make regular updates to our platform to improve the shopping experience and strengthen Etsy buyer trust, such as further optimizing the mobile experience and our payments platform. We recently launched multi-shop checkout on Etsy.com, which gives Etsy buyers the ability to purchase items from more than one seller in a single transaction, and we plan to introduce guest checkout in 2017. We believe that all of these improvements together will support improving conversion rates and will ultimately enable us to increase buyer frequency on Etsy.com.

Connect globally while continuing to scale locally: Our vision is global and local, and our platform supports Etsy buyers and Etsy sellers in nearly every country in the world. Cross-border transactions are the largest component of international GMS and we remain committed to reducing barriers such as language and currency so that sellers and buyers from different countries can easily connect and transact. We are also focused on building and deepening local Etsy communities around the world, each with its own ecosystem of Etsy sellers and Etsy buyers. GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country grew approximately 47% in 2016 compared with 2015, making it the fastest growing category of international GMS. We plan to continue to invest in local marketing and content and other locally relevant tools and enhancements around the world to encourage these connections.

We formerly referred to initiatives within our markets strategy as “Etsy Everyday” and “Build Local Marketplaces Globally.” The above initiatives reflect these ongoing efforts, but have been refined to better capture our evolving business opportunities.


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Our Services

We continue to focus on offering high-impact services that enable Etsy sellers to start, manage and scale their businesses. We launched our first Seller Service in late 2011 and in 2016 Seller Services represented $200.9 million, 55.0% of our revenue, a 47.0% increase over 2015. Seller Services revenue growth has been driven by service launches and enhancements that have allowed Etsy sellers to address the administrative tasks associated with running a business. For example, in 2016, we increased the number of countries where Direct Checkout is available to 36 countries, up from 22 countries in 2015. We also made FedEx and expedited United States Postal Service labels available through Shipping Labels, expanded the inventory available within Promoted Listings and launched our custom website service, Pattern. We are building a cohesive suite of services and tools specifically designed to help Etsy sellers start, manage and scale their businesses:

Start: According to our 2016 seller survey, more than half of Etsy sellers choose our markets as the first place to start their creative business. By setting up a shop in our markets, an Etsy seller gains access to a global audience of 28.6 million active buyers looking for unique goods or craft supplies. We offer a wealth of educational resources and a variety of listing tools to make the process of starting as intuitive as possible. Additionally, our vibrant community, including our 14,000 Etsy Teams and active forums, serve as a unique source of support that new Etsy sellers can turn to for advice and encouragement when starting a creative business.

Manage: We want to make it easier for Etsy sellers to run their businesses so that they can devote more time to making or designing their goods. We offer a wide range of services and tools that help Etsy sellers more effectively manage their business, from payments to shipping to accounting and taxes. For example, services and tools such as Direct Checkout, Shipping Labels and our partnership with Intuit all reduce the amount of time that a seller spends on time-consuming administrative tasks.

Scale: We want sellers to come to Etsy not only to access our global community of 28.6 million active buyers, but also because we offer sales and marketing opportunities that help them reach their business goals. Both Pattern and Etsy Wholesale are sales channels that Etsy sellers can use to reach new audiences. Additionally, Promoted Listings and our Google Shopping tool serve as powerful marketing tools for Etsy sellers looking to raise their profile on and off Etsy.com. We will continue to build each of these offerings and look to expand our marketing offerings into a suite of marketing services and analytics tools that empower Etsy sellers to drive and measure the growth of their businesses.

In 2017, we introduced Shop Manager, which enables Etsy sellers to access many of these tools and services along with all of their Etsy shops in one convenient place. We believe that this moves us closer to our long term goal of becoming the central hub for creative entrepreneurs and supporting them wherever they choose to pursue commerce.
Competition
We compete for the Etsy seller with both retailers and companies that sell software to small businesses. An Etsy seller can list her goods for sale with online retailers or sell her goods through local consignment and vintage stores and other venues and marketplaces, including through commerce channels on social networks like Facebook and Instagram. She may also sell wholesale directly to traditional retailers, including large national retailers, who discover her goods in our markets or otherwise. We also compete with companies that sell software and services to small businesses, enabling an Etsy seller to sell from her own website or otherwise run her business independently of our platform. We are able to compete for Etsy sellers based on our brand awareness, the global scale of our markets and the breadth of our online presence, the number and engagement of Etsy buyers, our Seller Services, our seller education resources and tools, our policies and fees, our mobile apps, the strength of our community and our values.
We also compete with retailers for the attention of the Etsy buyer. An Etsy buyer has the choice of shopping with any online or offline retailer, whether large marketplaces or national retail chains or local consignment and vintage stores or other venues or marketplaces. We are able to compete for Etsy buyers based on the unique goods that Etsy sellers list in our markets, our brand awareness, the person-to-person commerce experience, our reputation as trusted markets, our mobile apps, ease of payment and the availability and reliability of our platform.

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Intellectual Property
Protection of our technology and intellectual property is an important component of our success. We rely on intellectual property laws, primarily including trade secret, copyright and trademark laws and to a lesser extent patent laws, in the United States and abroad, and we use confidentiality procedures, non-disclosure agreements, invention assignment agreements and other contractual rights to protect our intellectual property.
While we have obtained or applied for patent protection for some of our intellectual property, we generally do not rely on patents as a principal means of protecting intellectual property. We file patents and register domain names, trademarks and service marks in the United States and abroad. We also rely upon common law protection for certain trademarks.

Circumstances beyond our control could pose a threat to our intellectual property rights. Effective intellectual property protection may not be available in the United States or other countries in which we operate, and changes in legal frameworks may impact the scope, enforceability and validity of rights. In addition, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective. Any impairment of our intellectual property rights could harm our business, our ability to compete and our operating results.
Government Regulation
As with any company operating on the internet, we are subject to a growing number of local, national and international laws and regulations. These laws are often complex, sometimes contradict other laws, and are frequently changing. Laws may be interpreted and enforced in different ways in various locations around the world, posing a significant challenge to our global business. For example, U.S. federal and state laws, E.U. directives and other national laws govern the processing of payments, consumer protection and the privacy of consumer information; other laws define and regulate unfair and deceptive trade practices. Still other laws dictate when and how sales or other taxes must be collected. Laws of defamation apply online and vary by country. The growing regulation of e-commerce worldwide could impose additional compliance burdens and costs on us or on Etsy sellers and could subject us to significant liability for any failure to comply. Additionally, because we operate internationally, we need to comply with various laws associated with doing business outside of the United States, including anti-money laundering, sanctions, anti-corruption and export control laws.
Emerging Growth Company Status

As of June 30, 2016, we had a public float of greater than $700 million and are therefore no longer considered an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. 
Available Information

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and file or furnish reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports are available free of charge on our website at investors.etsy.com as soon as reasonably practicable after we have filed or furnished them to the SEC. The information on our website is not incorporated into this Annual Report and investors should not rely on such information in deciding whether to invest in our common stock. Copies of our SEC reports and other documents are also available, without charge, by sending a letter to Investor Relations, Etsy, Inc., 117 Adams Street, Brooklyn, NY 11201, by sending an email to ir@etsy.com or by calling (347) 382-7582.

Additionally, our SEC reports may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. Our SEC reports are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after we have filed or furnished them to the SEC.

For a summary of our financial information by geographic location, see “Note 13—Segment and Geographic Information ” in the Notes to Consolidated Financial Statements. For information regarding our product development expenditures in the last three fiscal years, see “Management’s Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations.”

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Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other information in this Annual Report. If any of these risks actually occur, our business, financial condition, results of operations and prospects could be adversely affected. As a result, the price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of operating losses and we may not achieve or maintain profitability in the future.
We incurred net losses of $29.9 million, $54.1 million and $15.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we had an accumulated deficit of $116.3 million. We may not achieve or maintain profitability in the future. We expect that our operating expenses will increase substantially as we hire additional employees, increase our marketing efforts, expand our operations and continue to invest in the development of our platform, including our Seller Services and tools and technological enhancements. These efforts may be more costly than we expect and our revenue may not increase sufficiently to offset these additional expenses. In addition, our revenue may decline for a number of reasons, including those described in these Risk Factors.

Further, our revenue growth rate may continue to decelerate in the future for a number of reasons, including the gradual deceleration of our GMS growth rate. For further information about the rate of revenue and GMS growth, see “Management’s Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsRevenue.” You should not rely on growth rates of prior quarterly or annual periods as an indication of our future performance.
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
Our quarterly operating results, as well as our key metrics, may fluctuate for a variety of reasons, many of which are beyond our control. These reasons include those described in these Risk Factors and the following:

fluctuations in revenue generated from Etsy sellers on our platform, including as a result of the seasonality of market transactions and Etsy sellers’ use of Seller Services;

the amount and timing of our operating expenses;

our success in attracting and retaining Etsy sellers and Etsy buyers;

our success in executing on our Markets and Seller Services strategies;

the timing and success of new services and features we introduce;

the impact of our investment in marketing;

economic and market conditions, such as currency fluctuations and global events;

disruptions or defects in our markets, such as privacy or data security breaches or other incidents that impact the reliability of our platform;

the impact of competitive developments and our response to those developments;

our ability to manage our existing business and future growth; and

the impact of our revised global corporate structure that was implemented on January 1, 2015.

Fluctuations in our quarterly operating results and key metrics may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their

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models for valuing our common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish and other unanticipated issues may arise.
In addition, we believe that our quarterly operating results and key metrics may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our overall historical growth rate may have overshadowed the effect of seasonal variations on our historical operating results. These seasonal effects may become more pronounced over time, which could also cause our operating results and key metrics to fluctuate. You should not rely on the results of one quarter as an indication of future performance.
Our growth depends on our ability to attract and retain an active and engaged community of Etsy sellers and Etsy buyers.
Our financial performance has been and will continue to be significantly determined by our success in attracting and retaining active sellers and active buyers. For example, our revenue is driven by the number of active sellers, seller engagement, the number of active buyers, buyer engagement and our ability to maintain trusted markets. We must continue to encourage Etsy sellers to list items for sale and use our Seller Services and encourage Etsy buyers to return and purchase items in our markets more frequently.
We want to create the best shopping experience for Etsy buyers and are focused on making enhancements that encourage purchase frequency. We believe that many new Etsy sellers and Etsy buyers find Etsy.com by word of mouth and other non-paid referrals from existing Etsy sellers and Etsy buyers. If existing Etsy sellers are dissatisfied with their experience on our platform, they may stop listing items in our markets and using our Seller Services and may stop referring others to us. Likewise, if existing Etsy buyers do not find our platform appealing, whether because of a negative experience, lack of buyer-friendly features, declining interest in the nature of the goods offered by Etsy sellers or other factors, they may make fewer purchases and they may stop referring others to us. Under these circumstances, we may have difficulty attracting new Etsy sellers and Etsy buyers without incurring additional marketing expense.
Even if we are able to attract new Etsy sellers and Etsy buyers to replace the ones that we lose, they may not maintain the same level of activity, and the revenue generated from new Etsy sellers and Etsy buyers may not be as high as the revenue generated from the ones who leave our markets. If we are unable to retain existing Etsy sellers and Etsy buyers and attract new Etsy sellers and Etsy buyers who contribute to an active community, our growth prospects could be harmed and our business could be adversely affected.
Additionally, the demand for the goods listed in our markets is dependent on consumer preferences which can change quickly and may differ across generations and cultures. If demand for the goods that Etsy sellers offer declines, we may not be able to attract and retain Etsy buyers and our business would be harmed. Trends in socially-conscious consumerism and buying locally could also shift or slow which would make it more difficult to attract new Etsy sellers and Etsy buyers. Our growth prospects would also be hampered if the shift to online and mobile commerce does not continue.
The trustworthiness of our markets and the connections within our community are important to our success. If we are unable to maintain them, our ability to attract and retain Etsy sellers and Etsy buyers could suffer.
We have built trusted markets that embody our values-based culture. Our reputation depends upon our Etsy sellers, their unique offerings and their adherence to our policies. We establish trust in our markets in a variety of ways. For example, our policies are designed to encourage transparency and clearly outline the rights and responsibilities of Etsy sellers, Etsy buyers, Etsy Wholesale partners and production partners participating on our platform. We strive to give the Etsy buyer comfort that she is purchasing unique goods from a small business that adheres to certain principles. Our Integrity team uses a combination of machine learning, automated systems and community-generated flags to review items and shops that may violate our policies. We also have sophisticated tools to detect fraud and we strive to prohibit bad actors from using our platform. In addition, production partners who apply to join Etsy Manufacturing must commit to ethical expectations and to operating a safe and just workplace, with transparency and reliable customer service.
Etsy's transparency with our community helps to support the trustworthiness of our markets. For example, we publish an annual Progress Report that details our progress toward our ideals and shares our goals for the years to come and we also release an annual Transparency Report, which, among other things, describes the steps we take when items that do not meet our guidelines are listed on our platform, or when listed items are alleged to infringe third party rights.
We also establish trust by emphasizing the person behind every transaction. We deepen connections among members of our community through our communication tools, seller stories on our website and our in-person events, which highlight personal relationships as a key part of the Etsy experience. For example, Etsy sellers are encouraged to share their stories and use tools,

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such as shop videos, to reach Etsy buyers on our platform and on social media. We also recognize that sometimes transactions don’t go as planned. When that happens, our Case System provides a way for Etsy sellers and Etsy buyers to communicate with each other to resolve disputes.
We also encourage our employees to build meaningful connections with other members of our community. For example, we ask employees to perform support rotations to help foster connections with Etsy sellers and Etsy buyers and to help us better understand their needs.
The trustworthiness of our markets and the connections among the members of our community are the cornerstones of our business. Many things could undermine these cornerstones, such as:

complaints or negative publicity about us, our platform or our policies and guidelines, even if factually incorrect or based on isolated incidents;

an inability to gain the trust of prospective buyers;

disruptions or defects in our markets, such as privacy or data security breaches or other incidents that impact the reliability of our platform;

lack of awareness of our policies;

changes to our policies that members of our community perceive as inconsistent with our values or that are not clearly articulated;

a failure to enforce our policies effectively, fairly and transparently, including, for example, by allowing the widespread listing of prohibited items in our markets;

a failure to respond to feedback from our community; or

a failure to operate our business in a way that is consistent with our values.
If we are unable to maintain trustworthy markets and encourage connections among members of our community, then our ability to attract and retain Etsy sellers and Etsy buyers could be impaired and our reputation and business could be adversely affected.
Adherence to our values and our focus on our mission and long-term sustainability may negatively influence our short- or medium-term financial performance.
Our values are integral to everything we do. Accordingly, we intend to focus on the long-term sustainability of our business and work toward our mission to reimagine commerce and expand the Etsy Economy. We may take actions that we believe will benefit our business and the Etsy Economy and, therefore, our stockholders over a longer period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all. For example:

we may choose to prohibit the sale of items in our markets that we believe are inconsistent with our values even though we could benefit financially from the sale of those items;

we may choose to revise our policies in ways that we believe will be beneficial to our community in the long term even though the changes may be perceived unfavorably; or

we may take actions, such as investing in alternative forms of shipping or locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.

We are a Certified B Corporation. The term “Certified B Corporation” does not refer to a particular form of legal entity, but instead refers to companies that are certified by B Lab, an independent nonprofit organization, as meeting rigorous standards of social and environmental performance, accountability and transparency. Our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to meet B Lab’s certification requirements, if that change in status were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by Certified B Corporations. For example, since we do not intend to reorganize as a public benefit corporation

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under Delaware law, our future status as a Certified B Corporation may be affected. Likewise, our reputation could be harmed if our publicly reported B Corporation score declines and that created a perception that we have slipped in our satisfaction of the Certified B Corporation standards. Similarly, our reputation could be harmed if we take actions that are perceived to be misaligned with our values.
If we are not able to enhance our current offerings and develop new offerings to respond to the changing needs of Etsy sellers and Etsy buyers, our growth prospects may be harmed.
Our industry is characterized by rapidly changing technology, new service and product introductions and changing customer demands. We spend substantial time and resources understanding the needs of Etsy sellers and Etsy buyers and responding to them. For example, we enhance our Seller Services, search and discovery functionality and the member experience on a regular basis. We also regularly launch new products and services. For example, in 2016, we launched a new Seller Service, Pattern, which enables Etsy sellers to create their own custom website. We also introduced a number of tools, such as Google Shopping, which allows sellers to reach audiences off of Etsy by advertising their listings in Google search results. In 2017, we plan to launch a new craft supplies market, Etsy Studio, to serve our craft supplies sellers and help them reach a broader audience of craft supplies buyers around the world. Our effectiveness in enhancing our current offerings and introducing new offerings may impact our revenue growth and our operating results.
Etsy sellers and Etsy buyers may not be satisfied with our enhancements or new offerings or may perceive that these offerings do not respond to their needs. In addition, developing new services and features is complex, and the timetable for commercial release is difficult to predict and may vary from our historical experience. As a result, the introduction of new offerings may occur after anticipated release dates or they may be introduced as pilot programs, which may not be continued for various reasons. In addition, new offerings may not be successful due to defects or errors, negative publicity or our failure to market them effectively.
New offerings may not drive increases in revenue, may require substantial investment and planning and may bring us more directly into competition with companies that are better established or have greater resources than we do.
If we do not continue to cost-effectively develop new offerings that satisfy Etsy sellers and Etsy buyers, then our competitive position and growth prospects may be harmed. In addition, new offerings may have lower margins than existing offerings and our revenue from the new offerings may not be enough to offset the cost of developing them.
We expect to continue to increase our marketing efforts to help grow our business, but those efforts may not be effective.
Maintaining and promoting awareness of our markets and broader platform is important to our ability to attract and retain Etsy sellers and Etsy buyers. We believe that much of the historical growth in the number of active sellers and active buyers has originated from word-of-mouth referrals and other organic means, as our historical marketing efforts and expenditures have been relatively limited, although increasing in recent years. We launched our first brand marketing campaign in 2016, and intend to invest significant resources in marketing in the future, particularly brand marketing focused on bringing more Etsy buyers to our platform and encouraging existing buyers to return more frequently. We anticipate that our marketing initiatives may become increasingly expensive as we continue to invest in our marketing efforts and as competition increases, and generating a meaningful return on those initiatives may be difficult.

An important part of our markets strategy is to position Etsy's markets as go-to shopping destinations for unique items that buyers can use in their everyday lives. Our growth will depend in part on our ability to launch marketing campaigns that resonate with new and existing Etsy buyers and appropriately balance our level of marketing spending with the benefits that may be realized through revenue growth. If we are not able to change our brand perception and raise awareness of the breadth and depth of items available in our markets, our business could be adversely affected. The marketing efforts we implement may not succeed for a variety of reasons, including our inability to execute and implement our plans. External factors beyond our control may also impact the success of our marketing initiatives. Our marketing efforts currently include search engine marketing, affiliate marketing and display advertising, as well as search engine optimization, social media usage, mobile push notifications and email. We obtain a significant number of visits via search engines such as Google, Bing and Yahoo!. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, which can negatively affect the placement of links to our markets and, therefore, reduce the number of visits to our markets. The growing use of online ad-blocking software, including on mobile devices, may also impact the success of our marketing efforts because we may reach a smaller audience and fail to bring more Etsy buyers to our platform. We also obtain a significant number of visits through email advertising. If we are unable to successfully deliver emails to Etsy sellers and Etsy buyers, or if Etsy sellers and Etsy buyers do not open our emails, whether by choice, because those emails are marked as low priority or spam, or for other reasons, our business could be adversely affected. Social

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networking websites, such as Facebook and Pinterest, are another important source of visits to our markets. As online commerce and social networking evolve, we must continue to maintain a presence within these networks.
If the mobile solutions available to Etsy sellers and Etsy buyers are not effective, the use of our platform could decline.
Purchases made on mobile devices by consumers, including Etsy buyers, have increased significantly in recent years. The smaller screen size and reduced functionality associated with some mobile devices may make the use of our platform more difficult or less appealing. Etsy sellers are also increasingly using mobile devices to operate their businesses on our platform. If we are not able to deliver a rewarding experience on mobile devices, Etsy sellers’ ability to manage and scale their businesses may be harmed and, consequently, our business may suffer. Further, although we strive to provide engaging mobile experiences for both Etsy sellers and Etsy buyers who visit our mobile website using a browser on their mobile device, we depend on Etsy sellers and Etsy buyers using our mobile apps for the optimal mobile experience. Visits to our markets through a mobile website may not convert into purchases as often as visits made through our mobile app or through desktop, which could result in less revenue for us. Additionally, although conversion rates have continued to increase across mobile websites, mobile apps and desktop, these rates may slow or stall, which could also have a negative impact on revenue.
As new mobile devices and mobile platforms are released, we may encounter problems in developing or supporting apps for them. In addition, supporting new devices and mobile device operating systems may require substantial time and resources.
The success of our mobile apps could also be harmed by factors outside our control, such as:

actions taken by providers of mobile operating systems or mobile app download stores;

unfavorable treatment received by our mobile apps, especially as compared to competing apps, such as the placement of our mobile apps in a mobile app download store;

increased costs to distribute or use our mobile apps; or

changes in mobile operating systems, such as iOS and Android, that degrade the functionality of our mobile website or mobile apps or that give preferential treatment to competitive products.
If Etsy sellers and Etsy buyers encounter difficulty accessing or using our platform on their mobile devices, or if they choose not to use our platform on their mobile devices, our growth prospects and our business may be adversely affected.

Expanding our community outside of the United States is an important part of our strategy and the growth of our business could be harmed if our expansion efforts do not succeed.
Our vision is global and local and we are focused on expanding outside of the United States. Although we have a significant number of Etsy sellers and Etsy buyers outside of the United States, we have limited experience in developing local markets outside the United States and may not execute our strategy successfully. Operating outside of the United States also requires significant management attention, including managing and staffing operations over a broad geographic area with varying cultural norms and customs, and adapting our platform to local markets.
Despite our execution efforts, the goods that Etsy sellers list on Etsy.com may not appeal to non-U.S. consumers in the same way as they do to consumers in the United States. In addition, non-U.S. buyers are not as familiar with the Etsy brand as buyers in the United States and may not perceive us as relevant or trustworthy. Also, visits to Etsy.com from Etsy buyers outside the United States may not convert into sales as often as visits from within the United States, including due to the impact of the strong U.S. dollar relative to other currencies and the fact that a majority of the goods listed on our platform are denominated in U.S. dollars. Our success outside the United States will be linked to our ability to attract local Etsy sellers and Etsy buyers to our markets. If we are not able to expand outside of the United States successfully, our growth prospects could be harmed. An inability to develop Etsy's community globally or to otherwise grow our business outside of the United States on a cost-effective basis could adversely affect our GMS, revenue and operating results.
Competition is also likely to intensify outside of the United States, both where we operate now and where we plan to expand our operations. Local companies based outside the United States may have a substantial competitive advantage because of their greater understanding of, and focus on, their local markets. Some of our competitors may also be able to develop and grow internationally more quickly than we will.

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Continued expansion outside of the United States may also require significant financial investment. These investments include marketing , enhancing our machine translation and machine learning to help sellers and buyers connect even if they do not speak the same language, forming relationships with third-party service providers, supporting operations in multiple countries and potentially acquiring companies based outside the United States and integrating those companies with our operations. Our investment outside of the United States may be more costly than we expect and our revenue may not increase sufficiently to offset these additional expenses.
Further expansion outside of the United States will subject us to risks associated with operations abroad.
Doing business outside of the United States subjects us to increased risks and burdens such as:

complying with different (and sometimes conflicting) laws and regulatory standards (particularly including those related to the use and disclosure of personal information, online payments, intellectual property, consumer protection, online platform liability and taxation of goods and services);

fluctuations of foreign exchange rates;

potentially heightened risk of fraudulent transactions;

limitations on the repatriation of funds;

exposure to liabilities under anti-corruption, anti-money laundering and export control laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.K. Bribery Act of 2010, trade controls and sanctions administered by the U.S. Office of Foreign Assets Control, and similar laws and regulations in other jurisdictions;

varying levels of internet, e-commerce and mobile technology adoption and infrastructure;

our ability to enforce contracts and intellectual property rights in jurisdictions outside the United States; and

barriers to international trade, such as tariffs, customs or other taxes.
Etsy sellers face similar risks in conducting their businesses across borders. Even if we are successful in managing the risks of conducting our business across borders, if Etsy sellers are not, our business could be adversely affected.
If we invest substantial time and resources to expand our operations outside of the United States and cannot manage these risks effectively, the costs of doing business in those markets may be prohibitive or our expenses may increase disproportionately to the revenue generated in those markets.
Our payments system depends on third-party providers and is subject to evolving laws and regulations.
Etsy buyers primarily pay for purchases using Direct Checkout or PayPal. In the United States and other countries where Direct Checkout is available, Etsy buyers can use Direct Checkout on our platform to pay with credit cards, debit cards, bank transfers, PayPal and, in certain markets, Apple Pay, Android Pay and Etsy Gift Cards, rather than being directed to a third-party payment platform. A significant portion of our GMS, approximately 78%, is processed through Direct Checkout, and a significant portion of our revenue is derived from Direct Checkout.
We have engaged third-party service providers to perform underlying compliance, card processing and payment disbursing, currency exchange, identity verification and fraud analysis services. If these service providers do not perform adequately or if our relationships with these service providers were to terminate, Etsy sellers’ ability to receive orders or payment could be adversely affected and our business would be harmed. For example, third-party service providers may experience service outages from time to time that impact Etsy. In July 2016, a third-party payment processor experienced a technical issue that caused payment processing delays and complications for purchases through Direct Checkout, which required Etsy to develop a short-term manual solution. These payment processing delays and complications did not have a material impact on our results of operations for the fiscal year ended December 31, 2016. If a third-party payment processor has significant outages in the future and we do not have alternative payment processors in place or are unable to provide our own solution, our business could be harmed. In addition, if our third-party providers increase the fees they charge us, our operating expenses could increase. If we respond by increasing the fees we charge to Etsy sellers, some Etsy sellers may stop using Direct Checkout, stop listing new items for sale or even close their accounts altogether.

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The laws and regulations related to payments are complex, evolving and subject to change and vary across different jurisdictions in the United States and globally. As a result, we are required to spend significant time and effort to comply with those laws and regulations. Any failure or claim of our failure to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, could result in liabilities or could force us to stop offering Direct Checkout. Additionally, changes in payment regulation may occur that could render our payments system less profitable. For example, any significant change in credit or debit card interchange rates in the United States or other markets, including as a result of changes in interchange fee limitations, may negatively impact Direct Checkout.
As we expand the availability of Direct Checkout or offer new payment methods to Etsy sellers and Etsy buyers in the future, we may become subject to additional regulations and compliance requirements.
Further, through our agreements with our third-party payment processors, we are indirectly subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard, which are subject to change. Failure to comply with these rules and certification requirements could impact our ability to meet our contractual obligations with our third-party payment processors and could result in potential fines. We are also subject to rules governing electronic funds transfers. Any change in these rules and requirements could make it difficult or impossible for us to comply. In addition, similar to a potential increase in costs from third-party providers described above, any increased costs associated with compliance with payment card association rules could lead to increased fees for Etsy or Etsy sellers, which may negatively impact Direct Checkout usage and our markets.
Our business could be adversely affected by economic downturns, natural disasters, public health crises, political crises or other unexpected events.
Macroeconomic conditions may adversely affect our business. If general economic conditions deteriorate in the United States or other markets where we operate, consumer discretionary spending may decline and demand for the goods and services available in our platform may be reduced. This would cause sales in our markets and Seller Services revenue to decline and adversely impact our business. Conversely, if recent trends supporting self-employment and the desire for supplemental income were to reverse, the number of Etsy sellers offering their goods in our markets could decline and the number of goods listed in our markets could decline. In addition, we believe that currency exchange rates are dampening the demand from buyers outside the United States for goods denominated in U.S. dollars, which is impacting our GMS. As of December 31, 2016, approximately 88% of our GMS was denominated in U.S. dollars.
Natural disasters and other adverse weather and climate conditions, public health crises, political crises, such as terrorist attacks, war and other political instability or other unexpected events, could disrupt our operations, internet or mobile networks, or the operations of one or more of our third-party service providers. For example, when Hurricane Sandy struck New York in October 2012, our headquarters in Brooklyn was closed for five days, and we experienced a heavy volume of support requests from Etsy sellers and Etsy buyers, which required us to devote additional resources to handle those requests. Events of this type could impact Etsy sellers’ ability to continue producing goods for sale in our markets. These events may also impact consumer perceptions of well-being and security, which may adversely impact consumer discretionary spending. If any of these events occurs, our business could be adversely affected.
If sensitive information about members of our community is misused or disclosed, or if we or our third-party providers are subject to cyber attacks, members of our community may curtail use of our platform, we may be exposed to liability and our reputation could suffer.
Like all online services, our platform is vulnerable to power outages, telecommunications failures and catastrophic events, as well as computer viruses, break-ins, phishing attacks, denial-of-service attacks and other cyber attacks. Any of these incidents could lead to interruptions or shutdowns of our platform, loss of data or unauthorized disclosure of our members' personal or financial information. Cyber attacks could also result in the theft of our intellectual property. As we gain greater public visibility, we may face a higher risk of being targeted by cyber attacks. Although we rely on a variety of security measures, including encryption and authentication technology licensed from third parties, we cannot assure you that such measures will provide absolute security, particularly given the increasingly sophisticated tools and methods used by hackers and cyber terrorists. Security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or employees of our third-party service providers.
Additionally, some of our third party service providers, such as identify verification and payment processing providers, regularly have access to some confidential and sensitive member data. If these third parties fail to adhere to adequate security practices, or experience a breach of their networks, our members' data may be improperly accessed, used or disclosed.

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Cyber attacks aimed at disrupting our and our third-party service providers’ services have occurred regularly in the past, and we expect they will continue to occur in the future. If we or our third-party service providers experience security breaches that result in marketplace performance or availability problems or the loss or unauthorized disclosure of sensitive information, or if we fail to respond appropriately to any security breaches that we may experience, people may become unwilling to provide us the information necessary to set up an account with us. Existing Etsy sellers and Etsy buyers may stop listing new items for sale, decrease their purchases or close their accounts altogether. We could also face potential liability, regulatory investigation, costly remediation efforts and litigation, which may not be adequately covered by insurance. Any of these results could harm our growth prospects, our business and our reputation for maintaining trusted markets.
We face intense competition and may not be able to compete effectively.
Our industry is highly competitive and we expect competition to increase in the future. To be successful, we need to attract and retain both Etsy sellers and Etsy buyers. As a result, we face competition from a wide range of online and offline competitors.
We compete for Etsy sellers with both retailers and companies that sell software and services to small businesses. In addition to listing her goods for sale on Etsy, an Etsy seller can list her goods with other online retailers, such as Amazon, eBay or Alibaba, or sell her goods through local consignment and vintage stores and other venues or marketplaces, including through commerce channels on social networks like Facebook and Instagram. She may also sell wholesale directly to traditional retailers, including large national retailers, who discover her goods in our markets or otherwise. We also compete with companies that sell software and services to small businesses, enabling an Etsy seller to sell from her own website or otherwise run her business independently of our platform, such as Square, Intuit and Shopify.
We compete to attract, engage and retain Etsy sellers based on many factors, including:

our brand awareness;

the extent to which our Seller Services can ease the administrative tasks that an Etsy seller might encounter in running her business, wherever she chooses to pursue commerce;

the global scale of our markets and the breadth of our online presence;

the number and engagement of Etsy buyers;

our seller education resources and tools;

our policies and fees;

the ability to scale her business through Pattern, Etsy Wholesale or Etsy Manufacturing;

our mobile apps;

the strength of our community; and

our values.
In addition, we compete with retailers for the attention of the Etsy buyer. An Etsy buyer has the choice of shopping with any online or offline retailer, whether large marketplaces, such as Amazon, eBay or Alibaba, or national retail chains, such as West Elm or Target, or local consignment and vintage stores or other venues or marketplaces. Many of these competitors offer low-cost or free shipping, fast shipping times, favorable return policies and other features that may be difficult or impossible for Etsy sellers to match.
We compete to attract, engage and retain Etsy buyers based on many factors, including:

the breadth of unique goods that Etsy sellers list in our markets;

our brand awareness;

the person-to-person commerce experience;

our reputation for trustworthiness;

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our mobile apps;

ease of payment; and

the availability and reliability of our platform.
Many of our competitors and potential competitors have longer operating histories, greater resources, better name recognition or more customers than we do.
They may invest more to develop and promote their services than we do, and they may offer lower fees to sellers than we do. Further, our competitors could obtain preferential rates or shipping services, causing Etsy sellers and Etsy buyers to pay higher shipping costs or find alternative delivery services. Additionally, we believe that it is relatively easy for new businesses to create online commerce offerings or tools or services that enable entrepreneurship.
Local companies or more established companies based in markets where we operate outside of the United States may also have a better understanding of local customs, providing them a competitive advantage. For example, in certain markets outside the United States, we compete with smaller, but similar, local online marketplaces with a focus on unique goods that are attempting to attract sellers and buyers in those markets.
If we are unable to compete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business could be adversely affected.
We rely on Etsy sellers to provide a fulfilling experience to Etsy buyers.
A small portion of Etsy buyers complain to us about their experience with our platform. For example, Etsy buyers may report that they have not received the items that they purchased, that the items received were not as represented by an Etsy seller or that an Etsy seller has not been responsive to their questions.

Although our Case System provides a way for Etsy sellers and Etsy buyers to communicate with each other to resolve disputes, negative publicity and sentiment generated as a result of these types of complaints could reduce our ability to attract and retain Etsy sellers and Etsy buyers or damage our reputation. A perception that our levels of responsiveness and support for Etsy sellers and Etsy buyers are inadequate could have similar results. In some situations, we may choose to reimburse Etsy buyers for their purchases to help avoid harm to our reputation, but we may not be able to recover the funds we expend for those reimbursements.
Anything that prevents the timely processing of orders or delivery of goods to Etsy buyers could harm Etsy sellers. Service interruptions and delivery delays may be caused by events that are beyond the control of Etsy sellers, such as interruptions in order or payment processing, transportation disruptions, natural disasters, inclement weather, terrorism, public health crises or political unrest. Disruptions in the operations of a substantial number of Etsy sellers could also result in negative experiences for a substantial number of Etsy buyers, which could harm our reputation and adversely affect our business.

Our reputation may be harmed if members of our community use illegal or unethical business practices.
Our emphasis on our values makes our reputation particularly sensitive to allegations of illegal or unethical business practices by Etsy sellers or other members of our community. Our policies promote legal and ethical business practices, such as encouraging Etsy sellers to work only with manufacturers who do not use child or involuntary labor, who do not discriminate and who promote sustainability and humane working conditions. However, we do not control Etsy sellers or other members of our community or their business practices and cannot ensure that they comply with our policies. If members of our community engage in illegal or unethical business practices or are perceived to do so, we may receive negative publicity and our reputation may be harmed.
Failure to deal effectively with fraud could harm our business.
Although we have measures in place to detect and reduce the occurrence of fraudulent activity in our markets, those measures may not always be effective.
For example, Etsy sellers occasionally receive orders placed with fraudulent or stolen credit card data. Under current credit card practices, we could be held liable for orders placed through Direct Checkout with fraudulent credit card data even if the associated financial institution approved the credit card transaction. Although we attempt to detect or challenge fraudulent

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transactions, we may not be able to do so effectively. As a result, our business could be adversely affected. We could also incur significant fines or lose our ability to give the option of paying with credit cards if we fail to follow payment card industry data security standards or fail to limit fraudulent transactions conducted in our markets.
Negative publicity and sentiment resulting from fraudulent or deceptive conduct by members of our community or the perception that our levels of responsiveness and support for Etsy sellers and Etsy buyers are inadequate could reduce our ability to attract and retain Etsy sellers and Etsy buyers and damage our reputation.
Our business depends on continued and unimpeded access to the internet and mobile networks.
Etsy sellers and Etsy buyers rely on access to the internet or mobile networks to access our markets. Internet service providers may choose to disrupt or degrade access to our platform or increase the cost of such access. Mobile network operators or operating system providers could block or place onerous restrictions on the ability to download and use our mobile apps.
Internet service providers or mobile network operators could also attempt to charge us for providing access to our platform. In 2015, rules approved by the Federal Communications Commission went into effect that prohibit internet service providers from charging content providers higher rates in order to deliver their content over certain “fast traffic” lanes; however, the rules are subject to pending legal challenges and if they are overturned, or if the current Federal Communications Commission revokes or changes the rules, our business could be adversely impacted. Outside of the United States, government regulation of the internet, including the idea of network neutrality, may be developing or non-existent. As a result, we could face discriminatory or anti-competitive practices that could impede both our and Etsy sellers’ growth prospects, increase our costs and harm our business.
Our business depends on network and mobile infrastructure provided by third parties and on our ability to maintain and scale the technology underlying our platform.
The reliability of our platform is important to our reputation and our ability to attract and retain Etsy sellers and Etsy buyers. As the number of Etsy sellers and Etsy buyers, volume of traffic, number of transactions and the amount of information shared on our platform grow, our need for additional network capacity and computing power will also grow. The operation of the technology underlying our platform is expensive and complex, and we could experience operational failures. If we fail to accurately predict the rate or timing of the growth of our platform, we may be required to incur significant additional costs to maintain reliability. The investments we make in our platform are designed to grow our business and to improve our operating results in the long term, but these investments could also delay our ability to achieve profitability or reduce profitability in the near term.
We also depend on the development and maintenance of the internet and mobile infrastructure. This includes maintenance of reliable internet and mobile networks with the necessary speed, data capacity and security, as well as timely development of complementary products.
Third-party providers host much of our technology infrastructure. Any disruption in their services, or any failure of our providers to handle the demands of our markets could significantly harm our business. We exercise little control over these providers, which increases our vulnerability to their financial conditions and to problems with the services they provide. If we experience failures in our technology infrastructure or do not expand our technology infrastructure successfully, then our ability to attract and retain Etsy sellers and Etsy buyers could be adversely affected, which could harm our growth prospects and our business.
Our ability to recruit and retain employees is important to our success.
We strive to attract, retain and motivate employees, from our office administrators to our management team, who share our dedication to our community and our mission. As we continue to grow, we cannot guarantee we will continue to attract the employees we need to maintain our competitive position.
Some of the challenges we face in attracting and retaining employees include:

preserving our company culture as we grow;

continuing to attract and retain employees who share our values;

promoting existing employees into leadership positions to help sustain and grow our culture;


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hiring employees in multiple locations globally;

responding to competitive pressures and changing business conditions in ways that do not divert us from our values; and

integrating new personnel and businesses from acquisitions.
Our ability to attract, retain and motivate employees, including our management team, is important to our success. In general, our employees, including our management team, work for us on an at-will basis. The unexpected loss of or failure to retain one or more of our key employees, such as our CEO or CFO, could adversely affect our business. Other companies, including our competitors, may be successful in recruiting and hiring our employees, and it may be difficult for us to find suitable replacements on a timely basis or on competitive terms.
Filling engineering, product management and other technical positions in the New York City area is particularly challenging, especially in light of our distinctive technology philosophy and engineering culture. Qualified individuals are limited and in high demand, and we may incur significant costs to attract, develop and motivate them. Even if we were to offer higher compensation and other benefits, people with suitable technical skills may choose not to join us or to continue to work for us. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we are not able to maintain our engineering culture and broader company culture, then our ability to recruit and retain employees could suffer and our business would be harmed.
The growth of our business may strain our management team and our operational and financial infrastructure.
We have experienced rapid growth in our business, such as in headcount, the number of Etsy sellers and the number of countries in which we have Etsy sellers and Etsy buyers and we plan to continue to grow in the future, both in the United States and abroad. For example, our headcount has grown from 251 employees on December 31, 2011 to 1,043 employees on December 31, 2016. The growth of our business places significant demands on our management team and pressure to expand our operational and financial infrastructure. For example, we may need to continue to develop and improve our operational, financial and management controls and enhance our reporting systems and procedures. As we continue to grow, our operating expenses will increase. If we do not manage our growth effectively, the increases in our operating expenses could outpace any increases in our revenue and our business could be harmed.
We may expand our business through acquisitions of other businesses, which may divert management’s attention and/or prove to be unsuccessful.
We have acquired a number of other businesses in the past and may acquire additional businesses or technologies in the future. For example, in September 2016 we acquired Blackbird Technologies, Inc. Acquisitions may divert management’s time and focus from operating our business. Acquisitions also may require us to spend a substantial portion of our available cash, issue stock, incur debt or other liabilities, amortize expenses related to intangible assets or incur write-offs of goodwill or other assets. In addition, integrating an acquired business or technology is risky. Completed and future acquisitions may result in unforeseen operational difficulties and expenditures associated with:

integrating new businesses and technologies into our infrastructure;

consolidating operational and administrative functions;

coordinating outreach to our community;

maintaining morale and culture and retaining and integrating key employees;

maintaining or developing controls, procedures and policies (including effective internal control over financial reporting and disclosure controls and procedures); and

assuming liabilities related to the activities of the acquired business before and after the acquisition, including liabilities for violations of laws and regulations, commercial disputes, cyber attacks, taxes and other matters.
Moreover, we may not benefit from our acquisitions as we expect, or in the time frame we expect. We also may issue additional equity securities in connection with an acquisition, which could cause dilution to our stockholders. Finally, acquisitions could be viewed negatively by analysts, investors or the members of our community.

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Our business is subject to a large number of U.S. and non-U.S. laws, many of which are evolving.
We are subject to a variety of laws and regulations in the United States and around the world, including those relating to traditional businesses, such as employment laws and taxation, and laws and regulations focused on internet service providers and online commerce, such as online payments, privacy, anti-spam, data security and protection, online platform liability, intellectual property and consumer protection. In light of our international operations, we need to comply with various laws associated with doing business outside of the United States, including anti-money laundering, sanctions, anti-corruption and export control laws. These laws and regulations are continuously evolving, and compliance is costly and can require changes to our business practices and significant management time and effort.
Additionally, it is not always clear how existing laws apply to the internet as many of these laws do not address the unique issues raised by internet service providers or online commerce. For example, laws relating to online privacy are evolving differently in different jurisdictions. Federal, state and non-U.S. governmental authorities, as well as courts interpreting the laws, continue to evaluate and assess the privacy requirements relating to the use of third-party “cookies,” “web beacons” and other methods of online tracking. The United States, the European Union and other governments have enacted or are considering legislation that could (i) significantly restrict the ability of companies and individuals to collect and store user information, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools and (ii) require internet service providers to disclose user information to regulatory authorities.
Some providers of consumer devices and web browsers have implemented, or have announced plans to implement, ways to block tracking technologies which, if widely adopted, could also result in online tracking methods becoming significantly less effective. Any reduction in our ability to make effective use of such technologies could harm our ability to personalize the experience of Etsy buyers, increase our costs and limit our ability to attract and retain Etsy sellers and Etsy buyers on cost-effective terms. As a result, our business could be adversely affected.
In some cases, non-U.S. privacy, data security and protection, consumer protection, e-commerce and other laws and regulations are more restrictive than those in the United States and are actively enforced. For example, the European Union traditionally has imposed stricter obligations and provided for more onerous penalties under such laws than the United States. Consequently, the expansion of our operations internationally may require changes to the ways we display, collect and use consumer information and may necessitate unfavorable product changes for our non-U.S. users.
Existing and future laws and regulations enacted by federal, state or non-U.S. governments could impede the growth of internet service providers or online commerce. It is also possible that governments of one or more countries may seek to censor content available on our platform or may even attempt to block access to our platform. If we are restricted from operating in one or more countries, our ability to attract and retain Etsy sellers and Etsy buyers may be adversely affected and we may not be able to grow our business as we anticipate.
We strive to comply with all applicable laws, but they may conflict with each other, and by complying with the laws or regulations of one jurisdiction, we may find that we are violating the laws or regulations of another jurisdiction. Despite our efforts, we may not have fully complied in the past and may not in the future. If we become liable under laws or regulations applicable to us, we could be required to pay significant fines and penalties, our reputation may be harmed and we may be forced to change the way we operate. That could require us to incur significant expenses or to discontinue certain services, which could negatively affect our business.
Additionally, if third parties with whom we work violate applicable laws or our policies, those violations could result in other liabilities for us and could harm our business.
We may be subject to claims that items listed in our markets are counterfeit, infringing or illegal.
Although we do not create or take possession of the items listed in our markets by Etsy sellers, we frequently receive communications alleging that items listed in our markets infringe third-party copyrights, trademarks, patents or other intellectual property rights. We have intellectual property complaint and take-down procedures in place to address these communications, and we believe such procedures are important to promote confidence in our markets. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from our markets and, in certain cases, closing the shops of Etsy sellers who repeatedly violate our policies.
Our procedures may not effectively reduce or eliminate our liability. In particular, we may be subject to civil or criminal liability for activities carried out by Etsy sellers on our platform, especially outside the United States where we may be less protected under local laws than we are in the United States. Under current U.S. copyright law and the Communications Decency Act, we may benefit from statutory safe harbor provisions that protect us from copyright liability for content posted on

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our platform by Etsy sellers and Etsy buyers. However, trademark and patent laws do not include similar statutory provisions, and liability for these forms of intellectual property is often determined by court decisions. These safe harbors and court rulings may change unfavorably. In that event, we may be held secondarily liable for the intellectual property infringement of Etsy sellers.
Regardless of the validity of any claims made against us, we may incur significant costs and efforts to defend against or settle them. If a governmental authority determines that we have aided and abetted the infringement or sale of counterfeit goods or if legal changes result in us potentially being liable for actions by Etsy sellers on our platform, we could face regulatory, civil or criminal penalties. Successful claims by third-party rights owners could require us to pay substantial damages or refrain from permitting any further listing of the relevant items. These types of claims could force us to modify our business practices, which could lower our revenue, increase our costs or make our platform less user-friendly. Moreover, public perception that counterfeit or other unauthorized items are common in our markets, even if factually incorrect, could result in negative publicity and damage to our reputation.
We may be subject to intellectual property claims, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies in the future.
Companies in the internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. We periodically receive communications that claim we have infringed, misappropriated or misused others’ intellectual property rights. To the extent we gain greater public recognition, we may face a higher risk of being the subject of intellectual property claims. Third-parties may have intellectual property rights that cover significant aspects of our technologies or business methods and prevent us from expanding our offerings. Any intellectual property claim against us, with or without merit, could be time consuming and expensive to settle or litigate and could divert the attention of our management. Litigation regarding intellectual property rights is inherently uncertain due to the complex issues involved, and we may not be successful in defending ourselves in such matters.
In addition, some of our competitors have extensive portfolios of issued patents. Many potential litigants, including some of our competitors and patent holding companies, have the ability to dedicate substantial resources to enforcing their intellectual property rights. Any claims successfully brought against us could subject us to significant liability for damages and we may be required to stop using technology or other intellectual property alleged to be in violation of a third party’s rights in one or more jurisdictions where Etsy does business. We also might be required to seek a license for third-party intellectual property. Even if a license is available, we could be required to pay significant royalties or submit to unreasonable terms, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, which could require significant time and expense. If we cannot license or develop technology for any allegedly infringing aspect of our business, we would be forced to limit our service and may be unable to compete effectively. Any of these results could harm our business.
We may be involved in litigation matters that are expensive and time consuming.
In addition to intellectual property claims, we may become involved in other litigation matters, including class action lawsuits. For example, as described further in “Note 14—Commitments and ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements, three purported securities class action lawsuits have been filed naming Etsy and certain of our officers and/or directors as defendants. Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of current and former directors, officers and underwriters, in connection with the litigation described in this Annual Report and in connection with any future lawsuits. Any lawsuit to which we are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our offerings or business practices. Any of these results could adversely affect our business. In addition, defending claims is costly and can impose a significant burden on our management.
We may be unable to protect our intellectual property adequately.
Our intellectual property is an essential asset of our business. To establish and protect our intellectual property rights, we rely on a combination of trade secret, copyright, trademark and, to a lesser extent, patent laws, as well as confidentiality procedures and contractual provisions. The efforts we have taken to protect our intellectual property may not be sufficient or effective. We generally do not elect to register our copyrights, relying instead on the laws protecting unregistered intellectual property, which may not be sufficient. We rely on both registered and unregistered trademarks, which may not always be comprehensive in scope. In addition, our copyrights and trademarks, whether or not registered, and patents may be held invalid or unenforceable if challenged, and may be of limited territorial reach. While we have obtained or applied for patent protection with respect to some of our intellectual property, we generally do not rely on patents as a principal means of protecting intellectual property. To

26


the extent we do seek patent protection, any U.S. or other patents issued to us may not be sufficiently broad to protect our proprietary technologies.
In addition, we may not be effective in policing unauthorized use of our intellectual property and authorized uses may not have the intended effect. Even if we do detect violations, we may need to engage in litigation to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive and could divert our management’s attention. In addition, our efforts may be met with defenses and counterclaims challenging the validity and enforceability of our intellectual property rights or may result in a court determining that our intellectual property rights are unenforceable. The legal framework surrounding protection of intellectual property changes frequently throughout the world, and these changes may impact our ability to protect our intellectual property and defend against third party claims. If we are unable to cost-effectively protect our intellectual property rights, then our business could be harmed.
Our software is highly complex and may contain undetected errors.
The software underlying our platform is highly complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. We rely heavily on a software engineering practice known as “continuous deployment,” meaning that we typically release software code many times per day. This practice may result in the more frequent introduction of errors or vulnerabilities into the software underlying our platform. Any errors or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of our community members, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.
We are subject to the terms of open source licenses because our platform incorporates open source software.
The software powering our markets incorporates software covered by open source licenses. In addition, we regularly contribute source code to open source software projects and release internal software projects under open source licenses, and we anticipate doing so in the future. The terms of many open source licenses relied upon by Etsy and the internet and technology industries generally have not been interpreted by U.S. courts and there is a risk that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our markets. Under certain open source licenses, if certain conditions were met, we could be required to publicly release aspects of the source code of our software or to make our software available under open source licenses. To avoid the public release of the affected portions of our source code, we could be required to expend substantial time and resources to re-engineer some or all of our software. In addition, use of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to determine how to compromise our platform. Additionally, because any software source code we contribute to open source projects is publicly available, while we may benefit from the contributions of others, our ability to protect our intellectual property rights in such software source code may be limited or lost entirely, and we will be unable to prevent our competitors or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage and, if not addressed, could adversely affect our business, financial condition and results of operations.
Our business and our Etsy sellers and Etsy buyers may be subject to sales and other taxes.
The application of indirect taxes, such as sales and use tax, value-added tax, provincial taxes, goods and services tax, business tax and gross receipt tax, to businesses like ours and to Etsy sellers and Etsy buyers is a complex and evolving issue. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business or to Etsy sellers’ businesses. One or more states, the federal government or other countries may seek to impose additional reporting, record-keeping or indirect tax collection obligations on businesses like ours that facilitate online commerce. For example, taxing authorities in the United States and other countries have identified e-commerce platforms as a means to calculate, collect and remit indirect taxes for transactions taking place over the internet, and are considering related legislation. New legislation could require us or Etsy sellers to incur substantial costs in order to comply, including costs associated with tax calculation, collection, remittance and audit requirements, which could make selling in our markets less attractive and could adversely affect our business.

27


We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to taxation in the United States and in numerous other jurisdictions. We record tax expense based on current tax payments and our estimates of future tax payments, which may include reserves for estimates of probable settlements of tax audits. At any one time, multiple tax years could be subject to audit by various taxing jurisdictions. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be adversely impacted by changes in tax laws, changes in the mix of revenue among different jurisdictions, changes to accounting rules and changes to our ownership or capital structure. Fluctuations in our tax obligations and effective tax rate could adversely affect our business.
In January 2015, we implemented a revised corporate structure to more closely align our structure with our global operations and future expansion plans outside of the United States. Our new corporate structure changed how we use our intellectual property and implemented certain intercompany arrangements. We believe this may result in a reduction in our overall effective tax rate over the long term and other operational efficiencies; however, the tax laws of the jurisdictions in which we operate are subject to interpretation, and their application may depend on our ability to operate our business in a manner consistent with our corporate structure. Moreover, these tax laws are subject to change. Tax authorities may disagree with our position as to the tax treatment of our transfer of intangible assets or determine that the manner in which we operate our business does not achieve the intended tax consequences. If our new corporate structure does not achieve our expectations for any of these or other reasons, we may be subject to a higher overall effective tax rate and our business may be adversely affected.
If our insurance coverage is insufficient or our insurers are unable to meet their obligations, our insurance may not mitigate the risks facing our business.
Our insurance policies cover a number of risks and potential liabilities, such as general liability, property coverage, errors and omissions liability, employment liability, business interruptions, data breaches, crime, product liability and directors’ and officers’ liability. For certain types of business risk, we may not be able to, or may choose not to, acquire insurance. In addition, we may not obtain enough insurance to adequately mitigate the risks we face or we may have to pay high premiums and/or deductibles for the coverage we do obtain. Additionally, if any of our insurers becomes insolvent, it would be unable to pay any claims that we make.
Operating as a public company requires us to incur substantial costs and requires substantial management attention. In addition, our management team has limited experience managing a public company.
As a public company, we incur substantial legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations of the SEC. The rules and regulations of Nasdaq also apply to us. As part of these requirements, we have established and maintained effective disclosure and financial controls and made changes to our corporate governance practices. We expect that continued compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming. In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management and impact the manner in which we operate our business in ways we cannot currently anticipate.
Most of our management and other personnel have little experience managing a public company and preparing public filings. In addition, our management and other personnel divert attention from other business matters to devote substantial time to the reporting and other requirements of being a public company. In particular, we have incurred significant expense and devoted substantial management effort to complying with the requirements of Section 404 of the Sarbanes-Oxley Act. We may need to continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy of our financial reports.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting. It also requires our independent registered public accounting firm to attest to our evaluation of our internal controls over financial reporting. Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of

28


December 31, 2016, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal control in the future.
If we have a material weakness in our internal control over financial reporting in the future, we may not detect errors on a timely basis. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if we identify a material weakness in our internal control over financial reporting in the future, it could harm our operating results, cause us to fail to meet our SEC reporting obligations or Nasdaq listing requirements , adversely affect our reputation, cause our stock price to decline or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements. Further, if there are material weaknesses or failures in our ability to meet any of the requirements related to the maintenance and reporting of our internal controls, such as Section 404 of the Sarbanes-Oxley Act, investors may lose confidence in the accuracy and completeness of our financial reports and that could cause the price of our common stock to decline. We could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.
In addition, our internal control over financial reporting will not prevent or detect all errors and fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
The terms of our debt instruments may restrict our ability to pursue our business strategies.
We do not currently have any obligations outstanding under our credit facility. However, our credit facility requires us to comply with various covenants that limit our ability to take actions such as:

disposing of assets;

completing mergers or acquisitions;

incurring additional indebtedness;

encumbering our properties or assets;

paying dividends or making other distributions;

making specified investments; and

engaging in transactions with our affiliates.
These restrictions could limit our ability to pursue our business strategies. If we default under our credit facility and if the default is not cured or waived, the lenders could terminate their commitments to lend to us and cause any amounts outstanding to be payable immediately. Such a default could also result in cross defaults under other debt instruments. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.
We may need additional capital, which may not be available to us on acceptable terms or at all.
We believe that our existing cash and cash equivalents and short-term investments, together with cash generated from operations and available borrowing capacity under our credit facility, will be enough to meet our anticipated cash needs for at least the next 12 months. However, we may require additional cash resources due to changed business conditions or other developments, such as acquisitions or investments we may decide to pursue. We may seek to borrow funds under our credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution to our existing stockholders. Borrowing funds would result in increased debt service obligations and could result in additional operating and financial covenants that would limit our operations. It is also possible that financing may not be available to us in amounts or on terms acceptable to us, if at all.

29


Risks Related to Ownership of Our Common Stock
The price of our common stock has been and will likely continue to be volatile and declines in the price of common stock could subject us to litigation.
The price of our common stock has been and is likely to continue to be volatile. For example, since January 1, 2016, our common stock's daily closing price on Nasdaq has ranged from a low of $6.36 to a high of $15.81 through February 24, 2017. The price of our common stock may fluctuate significantly for numerous reasons, many of which are beyond our control, such as:

variations in our operating results and other financial and operational metrics, including the key financial and operating metrics disclosed in this Annual Report, as well as how those results and metrics compare to analyst and investor expectations;

forward-looking statements related to our financial guidance or projections, our failure to meet or exceed our financial guidance or projections or changes in our financial guidance or projections;

failure of analysts to initiate or maintain coverage of our company, changes in their estimates of our operating results or changes in recommendations by analysts that follow our common stock or a negative view of our financial guidance or projections;

announcements of new services or enhancements, strategic alliances or significant agreements or other developments by us or our competitors;

announcements by us or our competitors of mergers or acquisitions or rumors of such transactions involving us or our competitors;

changes in our board of directors, management or other key personnel;

disruptions in our markets due to hardware, software or network problems, security breaches or other issues;

the strength of the global economy or the economy in the jurisdictions in which we operate, currency fluctuations, and market conditions in our industry and those affecting members of our community;

the trading activity of our largest stockholders;

the number of shares of our common stock that are available for public trading;

litigation or other claims against us;

stockholder activism;

the performance of the equity markets in general and in our industry;

the operating performance of other similar companies;

changes in legal requirements relating to our business; and

any other factors discussed in this Annual Report.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. Stock prices of many technology companies have historically been highly volatile. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. For example, as described further in “Note 14—Commitments and ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements, three purported securities class action lawsuits have been filed naming Etsy and certain of our officers and/or directors as defendants. We may experience more such litigation following future periods of volatility or declines in our stock price. Any securities litigation, could result in substantial costs and divert our management’s attention and resources, which could adversely affect our business.

30


If analysts do not publish research about our business, or if they publish inaccurate or unfavorable research, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If few analysts cover us, demand for our common stock could decrease and our common stock price and trading volume may decline. Similar results may occur if one or more of these analysts stop covering us in the future or fail to publish reports on us regularly.
We do not intend to pay dividends on our capital stock, so any returns will be limited to increases in the value of our common stock.
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain future earnings for the operation and expansion of our business and do not anticipate declaring any dividends in the foreseeable future. In addition, our ability to pay cash dividends on our capital stock is restricted by the terms of our credit facility. As a result, stockholders will not receive dividends or other distributions and may only receive a return on their investment if the trading price of our common stock increases.
Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution to our stockholders and could cause the price of our common stock to decline.
We may issue additional common stock, convertible securities or other equity in the future. We also issue common stock to our employees, directors and other service providers pursuant to our equity incentive plans. Such issuances could be dilutive to investors and could cause the price of our common stock to decline. New investors in such issuances could also receive rights senior to those of current stockholders.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, could limit attempts to make changes in our management and could depress the price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control of our company or limiting changes in our management. Among other things, these provisions:

provide for a classified board of directors so that not all members of our board of directors are elected at one time;

permit our board of directors to establish the number of directors and fill any vacancies and newly created directorships;

provide that directors may only be removed for cause;

require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

eliminate the ability of our stockholders to call special meetings of stockholders;

prohibit stockholder action by written consent, which means all stockholder actions must be taken at a meeting of our stockholders;

provide that our board of directors is expressly authorized to amend or repeal any provision of our bylaws;

restrict the forum for certain litigation against us to Delaware; and

require advance notice for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our

31


management. In addition, Section 203 of the Delaware General Corporation Law, or DGCL, may delay or prevent a change in control of our company. Section 203 of the DGCL imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. Anti-takeover provisions could depress the price of our common stock by acting to delay or prevent a change in control of our company.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the DGCL, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
Item 1B. Unresolved Staff Comments.

None.
Item 2. Properties.
Our headquarters are located in Brooklyn, New York where we occupy approximately 198,635 square feet under a lease that expires in 2026. We use these facilities for our principal administration, technology and development and engineering activities. Our European headquarters are located in Dublin, Ireland. We also have other offices, including offices in San Francisco, Hudson (New York) and London.
We believe that our current facilities are suitable and adequate to meet our ongoing needs and that, if we require additional space, we will be able to obtain additional facilities.
Item 3. Legal Proceedings.
See “Note 14—Commitments and ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.


32


PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Etsy's Common Stock
Our common stock has been listed on the Nasdaq Global Select Market under the symbol “ETSY” since April 16, 2015. Prior to that date, there was no public trading market for our common stock. The following table sets forth the high and low intra-day sales price per share of our common stock as reported by Nasdaq:
 
2015
 
2016
 
High
 
Low
 
High
 
Low
First Quarter
N/A

 
N/A

 
$
9.40

 
$
6.04

Second Quarter (beginning April 16, 2015)
$
35.74

 
$
13.78

 
10.10

 
7.60

Third Quarter
23.44

 
11.85

 
15.70

 
9.08

Fourth Quarter
15.11

 
7.91

 
16.05

 
10.84

Holders of Record
As of the close of business on February 24, 2017, there were approximately 261 stockholders of record of our common stock. The number of stockholders of record is based upon the actual number of holders registered on this date and does not include holders of common stock in “street name” by brokers or other entities on behalf of stockholders.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings and do not anticipate paying cash dividends in the foreseeable future. Any future decision to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors thinks are relevant. In addition, our ability to pay cash dividends is limited by the terms of our Credit Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility” for additional information about our Credit Agreement.
Unregistered Sales of Equity Securities
On May 5, 2016, we issued and sold an aggregate of 80,011 shares of our common stock upon the net exercise of warrants to purchase 97,931 shares of our common stock. The shares of common stock were issued pursuant to Section 3(a)(9) of the Securities Act.
On September 19, 2016, we issued 685,749 shares of our common stock to the former stockholders of Blackbird Technologies, Inc. in connection with the acquisition of Blackbird. This transaction was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Regulation D.

33


Issuer Purchases of Equity Securities
The table below provides information with respect to repurchases of shares of our common stock during the three months ended December 31, 2016:
Period
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 - 31, 2016(1)
45,058

 
$
14.28

 

 

November 1 - 30, 2016

 

 

 

December 1 - 31, 2016

 

 

 

Total
45,058

 
$
14.28

 

 

(1) Represents shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units.
Performance Graph

The following graph shows a comparison from April 16, 2015 (the date our common stock commenced trading on Nasdaq) through December 31, 2016, of the cumulative total returns for our common stock, the Nasdaq Composite Index and the Russell 2000 Index. The graph assumes $100 was invested at the market close on April 16, 2015 in the common stock of Etsy, Inc. Such returns are based on historical results and are not intended to suggest future performance. The Nasdaq Composite Index and Russell 2000 Index assume reinvestment of any dividends.

performancegraph.jpg
This performance graph shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Securities Act or the Exchange Act.

34


Item 6. Selected Consolidated Financial and Other Data.
The following tables show selected consolidated financial data. The selected consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016, and the selected consolidated balance sheet data as of December 31, 2015 and 2016, are derived from our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the year ended December 31, 2012 and 2013, and the selected consolidated balance sheet data as of December 31, 2013 and 2014 is derived from our audited consolidated financial statements and related notes not included in this Annual Report.
The following tables also show certain unaudited operational and non-GAAP financial measures as well as a reconciliation between certain GAAP and non-GAAP measures. See the accompanying footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of OperationsNon-GAAP Financial Measures” below for more information. Our historical results and key metrics are not necessarily indicative of future results, and results for any interim period presented below are not necessarily indicative of the results to be expected for any annual period.
The following selected consolidated financial data and key metrics should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report.
 
Year Ended December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
(in thousands except share and per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Markets
$
55,330

 
$
78,544

 
$
108,732

 
$
132,648

 
$
158,204

Seller Services
15,863

 
42,817

 
82,502

 
136,608

 
200,857

Other
3,409

 
3,661

 
4,357

 
4,243

 
5,906

Total revenue
74,602

 
125,022

 
195,591

 
273,499

 
364,967

Cost of revenue(1)
24,493

 
47,779

 
73,633

 
96,979

 
123,328

Gross profit
50,109

 
77,243

 
121,958

 
176,520

 
241,639

Operating expenses:
 
 
 
 
 
 
 
 
 
Marketing(1)
10,902

 
17,850

 
39,655

 
66,771

 
82,799

Product development(1)
18,653

 
27,548

 
36,634

 
42,694

 
55,083

General and administrative(1)
21,909

 
31,112

 
51,920

 
68,939

 
86,180

Total operating expenses
51,464

 
76,510

 
128,209

 
178,404

 
224,062

(Loss) income from operations
(1,355
)
 
733

 
(6,251
)
 
(1,884
)
 
17,577

Other expense, net
(1,175
)
 
(675
)
 
(4,009
)
 
(26,110
)
 
(20,453
)
(Loss) income before income taxes
(2,530
)
 
58

 
(10,260
)
 
(27,994
)
 
(2,876
)
Benefit (provision) for income taxes
145

 
(854
)
 
(4,983
)
 
(26,069
)
 
(27,025
)
Net loss
$
(2,385
)
 
$
(796
)
 
$
(15,243
)
 
$
(54,063
)
 
$
(29,901
)
Net loss per share attributable to common stockholders—basic and diluted
$
(0.09
)
 
$
(0.02
)
 
$
(0.38
)
 
$
(0.59
)
 
$
(0.26
)
Weighted average common shares outstanding—basic and diluted
30,281,842

 
32,667,242

 
40,246,663

 
91,122,291

 
113,562,738


(1)
Includes total stock-based compensation expense as follows:
 
Year Ended December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
166

 
$
200

 
$
1,113

 
$
871

 
$
1,057

Marketing
57

 
79

 
216

 
560

 
971

Product development
436

 
785

 
1,461

 
2,860

 
5,079

General and administrative
3,435

 
2,770

 
7,260

 
6,550

 
8,794

Total stock-based compensation expense
$
4,094

 
$
3,834

 
$
10,050

 
$
10,841

 
$
15,901

 

35



 
Year Ended December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Other Operational and Financial Data(2):
 
 
 
 
 
 
 
 
 
GMS
$
895,152

 
$
1,347,833

 
$
1,931,981

 
$
2,388,387

 
$
2,841,985

Adjusted EBITDA
$
10,669

 
$
16,947

 
$
23,081

 
$
31,007

 
$
57,124

Active sellers
830

 
1,074

 
1,353

 
1,563

 
1,748

Active buyers
9,317

 
14,032

 
19,810

 
24,046

 
28,566

Percent mobile visits
N/A

 
41
%
 
54
%
 
60
%
 
64
%
Percent mobile GMS
N/A

 
30
%
 
37
%
 
43
%
 
48
%
Percent international GMS
28.4
%
 
28.4
%
 
30.9
%
 
29.8
%
 
30.4
%
 
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of OperationsKey Operating and Financial Metrics” for the definitions of the following terms: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” “mobile visits” and “mobile GMS.”
 
Year Ended December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Net loss
$
(2,385
)
 
$
(796
)
 
$
(15,243
)
 
$
(54,063
)
 
$
(29,901
)
Excluding:
 
 
 
 
 
 
 
 
 
Interest and other non-operating expense, net
438

 
256

 
549

 
1,202

 
5,502

(Benefit) provision for income taxes
(145
)
 
854

 
4,983

 
26,069

 
27,025

Depreciation and amortization
7,930

 
12,380

 
17,223

 
18,550

 
22,525

Stock-based compensation expense
4,094

 
3,834

 
5,920

 
8,981

 
13,168

Stock-based compensation expense—acquisitions

 

 
4,130

 
1,860

 
2,733

Loss on asset impairment

 

 

 

 
551

Net unrealized loss on warrant and other liabilities
737

 
419

 
411

 
3,133

 

Foreign exchange loss

 

 
3,049

 
21,775

 
14,951

Acquisition-related expenses

 

 
2,059

 

 
570

Contribution to Good Work Institute (formerly Etsy.org)

 

 

 
3,500

 

Adjusted EBITDA
$
10,669

 
$
16,947

 
$
23,081

 
$
31,007

 
$
57,124


 
As of December 31,
 
2013
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
Cash and cash equivalents and short-term investments
$
54,870

 
$
88,843

 
$
292,864

 
$
282,086

Net working capital
55,764

 
85,608

 
278,932

 
287,024

Total assets
104,900

 
246,203

 
553,061

 
581,193

Deferred revenue
2,760

 
3,452

 
4,712

 
5,648

Long-term liabilities
1,466

 
57,450

 
142,441

 
152,428

Convertible preferred stock
80,212

 
80,212

 

 

Total stockholders’ equity
4,003

 
67,088

 
330,498

 
344,757




36


Item 7. 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 and other financial information included elsewhere in this Annual Report on Form 10-K. This discussion, particularly information with respect to our outlook, our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the “Risk Factors” section.
Overview

Etsy offers markets, services and technology that empower creative entrepreneurs and shape a positive future for business.
Our mission is to reimagine commerce in ways that build a more fulfilling and lasting world. We believe we are creating a new economy, 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 connections with the people who sell them. We have a seller-aligned business model: we make money when our Etsy sellers make money, so we continue to invest in building the platform they depend on.

Our markets provide creative entrepreneurs with access to consumers around the world. Buyers come to Etsy.com to find what they are looking for among nearly 45 million unique items across more than 50 retail categories. We also offer a wide range of Seller Services and tools that are specifically designed to help creative entrepreneurs start, manage and scale their businesses.
Our revenue is diversified, generated from a mix of markets activities and Seller Services. Our largest market is Etsy.com. In 2017, we plan to launch a dedicated craft supplies market called Etsy Studio. We also own A Little Market, or ALM, a handmade and supplies market for sellers and buyers in France. Markets revenue is primarily made up of the 3.5% transaction fee that an Etsy seller pays for each completed transaction on Etsy.com and the $0.20 listing fee she pays for each item she lists on Etsy.com. Seller Services revenue includes the fees Etsy sellers pay us for services, which include Direct Checkout, our payment processing service; Promoted Listings, our ad service for prominent placement in on-site search results; Shipping Labels, which allow Etsy sellers to purchase shipping labels through our platform; and Pattern, launched in April 2016, which enables sellers to easily create their own custom website. Other revenue typically includes revenue generated from commercial partnerships.
As of December 31, 2016, our platform, which includes our markets, our services and our technology, connected 1.7 million active Etsy sellers and 28.6 million active Etsy buyers, in nearly every country in the world. In 2016, Etsy sellers generated GMS of $2.8 billion, of which approximately 48% came from purchases made on mobile devices. We are a global company: 30.4% of our 2016 GMS came from transactions where either an Etsy seller or an Etsy buyer were located outside of the United States.
Our business has grown in significant ways:
 
Our GMS was $2.8 billion in 2016, up 19.0% over 2015, and was $2.4 billion in 2015, up 23.6% over 2014.

Our revenue was $365.0 million in 2016, up 33.4% over 2015. In 2016, our Markets revenue was $158.2 million, up 19.3% over 2015, and our Seller Services revenue was $200.9 million, up 47.0% over 2015. Our revenue was $273.5 million in 2015, up 39.8% over 2014. In 2015, our Markets revenue was $132.6 million, up 22.0% over 2014, and our Seller Services revenue was $136.6 million, up 65.6% over 2014.

As of December 31, 2016, our number of active sellers was 1.7 million, up 11.8% since December 31, 2015, and our number of active buyers was 28.6 million, up 18.8% since December 31, 2015. As of December 31, 2015, our number of active sellers was 1.6 million, up 15.5% since December 31, 2014, and our number of active buyers was 24.0 million, up 21.4% since December 31, 2014.

Etsy sellers and Etsy buyers have transacted across borders since our first year of business, and our international community continues to grow. International GMS was 30.4% as a percentage of total GMS in 2016, compared to 29.8% of GMS in 2015 and 30.9% of GMS in 2014. In 2016, GMS generated between a non-U.S. buyer and a non-U.S. seller both located in the same country increased approximately 47% from 2015. In 2015, this component of GMS increased approximately 58% from 2014, partially due to the acquisition of ALM in June 2014. Currently, Etsy sellers and Etsy buyers are based in nearly every country in the world and our Etsy.com market is available in 10 languages.

37



During 2016, we continued to enhance our mobile offerings. Mobile visits represented approximately 64% of visits in 2016, 60% of visits in 2015 and 54% of visits in 2014. Mobile GMS represented approximately 48% of GMS in 2016, increasing from approximately 43% of GMS in 2015 and approximately 37% of total GMS in 2014. As of December 31, 2016, our mobile apps have been downloaded 41 million times.

We have continued to enhance our Seller Services offerings, most recently including the launch of Pattern in 2016. Seller Services revenue has increased as a percentage of total revenue in the past six years from less than 3% in 2011 to approximately 55% in 2016. Seller Services increased as a percentage of total revenue to 55% in 2016, up from approximately 50% in 2015 and 42% in 2014.
In 2016, we incurred a net loss of $29.9 million, compared to $54.1 million in 2015 and $15.2 million in 2014. In 2016, we reported Adjusted EBITDA of $57.1 million compared to $31.0 million in 2015 and $23.1 million in 2014.
See “—Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

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, people and technology investments) and assess the performance of our business. The unaudited key operating metrics, unaudited non-GAAP financial measure and key financial metrics we use are:
 
 
Year Ended December 31,
 
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
GMS
 
$
1,931,981

 
$
2,388,387

 
$
2,841,985

Revenue
 
$
195,591

 
$
273,499

 
$
364,967

Markets revenue
 
$
108,732

 
$
132,648

 
$
158,204

Seller Services revenue
 
$
82,502

 
$
136,608

 
$
200,857

Net loss
 
$
(15,243
)
 
$
(54,063
)
 
$
(29,901
)
Adjusted EBITDA
 
$
23,081

 
$
31,007

 
$
57,124

 
 
 
 
 
 
 
Active sellers
 
1,353

 
1,563

 
1,748

Active buyers
 
19,810

 
24,046

 
28,566

Percent mobile visits
 
54
%
 
60
%
 
64
%
Percent mobile GMS
 
37
%
 
43
%
 
48
%
Percent international GMS
 
30.9
%
 
29.8
%
 
30.4
%
GMS
Gross merchandise sales, or GMS, is the dollar value of items sold in our markets within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by Etsy. GMS is largely driven by transactions in our Markets and is not directly impacted by Seller Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our markets, 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 adjusted to exclude: interest and other non-operating expense, net; provision for income taxes; depreciation and amortization; stock-based compensation expense; loss on asset impairment; net unrealized loss on warrant and other liabilities; foreign exchange loss; acquisition-related expenses and contributions to Good Work Institute (formerly Etsy.org). See “Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA, including its limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.


38


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, Pattern, Google Shopping and Etsy Wholesale enrollment. 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 identified by a unique e-mail address; a single person can have multiple Etsy buyer accounts. We generate revenue 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 visit represents activity from a unique browser or mobile app. A visit ends after 30 minutes of inactivity. 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 view percent mobile visits as a key indicator of the level of engagement of Etsy sellers and Etsy buyers on our mobile website and mobile apps and of our ability to sustain GMS and revenue.
Mobile GMS
Mobile GMS is GMS that results from a transaction completed 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 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.
Non-GAAP Financial Measures
Adjusted EBITDA
In this Annual Report on Form 10-K, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net loss adjusted to exclude: interest and other non-operating expense, net; provision for income taxes; depreciation and amortization; stock-based compensation expense; loss on asset impairment; net unrealized loss on warrant and other liabilities; foreign exchange loss; acquisition-related expenses and contributions to Good Work Institute (formerly Etsy.org). Below is a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA because it is a key measure used by our management and board of directors to evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans, determine incentive compensation and assess the health of our business. As our Adjusted EBITDA increases, we are able to invest more in our platform.
We believe that Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business as it removes the impact of certain non-cash items and certain variable charges.

39


Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not consider the impact of stock-based compensation expense or changes in the fair value of warrants;
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
Adjusted EBITDA does not consider the impact of foreign exchange loss;
Adjusted EBITDA does not consider the impact of loss on asset impairment;
Adjusted EBITDA does not reflect acquisition-related expenses;
Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense;
Adjusted EBITDA does not reflect the impact of our contributions to Good Work Institute (formerly Etsy.org); and
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.

The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:
 
Year Ended December 31,
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
(in thousands)
Net loss
$
(15,243
)
 
$
(54,063
)
 
$
(29,901
)
Excluding:
 
 
 
 
 
Interest and other non-operating expense, net(1)
549

 
1,202

 
5,502

Provision for income taxes
4,983

 
26,069

 
27,025

Depreciation and amortization(1)
17,223

 
18,550

 
22,525

Stock-based compensation expense
5,920

 
8,981

 
13,168

Stock-based compensation expense—acquisitions
4,130

 
1,860

 
2,733

Loss on asset impairment

 

 
551

Net unrealized loss on warrant and other liabilities
411

 
3,133

 

Foreign exchange loss
3,049

 
21,775

 
14,951

Acquisition-related expenses
2,059

 

 
570

Contribution to Good Work Institute (formerly Etsy.org)(2)

 
3,500

 

Adjusted EBITDA
$
23,081

 
$
31,007

 
$
57,124


(1) Included in interest and depreciation expense amounts above, interest and depreciation expense related to our new headquarters under build-to-suit accounting requirements, which commenced in May 2016, for the years ended December 31, 2014, 2015 and 2016 is as follows:
 
Year Ended December 31,
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
(in thousands)
Interest expense
$

 
$

 
$
5,337

Depreciation

 

 
2,186


(2) Etsy made a one-time contribution of 188,235 shares of common stock totaling $3.2 million and $0.3 million to Good Work Institute (formerly Etsy.org) during the first and second quarters of 2015, respectively.

40


Key Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in the section titled “Risk Factors.”
Growth and Retention of Active Sellers and Active Buyers
Our success depends in part on the growth and retention of our active sellers and active buyers. Our revenue is driven by the number of active sellers, seller engagement, the number of active buyers, buyer engagement and our ability to maintain trusted markets. As of December 31, 2016, our markets had grown to 1.7 million active sellers and 28.6 million active buyers, up from 1.6 million active sellers and 24.0 million active buyers as of December 31, 2015. We believe two of our most significant opportunities to drive growth within our markets are to bring new buyers to Etsy and to encourage existing buyers to return more frequently. Repeat purchases demonstrate the loyalty of Etsy buyers. In 2016, approximately 41.0% of our active buyers made purchases on two or more days in the previous 12 months, up from 40.6% in 2015. To analyze our retention rates, we measure repeat activity by Etsy sellers and Etsy buyers.
Cohort of 2011, 2012 and 2013 Active Sellers
We refer to active sellers as of December 31, 2011 as “2011 Active Sellers,” as of December 31, 2012 as “2012 Active Sellers” and as of December 31, 2013 as “2013 Active Sellers.” Of total 2011 Active Sellers, 32.3% remained active sellers through their fourth year on the platform, compared to 32.3% for 2012 Active Sellers and 31.5% for 2013 Active Sellers. The average annual GMS per 2011 Active Seller during their fourth year on the platform was over five times higher than their first year, compared to over four times higher for 2012 Active Sellers and almost four times higher for 2013 Active Sellers.
sellercohorta03.jpg
Cohort of 2011, 2012 and 2013 Active Sellers
This cohort data demonstrates our success in retaining sellers over a multi-year period, with the sellers that remain on our platform maintaining consistent GMS growth.

41


Cohort of 2011, 2012 and 2013 Active Buyers
We refer to active buyers as of December 31, 2011 as “2011 Active Buyers,” as of December 31, 2012 as “2012 Active Buyers” and as of December 31, 2013 as “2013 Active Buyers.” Of total 2011 Active Buyers, 44.7% remained active buyers through their fourth year on the platform, compared to 42.5% for 2012 Active Buyers and 41.1% for 2013 Active Buyers. The average annual GMS per 2011 Active Buyer during their fourth year on the platform was 89.2% higher than their first year, compared to 88.3% for 2012 Active Buyers and 80.5% for 2013 Active Buyers. We note that 2013 was the first year we started to significantly invest in our paid acquisition marketing efforts to grow our buyer base.
buyercohorta11.jpg
Cohort of 2011, 2012 and 2013 Active Buyers
This cohort data demonstrates our ability to consistently retain buyers over a multi-year period and reflects the loyalty of our buyer base. We have identified our ability to increase purchase frequency among these long-term buyers as one of our significant opportunities for growth and we are focused on improving search and recommendations to better match our buyers with the nearly 45 million items listed on Etsy.com, driving buyer growth and retention.

Seller Services Growth
Our business model is based on shared success: we make money when Etsy sellers make money, so we continue to invest in building the platform they depend on. Over the long term, our goal is to become the central hub for creative entrepreneurs and to support them wherever they choose to pursue commerce. To achieve this, we continue to invest our resources to develop in-house a cohesive platform of Seller Services and tools that help sellers start, manage and scale their businesses. As of December 31, 2016, 51.7% of active sellers used one or more of our Seller Services compared to 48.1% of active sellers as of December 31, 2015. For December 31, 2016, this included 45.5% of active sellers using Direct Checkout, 15.9% of active sellers using Promoted Listings, 26.3% of active sellers in the United States and Canada using Shipping Labels and 2.5% of active sellers using Pattern (includes eight months of paid seller activity since the launch of this service in April 2016). Additionally, in 2016 approximately 78% of GMS was processed through Direct Checkout compared to 62% in 2015. We expect continued revenue growth in 2017 from our existing Seller Services, albeit at a slower pace than 2016, driven by both adoption and product enhancements, with the aim, over time, of re-investing this revenue to build a suite of services that form a cohesive platform for the best place to run a business.

42


Investment in Marketing
We are focusing on initiatives to shape perceptions of Etsy’s markets as go-to shopping destinations for unique items that consumers use in their everyday lives by investing in both acquisition and brand marketing. Within acquisition marketing, we align our investments with a model that is guided by our two-year lifetime value model and makes conservative assumptions about how paid traffic will perform compared with organic traffic. We remain committed to achieving positive return on investment at the aggregate company level on our marketing spend and maintaining a marketing payback period that continues to outperform our two-year lifetime value model. Over time, we believe this will help us attract a larger audience and also encourage existing buyers to make more frequent purchases. We launched our first global brand marketing campaign, called “Difference Makes Us,” in September 2016 to showcase the breadth and depth of items available within the Etsy.com market. In 2016, we spent $82.8 million on marketing expenses, or 22.7% of revenue, up 24.0% over 2015. In 2015, we spent $66.8 million on marketing expenses, or 24.4% of revenue, up 68.4% over 2014. In the upcoming year, we expect marketing expenses to increase as a percentage of total revenue as we continue to increase our investment in brand-related marketing following the launch of our global brand campaign in 2016.
Investment in Technology
Our widely-respected engineering team has built a sophisticated platform that enables millions of Etsy sellers and Etsy buyers to smoothly transact across borders, languages and devices. We have made, and will continue to make, significant investments in our platform to attract buyers and sellers to our markets and enhance their experience. In September 2016, we acquired Blackbird, a machine learning company, which we believe will augment our ability to surface the most relevant and personalized search results going forward. In 2016, we spent $55.1 million on product development expenses, or 15.1% of revenue, up 29.0% over 2015 and in 2015, we spent $42.7 million on product development expenses, or 15.6% of revenue, up 16.5% over 2014. In addition, we capitalized website development and internal-use software, including stock-based compensation, of $12.6 million and $10.2 million in 2016 and 2015, respectively. We plan to continue to invest in innovation to address the needs of our community. In the upcoming year, we expect product development expenses to increase as a percentage of total revenue as we continue to recognize expenses related to the acquisition of Blackbird.
Investment in Connected Experience—Mobile and Desktop
We want to engage Etsy buyers wherever they are and to provide an enjoyable and connected shopping experience no matter what device they use to access any of the Etsy markets. We are a mobile-first company, meaning mobile is integrated into everything that we do, and have focused on expanding our mobile capabilities in recent years. Our mobile website and our “Buy on Etsy” mobile app for Etsy buyers include search, discovery, curation, personalization and social shopping features, optimized for a personal mobile experience. Mobile visits represented 64% of total visits in 2016 compared to 60% of total visits in 2015. In addition, mobile GMS was 48% of total GMS in 2016, up from 43% of total GMS in 2015. We are focused on continuing to narrow the gap between mobile visits and mobile GMS in 2017.
International Growth
Our growth will depend in part on international Etsy sellers and international Etsy buyers constituting an increasing portion of our community. Our vision is global and local, and our platform supports buyers and sellers in nearly every country in the world. International GMS was 30.4% of GMS in 2016 compared to 29.8% in 2015. We expect international GMS to grow faster than U.S. domestic GMS in 2017, driven by our efforts to build local communities and foster local connections and assuming that currency remains stable compared to average levels in December 2016. In 2016, 33.3% of Etsy sellers were located outside the United States, and Etsy.com is available in 10 languages, with our platform supporting buyers and sellers in nearly every country in the world. Cross-border transactions is the largest component of international GMS and we remain committed to reducing barriers such as language and currency so that sellers and buyers from different countries can easily connect and transact. We are also focused on building and deepening local Etsy communities around the world, each with its own ecosystem of Etsy sellers and Etsy buyers. GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country grew approximately 47% in 2016 compared with 2015, making it the fastest growing category of international GMS. We continue to believe that we can grow international GMS, over time, to represent 50% of our total GMS. To meet our goals, we plan to continue to invest in local marketing and other locally-relevant tools and enhancements around the world to encourage these connections.

43


Components of Our Results of Operations
Revenue
Our revenue consists of Markets revenue, Seller Services revenue and Other revenue.
Markets.  Markets revenue is primarily made up of the 3.5% transaction fee that an Etsy seller pays for each completed transaction on Etsy.com, exclusive of shipping fees charged, and the listing fee of $0.20 she pays for each item she lists (for up to four months) on Etsy.com. Revenue from completed Wholesale transactions through Etsy.com and transaction and listing revenue for other markets, including ALM and Etsy Studio, launching in 2017, are a smaller contribution to Markets revenue.
Seller Services revenue.  Seller Services revenue consists of fees an Etsy seller pays us for the Seller Services she uses, including Direct Checkout, Promoted Listings, Shipping Labels and Pattern.

Revenue from Direct Checkout consists of fees an Etsy seller pays us to process credit, debit and Etsy Gift Card payments. Direct Checkout fees vary between 3-4% of the item’s total sale price plus a flat fee per order, depending on the country in which her bank account is located. Direct Checkout fees are based on an item’s total sale price, including shipping.

Revenue from Promoted Listings consists of cost-per-click fees an Etsy seller pays us for prominent placement of her listings in search results generated by Etsy buyers in our markets.

Revenue from Shipping Labels consists of fees an Etsy seller pays us when she purchases shipping labels directly through our platform, net of the cost we incur in purchasing those shipping labels. We are able to provide our sellers shipping labels from the United States Postal Service, FedEx and Canada Post at discounted pricing due to the volume of purchases through our platform.

Revenue from Pattern by Etsy consists of monthly subscription and annual domain registration fees, an optional add-on, an Etsy seller pays to use our custom website services.
Other revenue.  Other revenue includes the fees we receive from Paypal for transactions that occur outside of Direct Checkout, funds we receive from a third-party for unused Etsy Gift Cards and revenue from commercial partnerships.
Our revenue recognition policies are discussed under “—Critical Accounting Policies and Significant Judgments and Estimates.”
Cost of Revenue
Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees and credit card chargebacks to support Direct Checkout revenue along with costs of refunds made to Etsy buyers that we are not able to collect from Etsy sellers. Cost of revenue also includes expenses associated with the operation and maintenance of our platform and data centers, including depreciation and amortization, employee-related costs and hosting and bandwidth costs. Our cost of revenue as a percentage of revenue may change over time as our revenue mix changes; for example, to the extent that Direct Checkout revenue increases as a percentage of revenue, there may be a dampening effect on our gross margin.

44


Operating Expenses
Operating expenses consist of marketing, product development and general and administrative expenses. Direct and indirect employee-related expenses are the most significant component of the product development and general and administrative expense categories, and we expect these costs to increase as we continue to hire new employees in order to support our anticipated growth. We include stock-based compensation expense in the applicable operating expense category based on the respective equity award recipient’s function.
Marketing.  Marketing expenses consist primarily of digital marketing and brand-related marketing expenses. Digital marketing largely consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing and affiliate marketing, focused on buyer acquisition. Our brand marketing efforts use channels such as display and video to support campaigns focused on raising brand awareness and improving brand perception. Marketing expenses also include employee-related expenses for our employees involved in digital marketing, brand marketing and design, seller development and growth, public relations and communications, product marketing and marketing research activities. Marketing expenses are primarily driven by investments to grow and retain members on our platform.
Product development.  Product development expenses consist primarily of employee-related expenses for our employees involved in engineering, product management, product design and product research activities. Additional expenses include consulting costs related to the development, quality assurance and testing of new technology and enhancement of our existing technology.

General and administrative.  General and administrative expenses consist primarily of costs associated with the use of facilities and equipment, including depreciation and amortization, rent, office overhead and certain professional services expenses. General and administrative expenses also include employee-related expenses for our employees involved in general corporate functions. General and administrative expenses are primarily driven by increases in headcount required to support business growth.
Other (Expense) Income, net
Other (expense) income, net consists of interest expense, interest and other income, foreign exchange loss and net unrealized loss on warrant and other liabilities.

45


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.
 
 
Year Ended 
 December 31,
 
2014
 
2015
 
2016
 
 
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
 
 
Markets
$
108,732

 
$
132,648

 
$
158,204

Seller Services
82,502

 
136,608

 
200,857

Other
4,357

 
4,243

 
5,906

Total revenue
195,591

 
273,499

 
364,967

Cost of revenue
73,633

 
96,979

 
123,328

Gross profit
121,958

 
176,520

 
241,639

Operating expenses:
 
 
 
 
 
Marketing
39,655

 
66,771

 
82,799

Product development
36,634

 
42,694

 
55,083

General and administrative
51,920

 
68,939

 
86,180

Total operating expenses
128,209

 
178,404

 
224,062

(Loss) income from operations
(6,251
)
 
(1,884
)
 
17,577

Other expense, net
(4,009
)
 
(26,110
)
 
(20,453
)
Loss before income taxes
(10,260
)
 
(27,994
)
 
(2,876
)
Provision for income taxes
(4,983
)
 
(26,069
)
 
(27,025
)
Net loss
$
(15,243
)
 
$
(54,063
)
 
$
(29,901
)
 
 
 
 
 
 
 
Year Ended 
 December 31,
 
2014
 
2015
 
2016
Revenue:
 
 
 
 
 
Markets
55.6
 %
 
48.5
 %
 
43.3
 %
Seller Services
42.2

 
49.9

 
55.0

Other
2.2

 
1.6

 
1.6

Total revenue
100.0

 
100.0

 
100.0

Cost of revenue
37.6

 
35.5

 
33.8

Gross profit
62.4

 
64.5

 
66.2

Operating expenses:
 
 
 
 
 
Marketing
20.3

 
24.4

 
22.7

Product development
18.7

 
15.6

 
15.1

General and administrative
26.5

 
25.2

 
23.6

Total operating expenses
65.5

 
65.2

 
61.4

(Loss) income from operations
(3.2
)
 
(0.7
)
 
4.8

Other expense, net
(2.0
)
 
(9.5
)
 
(5.6
)
Loss before income taxes
(5.2
)
 
(10.2
)
 
(0.8
)
Provision for income taxes
(2.5
)
 
(9.5
)
 
(7.4
)
Net loss
(7.8
)
 
(19.8
)
 
(8.2
)


46


Comparison of Years Ended December 31, 2015 and 2016
Revenue
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
 
Markets
 
$
132,648

 
$
158,204

 
$
25,556

 
19.3
%
Percentage of total revenue
 
48.5
%
 
43.3
%
 
 
 
 
Seller Services
 
$
136,608

 
$
200,857

 
$
64,249

 
47.0
%
Percentage of total revenue
 
49.9
%
 
55.0
%
 
 
 
 
Other
 
$
4,243

 
$
5,906

 
$
1,663

 
39.2
%
Percentage of total revenue
 
1.6
%
 
1.6
%
 
 
 
 
Total revenue
 
$
273,499

 
$
364,967

 
$
91,468

 
33.4
%
GMS increased $453.6 million, or 19.0%, to $2.8 billion in the year ended December 31, 2016 compared to the year ended December 31, 2015. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2016 would have been 20.0%, or approximately one percentage point higher than the reported 19.0% growth. Supporting this growth in GMS, active sellers increased 11.8% to 1.7 million and active buyers increased 18.8% to 28.6 million at December 31, 2016 compared to December 31, 2015.
During the year ended December 31, 2016, percent mobile visits increased as a percentage of total visits to approximately 64%, up from approximately 60% for the year ended December 31, 2015 and mobile GMS increased as a percentage of total GMS to approximately 48%, up from approximately 43% for the year ended December 31, 2015. These increases were a result of increased mobile traffic and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers. Mobile GMS continued to grow faster than mobile visits and, as a result, the gap between mobile visits and mobile GMS narrowed slightly. Year-over-year, mobile app and mobile web GMS and conversion rates each continued to grow faster than desktop GMS. We anticipate conversion rate gains across both mobile and desktop in 2017 that reflect improvements in our search and recommendations capabilities. We believe that we will continue to see the gap between mobile visits and mobile GMS narrow over time.
For the year ended December 31, 2016, international GMS increased as a percentage of total GMS to 30.4%, from 29.8% for the year ended December 31, 2015. The improved performance in percent international GMS was largely driven by GMS growth between U.S. buyers and international sellers and GMS growth between buyers and sellers outside of the U.S., both in the same country and cross-border. We continue to believe the decline of GMS between U.S. sellers and international buyers, which decreased 8% for the year ended December 31, 2016, is indicative of the indirect impact of fluctuating currency exchange rates on international buyer behavior, which is difficult to estimate. Finally, GMS growth between international buyers and sellers in the same country remains the fastest growing category of international GMS. GMS between international buyers and sellers in the same country grew approximately 47% year-over-year during the year ended December 31, 2016 and has grown from our smallest category historically to be more similar in size to GMS between international buyers and sellers in different countries. We believe the robust growth in this GMS category demonstrates the progress we are making on our strategy to build and deepen local Etsy communities around the world.
Revenue increased $91.5 million, or 33.4%, to $365.0 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, of which 55.0% consisted of Seller Services revenue and 43.3% consisted of Markets revenue.
Markets revenue increased $25.6 million, or 19.3%, to $158.2 million in the year ended December 31, 2016 compared to the year ended December 31, 2015. This growth corresponded with a 19.0% increase in GMS to a total of $2.8 billion for the year ended December 31, 2016. As our GMS increased, our Markets revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue.
Seller Services revenue increased $64.2 million, or 47.0%, to $200.9 million in the year ended December 31, 2016 compared to the year ended December 31, 2015. The growth in Seller Services revenue was primarily driven by an increase in revenue from Direct Checkout, which continued to benefit from the integration of Paypal through the anniversary of this integration at the end of the fourth quarter. As this integration was a substantial driver of year-over-year Seller Services revenue growth, we expect Direct Checkout and Seller Services revenue growth to decelerate in 2017. Seller Services revenue also benefited from

47


the growth in revenue from Promoted Listings and Shipping Labels and, to a lesser extent, a modest contribution from Pattern by Etsy. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements. The increase in Shipping Label revenue reflects a combination of an increase in label volume and an increase in average margin per label. Seller Services revenue continued to outpace growth in Markets revenue during 2016. As of December 31, 2016, 51.7% of active sellers use one or more of our Seller Services compared to 48.1% of active sellers as of December 31, 2015. At December 31, 2016, 45.5% of active sellers used Direct Checkout, 15.9% of active sellers used Promoted Listings, 26.3% of active sellers in the United States and Canada used Shipping Labels and 2.5% of active sellers used Pattern. We expect modest contributions to revenue from recently launched Seller Services and tools in 2017.
Other revenue increased $1.7 million, or 39.2%, to $5.9 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, mainly due to the recognition of $1.7 million in revenue from accumulated unused gift card funds received from our third-party service provider. This represents the three-year cumulative value of gift cards that the third-party service provider has concluded are not likely to be redeemed. Future unused gift card revenue will be recognized monthly as earned and is not anticipated to be significant in future periods. This increase was partially offset by a reduction of processing fees from Paypal, a third-party payment processor, as a result of its integration into Direct Checkout.


Cost of Revenue
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Cost of revenue
 
$
96,979

 
$
123,328

 
$
26,349

 
27.2
%
Percentage of total revenue
 
35.5
%
 
33.8
%
 
 
 
 
Cost of revenue increased $26.3 million, or 27.2%, to $123.3 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of additional costs to support the increase in Direct Checkout revenue and, to a lesser extent, an increase in employee-related costs. Cost of revenue decreased as a percentage of revenue due to the leverage we achieved in costs related to our technology infrastructure and employee-related costs.
Operating Expenses
There were 1,043 total employees on December 31, 2016, compared with 819 on December 31, 2015.
Marketing
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Marketing
 
$
66,771

 
$
82,799

 
$
16,028

 
24.0
%
Percentage of total revenue
 
24.4
%
 
22.7
%
 
 
 
 
Marketing expenses increased $16.0 million, or 24.0%, to $82.8 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of an increased spend on brand marketing campaigns and affiliate marketing related to buyer acquisition, as well as an increase in employee-related expenses in our marketing team, which includes our public relations, communications and seller development teams.

48


Product development
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Product development
 
$
42,694

 
$
55,083

 
$
12,389

 
29.0
%
Percentage of total revenue
 
15.6
%
 
15.1
%
 
 
 
 
Product development expenses increased $12.4 million, or 29.0%, to $55.1 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of an increase in employee-related expenses in our product and engineering teams, including additional expenses resulting from the acquisition of Blackbird Technologies in September 2016.
General and administrative
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
General and administrative
 
$
68,939

 
$
86,180

 
$
17,241

 
25.0
%
Percentage of total revenue
 
25.2
%
 
23.6
%
 
 
 
 
General and administrative expenses increased $17.2 million, or 25.0%, to $86.2 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily driven by an increase in employee-related expenses, overhead related to our new office locations, including depreciation expense related to our new Brooklyn headquarters, and professional services mainly related to compliance with the Sarbanes-Oxley Act. This increase was partially offset by a one-time contribution of $3.5 million to Good Work Institute (formerly Etsy.org) during the first half of 2015. Removing the impact of this contribution, general and administrative expenses would have increased 31.7%. We expect general and administrative expenses as a percentage of revenue to decline in 2017.
Other Expense, net
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Other expense, net
 
$
(26,110
)
 
$
(20,453
)
 
$
5,657

 
(21.7
)%
Percentage of total revenue
 
(9.5
)%
 
(5.6
)%
 
 
 
 
Other expense, net was $26.1 million in the year ended December 31, 2015, mainly due to a foreign currency loss due to intercompany debt in connection with the revised global corporate structure that we implemented on January 1, 2015. The loss was in addition to the mark-to-market loss related to convertible warrants. As a result of the IPO, the convertible warrants are now classified as equity instruments and do not require additional mark-to-market adjustments. Other expense, net was $20.5 million in the year ended December 31, 2016, primarily as a result of a currency exchange loss related to the intercompany debt and cash settlements resulting in realized currency loss as well as interest expense largely associated with the build-to-suit lease accounting for our new corporate headquarters.

49


Provision for Income Taxes
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2015
 
2016
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Provision for income taxes
 
$
(26,069
)
 
$
(27,025
)
 
$
(956
)
 
3.7
%
Percentage of total revenue
 
(9.5
)%
 
(7.4
)%
 
 
 
 
Our income tax provision for the year ended December 31, 2015 and the year ended December 31, 2016 was $26.1 million and $27.0 million, respectively. The primary driver of the income tax provision was tax expense related to our updated corporate structure of $17.1 million for the years ended December 31, 2015 and 2016. For both periods, other drivers include the mix of income and losses in jurisdictions with a wide range of tax rates, the disallowance of the benefit of losses in certain foreign jurisdictions and the amount of non-deductible stock-based compensation expense.


Comparison of Years Ended December 31, 2014 and 2015
Revenue
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2014
 
2015
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
 
Markets
 
$
108,732

 
$
132,648

 
$
23,916

 
22.0
 %
Percentage of total revenue
 
55.6
%
 
48.5
%
 
 
 
 
Seller Services
 
$
82,502

 
$
136,608

 
$
54,106

 
65.6
 %
Percentage of total revenue
 
42.2
%
 
49.9
%
 
 
 
 
Other
 
$
4,357

 
$
4,243

 
$
(114
)
 
(2.6
)%
Percentage of total revenue
 
2.2
%
 
1.6
%
 
 
 
 
Total revenue
 
$
195,591

 
$
273,499

 
$
77,908

 
39.8
 %
GMS increased $456.4 million, or 23.6%, to $2.4 billion in the year ended December 31, 2015 compared to the year ended December 31, 2014. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2015 would have been 25.2%, or approximately 1.6 percentage points higher than the reported 23.6% growth. Supporting this growth, active sellers increased 15.5% to 1.6 million and active buyers increased 21.4% to 24.0 million for at December 31, 2015 compared to December 31, 2014.
During the year ended December 31, 2015, percent mobile visits increased as a percentage of total visits to approximately 60%, up from approximately 54% for the year ended December 31, 2014 and mobile GMS increased as a percentage of total GMS to approximately 43%, up from 37% for the year ended December 31, 2014. These increases were a result of increased mobile traffic and, to a lesser extent, improvements in our mobile offerings for Etsy buyers.
For the year ended December 31, 2015, international GMS decreased as a percentage of total GMS to 29.8%, from 30.9% for the year ended December 31, 2014. We believe that the impact of currency exchange rates contributed to the year-over-year decline in percent international GMS for the reasons described below. In addition, we believe weaker local currencies in key international markets continued to dampen the demand for U.S. dollar-denominated goods during the year ended December 31, 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 two to four percentage points for the year ended December 31, 2015.
Revenue increased $77.9 million, or 39.8%, to $273.5 million in the year ended December 31, 2015 compared to the year ended December 31, 2014, of which 49.9% consisted of Seller Services revenue and 48.5% consisted of Markets revenue.

50


Markets revenue increased $23.9 million, or 22.0%, to $132.6 million in the year ended December 31, 2015 compared to the year ended December 31, 2014. This growth corresponded with a 23.6% increase in GMS to a total of $2.4 billion for the year ended December 31, 2015. As our GMS increased, our Markets revenue increased, primarily due to growth in transaction fee revenue and, to a lesser extent, an increase in listing fee revenue.
Seller Services revenue increased $54.1 million, or 65.6%, to $136.6 million in the year ended December 31, 2015 compared to the year ended December 31, 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 in Promoted Listings revenue was due to the re-launch of the product at the end of the third quarter of 2014. The fourth quarter of 2015 was the first full quarter following the anniversary of the re-launch of Promoted Listings. The increase in Direct Checkout revenue reflects an increase in the number of Etsy sellers using the service and the increase in overall GMS. Additionally, Direct Checkout revenue benefited from our integration of PayPal during the fourth quarter of 2015. 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. As of December 31, 2015, 48.1% of active sellers use one or more of our Seller Services compared to 46.1% of active sellers as of December 31, 2014. As of December 31, 2015, 40.2% of active sellers used Direct Checkout, 16.7% of active sellers used Promoted Listings and 23.9% of active sellers in the United States and Canada used Shipping Labels.
Other revenue decreased $0.1 million, or 2.6%, to $4.2 million in the year ended December 31, 2015 compared to the year ended December 31, 2014, mainly the result of a decrease in processing fees received from Paypal, a third-party service provider, due to the integration of PayPal into Direct Checkout late in the fourth quarter of 2015.
Cost of Revenue
 
 
 
Year Ended 
 December 31,
 
Change
 
 
2014