10-Q 1 etsy3311710q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017
 
 
 
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) 

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 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,” “smaller reporting company” and “emerging growth 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 ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

The number of shares of common stock outstanding as of April 13, 2017 was 116,516,286.




Etsy, Inc.
Table of Contents

Note Regarding Forward-Looking Statements
 
 
Page
 
Part I - Financial Information
Item 1.
Consolidated Financial Statements (Unaudited)
 
Consolidated Balance Sheets as of December 31, 2016 and March 31, 2017
 
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2017
 
Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2017
 
Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2017
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2017
 
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
Part II - Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures
 
Exhibit Index
Unless the context otherwise requires, we use the terms “Etsy,” the “Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q, or Quarterly Report, to refer to Etsy, Inc. and, where appropriate, our consolidated subsidiaries.
See “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 Quarterly Report: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” “mobile visit” and “mobile GMS.”




NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report 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, cost-savings initiatives, new management team transition and plans, 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 report.

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 - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
Etsy, Inc.
Consolidated Balance Sheets (Unaudited)
(In thousands except share and per share amounts)
 
As of
December 31,
2016
 
As of
March 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
181,592

 
$
194,807

Short-term investments
100,494

 
81,145

Accounts receivable, net of allowance for doubtful accounts of $1,999 and $1,891 as of December 31, 2016 and March 31, 2017, respectively
26,426

 
25,085

Prepaid and other current assets
15,571

 
19,911

Deferred tax charge—current
17,132

 

Funds receivable and seller accounts
29,817

 
34,292

Total current assets
371,032

 
355,240

Restricted cash
5,341

 
5,341

Property and equipment, net of accumulated depreciation and amortization of $46,153 and $51,176 as of December 31, 2016 and March 31, 2017, respectively
126,407

 
127,168

Goodwill
35,657

 
35,970

Intangible assets, net of accumulated amortization of $4,209 and $5,674 as of December 31, 2016 and March 31, 2017, respectively
7,507

 
6,062

Deferred tax charge—net of current portion
34,264

 

Other assets
985

 
958

Total assets
$
581,193

 
$
530,739

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,978

 
$
6,371

Accrued expenses
24,179

 
22,638

Capital lease obligations—current
6,829

 
6,748

Funds payable and amounts due to sellers
29,817

 
34,292

Deferred revenue
5,648

 
5,777

Other current liabilities
6,557

 
5,327

Total current liabilities
84,008

 
81,153

Capital lease obligations—net of current portion
5,296

 
4,610

Deferred tax liabilities
65,068

 
65,034

Facility financing obligation
57,360

 
59,586

Other liabilities
24,704

 
25,308

Total liabilities
236,436

 
235,691

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2016 and March 31, 2017; 115,973,039 and 116,268,470 shares issued and outstanding as of December 31, 2016 and March 31, 2017, respectively)
116

 
116

Additional paid-in capital
442,510

 
447,648

Accumulated deficit
(116,341
)
 
(168,211
)
Accumulated other comprehensive income
18,472

 
15,495

Total stockholders’ equity
344,757

 
295,048

Total liabilities and stockholders’ equity
$
581,193

 
$
530,739



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

4


Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share amounts)
 
 
Three Months Ended 
 March 31,
 
2016
 
2017
Revenue
$
81,847

 
$
96,891

Cost of revenue
27,911

 
34,659

Gross profit
53,936

 
62,232

Operating expenses:
 
 
 
Marketing
15,847

 
23,454

Product development
12,230

 
18,116

General and administrative
19,076

 
22,763

Total operating expenses
47,153

 
64,333

Income (loss) from operations
6,783

 
(2,101
)
Other (expense) income:
 
 
 
Interest expense and amortization of deferred financing costs
(538
)
 
(2,591
)
Interest and other income
441

 
439

Foreign exchange gain
8,120

 
2,780

Total other income
8,023

 
628

Income (loss) before income taxes
14,806

 
(1,473
)
(Provision) benefit for income taxes
(13,614
)
 
1,052

Net income (loss)
$
1,192

 
$
(421
)
Net income (loss) per share attributable to common stockholders:
 
 
 
Basic
$
0.01

 
$
0.00

Diluted
$
0.01

 
$
0.00

Weighted average common shares outstanding:
 
 
 
Basic
112,129,470

 
115,696,024

Diluted
115,368,566

 
115,696,024

 

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

5


Consolidated Statements of Comprehensive Loss (Unaudited)
(In thousands)
 
 
Three Months Ended 
 March 31,
 
2016
 
2017
Net income (loss)
$
1,192

 
$
(421
)
Other comprehensive (loss) income:
 
 
 
Cumulative translation adjustment
(7,439
)
 
(2,955
)
Unrealized gains (losses) on marketable securities, net of tax
92

 
(22
)
Total other comprehensive loss
(7,347
)
 
(2,977
)
Comprehensive loss
$
(6,155
)
 
$
(3,398
)


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

6


Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(In thousands except share amounts)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total
 
 
Shares
 
Amount
Balance as of December 31, 2016
115,973,039

 
$
116

 
$
442,510

 
$
(116,341
)
 
$
18,472

 
$
344,757

Stock-based compensation

 

 
4,348

 

 

 
4,348

Exercise of vested options
207,970

 

 
600

 

 

 
600

Vesting of restricted stock units, net of shares withheld
87,461

 

 
(797
)
 

 

 
(797
)
Stock-based compensation—acquisitions

 

 
902

 

 

 
902

Cumulative effect adjustment

 

 
85

 
(51,449
)
 

 
(51,364
)
Other comprehensive loss

 

 

 

 
(2,977
)
 
(2,977
)
Net loss

 

 

 
(421
)
 

 
(421
)
Balance as of March 31, 2017
116,268,470

 
$
116

 
$
447,648

 
$
(168,211
)
 
$
15,495

 
$
295,048

 
 

 
 

 
 

 
 

 
 

 
 

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

7


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended 
 March 31,
 
2016
 
2017
Cash flows from operating activities
 
 
 
Net income (loss)
$
1,192

 
$
(421
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
2,581

 
4,043

Stock-based compensation expense—acquisitions
656

 
842

Depreciation and amortization expense
4,731

 
6,938

Bad debt expense
341

 
332

Foreign exchange gain
(8,120
)
 
(2,780
)
Amortization of debt issuance costs
45

 
56

Non-cash interest expense

 
2,145

Interest on marketable securities
(258
)
 
277

Loss on disposal of assets
492

 
49

Amortization of deferred tax charge
9,493

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
799

 
1,093

Funds receivable and seller accounts
(5,913
)
 
(4,351
)
Prepaid expenses and other current assets
472

 
(4,385
)
Other assets
(140
)
 
(28
)
Accounts payable
173

 
(3,404
)
Accrued and other current liabilities
(10,819
)
 
(2,234
)
Funds payable and amounts due to sellers
5,913

 
4,351

Deferred revenue
279

 
109

Other liabilities
903

 
677

Net cash provided by operating activities
2,820

 
3,309

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(10,870
)
 
(2,700
)
Development of internal-use software
(2,168
)
 
(3,956
)
Purchases of marketable securities
(108,289
)
 
(23,240
)
Sales of marketable securities
6,901

 
42,290

Net cash (used in) provided by investing activities
(114,426
)
 
12,394

Cash flows from financing activities
 
 
 
Repurchase of stock

 
(797
)
Proceeds from exercise of stock options
1,223

 
600

Payments on capitalized lease obligations
(1,355
)
 
(1,835
)
Deferred payments on acquisition of business
(649
)
 

Net cash used in financing activities
(781
)
 
(2,032
)
Effect of exchange rate changes on cash
(476
)
 
(456
)
Net (decrease) increase in cash and cash equivalents
(112,863
)
 
13,215

Cash and cash equivalents at beginning of period
271,244

 
181,592

Cash and cash equivalents at end of period
$
158,381

 
$
194,807

Supplemental non-cash disclosures
 
 
 
Equipment acquired under capital lease obligations
$
982

 
$
1,068

Stock-based compensation capitalized in development of capitalized software
$
123

 
$
306

Non-cash additions to development of internal-use software and property and equipment
$
1,966

 
$
358


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

8


Notes to Consolidated Financial Statements
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Etsy, Inc. (the “Company” or “Etsy”) was incorporated in Delaware in February 2006. Etsy offers markets, services and technology that empower creative entrepreneurs and shape a positive future for business. The Company generates revenue primarily from transaction and listing fees, Etsy Payments fees (formerly referred to as Direct Checkout fees), Promoted Listing fees and Shipping Label sales.
Basis of Consolidation
The consolidated financial statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
For the three months ended March 31, 2016, the Company reclassified $1.0 million of excess tax benefits from exercise of stock options from cash used in financing activities to cash provided by operating activities to conform to the current year presentation upon adoption of ASU 2016-09, Stock Compensation: Improvements to Employee Share-based Payment Accounting.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of March 31, 2017, the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2016 and 2017, the consolidated statements of cash flows for the three months ended March 31, 2016 and 2017 and the consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2017 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of March 31, 2017, results of operations for the three months ended March 31, 2016 and 2017 and cash flows for the three months ended March 31, 2016 and 2017. The financial data and the other information disclosed in these notes to the consolidated financial statements related to these three month periods are unaudited. These unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017 (the “Annual Report”).
During the first quarter of 2017, the Company adopted the accounting principles outlined within ASU 2016-16, Income Taxes: Intra-entity Transfers of Assets other than Inventory removing the requirement to capitalize previously reported deferred tax charges and recognize the associated amortization through the tax provision. There have been no additional material changes in the Company's significant accounting policies from those that were disclosed in the Annual Report.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition, income taxes, website development costs and internal-use software, purchase price allocations for business combinations, valuation of goodwill and intangible assets, leases and stock-based compensation. The Company evaluates its estimates and judgments on an ongoing basis and revises them when necessary. Actual results may differ from the original or revised estimates.

9


Etsy, Inc.
Notes to Consolidated Financial Statements

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

The Company's quarterly tax provision and quarterly estimate of its annual effective tax rate are subject to significant variations due to several factors, including variability in predicting its pretax and taxable income and the mix of jurisdictions to which those relate, changes of expenses or losses for which tax benefits are not recognized and changes in the laws, regulations and administrative practices of the jurisdictions in which the Company operates.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers, which replaces existing revenue recognition guidance. The new guidance is effective for the annual and interim periods beginning after December 15, 2017. Among other things, the updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company has performed a preliminary assessment over the Markets and Seller Services revenue streams and does not expect the adoption of this standard to have a material impact on its consolidated financial statements. The Company is also performing an assessment over data availability and presentation necessary to meet additional disclosure requirements. In addition, the Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact current conclusions.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires a reporting entity to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases to increase transparency and comparability. The new guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. Upon adoption of this standard, the Company expects to recognize, on a discounted basis, its minimum commitments under noncancelable operating leases on the consolidated balance sheets resulting in the recording of right of use assets and lease obligations. The Company is currently evaluating additional impacts the guidance will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The new guidance is effective for the annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, to clarify the definition of a business and provide guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is to be applied on a prospective basis and is effective for the annual and interim periods beginning after December 15, 2017. As the adoption of this standard will only impact prospective acquisitions, the Company does not anticipate this update to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the measurement of goodwill impairment by eliminating step two from the goodwill impairment test. The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The new guidance is effective for the annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company does not anticipate the update to have a material impact on its consolidated financial statements.

10


Etsy, Inc.
Notes to Consolidated Financial Statements

Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-based Payment Accounting, for share-based payment transactions that require a reporting entity to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement. The new guidance is effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted for financial statements as of the beginning of an interim or annual reporting period. The Company has adopted this standard in the first quarter of 2017. As a result of this updated guidance, the Company recorded $0.3 million of excess tax benefits to income tax expense, rather than additional paid-in capital, in the three months ended March 31, 2017. On a prospective basis, the Company has updated its calculation of diluted earnings per share to exclude excess tax benefits previously included in the calculation of assumed proceeds under the treasury stock method. The Company has elected to apply the updated guidance on cash flow classification of excess tax benefits as operating activities using a retrospective approach for consistent year-over-year comparability. The Company has elected to recognize forfeitures as they occur on a modified retrospective basis and to adopt the amendments on statutory withholding requirements on a prospective basis, both of which have no material impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-entity Transfers of Assets other than Inventory, which eliminated the exception that previously existed for the income tax consequences of intra-entity asset transfers other than inventory. The new guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted in annual reporting periods for which interim or annual financial statements have not been issued. The Company has adopted this standard in the first quarter of 2017. The amendments in this update have been applied on a modified retrospective basis through a cumulative effect adjustment recorded to retained earnings as of January 1, 2017 of $51.4 million, which represents the unamortized amount of the deferred tax charge asset on the balance sheet at December 31, 2016. Consequently, the adoption of this standard eliminates the recognition in the tax provision of $17.1 million in each year through 2019, the year through which the deferred tax charge was previously amortizable. Additionally, a deferred tax asset of $21.7 million was recognized which previously qualified for an exception that has been eliminated. A full valuation allowance for that deferred tax asset was also recognized resulting in no impact to the consolidated financial statements.
Note 2—Stock-based Compensation

The Company has granted stock options and restricted stock units under the Equity Incentive Plan (“2015 Plan”) in the three months ended March 31, 2017. As permitted by the 2015 Plan, the Board of Directors approved an increase of 5,798,651 shares available for issuance under the 2015 Plan as of January 3, 2017. At March 31, 2017, 23,347,913 shares were authorized under the 2015 Plan, and 17,073,943 shares were available for future grant.
In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance per ASU 2016-09. In reporting periods prior to 2017, the Company estimated forfeitures at the time of grant and revised in subsequent periods as necessary if actual forfeitures differed from estimates.
The fair value of options granted in each year using the Black-Scholes pricing model has been based on the following assumptions:
 
Three Months Ended 
 March 31,
 
2016
 
2017
Volatility
44.2% - 44.6%
 
42.2% - 42.7%
Risk-free interest rate
1.5% - 1.9%
 
2.1% - 2.2%
Expected term (in years)
6.0 - 6.1
 
6.3 - 6.3
Dividend rate
—%
 
—%
 


11


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table summarizes the activity for the Company's options:

 
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contract Term (in years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2016
9,339,567

 
$
7.89

 
 
 
 
Granted
1,251,451

 
10.51

 
 
 
 
Exercised
(207,970
)
 
2.89

 
 
 
 
Forfeited/Canceled
(62,280
)
 
12.63

 
 
 
 
Outstanding at March 31, 2017
10,320,768

 
8.28

 
6.84
 
$
34,332

Total exercisable at March 31, 2017
6,627,302

 
6.73

 
5.70
 
31,339


The following table summarizes the weighted average grant date fair value of options granted, intrinsic value of options exercised and fair value of awards vested in the three months ended March 31, 2016 and 2017 (in thousands except per share amounts):
 
Three Months Ended 
 March 31,
 
2016
 
2017
Weighted average grant date fair value of options granted
$
3.69

 
$
4.66

Intrinsic value of options exercised
2,426

 
1,732

Fair value of awards vested
3,335

 
3,790


The total unrecognized compensation at March 31, 2017 was $16.9 million, which will be recognized over a weighted-average period of 2.27 years.

The following table summarizes the activity for the Company's unvested RSUs:
 
Shares
 
Weighted-Average
Grant Date Fair Value
Unvested at December 31, 2016
3,135,181

 
$
10.70

Granted
1,169,906

 
10.78

Vested
(156,670
)
 
9.16

Forfeited/Canceled
(78,564
)
 
11.49

Unvested at March 31, 2017
4,069,853

 
10.77


The total unrecognized compensation at March 31, 2017 was $38.9 million, which will be recognized over a weighted-average period of 3.10 years.

Total stock-based compensation expense included in the consolidated statements of operations is as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2017
Cost of revenue
$
200

 
$
364

Marketing
178

 
444

Product development
857

 
2,020

General and administrative
2,002

 
2,057

Total stock-based compensation expense
$
3,237

 
$
4,885


Total stock-based compensation expense in the three months ended March 31, 2016 and 2017 includes $0.7 million and $0.8 million in acquisition-related stock-based compensation expense, respectively.

12


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 3—Income Taxes

The Company has adopted the provisions of ASU 2016-09 and ASU 2016-16 as of the beginning of the current fiscal year. Please refer to Note 1—Basis of Presentation and Summary of Significant Accounting Policies for additional detail regarding the adoption of these accounting standards and their impact on the consolidated financial statements.

The amount of unrecognized tax benefits included in the consolidated balance sheets increased $0.1 million in the three months ended March 31, 2017, from $23.6 million at December 31, 2016 to $23.7 million at March 31, 2017. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $11.9 million at March 31, 2017.
Note 4—Fair Value Measurements
The Company has characterized its investments in marketable securities, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the investment. Investments recorded in the accompanying consolidated balance sheet are categorized based on the inputs to valuation techniques as follows:
Level 1—These are investments where values are based on unadjusted quoted prices for identical assets in an active market that the Company has the ability to access.
Level 2—These are investments where values are based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
Level 3—These are liabilities where values are derived from techniques in which one or more significant inputs are unobservable.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and March 31, 2017 (in thousands):
 
As of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial Paper
$

 
$
2,997

 
$

 
$
2,997

Money market funds
98,161

 

 

 
98,161

U.S. Government bills
1,950

 

 

 
1,950

 
100,111

 
2,997

 

 
103,108

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
17,146

 

 
17,146

Corporate bonds

 
33,303

 

 
33,303

U.S. Government and agency bills
50,045

 

 

 
50,045

 
50,045

 
50,449

 

 
100,494

 
$
150,156

 
$
53,446

 
$

 
$
203,602

Liability
 
 
 
 
 
 
 
Post-combination compensation classified as liability
$

 
$

 
$
2,067

 
$
2,067

 
$

 
$

 
$
2,067

 
$
2,067


13


Etsy, Inc.
Notes to Consolidated Financial Statements

 
As of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial Paper
$

 
$
16,436

 
$

 
$
16,436

Money market funds
94,266

 

 

 
94,266

U.S. Government and agency bills
8,190

 

 

 
8,190

 
102,456

 
16,436

 

 
118,892

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
18,947

 

 
18,947

Corporate bonds

 
20,380

 

 
20,380

U.S. Government and agency bills
41,818

 

 

 
41,818

 
41,818

 
39,327

 

 
81,145

 
$
144,274

 
$
55,763

 
$

 
$
200,037

Liability
 
 
 
 
 
 
 
Post-combination compensation classified as a liability
$

 
$

 
$
2,007

 
$
2,007

 
$

 
$

 
$
2,007

 
$
2,007

Level 1 instruments include money market funds and AAA-rated U.S. Government and agency securities, which are valued based on inputs including quotes from broker-dealers or recently executed transactions in the same or similar securities.
Level 2 instruments include fixed-income funds consisting of investments in commercial paper and corporate bonds, which are valued based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
Level 3 instruments include post-combination compensation classified as a liability in connection with the acquisition of ALM. The post-combination compensation is classified as a liability due to its affiliation with a related put option, which will expire upon vesting of the underlying consideration, and its fair value is determined based on the fair value of the Company's common stock at the period-end reporting date, with adjustments included in general and administrative expenses.
The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):
 
Three Months Ended 
 March 31, 2017
Balance at beginning of period
$
2,067

Changes to liability-classified stock awards
(60
)
Balance at end of period
$
2,007



14


Etsy, Inc.
Notes to Consolidated Financial Statements


Note 5—Marketable Securities
Short-term investments and certain cash equivalents consist of marketable securities that are available-for-sale. The cost and fair value of available-for-sale securities were as follows as of the dates indicated (in thousands):
 
Cost
 
Gross
Unrealized
Holding Loss
 
Gross
Unrealized
Holding Gain
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
2,997

 
$

 
$

 
$
2,997

 
2,997

 

 

 
2,997

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
17,146

 

 

 
17,146

Corporate bonds
33,318

 
(16
)
 
1

 
33,303

U.S. Government and agency bills
50,059

 
(15
)
 
1

 
50,045

 
100,523

 
(31
)
 
2

 
100,494

 
$
103,520

 
$
(31
)
 
$
2

 
$
103,491

March 31, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
16,436

 
$

 
$

 
$
16,436

U.S. Government and agency bills
8,189

 

 
1

 
8,190

 
24,625

 

 
1

 
24,626

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
18,947

 

 

 
18,947

Corporate bonds
20,402

 
(23
)
 
1

 
20,380

U.S. Government and agency bills
41,848

 
(30
)
 

 
41,818

 
81,197

 
(53
)
 
1

 
81,145

 
$
105,822

 
$
(53
)
 
$
2

 
$
105,771

The Company’s investments in marketable securities consist primarily of investments in fixed-income funds and AAA-rated U.S. Government and agency bills. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. The Company evaluates fair values for each individual security in the investment portfolio.

15


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 6—Net Income (Loss) Per Share
The following table presents the calculation of basic and diluted net income (loss) per share for periods presented (in thousands except share and per share amounts):
 
Three Months Ended 
 March 31,
 
2016
 
2017
Numerator:
 
 
 
Net income (loss)
$
1,192

 
$
(421
)
Net income allocated to participating securities under the two-class method
(7
)
 

Net income (loss) applicable to common stockholders
$
1,185

 
$
(421
)
 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding—basic (1)
112,129,470

 
115,696,024

Common equivalent shares from options to purchase common stock and restricted stock units
3,161,056

 

Dilutive effect of assumed conversion of warrants
78,040

 

Weighted average common shares outstanding—diluted (1)
115,368,566

 
115,696,024

 
 
 
 
Net income (loss) per share applicable to common stockholders—basic
$
0.01

 
$
0.00

Net income (loss) per share applicable to common stockholders—diluted
$
0.01

 
$
0.00


(1)
618,718 shares of unvested stock are considered participating securities and are excluded from basic and diluted shares outstanding for the three months ended March 31, 2016.

The following potential common shares were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 
Three Months Ended 
 March 31,
 
2016
 
2017
Stock options
4,394,503

 
9,543,393

Restricted stock units
613,861

 
3,547,176

Total anti-dilutive securities
5,008,364

 
13,090,569

Note 7—Segment and Geographic Information
The Company has determined it operates as one operating and reportable segment for purposes of allocating resources and evaluating financial performance.
Revenue by country is based on the billing address of the seller. The following table summarizes revenue by geographic area (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2017
United States
$
63,041

 
$
71,523

International
18,806

 
25,368

Revenue
$
81,847

 
$
96,891

No individual international country’s revenue exceeded 10% of total revenue. All significant long-lived assets are located in the United States.

16


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 8—Contingencies
Non-Income Tax Contingencies
The Company had reserves of $0.3 million and $0.4 million at December 31, 2016 and March 31, 2017, respectively, for certain non-income tax obligations, representing management’s best estimate of its potential liability. The Company could also be subject to examination in various jurisdictions related to non-income tax matters. The resolution of these types of matters, if in excess of the recorded reserve, could have an adverse impact on the Company’s business.
Legal Proceedings

On May 13, 2015, a purported securities class action complaint (Altayyar v. Etsy, Inc., et al., Docket No. 1:15-cv-02785) was filed in the United States District Court for the Eastern District of New York against the Company and certain officers. The complaint was brought on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of the Company's common stock from April 16, 2015 through and including May 10, 2015. It asserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false or misleading statements and omissions with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement and actions taken by third-party brands against Etsy sellers for trademark or copyright infringement. 

On October 22, 2015, the court appointed a lead plaintiff and lead plaintiff’s counsel. On January 21, 2016, the lead plaintiff filed an amended class action complaint alleging false or misleading statements or omissions with respect to substantially the same topics as the original complaint. The amended complaint adds certain outside directors and underwriters as defendants, expands the purported class period to be April 16, 2015 to August 4, 2015, inclusive, and asserts violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On April 5, 2016, defendants moved to dismiss the amended complaint.  On March 24, 2017, the court entered a judgment dismissing the amended complaint in its entirety, with prejudice, based on an opinion filed March 16, 2017.   On April 21, 2017, Plaintiffs filed a notice of appeal in the United States Court of Appeals for the Second Circuit. The Company and the named officers and directors intend to defend themselves vigorously against this action. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome.

On July 21, 2015, a purported securities class action complaint (Cervantes v. Dickerson, et.al., Case No. CIV 534768) was filed in the Superior Court of State of California, County of San Mateo against the Company, certain officers, directors and underwriters. The complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933.  As in the Altayyar litigation, the complaint alleges misrepresentations in the Company’s Registration Statement on Form S-1 and Prospectus with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys' fees. On December 7, 2015, the Company and the underwriter defendants moved to stay the Cervantes action on the grounds of forum non conveniens.

On November 5, 2015, another purported securities class action complaint (Weiss v. Etsy et al., No. CIV 536123) was filed in the Superior Court of State of California, County of San Mateo. The Weiss complaint names as defendants the Company and the same officers, directors and underwriters named in the Cervantes complaint, and also asserts violations of Sections 11 and 15 of the Securities Act of 1933 based on allegedly false or misleading statements or omissions with respect to, among other things, merchandise for sale on the Company's website that may be counterfeit or constitute trademark or copyright infringement. On December 24, 2015, the court consolidated the Cervantes and Weiss actions. The Company and the named officers and directors intend to defend themselves vigorously against these consolidated actions. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome of this matter and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from an unfavorable outcome. On February 3, 2016, the court granted the Company’s motion to stay the consolidated actions. 

17


Etsy, Inc.
Notes to Consolidated Financial Statements

In addition, from time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation, regardless of their success, could have an adverse effect on the Company’s consolidated results of operations or cash flows in the period the claims or litigation are resolved. As of March 31, 2017, the Company does not believe that there are any material litigation exposures relating to these other claims.
Note 9—Subsequent Event

On April 30, 2017, the Board of Directors approved a plan to increase efficiency and streamline the Company's cost structure. As a result, the Company identified savings that will be realized through a combination of headcount reductions of approximately 80 positions (approximately 8% of the total workforce) and a reduction in internal program expenses. The Company expects to incur employee severance charges and other exit costs of $4.5 million to $6 million, largely made up of cash expenditures, which will be recognized through the end of 2017.

The Board of Directors has appointed Josh Silverman, a director on the Board since November 2016, as President and Chief Executive Officer as of May 3, 2017. Mr. Silverman succeeds Chad Dickerson, who will step down as President, Chief Executive Officer and Chair of the Board of Directors as of May 3, 2017. Fred Wilson, who joined the Etsy Board in June 2007 and served as lead independent director since October 2014, will succeed Mr. Dickerson as Chair of the Board. In addition, John Allspaw, Chief Technology Officer, will be leaving the Company.


18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017. 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 Quarterly Report, particularly in the “Risk Factors” section. For more information regarding key factors affecting our performance, see“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting our Performance” in our Annual Report on Form 10-K, which we incorporate by reference.
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 in 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. 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 April 2017, we launched 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 Etsy Payments (formerly referred to as 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 by Etsy, 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 March 31, 2017, our platform, which includes our markets, our services and our technology, connected 1.8 million active Etsy sellers and 29.7 million active Etsy buyers, in nearly every country in the world. In the three months ended March 31, 2017, Etsy sellers generated GMS of $719.0 million, of which approximately 51% came from purchases made on mobile devices. We are a global company and 32.1% of our GMS in the three months ended March 31, 2017 came from transactions where either an Etsy seller or an Etsy buyer were located outside of the United States.

19


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 and financial metrics we use are:
 
 
Three Months Ended 
 March 31,
 
2016
 
2017
 
 
 
 
 
(in thousands, except percentages)
GMS
$
629,853

 
$
719,037

Revenue
$
81,847

 
$
96,891

Markets revenue
$
35,730

 
$
40,759

Seller Services revenue
$
43,533

 
$
53,947

Net income (loss)
$
1,192

 
$
(421
)
Adjusted EBITDA
$
14,751

 
$
9,722

 
 
 
 
Active sellers
1,603

 
1,801

Active buyers
25,027

 
29,669

Percent mobile visits
63
%
 
66
%
Percent mobile GMS
47
%
 
51
%
Percent international GMS
30.3
%
 
32.1
%
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 income (loss) adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; and foreign exchange gain. 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 income (loss), the most directly comparable financial measure calculated in accordance with GAAP.
Active Sellers
An active seller is an Etsy seller who has incurred at least one charge from us in the last 12 months. Charges include transaction fees, listing fees and fees for Etsy Payments, 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.

20


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 ALM and Etsy Wholesale as well as 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.

21


Results of Operations
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. For more information regarding the components of our results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations” in the Annual Report, which we incorporate by reference.
 
 
Three Months Ended 
 March 31,
 
2016
 
2017
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
Markets
$
35,730

 
$
40,759

Seller Services
43,533

 
53,947

Other
2,584

 
2,185

Total revenue
81,847

 
96,891

Cost of revenue
27,911

 
34,659

Gross profit
53,936

 
62,232

Operating expenses:
 
 
 
Marketing
15,847

 
23,454

Product development
12,230

 
18,116

General and administrative
19,076

 
22,763

Total operating expenses
47,153

 
64,333

Income (loss) from operations
6,783

 
(2,101
)
Other income, net
8,023

 
628

Income (loss) before income taxes
14,806

 
(1,473
)
(Provision) benefit for income taxes
(13,614
)
 
1,052

Net income (loss)
$
1,192

 
$
(421
)
 
 
 
 
 
Three Months Ended 
 March 31,
 
2016
 
2017
Revenue:
 
 
 
Markets
43.7
 %
 
42.1
 %
Seller Services
53.2

 
55.7

Other
3.2

 
2.3

Total revenue
100.0

 
100.0

Cost of revenue
34.1

 
35.8

Gross profit
65.9

 
64.2

Operating expenses:
 
 
 
Marketing
19.4

 
24.2

Product development
14.9

 
18.7

General and administrative
23.3

 
23.5

Total operating expenses
57.6

 
66.4

Income (loss) from operations
8.3

 
(2.2
)
Other income, net
9.8

 
0.6

Income (loss) before income taxes
18.1

 
(1.5
)
(Provision) benefit for income taxes
(16.6
)
 
1.1

Net income (loss)
1.5
 %
 
(0.4
)%


22


Comparison of Three Months Ended March 31, 2016 and 2017
Revenue
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
 
Markets
 
$
35,730

 
$
40,759

 
$
5,029

 
14.1
 %
Percentage of total revenue
 
43.7
%
 
42.1
%
 
 
 
 
Seller Services
 
$
43,533

 
$
53,947

 
$
10,414

 
23.9
 %
Percentage of total revenue
 
53.2
%
 
55.7
%
 
 
 
 
Other
 
$
2,584

 
$
2,185

 
$
(399
)
 
(15.4
)%
Percentage of total revenue
 
3.2
%
 
2.3
%
 
 
 
 
Total revenue
 
$
81,847

 
$
96,891

 
$
15,044

 
18.4
 %
GMS increased $89.2 million, or 14.2%, to $719.0 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. 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 in the first quarter of 2017 would have been 15.2%, or approximately 1 percentage point higher than reported growth. Supporting this growth in GMS, active sellers increased 12.4% to 1.8 million and active buyers increased 18.5% to 29.7 million at March 31, 2017 compared to March 31, 2016. GMS grew slower than anticipated in the first quarter of 2017 due to average converting visit value, conversion rates and visits that were below expectations.
During the three months ended March 31, 2017, percent mobile visits increased as a percentage of total visits to approximately 66% up from approximately 63% for the three months ended March 31, 2016, and mobile GMS increased as a percentage of total GMS to approximately 51%, up from approximately 47% for the three months ended March 31, 2016. 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 each continued to grow faster than desktop GMS during the three months ended March 31, 2017. We believe that we will continue to see the gap between mobile visits and mobile GMS narrow over time. 
For the three months ended March 31, 2017, international GMS increased as a percentage of total GMS to 32.1%, from 30.3% for the three months ended March 31, 2016. The improved performance in percent international GMS was largely driven by GMS growth between buyers and sellers outside of the U.S., both in the same country and cross-border and GMS growth between U.S. buyers and international sellers. GMS growth between international buyers and sellers in the same country remains the fastest growing category of international GMS, increasing 44% year-over-year during the first quarter. This category has grown from our smallest category historically to be similar in size to GMS between international buyers and sellers in different countries and GMS between U.S. sellers and international buyers. We believe the robust growth in this category demonstrates the progress we are making on our strategy to build and deepen local Etsy communities around the world. We also continue to believe the decline of GMS between U.S. sellers and international buyers, which decreased 1% year-over-year during the first quarter, is indicative of the indirect impact of fluctuating currency exchange rates on international buyer behavior, which is difficult to estimate.
Revenue increased $15.0 million, or 18.4%, to $96.9 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, of which 42.1% of the total consisted of Markets revenue and 55.7% consisted of Seller Services revenue.
Markets revenue increased $5.0 million, or 14.1%, to $40.8 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This growth corresponded with a 14.2% increase in GMS to a total of $719.0 million for the three months ended March 31, 2017. 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 $10.4 million, or 23.9%, to $53.9 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The growth in Seller Services revenue was primarily driven by an increase in revenue from Etsy Payments, largely driven by overall GMS growth trends and increased seller adoption. Seller

23


Services revenue also benefited from the growth in revenue from Promoted Listings and, to a lesser extent, Pattern and Shipping Labels. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements. Pattern revenue was fully incremental during the first quarter of 2017 due to its launch in April 2016, with the first paid subscriptions beginning in May. The increase in Shipping Label revenue reflects a combination of an increase in label volume and an increase in average margin per label. Growth in Seller Services revenue continued to outpace growth in Markets revenue in the first quarter of 2017. We expect to see modest contributions to revenue related to new product launches and types of Seller Services, including Pattern. We do not expect the incremental revenue related to these new product launches and types of Seller Services to be material in comparison to total revenue in 2017.
Other revenue decreased 15.4% to $2.2 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. During the three months ended March 31, 2016, $1.7 million of revenue was recognized from accumulated unused gift card funds received from our third-party service provider, representing the three-year cumulative value of gift cards that the third-party service provider concluded were not likely to be redeemed. Ongoing gift card revenue is recognized monthly as earned and does not have a significant contribution to total revenue. During the three months ended March 31, 2017, $1.3 million of revenue was recognized related to our partnership with Google in conjunction with our Google Shopping offering for sellers. Revenue related to our partnership with Google is not expected to be significant through the remainder of 2017. The overall decrease in other revenue was also driven by a reduction of processing fees from Paypal as a result of its integration into Etsy Payments.

Cost of Revenue
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Cost of revenue
 
$
27,911

 
$
34,659

 
$
6,748

 
24.2
%
Percentage of total revenue
 
34.1
%
 
35.8
%
 
 
 
 
Cost of revenue increased $6.7 million, or 24.2%, to $34.7 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily as a result of additional costs to support the increase in Etsy Payments revenue and, to a lesser extent, an increase in employee-related costs. Cost of revenue increased as a percentage of revenue largely due to the increase in Etsy Payments revenue, a lower-margin revenue stream, driving higher associated costs as well as increased employee-related costs.
Operating Expenses
There were 1,062 total employees on March 31, 2017, compared with 1,043 on December 31, 2016.
Marketing
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Marketing
 
$
15,847

 
$
23,454

 
$
7,607

 
48.0
%
Percentage of total revenue
 
19.4
%
 
24.2
%
 
 
 
 
Marketing expenses increased $7.6 million, or 48.0%, to $23.5 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily as a result of increased spend on brand marketing campaigns and digital marketing related to buyer acquisition, as well as an increase in employee-related expenses on our marketing team, which includes our public relations, communications and seller development teams.



24


Product development
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Product development
 
$
12,230

 
$
18,116

 
$
5,886

 
48.1
%
Percentage of total revenue
 
14.9
%
 
18.7
%
 
 
 
 
Product development expenses increased $5.9 million, or 48.1%, to $18.1 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, 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, Inc. (“Blackbird”) in September 2016. We expect additional product development expenses in 2017 as compared to 2016 as a result of expenses related to the acquisition of Blackbird.
General and administrative
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
General and administrative
 
$
19,076

 
$
22,763

 
$
3,687

 
19.3
%
Percentage of total revenue
 
23.3
%
 
23.5
%
 
 
 
 
General and administrative expenses increased $3.7 million, or 19.3%, to $22.8 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily driven by an increase in employee-related expenses, partially offset by lower professional services expenses and post-combination stock compensation expense related to the acquisition of ALM year-over-year.
Other Income, net
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Other income, net
 
$
8,023

 
$
628

 
$
(7,395
)
 
(92.2
)%
Percentage of total revenue
 
9.8
%
 
0.6
%
 
 
 
 
Other income, net was $8.0 million in the three months ended March 31, 2016 mainly due to a foreign currency gain due to intercompany debt in connection with the global corporate structure that we implemented on January 1, 2015. Other income, net was $0.6 million in the three months ended March 31, 2017 mainly due to a foreign currency gain related to the intercompany debt, partially offset by interest expense largely associated with the build-to-suit lease accounting related to our corporate headquarters.

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(Provision) Benefit for Income Taxes
 
 
 
Three Months Ended
March 31,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
(Provision) benefit for income taxes
 
$
(13,614
)
 
$
1,052

 
$
14,666

 
(107.7
)%
Percentage of total revenue
 
(16.6
)%
 
1.1
%
 
 
 
 
Our income tax provision and benefit for the three months ended March 31, 2016 and March 31, 2017 was $13.6 million and $1.1 million, respectively. The primary driver of our income tax provision for the three months ended March 31, 2016 was tax expense related to our global corporate structure of $9.5 million. For both periods, other drivers include forecasted pretax income, the disallowance of the benefit of losses in certain foreign jurisdictions, the amount of non-deductible stock-based compensation expense and a benefit related to our research and development tax credit.
Non-GAAP Financial Measures
Adjusted EBITDA
In this quarterly report, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income (loss) adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; and foreign exchange gain. Below is a reconciliation of Adjusted EBITDA to net income (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.
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;
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 gain;
Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense; 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 income (loss) and our other GAAP results.


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The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2017
 
 
 
 
 
 
 
(in thousands)
Net income (loss)
 
$
1,192

 
$
(421
)
Excluding:
 
 
 
 
Interest and other non-operating expense, net (1)
 
97

 
2,152

Provision (benefit) for income taxes
 
13,614

 
(1,052
)
Depreciation and amortization (1)
 
4,731

 
6,938

Stock-based compensation expense
 
2,581

 
4,043

Stock-based compensation expense—acquisitions
 
656

 
842

Foreign exchange gain
 
(8,120
)
 
(2,780
)
Adjusted EBITDA
 
$
14,751

 
$
9,722


(1)
Included in interest and depreciation expense amounts above, interest and depreciation expense related to our headquarters under build-to-suit accounting requirements, which commenced in May 2016, in the three months ended March 31, 2016 and 2017 is as follows:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2017
 
 
 
 
 
 
 
(in thousands)
Interest expense
 
$

 
$
2,145

Depreciation
 

 
819

Liquidity and Capital Resources
The following table shows our cash and cash equivalents, short-term investments, accounts receivable and working capital:
 
As of
March 31, 2017
 
(in thousands)
Cash and cash equivalents
$
194,807

Short-term investments
81,145

Accounts receivable, net
25,085

Net working capital
274,087

As of March 31, 2017, our cash and cash equivalents, a majority of which were held in cash deposits and money market funds, were held for future capital investments and working capital purposes.
We invest our excess working capital funds into short-term instruments, including fixed-income funds and AAA-rated U.S. Government and agency securities aligned with our investment strategy. These investments are intended to allow us to preserve our principal, maintain the ability to meet our liquidity needs, deliver positive yields and continue to provide us with direct fiduciary control. In accordance with our investment policy, all investments have maturities no longer than 24 months, with the average maturity of these investments maintained at 12 months or less.
Sources of Liquidity
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 Agreement (described below under “Credit Facility”), will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in our “Risk Factors” in this report.

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Credit Facility
In May 2014, we entered into a $35.0 million senior secured revolving credit facility pursuant to a Revolving Credit and Guaranty Agreement with several lenders, or the Credit Agreement. In March 2015, we amended the Credit Agreement to increase the credit facility to $50.0 million. In December 2015, we amended the Credit Agreement to clarify certain provisions relating to permitted investments and to make other immaterial updates. As amended, the Credit Agreement will mature in May 2019. The amended Credit Agreement includes a letter of credit sublimit of $10.0 million and a swingline loan sublimit of $15.0 million. A description of the terms of the Credit Agreement is included in “Note 7—Debt” in our Annual Report on Form 10-K.
As of May 2, 2017, no amounts have been drawn under the credit facility.
Historical Cash Flows
 
Three Months Ended 
 March 31,
 
2016
 
2017
 
 
 
 
 
(in thousands)
Cash provided by (used in):
 
 
 
Operating activities
$
2,820

 
$
3,309

Investing activities
(114,426
)
 
12,394

Financing activities
(781
)
 
(2,032
)
Net Cash Provided by Operating Activities
Our cash flows from operations are largely dependent on the amount of revenue generated on our platform. Net cash provided by operating activities in each period presented has been influenced by changes in accounts receivable, funds receivable and customer accounts, prepaid expenses and other current assets, accounts payable and accrued liabilities, and funds payable and amounts due to customers.
Net cash provided by operating activities was $3.3 million in the three months ended March 31, 2017, as a result of the net loss of $0.4 million, depreciation and amortization expense, stock-based compensation expense, foreign exchange gain and other non-cash charges of $11.9 million and changes in our operating assets and liabilities that used $8.2 million in cash.
Net cash provided by operating activities was $2.8 million in the three months ended March 31, 2016, as a result of the net income of $1.2 million, depreciation and amortization expense, stock-based compensation expense, amortization of deferred tax charge and other non-cash charges of $9.9 million and changes in our operating assets and liabilities that used $8.3 million in cash.
Net Cash (Used in) Provided by Investing Activities
Our primary investing activities consist of sales, maturities and purchases of short-term marketable securities, capital expenditures, including purchases of property and equipment and investments in website development and internal-use software to support our overall business growth. Investments in website development and internal-use software and purchases of property and equipment may vary from period to period due to timing of the expansion of our operations.
Net cash provided by investing activities was $12.4 million in the three months ended March 31, 2017. This was primarily attributable to net sales of marketable securities of $19.1 million, mainly due to increased investments in instruments with shorter-term maturities, classified as cash equivalents, in the first quarter of 2017 as we continue to monitor interest rate changes. This increase was offset by $6.7 million in capital expenditures, including $2.7 million for purchases of property and equipment and $4.0 million for website development and internal-use software as we continue to invest in projects adding new features and functionality to the Etsy platform.
Net cash used in investing activities was $114.4 million in the three months ended March 31, 2016. This was primarily attributable to net purchases of marketable securities of $101.4 million, as we made a significant investment of our excess working capital into short-term marketable securities in the first quarter of 2016 with the implementation of our investment strategy, and $13.0 million in capital expenditures, including $10.9 million for purchases of property and equipment, largely related to the build-out of our Brooklyn headquarters, and $2.1 million for website development and internal-use software.

28


Net Cash Used in Financing Activities
Our primary financing activities include financing of capitalized leases for computer equipment, proceeds from exercise of stock options and shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units.
Net cash used in financing activities was $2.0 million in the three months ended March 31, 2017. This was primarily attributable to payments on capitalized lease obligations of $1.8 million and stock repurchases of vested RSUs withheld to satisfy tax obligations of $0.8 million, partially offset by proceeds from the exercise of stock options of $0.6 million.
Net cash used in financing activities was $0.8 million in the three months ended March 31, 2016. This was primarily attributable to payments on capitalized lease obligations of $1.3 million and a deferred payment related to ALM of $0.6 million, offset by proceeds from the exercise of stock options of $1.2 million.
Off Balance Sheet Arrangements
As of March 31, 2017, we did not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
In January 2017, we entered into a three-year contractual commitment to integrate and utilize cross-channel marketing software with an aggregate future payment of $6.3 million. As of March 31, 2017, there were no other material changes in commitments under contractual obligations, compared to the contractual obligations disclosed in the Annual Report.
Unrecognized tax benefits totaled $23.6 million and $23.7 million at December 31, 2016 and March 31, 2017, respectively. While the ultimate resolution and timing of these unrecognized tax positions are uncertain, we do not expect this balance to significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, income taxes, website development costs and internal-use software, purchase price allocations for business combinations, valuation of goodwill and intangible assets, leases and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For information regarding changes to our significant accounting policies, please refer to “Note 1—Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements. For a summary of our significant accounting policies, see our Annual Report on Form 10-K.
Recent Accounting Pronouncements
For information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements, please refer to “Note 1—Basis of Presentation and Summary of Significant Accounting Policies ” in the Notes to Consolidated Financial Statements.

29


Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the three months ended March 31, 2017, compared to those discussed in the Annual Report, except as described below.
Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in currency exchange rates, particularly changes in the Pound Sterling and Euro. Fluctuations in currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. On January 1, 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, which resulted in a U.S. dollar-denominated intercompany debt on a Euro-denominated ledger that may be subject to continued currency exchange rate risk. A 10% increase or decrease in current exchange rates could result in an increase or decrease to currency exchange (loss) gain of $44.3 million.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017. “Disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the first quarter of 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

30


PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See “Note 8—ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements.
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, and the other information in this Quarterly Report on Form 10-Q. 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 a net loss of $0.4 million for the three months ended March 31, 2017 and incurred net losses of $29.9 million,$54.1 million, $15.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of March 31, 2017, we had an accumulated deficit of $168.2 million. We may not achieve or maintain profitability in the future. Our operating expenses may increase if we increase our marketing efforts, expand our operations, hire additional employees 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 and the success of any cost-reduction activities;

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

our success in executing on our Markets and Seller Services strategies and the impact of any changes in our strategy;

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;

31



any failure or delay in transitioning our new management team and any future management team changes; 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 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.

32


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, 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


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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 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 launched 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.
Our marketing efforts to help grow our business 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. Our marketing initiatives may become increasingly expensive as we continue to invest in 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

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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 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.

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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.
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 Etsy Payments or PayPal. In the United States and other countries where Etsy Payments is available, Etsy buyers can use Etsy Payments 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 is processed through Etsy Payments, and a significant portion of our revenue is derived from Etsy Payments.
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 Etsy Payments, which required Etsy to develop a short-term manual solution. 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

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the fees we charge to Etsy sellers, some Etsy sellers may stop using Etsy Payments, stop listing new items for sale or even close their accounts altogether.
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 Etsy Payments. 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 Etsy Payments.
As we expand the availability of Etsy Payments 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 Etsy Payments 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. For the three months ended March 31, 2017, approximately 86% 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.

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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.
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;

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the person-to-person commerce experience;

our reputation for trustworthiness;

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.

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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 Etsy Payments with fraudulent credit card data even if the associated financial institution approved the credit card transaction. Although we attempt to detect or challenge fraudulent 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 and retain the employees we need to maintain our competitive position.

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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;

negative perceptions based on recent headcount reductions or changes in senior management;

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

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 new CEO or CFO who are expected to start shortly, 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 current CTO leadership transition, 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.

We have experienced a number of changes to our senior management team. If we are unable to effectively transition and integrate our new executive officers, our business and financial results could be adversely impacted.

We are in the process of transitioning the role of Chief Executive Officer. In addition, we will be adding a new Chief Financial Officer and Chief Technology Officer. As a result, certain members of our senior management team will be new to Etsy and, in some cases, learning about our business and the Company. If there is any failure or delay in transitioning to our new management team or if we fail to integrate quickly and effectively, our business and financial results could be adversely impacted.
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. 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. 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 not achieve the intended results of our recently announced plan to increase efficiency and streamline our cost structure.
 
During the second quarter of 2017, we commenced a plan to increase efficiency and streamline our cost structure, which includes a combination of headcount reductions and reductions in internal program expenses. If we are unable to realize the expected outcomes from these or other efforts, our business and operating results may be harmed.

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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.
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.

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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 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

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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 8—ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements in this Quarterly Report, 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 Quarterly 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 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

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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.
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.

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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 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;


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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.
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 April 13, 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 Quarterly Report, as well as how those results and metrics compare to analyst and investor expectations;

the review of our financial guidance by our new management team and our decision to delay issuing financial guidance in the first quarter earnings release;

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, including as a result of the review of guidance by our new senior management team;

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;

the amount and timing of our operating expenses and the success of any cost-savings actions we take;

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;


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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 Quarterly 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 8—ContingenciesLegal Proceedings” in the Notes to Consolidated Financial Statements in this Quarterly Report, 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.
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.


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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 Di