10-Q 1 etsy6301710q.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 June 30, 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, a smaller reporting company or an emerging growth 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 July 14, 2017 was 118,257,427.




Etsy, Inc.
Table of Contents
 
 
Page
 
Note Regarding Forward-Looking Statements
 
Part I - Financial Information
Item 1.
Consolidated Financial Statements (Unaudited)
 
Consolidated Balance Sheets as of December 31, 2016 and June 30, 2017
 
Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2017
 
Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2016 and 2017
 
Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2017
 
Consolidated Statements of Cash Flows for the six months ended June 30, 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, (“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 Quarterly 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 Quarterly Report. Given these uncertainties, you should read this Quarterly Report in its entirety and not place undue reliance on any forward-looking statements in this Quarterly 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 Quarterly Report. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly 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 Quarterly Report. We disclaim any obligation to update forward-looking statements.


3


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
June 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
181,592

 
$
226,885

Short-term investments
100,494

 
60,353

Accounts receivable, net of allowance for doubtful accounts of $1,999 and $2,278 as of December 31, 2016 and June 30, 2017, respectively
26,426

 
24,990

Prepaid and other current assets
15,571

 
28,916

Deferred tax charge—current
17,132

 

Funds receivable and seller accounts
29,817

 
35,084

Total current assets
371,032

 
376,228

Restricted cash
5,341

 
5,341

Property and equipment, net of accumulated depreciation and amortization of $46,153 and $56,667 as of December 31, 2016 and June 30, 2017, respectively
126,407

 
129,074

Goodwill
35,657

 
37,438

Intangible assets, net of accumulated amortization of $4,209 and $3,274 as of December 31, 2016 and June 30, 2017, respectively
7,507

 
5,301

Deferred tax charge—net of current portion
34,264

 

Other assets
985

 
935

Total assets
$
581,193

 
$
554,317

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

 
$
7,595

Accrued expenses
24,179

 
30,377

Capital lease obligations—current
6,829

 
7,345

Funds payable and amounts due to sellers
29,817

 
35,084

Deferred revenue
5,648

 
5,789

Other current liabilities
6,557

 
2,134

Total current liabilities
84,008

 
88,324

Capital lease obligations—net of current portion
5,296

 
6,191

Deferred tax liabilities
65,068

 
65,028

Facility financing obligation
57,360

 
60,668

Other liabilities
24,704

 
25,827

Total liabilities
236,436

 
246,038

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2016 and June 30, 2017; 115,973,039 and 117,819,400 shares issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)
116

 
118

Additional paid-in capital
442,510

 
462,578

Accumulated deficit
(116,341
)
 
(156,542
)
Accumulated other comprehensive income
18,472

 
2,125

Total stockholders’ equity
344,757

 
308,279

Total liabilities and stockholders’ equity
$
581,193

 
$
554,317



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 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Revenue
$
85,349

 
$
101,692

 
$
167,196

 
$
198,583

Cost of revenue
29,098

 
35,724

 
57,009

 
70,383

Gross profit
56,251

 
65,968

 
110,187

 
128,200

Operating expenses:
 
 
 
 
 
 
 
Marketing
17,205

 
27,521

 
33,052

 
50,975

Product development
11,840

 
21,754

 
24,070

 
39,870

General and administrative
22,537

 
28,411

 
41,613

 
51,174

Total operating expenses
51,582

 
77,686

 
98,735

 
142,019

Income (loss) from operations
4,669

 
(11,718
)
 
11,452

 
(13,819
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense and amortization of deferred financing costs
(1,803
)
 
(2,696
)
 
(2,341
)
 
(5,287
)
Interest and other income
470

 
543

 
911

 
982

Foreign exchange (loss) gain
(6,386
)
 
16,103

 
1,734

 
18,883

Total other (expense) income
(7,719
)
 
13,950

 
304

 
14,578

(Loss) income before income taxes
(3,050
)
 
2,232

 
11,756

 
759

(Provision) benefit for income taxes
(4,261
)
 
9,437

 
(17,875
)
 
10,489

Net (loss) income
$
(7,311
)
 
$
11,669

 
$
(6,119
)
 
$
11,248

Net (loss) income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
0.10

 
$
(0.05
)
 
$
0.10

Diluted
$
(0.06
)
 
$
0.10

 
$
(0.05
)
 
$
0.10

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
113,045,888

 
116,933,216

 
112,760,531

 
116,453,790

Diluted
113,045,888

 
120,723,938

 
112,760,531

 
120,424,631

 

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

5


Consolidated Statements of Comprehensive Loss (Unaudited)
(In thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Net (loss) income
$
(7,311
)
 
$
11,669

 
$
(6,119
)
 
$
11,248

Other comprehensive income (loss):
 
 
 
 
 
 
 
Cumulative translation adjustment
4,011

 
(13,381
)
 
(3,428
)
 
(16,336
)
Unrealized gains (losses) on marketable securities, net of tax
16

 
11

 
108

 
(11
)
Total other comprehensive income (loss)
4,027

 
(13,370
)
 
(3,320
)
 
(16,347
)
Comprehensive loss
$
(3,284
)
 
$
(1,701
)
 
$
(9,439
)
 
$
(5,099
)


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

 

 
11,117

 

 

 
11,117

Exercise of vested options
1,592,327

 
2

 
6,374

 

 

 
6,376

Vesting of restricted stock units, net of shares withheld
254,034

 

 
(2,029
)
 

 

 
(2,029
)
Stock-based compensation—acquisitions

 

 
1,683

 

 

 
1,683

Conversion of liability-classified restricted shares upon vesting

 

 
2,838

 

 

 
2,838

Cumulative effect adjustment

 

 
85

 
(51,449
)
 

 
(51,364
)
Other comprehensive loss

 

 

 

 
(16,347
)
 
(16,347
)
Net income

 

 

 
11,248

 

 
11,248

Balance as of June 30, 2017
117,819,400

 
$
118

 
$
462,578

 
$
(156,542
)
 
$
2,125

 
$
308,279

 
 

 
 

 
 

 
 

 
 

 
 

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

7


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2016
 
2017
Cash flows from operating activities
 
 
 
Net (loss) income
$
(6,119
)
 
$
11,248

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
6,033

 
10,592

Stock-based compensation expense—acquisitions
1,472

 
2,455

Depreciation and amortization expense
9,834

 
13,598

Bad debt expense
681

 
863

Foreign exchange gain
(1,734
)
 
(18,883
)
Amortization of debt issuance costs
91

 
110

Non-cash interest expense
1,287

 
4,368

Interest on marketable securities
(573
)
 
302

Loss on disposal of assets
766

 
89

Amortization of deferred tax charge
9,267

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
135

 
1,008

Funds receivable and seller accounts
(3,630
)
 
(4,436
)
Prepaid expenses and other current assets
453

 
(13,172
)
Other assets
593

 
(54
)
Accounts payable
(5,804
)
 
(2,282
)
Accrued and other current liabilities
1,288

 
3,928

Funds payable and amounts due to sellers
3,630

 
4,436

Deferred revenue
469

 
27

Other liabilities
1,442

 
1,251

Net cash provided by operating activities
19,581

 
15,448

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(26,278
)
 
(3,593
)
Development of internal-use software
(5,611
)
 
(6,604
)
Purchases of marketable securities
(108,216
)
 
(29,462
)
Sales of marketable securities
19,799

 
69,290

Net cash (used in) provided by investing activities
(120,306
)
 
29,631

Cash flows from financing activities
 
 
 
Repurchase of stock for tax on RSU vesting
(180
)
 
(2,028
)
Proceeds from exercise of stock options
2,894

 
6,376

Payments on capital lease obligations
(2,810
)
 
(3,742
)
Deferred payments on acquisition of business
(649
)
 

Payments on facility financing obligation

 
(1,224
)
Net cash used in financing activities
(745
)
 
(618
)
Effect of exchange rate changes on cash
(2,292
)
 
832

Net (decrease) increase in cash and cash equivalents
(103,762
)
 
45,293

Cash and cash equivalents at beginning of period
271,244

 
181,592

Cash and cash equivalents at end of period
$
167,482

 
$
226,885

Supplemental non-cash disclosures
 
 
 
Equipment acquired under capital lease obligations
$
2,074

 
$
5,152

Stock-based compensation capitalized in development of capitalized software
$
267

 
$
525

Non-cash additions to development of internal-use software and property and equipment
$
9,800

 
$
176

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 is a global creative commerce platform. Etsy builds markets, services and economic opportunity for creative entrepreneurs. 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 six months ended June 30, 2016, the Company reclassified $0.5 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 June 30, 2017, the consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2016 and 2017, the consolidated statements of cash flows for the six months ended June 30, 2016 and 2017 and the consolidated statement of changes in stockholders’ equity for the six months ended June 30, 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 June 30, 2017, results of operations for the three and six months ended June 30, 2016 and 2017 and cash flows for the six months ended June 30, 2016 and 2017. The results from these interim periods are not necessarily indicative of the results to be anticipated for the full annual period or any future period. The financial data and the other information disclosed in these notes to the consolidated financial statements related to these three and six 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 stock-based compensation and restructuring and other exit costs. 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 (“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 of its Markets and Seller Services revenue streams and, while the Company is still finalizing the identification of its performance obligations, it does not expect the adoption of this standard to have a material impact on its revenue recognition on an ongoing basis. The Company is also performing an assessment over data availability and the presentation that will be necessary to meet additional disclosure requirements pursuant to this guidance. In addition, the Company continues to monitor additional changes, modifications, clarifications or interpretations related to this guidance 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 whether there are any additional impacts this 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 this guidance will have on its consolidated financial statements, but does not expect it to have a significant impact on its consolidated financial statements because its balance of restricted cash does not change significantly from period to period.
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 that this update will 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 expects to adopt this guidance in the fourth quarter of 2017 and does not anticipate the update to have a material impact on its consolidated financial statements.

10


Etsy, Inc.
Notes to Consolidated Financial Statements

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting, to increase comparability and provide clarity on whether changes in the terms or conditions in a share-based payment award require a reporting entity to apply modification guidance per FASB Accounting Standards Codification Topic 718. The new guidance is to be applied on a prospective basis, 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 this guidance will have on its 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 adopted this standard in the first quarter of 2017. As a result of this updated guidance, the Company recorded $2.6 million and $2.9 million of excess tax benefits to income tax expense, rather than additional paid-in capital, in the three and six months ended June 30, 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 granted stock options and restricted stock units (“RSUs”) under its 2015 Equity Incentive Plan (“2015 Plan”) in the three months ended June 30, 2017. As permitted by the 2015 Plan, the Board of Directors approved an increase of 5,798,651 shares to the total number of shares available for issuance under the 2015 Plan as of January 3, 2017. At June 30, 2017, 23,347,913 shares were authorized under the 2015 Plan, and 13,407,187 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.

11


Etsy, Inc.
Notes to Consolidated Financial Statements

The fair value of options granted in the periods presented below using the Black-Scholes pricing model has been based on the following assumptions:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Volatility
44.3% - 44.6%
 
41.7% - 44.2%
 
44.2% - 44.6%
 
41.7% - 44.2%
Risk-free interest rate
1.2% - 1.5%
 
1.9% - 2.0%
 
1.2% - 1.9%
 
1.9% - 2.2%
Expected term (in years)
5.5 - 6.3
 
5.5 - 6.3
 
5.5 - 6.3
 
5.5 - 6.3
Dividend rate
—%
 
—%
 
—%
 
—%
 
The following table summarizes the activity for the Company's options during the period presented below:
 
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
5,473,601

 
10.77

 
 
 
 
Exercised
(1,592,327
)
 
4.00

 
 
 
 
Forfeited/Canceled
(718,334
)
 
10.80

 
 
 
 
Outstanding at June 30, 2017
12,502,507

 
9.47

 
6.60
 
$
71,404

Total exercisable at June 30, 2017
6,069,330

 
7.87

 
3.59
 
45,027

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 and six months ended June 30, 2016 and 2017 (in thousands except per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Weighted average grant date fair value of options granted
$
4.09

 
$
4.73

 
$
3.78

 
$
4.71

Intrinsic value of options exercised
3,722

 
11,135

 
6,110

 
12,866

Fair value of awards vested
2,873

 
6,695

 
6,209

 
10,485

The total unrecognized compensation expense at June 30, 2017 related to the Company's options was $29.6 million, which will be recognized over an estimated weighted-average amortization period of 3.44 years.
The following table summarizes the activity for the Company's unvested RSUs during the period presented below:
 
Shares
 
Weighted-Average
Grant Date Fair Value
Unvested at December 31, 2016
3,135,181

 
$
10.70

Granted
1,775,586

 
11.14

Vested
(433,174
)
 
9.39

Forfeited/Canceled
(473,653
)
 
10.50

Unvested at June 30, 2017
4,003,940

 
11.06

The total unrecognized compensation expense at June 30, 2017 related to the Company's unvested RSUs was $38.8 million, which will be recognized over an estimated weighted-average amortization period of 3.03 years.

12


Etsy, Inc.
Notes to Consolidated Financial Statements

Total stock-based compensation expense included in the consolidated statements of operations for the periods presented below is as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Cost of revenue
$
250

 
$
398

 
$
451

 
$
762

Marketing
221

 
528

 
402

 
972

Product development
1,026

 
2,053

 
1,883

 
4,073

General and administrative
2,771

 
5,183

 
4,769

 
7,240

Total stock-based compensation expense
$
4,268

 
$
8,162

 
$
7,505

 
$
13,047

Total stock-based compensation expense in the three months ended June 30, 2016 and 2017 includes $0.8 million and $1.6 million in acquisition-related stock-based compensation expense, respectively. Total stock-based compensation expense in the six months ended June 30, 2016 and 2017 includes $1.5 million and $2.5 million in acquisition-related stock-based compensation expense, respectively.
Total stock-based compensation expense in the three and six months ended June 30, 2017 includes $1.7 million of costs associated with the Actions (as defined below) approved by the Board of Directors during the second quarter of 2017 discussed in “Note 9—Restructuring and Other Exit Costs.”
Note 3—Income Taxes

The Company 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.
Included in the tax benefit for the three and six months ended June 30, 2017 is a discrete benefit of $3.0 million related to the costs discussed in “Note 9—Restructuring and Other Exit Costs.”
The amount of unrecognized tax benefits included in the consolidated balance sheets increased $0.3 million in the six months ended June 30, 2017, from $23.6 million at December 31, 2016 to $23.9 million at June 30, 2017. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $23.9 million at June 30, 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.

13


Etsy, Inc.
Notes to Consolidated Financial Statements

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and June 30, 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

 
As of June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial Paper
$

 
$
32,570

 
$

 
$
32,570

Money market funds
88,819

 

 

 
88,819

U.S. Government and agency bills
20,177

 

 

 
20,177

 
108,996

 
32,570

 

 
141,566

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
9,764

 

 
9,764

Corporate bonds

 
17,335

 

 
17,335

U.S. Government and agency bills
33,254

 

 

 
33,254

 
33,254

 
27,099

 

 
60,353

 
$
142,250

 
$
59,669

 
$

 
$
201,919

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 was classified as a liability due to its affiliation with a related put option, which expired upon vesting of the underlying consideration in the second quarter of 2017, and its fair value was previously 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.

14


Etsy, Inc.
Notes to Consolidated Financial Statements

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):
 
Six Months Ended 
 June 30, 2017
Balance at beginning of period
$
2,067

Changes to liability-classified stock awards
771

Conversion of liability-classified restricted shares upon vesting
(2,838
)
Balance at end of period
$


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

June 30, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
32,570

 
$

 
$

 
$
32,570

U.S. Government and agency bills
20,177

 

 

 
20,177

 
52,747

 

 

 
52,747

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
9,764

 

 

 
9,764

Corporate bonds
17,349

 
(14
)
 

 
17,335

U.S. Government and agency bills
33,280

 
(26
)
 

 
33,254

 
60,393

 
(40
)
 

 
60,353

 
$
113,140

 
$
(40
)
 
$

 
$
113,100

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 (Loss) Income Per Share
The following table presents the calculation of basic and diluted net (loss) income per share for periods presented (in thousands except share and per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(7,311
)
 
$
11,669

 
$
(6,119
)
 
$
11,248

Net income allocated to participating securities under the two-class method

 
(17
)
 

 
(16
)
Net (loss) income applicable to common stockholders—basic
(7,311
)
 
11,652

 
(6,119
)
 
11,232

Dilutive effect of net income allocated to participating securities under the two-class method

 
17

 

 
16

Change in fair value of liability classified restricted stock

 
832

 

 
771

Net (loss) income applicable to common stockholders—diluted
$
(7,311
)
 
$
12,501

 
$
(6,119
)
 
$
12,019

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic (1)
113,045,888

 
116,933,216

 
112,760,531

 
116,453,790

Common equivalent shares from options to purchase common stock and restricted stock units

 
2,921,081

 

 
3,118,640

Dilutive effect of assumed conversion of restricted stock units

 
844,331

 

 
838,890

Dilutive effect of assumed conversion of restricted stock from acquisition

 
25,310

 

 
13,311

Weighted average common shares outstanding—diluted
113,045,888

 
120,723,938

 
112,760,531

 
120,424,631

 
 
 
 
 
 
 
 
Net (loss) income per share applicable to common stockholders—basic
$
(0.06
)
 
$
0.10

 
$
(0.05
)
 
$
0.10

Net (loss) income per share applicable to common stockholders—diluted
$
(0.06
)
 
$
0.10

 
$
(0.05
)
 
$
0.10

(1)
172,445 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the three and six months ended June 30, 2017.
The following potential common shares were excluded from the calculation of diluted net (loss) income per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Stock options
11,129,114

 
6,201,891

 
11,155,837

 
4,451,613

Restricted stock units
1,941,768

 
648,762

 
1,395,452

 
1,065,495

Warrants
36,590

 

 
67,261

 

Total anti-dilutive securities
13,107,472

 
6,850,653

 
12,618,550

 
5,517,108


16


Etsy, Inc.
Notes to Consolidated Financial Statements

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 for the periods presented (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
United States
$
64,773

 
$
73,546

 
$
127,814

 
$
145,068

International
20,576

 
28,146

 
39,382

 
53,515

Revenue
$
85,349

 
$
101,692

 
$
167,196

 
$
198,583

No individual country’s revenue other than the United States exceeded 10% of total revenue for the periods presented. All significant long-lived assets are located in the United States.
Note 8—Contingencies
Non-Income Tax Contingencies
The Company had reserves of $0.3 million and $0.4 million at December 31, 2016 and June 30, 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 August 2, 2017, Plaintiffs appealed to 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,

17


Etsy, Inc.
Notes to Consolidated Financial Statements

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. 
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. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business.
Note 9—Restructuring and Other Exit Costs
On April 30, 2017, the Board of Directors approved a plan to increase efficiency and streamline the Company's cost structure through headcount reductions and a reduction in internal program expenses (the “May Actions”). On June 16, 2017, the Board of Directors approved additional initiatives that are designed to improve focus on key strategic growth opportunities (together with the May Actions, the “Actions”). The Actions included total headcount reductions of 245 positions or 23% of the total workforce as of December 31, 2016, closing A Little Market (“ALM”), a market in France, and closing or consolidating certain international offices.
In connection with the Actions, the Company expects to incur restructuring and other exit costs, comprised of employee severance, stock compensation modifications and other exit costs, of $12.3 million to $16.6 million, largely made up of cash expenditures. For the three months ended June 30, 2017, $11.3 million of these costs have been incurred, including $9.0 million of severance charges, $1.7 million of stock modification charges and $0.6 million of other exit costs. The remaining $1.0 million to $5.3 million of expected costs and all remaining cash payments are expected to be recognized over the remainder of 2017. The remaining range of expected costs relates primarily to uncertainty in the amount of exit costs that will be recognized in connection with the ultimate disposition of one of the Company's international offices.

18


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table displays restructuring and other exit costs recorded related to the Actions and a rollforward of the charges to the accrued expenses balance as of June 30, 2017 (in thousands):
 
Severance Charge
 
Stock-Based Compensation
 
Other Exit Costs
 
Total
Balance, December 31, 2016
$

 
$

 
$

 
$

Total restructuring and other exit costs
8,972

 
1,668

 
620

 
11,260

Costs charged against equity/assets

 
(1,668
)
 

 
(1,668
)
Cash payments
(2,110
)
 

 
(278
)
 
(2,388
)
Balance, June 30, 2017
$
6,862

 
$

 
$
342

 
$
7,204

Total restructuring and other exit costs related to the Actions included in the consolidated statements of operations are as follows (in thousands):
 
Three and Six Months Ended 
 
June 30, 2017
Cost of revenue
$
694

Marketing
2,349

Product development
3,101

General and administrative
5,116

Total restructuring and other exit costs
$
11,260


19


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
Business
Etsy builds markets, services and economic opportunity for creative entrepreneurs. 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. Our six key geographic markets are the United States, Canada, United Kingdom, France, Germany and Australia. Our top six purchase categories based on GMS are (from largest to smallest): clothing and accessories, home and living, jewelry, craft supplies, art and collectibles, and paper and party supplies. Each of our top three categories accounted for over $500 million in GMS over the last 12 months.
Our top priority is to grow our core Etsy.com market, especially within our six key geographic markets. We are focused on winning the purchase occasions that center around celebrations, gifting and style. We want to empower our passionate community of 1.8 million Etsy sellers to compete and win against mass retailers through four key initiatives:
Improving trust and reliability on Etsy.com. We want to ensure that the Etsy brand delivers trust and reliability throughout the buying experience.
Enhancing search and discovery. Helping buyers better navigate the 45 million items on Etsy.com is a key area of focus.
Building world-class marketing capabilities. We are focused on Search Engine Optimization, digital acquisition marketing and email to increase traffic to Etsy.com.
Providing best-in-class seller tools and services. We plan to continue to invest in tools and Seller Services that enable Etsy sellers to start, manage and scale their businesses.
Our revenue is diversified, generated from a mix of market activities and Seller Services. 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 the seller pays for each item listed on Etsy.com. Seller Services revenue includes the fees Etsy sellers pay us for services, which include Etsy Payments (formerly called 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.
Quarter Highlights
As of June 30, 2017, our platform, which includes our markets, our services and our technology, connected 1.8 million active Etsy sellers and 30.6 million active Etsy buyers, in nearly every country in the world. In the three and six months ended June 30, 2017, Etsy sellers generated GMS of $748.0 million and $1.5 billion, respectively, of which approximately 51% in each period came from purchases made on mobile devices. We are a global company and 32% of our GMS in the three and six months ended June 30, 2017 came from transactions where either an Etsy seller or an Etsy buyer were located outside of the United States.
In May 2017, we made key changes in management, appointing a new Chief Executive Officer, Josh Silverman, and a new Chief Financial Officer, Rachel Glaser. In July 2017, we appointed Mike Fisher as our new Chief Technology Officer.

20



We are focused on creating a more agile organization. On April 30, 2017, the Board of Directors approved a plan to increase efficiency and streamline the Company's cost structure through headcount reductions and a reduction in third party and internal program expenses (the “May Actions”). On June 16, 2017, the Board of Directors approved additional initiatives that are designed to improve focus on key strategic growth opportunities (together with the May Actions, the “Actions”). We believe our newly streamlined organizational structure will allow us to execute faster on our key initiatives, and in recent months, we have increased the pace of experiments. The Actions included:
Headcount reductions. Since May 2017, we have reduced our headcount by approximately 245 positions, or approximately 23% of our total headcount at the end of 2016.
Streamlining international operations. We plan to close ALM at the end of September 2017 in order to focus on one core Etsy market in France. We are also closing our office in Melbourne, Australia and have reduced the marketing staff footprint in our key international markets. We remain committed to driving growth in our key international markets and plan to leverage our centralized product development and marketing initiatives resources to support our efforts in our key international markets.
Driving meaningful annualized cost savings. As a result of the Actions, we have identified approximately $20 million in 2017 expense reductions, which are expected to result in approximately $35 million in annualized cost savings. These savings will be realized through a combination of headcount reductions, reduced third-party expenses and programming costs.
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 
 June 30,
 
% Growth
Y/Y
 
Six Months Ended 
 June 30,
 
% Growth
Y/Y
 
2016
 
2017
 
 
 
2016
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
GMS
$
669,704

 
$
748,029

 
11.7
 %
 
$
1,298,871

 
$
1,467,066

 
12.9
 %
Revenue
$
85,349

 
$
101,692

 
19.1
 %
 
$
167,196

 
$
198,583

 
18.8
 %
Markets revenue
$
37,405

 
$
42,069

 
12.5
 %
 
$
73,135

 
$
82,828

 
13.3
 %
Seller Services revenue
$
47,069

 
$
58,816

 
25.0
 %
 
$
90,602

 
$
112,763

 
24.5
 %
Net (loss) income
$
(7,311
)
 
$
11,669

 
(259.6
)%
 
$
(6,119
)
 
$
11,248

 
(283.8
)%
Adjusted EBITDA
$
14,040

 
$
12,696

 
(9.6
)%
 
$
28,791

 
$
22,418

 
(22.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Active sellers
1,654

 
1,834

 
10.9
 %
 
1,654

 
1,834

 
10.9
 %
Active buyers
26,104

 
30,584

 
17.2
 %
 
26,104

 
30,584

 
17.2
 %
Percent mobile visits
64
%
 
65
%
 
100
 bps
 
63
%
 
66
%
 
300
 bps
Percent mobile GMS
47
%
 
51
%
 
400
 bps
 
47
%
 
51
%
 
400
 bps
Percent international GMS
31
%
 
32
%
 
100
 bps
 
31
%
 
32
%
 
100
 bps
GMS
Gross merchandise sales (“GMS”) is the dollar value of items sold in our markets within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by Etsy. GMS is largely driven by transactions in our Markets and is not directly impacted by Seller Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our markets, we believe that GMS is an indicator of the success of Etsy sellers, the satisfaction of Etsy buyers, the health of our ecosystem and the scale and growth of our business.
Adjusted EBITDA
Adjusted EBITDA represents our net (loss) income adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); and restructuring and other exit costs. See “Non-GAAP Financial Measures” for information regarding our use of

21


Adjusted EBITDA, including its limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated in accordance with GAAP.
Active Sellers
An active seller is an Etsy seller who has incurred at least one charge from us in the last 12 months. Charges include transaction fees, listing fees and fees for 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.
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. When calculating percent mobile GMS, we do not take into account refunds associated with canceled transactions. 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. When calculating percent international GMS, we do not take into account refunds associated with canceled transactions. 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.

22


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. We have included in “Comparison of Three Months Ended June 30, 2016 and 2017” below non-GAAP cost of revenue, marketing expenses, product development expenses and general and administrative expenses, each excluding restructuring and other exit costs. See “Non-GAAP Financial Measures” for a reconciliation of these measures to cost of revenue, marketing expenses, product development expenses and general and administrative expenses, respectively, the most directly comparable financial measures calculated in accordance with GAAP. 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
Markets
$
37,405

 
$
42,069

 
$
73,135

 
$
82,828

Seller Services
47,069

 
58,816

 
90,602

 
112,763

Other
875

 
807

 
3,459

 
2,992

Total revenue
85,349

 
101,692

 
167,196

 
198,583

Cost of revenue
29,098

 
35,724

 
57,009

 
70,383

Gross profit
56,251

 
65,968

 
110,187

 
128,200

Operating expenses:
 
 
 
 
 
 
 
Marketing
17,205

 
27,521

 
33,052

 
50,975

Product development
11,840

 
21,754

 
24,070

 
39,870

General and administrative
22,537

 
28,411

 
41,613

 
51,174

Total operating expenses
51,582

 
77,686

 
98,735

 
142,019

Income (loss) from operations
4,669

 
(11,718
)
 
11,452

 
(13,819
)
Other (expense) income, net
(7,719
)
 
13,950

 
304

 
14,578

(Loss) income before income taxes
(3,050
)
 
2,232

 
11,756

 
759

(Provision) benefit for income taxes
(4,261
)
 
9,437

 
(17,875
)
 
10,489

Net (loss) income
$
(7,311
)
 
$
11,669

 
$
(6,119
)
 
$
11,248

 
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2017
 
2016
 
2017
Revenue:
 
 
 
 
 
 
 
Markets
43.8
 %
 
41.4
 %
 
43.7
 %
 
41.7
 %
Seller Services
55.1

 
57.8

 
54.2

 
56.8

Other
1.0

 
0.8

 
2.1

 
1.5

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue
34.1

 
35.1

 
34.1

 
35.4

Gross profit
65.9

 
64.9

 
65.9

 
64.6

Operating expenses:
 
 
 
 
 
 
 
Marketing
20.2

 
27.1

 
19.8

 
25.7

Product development
13.9

 
21.4

 
14.4

 
20.1

General and administrative
26.4

 
27.9

 
24.9

 
25.8

Total operating expenses
60.4

 
76.4

 
59.1

 
71.5

Income (loss) from operations
5.5

 
(11.5
)
 
6.8

 
(7.0
)
Other (expense) income, net
(9.0
)
 
13.7

 
0.2

 
7.3

(Loss) income before income taxes
(3.6
)
 
2.2

 
7.0

 
0.4

(Provision) benefit for income taxes
(5.0
)
 
9.3

 
(10.7
)
 
5.3

Net (loss) income
(8.6
)%
 
11.5
 %
 
(3.7
)%
 
5.7
 %


23


Comparison of Three Months Ended June 30, 2016 and 2017
Revenue
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
 
Markets
 
$
37,405

 
$
42,069

 
$
4,664

 
12.5
 %
Percentage of total revenue
 
43.8
%
 
41.4
%
 
 
 
 
Seller Services
 
$
47,069

 
$
58,816

 
$
11,747

 
25.0
 %
Percentage of total revenue
 
55.1
%
 
57.8
%
 
 
 
 
Other
 
$
875

 
$
807

 
$
(68
)
 
(7.8
)%
Percentage of total revenue
 
1.0
%
 
0.8
%
 
 
 
 
Total revenue
 
$
85,349

 
$
101,692

 
$
16,343

 
19.1
 %
GMS increased $78.3 million, or 11.7%, to $748.0 million in the three months ended June 30, 2017 compared to the three months ended June 30, 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 second quarter of 2017 would have been 12.6%, or approximately one percentage point higher than reported growth. Supporting this growth in GMS, active sellers increased 10.9% to 1.8 million and active buyers increased 17.2% to 30.6 million at June 30, 2017 compared to June 30, 2016. We expect GMS growth deceleration to stabilize in the second half of 2017, with third quarter GMS growth higher than second quarter GMS growth.
During the three months ended June 30, 2017, percent mobile visits increased as a percentage of total visits to approximately 65% up from approximately 64% for the three months ended June 30, 2016, and mobile GMS increased as a percentage of total GMS to approximately 51%, up from approximately 47% for the three months ended June 30, 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 web continued to be the largest contributor to both overall visits and mobile GMS. Mobile GMS growth during the second quarter of 2017 was approximately 20%, with mobile web and mobile app GMS each continuing to grow significantly faster than desktop GMS during the period. Mobile web and mobile Buy on Etsy app conversion rates increased but desktop conversion rates decreased and, as a result, our aggregate conversion rate declined slightly in the three months ended June 30, 2017 compared to the three months ended June 30, 2016. We expect conversion rates to increase across both mobile and desktop in the second half of 2017.
For the three months ended June 30, 2017, international GMS increased as a percentage of total GMS to approximately 32%, from approximately 31% for the three months ended June 30, 2016. During the three months ended June 30, 2017, the growth in percent international GMS was largely driven by GMS growth between U.S. buyers and international sellers and GMS growth between buyers and sellers outside of the United States, both in the same country and cross-border. GMS growth between international buyers and sellers in the same country remained the fastest growing category of international GMS, up approximately 39% year-over-year during the second quarter. International GMS was up approximately 18% in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, growing faster than overall GMS. We believe the growth in this category demonstrates the progress we are making on our strategy to build and deepen local Etsy communities in our key international markets.
Revenue increased $16.3 million, or 19.1%, to $101.7 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, of which 41.4% of the total consisted of Markets revenue and 57.8% consisted of Seller Services revenue. We continue to expect revenue growth to outpace GMS and operating expense growth for the remainder of 2017 and to accelerate compared to the first half of 2017.
Markets revenue increased $4.7 million, or 12.5%, to $42.1 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016. This growth corresponded with a 11.7% increase in GMS to a total of $748.0 million for the three months ended June 30, 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 $11.7 million, or 25.0%, to $58.8 million in the three months ended June 30, 2017 compared to the three months ended June 30, 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. The share of GMS processed

24


through our Etsy Payments platform was 85% in the second quarter, up from 76% in the second quarter of 2016, primarily due to the transition of all sellers in eligible countries to the platform. Seller 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. The increase in Pattern revenue reflects increased subscriptions since its launch in April 2016. The increase in Shipping Label revenue reflects a combination of an increase in label volume and, to a lesser extent, an increase in average margin per label. Growth in Seller Services revenue continued to outpace growth in Markets revenue in the second quarter of 2017. We expect continued Seller Services revenue growth during the second half of the year and we expect Seller Services revenue to grow at a faster rate than GMS and Markets revenue, primarily driven by Promoted Listings and Etsy Payments.
Other revenue remained relatively flat for the three months ended June 30, 2017 compared to the three months ended June 30, 2016.
Cost of Revenue
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Cost of revenue
 
$
29,098

 
$
35,724

 
$
6,626

 
22.8
%
Percentage of total revenue
 
34.1
%
 
35.1
%
 
 
 
 
Cost of revenue increased $6.6 million, or 22.8%, to $35.7 million in the three months ended June 30, 2017 compared to the three months ended June 30, 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, including $0.7 million of restructuring and other exit costs associated with the Actions. Excluding the impact of restructuring and other exit costs, non-GAAP cost of revenue increased $5.9 million, or 20.4% to $35.0 million, representing 34.4% of total revenue. Cost of revenue increased as a percentage of revenue largely due to increased employee-related costs and professional services.
Operating Expenses
We had 877 total employees on July 26, 2017, which reflects the majority of the headcount reductions resulting from the Actions, compared with 1,062 total employees on March 31, 2017.
Marketing
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Marketing
 
$
17,205

 
$
27,521

 
$
10,316

 
60.0
%
Percentage of total revenue
 
20.2
%
 
27.1
%
 
 
 
 
Marketing expenses increased $10.3 million, or 60.0%, to $27.5 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily as a result of increased spend on digital marketing related to buyer acquisition and an increase in employee-related expenses for our marketing team, including $2.3 million of restructuring and other exit costs associated with the Actions. Excluding the impact of restructuring and other exit costs, non-GAAP marketing expenses increased $8.0 million, or 46.3% to $25.2 million, representing 24.8% of total revenue. During the second quarter, we decided to pause our investment in brand marketing for the remainder of 2017 and a portion of the spend earmarked for brand was re-allocated to digital acquisition marketing.

25


Product development
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Product development
 
$
11,840

 
$
21,754

 
$
9,914

 
83.7
%
Percentage of total revenue
 
13.9
%
 
21.4
%
 
 
 
 
Product development expenses increased $9.9 million, or 83.7%, to $21.8 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily as a result of an increase in employee-related expenses for our product and engineering teams, including $3.1 million of restructuring and other exit costs associated with the Actions, and additional expenses resulting from the acquisition of Blackbird Technologies, Inc. (“Blackbird”) in September 2016.We expect to incur additional product development expenses through the third quarter of 2017 as compared to 2016 as a result of expenses related to the acquisition of Blackbird. Excluding the impact of restructuring and other exit costs, non-GAAP product development expenses increased $6.8 million, or 57.5% to $18.7 million, representing 18.3% of total revenue.
General and administrative
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
General and administrative
 
$
22,537

 
$
28,411

 
$
5,874

 
26.1
%
Percentage of total revenue
 
26.4
%
 
27.9
%
 
 
 
 
General and administrative expenses increased $5.9 million, or 26.1%, to $28.4 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily driven by an increase in employee-related expenses, including $5.1 million of restructuring and other exit costs associated with the Actions. Excluding the impact of restructuring and other exit costs, non-GAAP general and administrative expenses increased $0.8 million, or 3.4%, to $23.3 million, representing 22.9% of total revenue.
Other (Expense) Income, net
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Other (expense) income, net
 
$
(7,719
)
 
$
13,950

 
$
21,669

 
(280.7
)%
Percentage of total revenue
 
(9.0
)%
 
13.7
%
 
 
 
 
Other income, net was $14.0 million in the three months ended June 30, 2017 mainly due to a foreign currency gain related to our intercompany debt resulting from the significant change in exchange rates during the period, partially offset by interest expense associated with the build-to-suit lease accounting related to our corporate headquarters. Other expense, net was $7.7 million in the three months ended June 30, 2016 mainly due to a foreign currency loss on our intercompany debt and interest expense on our corporate headquarters lease.

26


(Provision) Benefit for Income Taxes
 
 
 
Three Months Ended
June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
(Provision) benefit for income taxes
 
$
(4,261
)
 
$
9,437

 
$
13,698

 
(321.5
)%
Percentage of total revenue
 
(5.0
)%
 
9.3
%
 
 
 
 
Our income tax benefit and provision for the three months ended June 30, 2017 and 2016 was $9.4 million and $4.3 million, respectively. Our tax rate is affected by recurring items, and discrete items that may differ between and among periods.
The primary drivers of our income tax benefit for the three months ended June 30, 2017 were the exclusion of certain foreign jurisdictions that are subject to a valuation allowance from the forecasted annual effective tax rate, a discrete tax benefit for stock based compensation of $3.0 million, and a discrete tax benefit related to restructuring and exit costs of $3.0 million. The primary driver of our income tax provision for the three months ended June 30, 2016 was an increase in our forecasted pretax income.
Comparison of Six Months Ended June 30, 2016 and 2017
Revenue
 
 
 
Six Months Ended 
 June 30,
 
Change
 
 
2016
 
2017
 
$
 
%
 
 
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
 
Markets
 
$
73,135

 
$
82,828

 
$
9,693

 
13.3
 %
Percentage of total revenue
 
43.7
%
 
41.7
%
 
 
 
 
Seller Services
 
$
90,602

 
$
112,763

 
$
22,161

 
24.5
 %
Percentage of total revenue
 
54.2
%
 
56.8
%
 
 
 
 
Other
 
$
3,459

 
$
2,992

 
$
(467
)
 
(13.5
)%
Percentage of total revenue
 
2.1
%
 
1.5
%
 
 
 
 
Total revenue
 
$
167,196