10-Q 1 etsy9301810q.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 September 30, 2018
 
 
 
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 every Interactive Data File required to be submitted 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 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 ¨
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 November 2, 2018 was 120,460,043.




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 September 30, 2018 and December 31, 2017
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017
 
Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2018
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 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
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,” and “mobile GMS.”

Etsy has used, and intends to continue using, its investor relations website and the Etsy News Blog (blog.etsy.com/news) to disclose material non-public information and to comply with its disclosure obligations under Regulation FD. Accordingly, you should monitor our investor relations website and the Etsy News Blog in addition to following our press releases, SEC filings and public conference calls and webcasts.





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 relating to our anticipated international growth, the timing of product launches and our cloud migration, the impact of our four key initiatives, pricing model, marketing and product investments and cloud migration on future GMS and revenue growth, and our anticipated expenses and their impact on our future financial performance. 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 the section titled “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.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and, although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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
September 30,
2018
 
As of
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
362,727


$
315,442

Short-term investments
221,409

 
25,108

Accounts receivable, net of allowance for doubtful accounts of $4,641 and $2,687 as of September 30, 2018 and December 31, 2017, respectively
36,385

 
33,677

Prepaid and other current assets
23,958

 
20,379

Funds receivable and seller accounts
63,470

 
44,658

Total current assets
707,949

 
439,264

Restricted cash
5,341


5,341

Property and equipment, net of accumulated depreciation and amortization of $80,248 and $66,226 as of September 30, 2018 and December 31, 2017, respectively
119,243

 
117,617

Goodwill
37,802

 
38,541

Intangible assets, net of accumulated amortization
36,360

 
4,100

Other assets
673

 
720

Total assets
$
907,368

 
$
605,583

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,130

 
$
13,622

Accrued expenses
37,191

 
28,743

Capital lease obligations—current
4,284

 
5,798

Funds payable and amounts due to sellers
63,470

 
44,658

Deferred revenue
7,180

 
6,262

Other current liabilities
2,676

 
3,394

Total current liabilities
128,931

 
102,477

Capital lease obligations—net of current portion
2,791

 
4,115

Deferred tax liabilities
30,851

 
23,786

Facility financing obligation
60,008

 
60,049

Long-term debt, net
272,790

 

Other liabilities
17,378

 
18,262

Total liabilities
512,749

 
208,689

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 120,244,674 and 121,769,238 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)
120

 
122

Preferred stock ($0.001 par value, 25,000,000 shares authorized as of September 30, 2018 and December 31, 2017)

 

Additional paid-in capital
551,293

 
499,441

Accumulated deficit
(149,707
)
 
(96,290
)
Accumulated other comprehensive loss
(7,087
)
 
(6,379
)
Total stockholders’ equity
394,619

 
396,894

Total liabilities and stockholders’ equity
$
907,368

 
$
605,583

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
150,366

 
$
106,380

 
$
403,665

 
$
304,963

Cost of revenue
46,947

 
36,383

 
133,651

 
106,766

Gross profit
103,419

 
69,997

 
270,014

 
198,197

Operating expenses:
 
 
 
 
 
 
 
Marketing
39,516

 
23,520

 
94,651

 
74,495

Product development
24,418

 
16,958

 
68,707

 
56,828

General and administrative
20,748

 
22,094

 
61,359

 
73,268

Total operating expenses
84,682

 
62,572

 
224,717

 
204,591

Income (loss) from operations
18,737

 
7,425

 
45,297

 
(6,394
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(6,135
)
 
(2,908
)
 
(16,024
)
 
(8,195
)
Interest and other income
2,367

 
654

 
5,902

 
1,636

Foreign exchange (loss) gain
(373
)
 
8,069

 
(2,973
)
 
26,952

Total other (expense) income
(4,141
)
 
5,815

 
(13,095
)
 
20,393

Income before income taxes
14,596

 
13,240

 
32,202

 
13,999

Benefit for income taxes
5,298

 
12,562

 
4,038

 
23,051

Net income
$
19,894

 
$
25,802

 
$
36,240

 
$
37,050

Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.22

 
$
0.30

 
$
0.32

Diluted
$
0.15

 
$
0.21

 
$
0.29

 
$
0.31

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
119,870,711

 
119,592,191

 
120,469,066

 
117,387,714

Diluted
129,086,137

 
123,224,559

 
126,497,281

 
121,346,921

 

The accompanying notes are an integral part of these Consolidated Financial Statements

5


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
19,894

 
$
25,802

 
$
36,240

 
$
37,050

Other comprehensive loss:
 
 
 
 
 
 
 
Cumulative translation adjustment
(544
)
 
(6,267
)
 
(696
)
 
(22,603
)
Unrealized gains (losses) on marketable securities, net of tax
5

 
40

 
(12
)
 
29

Total other comprehensive loss
(539
)
 
(6,227
)
 
(708
)
 
(22,574
)
Comprehensive income
$
19,355

 
$
19,575

 
$
35,532

 
$
14,476



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 Loss
 
Total
 
 
Shares
 
Amount
Balance as of December 31, 2017
121,769,238

 
$
122

 
$
499,441

 
$
(96,290
)
 
$
(6,379
)
 
$
396,894

Stock-based compensation

 

 
23,288

 

 

 
23,288

Exercise of vested options
1,354,886

 
1

 
15,572

 

 

 
15,573

Issuance of convertible senior notes, net of issuance costs and taxes

 

 
54,214

 

 

 
54,214

Purchase of capped call, net of taxes

 

 
(26,243
)
 

 

 
(26,243
)
Vesting of restricted stock units, net of shares withheld
650,884

 
1

 
(17,137
)
 

 

 
(17,136
)
Stock repurchase
(3,530,334
)
 
(4
)
 

 
(89,657
)
 

 
(89,661
)
Stock-based compensation—acquisitions

 

 
2,158

 

 

 
2,158

Other comprehensive loss

 

 

 

 
(708
)
 
(708
)
Net income

 

 

 
36,240

 

 
36,240

Balance as of September 30, 2018
120,244,674

 
$
120

 
$
551,293

 
$
(149,707
)
 
$
(7,087
)
 
$
394,619

 
 

 
 

 
 

 
 

 
 

 
 

 
 
The accompanying notes are an integral part of these Consolidated Financial Statements

7


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
36,240

 
$
37,050

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
21,829

 
17,389

Stock-based compensation expense—acquisitions
2,158

 
3,179

Depreciation and amortization expense
19,116

 
20,620

Bad debt expense
3,617

 
2,059

Foreign exchange loss (gain)
2,973

 
(26,952
)
Amortization of debt issuance costs
831

 
164

Non-cash interest expense
7,632

 
6,752

Interest on marketable securities
(1,575
)
 
384

Loss on disposal of assets
26

 
395

Deferred income taxes
(4,038
)
 
(23,051
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,631
)
 
(2,139
)
Funds receivable and seller accounts
(19,398
)
 
(14,202
)
Prepaid expenses and other current assets
1,155

 
(1,715
)
Other assets
32

 
(48
)
Accounts payable
(80
)
 
(2,574
)
Accrued and other current liabilities
8,178

 
(66
)
Funds payable and amounts due to sellers
19,398

 
14,202

Deferred revenue
991

 
512

Other liabilities
4,678

 
363

Net cash provided by operating activities
97,132

 
32,322

Cash flows from investing activities
 
 
 
Cash paid for asset acquisition
(35,323
)
 

Purchases of property and equipment
(442
)
 
(3,872
)
Development of internal-use software
(13,674
)
 
(8,042
)
Purchases of marketable securities
(359,182
)
 
(46,808
)
Sales of marketable securities
164,443

 
96,540

Net cash (used in) provided by investing activities
(244,178
)
 
37,818

Cash flows from financing activities
 
 
 
Repurchase of stock for tax on RSU vesting
(17,136
)
 
(4,897
)
Repurchase of stock
(89,661
)
 

Proceeds from exercise of stock options
15,573

 
21,936

Proceeds from issuance of convertible senior notes
345,000

 

Payment of debt issuance costs
(9,962
)
 

Purchase of capped call
(34,224
)
 

Payments on capital lease obligations
(4,748
)
 
(5,838
)
Payments on facility financing obligation
(7,817
)
 
(4,330
)
Net cash provided by financing activities
197,025

 
6,871

Effect of exchange rate changes on cash
(2,694
)
 
1,685

Net increase in cash, cash equivalents, and restricted cash
47,285

 
78,696

Cash, cash equivalents, and restricted cash at beginning of period
320,783

 
186,933

Cash, cash equivalents, and restricted cash at end of period
$
368,068


$
265,629


8


Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Supplemental non-cash disclosures
 
 
 
Equipment acquired under capital lease obligations
$
1,909

 
$
5,422

Stock-based compensation capitalized in development of capitalized software
$
1,459

 
$
672

Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses
$
1,354

 
$
118


The accompanying notes are an integral part of these Consolidated Financial Statements

9


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”) is the global marketplace for unique and creative goods. The Company generates revenue primarily from transaction and listing fees, Etsy Payments fees, Promoted Listing fees, Etsy Shipping Label sales, Pattern by Etsy fees, Etsy Plus subscription fees, and Targeted Offers fees.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain items in the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation reflected in the Consolidated Financial Statements. Specifically, the Company reclassified $35.4 million and $98.6 million previously included in Services revenue to Marketplace revenue (see “Note 2—Revenue”) for the three and nine months ended September 30, 2017, respectively, to conform to the current year presentation in connection with the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
Additionally, the Company reclassified $5.3 million on the Consolidated Statement of Cash Flows in the nine months ended September 30, 2017 to include restricted cash in the beginning and ending cash, cash equivalents, and restricted cash balances to conform to the current year presentation upon adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash.
The Company also reclassified $23.1 million previously included in changes in prepaid expenses and other current assets and other liabilities to deferred income taxes on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 to conform to the current year presentation.
Correction of Errors
During the three months ended June 30, 2018, the Company recorded $2.8 million of revenue as correction of an error related to the years ended December 31, 2017 and 2016. The Company has concluded that the error and its correction were not material to the Consolidated Financial Statements for any of the periods impacted nor are they expected to be material for the estimated 2018 results.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of September 30, 2018, the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 and the Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual Consolidated Financial Statements except for reclassifications described above and new accounting standards adopted as of January 1, 2018 as disclosed below, and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2018, results of operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017. The results for 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 nine 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 March 1, 2018 (the “Annual Report”).

10


Etsy, Inc.
Notes to Consolidated Financial Statements

During the first quarter of 2018, the Company adopted the accounting principles outlined within ASU 2014-09, Revenue from Contracts with Customers, and ASU 2016-18, Statement of Cash Flows: Restricted Cash, each as described below. 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: for revenue recognition, determining the nature and timing of satisfaction of performance obligations and stand-alone selling price for use in allocating the subscription price; 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; restructuring and other exit costs (income); and fair value of financial instruments. 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.
Cash, Cash Equivalents, and Short-term Investments
The Company considers all investments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash restricted by third parties is not considered cash and cash equivalents. Short-term investments, consisting primarily of commercial paper, corporate bonds, and U.S. Government and agency securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax provisions or benefits.
The following table provides cash, cash equivalents, and short-term investments within the Consolidated Balance Sheets as of the dates indicated (in thousands):
 
As of
September 30,
2018
 
As of
December 31,
2017
Cash and cash equivalents
$
362,727

 
$
315,442

Short-term investments
221,409

 
25,108

Total cash, cash equivalents, and short-term investments
$
584,136

 
$
340,550

Revenue Recognition
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help Etsy sellers start, manage, and scale their business. Revenues are recognized as the Company transfers control of promised goods or services to Etsy sellers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk and has the latitude in establishing pricing and selecting suppliers, among other factors. Based on its evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. Sales and usage-based taxes are excluded from revenues.
See “Note 2—Revenue” for additional information regarding revenue recognition.
Income Taxes
The Company’s income tax (provision) benefit 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.

11


Etsy, Inc.
Notes to Consolidated Financial Statements

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, recording of excess tax benefits related to stock-based compensation and changes in the laws, regulations and administrative practices of the jurisdictions in which the Company operates.
Net Income Per Share
Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period using the two-class method. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares of common stock and potentially dilutive common stock outstanding during the period. Net income in the diluted net income per share calculation is adjusted for income or loss from fair value adjustments on instruments accounted for as liabilities, but which may be settled in shares. The dilutive effect of outstanding options and stock-based compensation awards is reflected in diluted net income per share by application of the treasury stock method. Since the Company expects to settle in cash the principal outstanding under the 0% Convertible Senior Notes due 2023 the Company issued in March 2018 (the “Notes,” see “Note 3—Convertible Debt”), it uses the treasury stock method when calculating the potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $36.27 per share.
The calculation of diluted net income per share excludes all anti-dilutive common shares. For periods in which the Company has reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, and additional changes, modifications, clarifications or interpretations related to this guidance thereafter, which require 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. The Company expects to adopt this guidance on a prospective basis as of January 1, 2019, utilizing transition guidance introduced in ASU 2018-11, Leases: Targeted Improvements. 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 January 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements.
In July 2018, FASB issued ASU 2018-09, Codification Improvements, which clarifies, corrects and makes minor improvements across multiple topics in the codification. The transition and effective dates are based on the facts and circumstances of each amendment, with some amendments becoming effective upon issuance of the update, and others becoming effective for annual periods beginning after December 15, 2018. The amendments that were effective upon issuance of the update did not have an impact on the Company’s Consolidated Financial Statements. The Company is currently evaluating the impact of the adoption of the other amendments on its Consolidated Financial Statements.

12


Etsy, Inc.
Notes to Consolidated Financial Statements

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and additional changes, modifications, clarifications or interpretations related to this guidance thereafter, which replaces existing revenue recognition guidance. The new guidance was 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 adopted the requirements of the new guidance as of January 1, 2018, utilizing the full retrospective method of transition. In connection with the adoption, the company reclassified Etsy Payments revenue from Services revenue to Marketplace revenue in the Consolidated Statements of Operations. Aside from this presentation reclassification, adoption of the new guidance did not result in changes to the prior year or current year Consolidated Financial Statements. See Note 2—Revenue” for additional information regarding revenue recognition.
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. The Company adopted this standard in the first quarter of 2018 utilizing the full retrospective method of transition. As a result of this guidance, the Company reclassified $5.3 million on the Consolidated Statement of Cash Flows in the nine months ended September 30, 2018 and 2017 to include restricted cash in the beginning and ending cash, cash equivalents, and restricted cash balances.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Beginning balance:
 
 
 
Cash and cash equivalents
$
315,442

 
$
181,592

Restricted cash
5,341

 
5,341

Total cash, cash equivalents, and restricted cash
$
320,783

 
$
186,933

 
 
 
 
Ending balance:
 
 
 
Cash and cash equivalents
$
362,727

 
$
260,288

Restricted cash
5,341

 
5,341

Total cash, cash equivalents, and restricted cash
$
368,068

 
$
265,629

The balances included in restricted cash represent amounts held as collateral associated with the lease of the Company’s Brooklyn, New York headquarters. This standard had no other impact to the Consolidated Financial Statements.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The new guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted this standard in the third quarter of 2018 noting that the adoption of the standard had no material impact on its Consolidated Financial Statements.

13


Etsy, Inc.
Notes to Consolidated Financial Statements

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which adds, modifies and removes various disclosure requirements for fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company adopted this standard in the third quarter of 2018 noting that the adoption of the standard had no impact on its fair value measurement disclosures.
Note 2—Revenue

The following table summarizes revenue by type of service for the periods presented (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Marketplace revenue (1)
$
110,927

 
$
77,808

 
$
290,200

 
$
223,815

Services revenue
38,194

 
27,976

 
110,306

 
77,560

Other revenue
1,245

 
596

 
3,159

 
3,588

Revenue
$
150,366

 
$
106,380

 
$
403,665

 
$
304,963

(1)
Etsy Payments revenue for the three and nine months ended September 30, 2018 has been classified and presented within Marketplace revenue. Comparative periods have been reclassified to conform to current period presentation.

Marketplace Revenue: As members of the Etsy marketplace, Etsy sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. Etsy sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Variable fees include the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and Etsy Payments fees for processing payments, including foreign currency payments. Prior to July 16, 2018, the transaction fee was 3.5% of each completed transaction, exclusive of shipping fees charged. Etsy Payments processing fees vary between 3 - 4% of an item’s total sale price, including shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional 2.5 - 5% transaction fee is applied.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee and Etsy Payments fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable while transaction fees and Etsy Payments fees are recorded net of refunds.
Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which include Promoted Listings, Etsy Shipping Labels, Pattern by Etsy, Etsy Plus, and Targeted Offers. Each service below represents an individual obligation that the Company must perform when an Etsy seller chooses to use the service.
Revenue from Promoted Listings, the Company’s on-site advertising service, consists of cost-per-click fees an Etsy seller pays for prominent placement of the seller’s listings in search results in the Company’s marketplace. Promoted Listings fees are based on an auction system, which utilizes the budget that each Etsy seller sets when using Promoted Listings to determine the cost-per-click fee. Promoted Listing fees are nonrefundable and are charged to a seller’s Etsy bill when the Promoted Listing is clicked; at which time revenue is recognized.
Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays the Company when the seller purchases shipping labels through our platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides sellers access to purchase shipping labels from the United States Postal Service, FedEx, and Canada Post at discounted pricing due to the volume of purchases through its platform. The Company recognizes Etsy Shipping Label revenue when an Etsy seller purchases a shipping label. The Company recognizes Etsy Shipping Label revenue on a net basis as the Company is an agent in this arrangement and does not take ownership of shipping labels prior to transferring the labels to the Etsy Seller. Etsy Shipping Label revenue is recorded net of refunds.

14


Etsy, Inc.
Notes to Consolidated Financial Statements

Revenue from Pattern by Etsy consists of monthly subscription fees an Etsy seller pays to use the Company’s custom website services. The Company recognizes revenue from Pattern ratably over the term of the subscription. The Pattern subscription fee is $15 per month and is nonrefundable.
Revenue from Etsy Plus consists of monthly subscription fees an Etsy seller pays for enhanced tools and credits for use on the Company’s platform. The Etsy Plus subscription fee is $10 per month and is nonrefundable. Each feature represents its own distinct performance obligation. The Company allocates subscription revenue based on the relative actual or estimated stand-alone selling price of the features included in the Etsy Plus offering. Enhanced tools include advanced shop customization options, targeted restock notifications, discounts on branded packaging and promotional materials, and free or discounted custom web addresses, all of which are recognized ratably over the 30-day subscription period. Additionally, the subscription includes $5 of Promoted Listing credits and 15 free listing credits per month. The allocated value of Promoted Listing credits is recognized when the Promoted Listing is clicked, or when the 30-day subscription period expires. The allocated value of listing credits is deferred until the option is used, and once used, allocated over the four-month listing period. Any unused listing credits are recognized when the 30-day subscription period expires.
Revenue from Targeted Offers consists of fees an Etsy seller pays the Company to send email notifications with offer discounts and coupons to buyers who have favorited items or added items to their cart. A nonrefundable fee of $0.10 per email is charged to a seller’s Etsy bill when the email is sent; at which time the revenue is recognized.
Other revenue: Other revenue typically includes revenue generated from commercial partnerships, which are recognized as the customer in each contract consumes the benefit of the service Etsy provides in each arrangement.
Payment terms
Etsy sellers receive a bill electronically on the first day of each month for the previous month’s charges, including all listing fees, transactions fees, Promoted Listing fees, Etsy Shipping Labels fees, Pattern fees, Etsy Plus fees, and Targeted Offers fees. Payment is due by the 15th of every month.
Etsy Payments fees are deducted from the funds credited to the seller’s shop payment account prior to settlement of those funds to the seller’s bank account.
Contract balances
Deferred revenues
The Company records deferred revenues when cash payments are received or due in advance of the completion of the listing or subscription period, which represents the value of the Company’s unsatisfied performance obligations. Deferred listing revenue is recognized ratably over the remainder of the four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. Deferred Etsy Plus subscription revenues related to the enhanced features noted above are recognized ratably over the 30-day subscription period. Credits for Promoted Listings are recognized when used, or when the 30-day subscription period expires. Credits for listing fees are recognized over the four-month listing period when used, and any unused credits are recognized when the 30-day subscription period expires. The amount of revenue recognized in the nine months ended September 30, 2018 that was included in the deferred balance at the beginning of the period was $6.3 million.
Significant judgments
Judgment is required to assess the nature of the services that the Company promises to its customers and the timing of satisfaction of those promised services.
For services that are refundable, the Company accounts for the right of return as a refund liability and reduction of revenue recognized in the amount of refunds that are expected to be issued. Refunds are estimated monthly, are based on historical refund patterns, and are updated at the end of each reporting period as additional information becomes available.

15


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 3—Convertible Debt
In March 2018, the Company issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the Notes were $335.0 million after deducting the initial purchasers’ discount and offering expenses.
The Notes are convertible based upon an initial conversion rate of 27.5691 shares of the Company’s common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $36.27 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock. The Company will settle any conversions of the Notes in cash, shares of the Company’s common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The Notes will mature on March 1, 2023, unless earlier converted or repurchased. Prior to the close of business on the business day immediately preceding November 1, 2022, holders may convert all or a portion of their Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) with respect to any or all of the Notes called for redemption by the Company prior to the close of business on the business day immediately preceding November 1, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day prior to the redemption date, even if the Notes are not otherwise convertible at such time; (4) upon the occurrence of specified corporate events. On and after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased. Holders of Notes who convert their Notes in connection with a notice of a redemption or a make-whole fundamental change may be entitled to a premium in the form of an increase in the conversion rate of the Notes. During the third quarter of 2018, the closing price of the Company’s common stock exceeded 130% of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of the Notes may convert their Notes during the fourth quarter of 2018. As of September 30, 2018, the Company had not received any conversion notices, and, as such, the Notes are not currently redeemable for cash and are therefore classified as long-term debt.
The Notes are general unsecured obligations of the Company. The Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment with all of our liabilities that are not so subordinated; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s own stock, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Notes of approximately $72.8 million is included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability

16


Etsy, Inc.
Notes to Consolidated Financial Statements

component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and are amortized to interest expense using the effective interest method over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
Non-cash interest expense related to the Notes for the three and nine months ended September 30, 2018 was $3.7 million and $8.5 million, respectively. Total unamortized debt issuance costs were $7.0 million as of September 30, 2018.
The estimated fair value of the Notes was $278.7 million as of September 30, 2018. The estimated fair value of the Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in “Note 7—Fair Value Measurements.”
Capped Call Transactions
The Company used $34.2 million of the net proceeds from the Notes offering to enter into separate capped call transactions (“Capped Call Transactions”) with the initial purchasers and/or their respective affiliates. The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the Notes upon conversion of the Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the Capped Call Transactions with such reduction and/or offset subject to a cap. The Capped Call Transactions have an initial cap price of $52.76 per share of the Company’s common stock, which represents a premium of 100% over the last reported sale price of the Company’s common stock on March 8, 2018, and is subject to certain adjustments under the terms of the Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Notes.
The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock. The premiums paid for the Capped Call Transactions have been included as a net reduction to additional paid-in capital within stockholders’ equity.
Note 4—Stock-based Compensation

During the three and nine months ended September 30, 2018, the Company granted stock options and restricted stock units (“RSUs”) under its 2015 Equity Incentive Plan (“2015 Plan”) and, pursuant to the evergreen increase provision of the 2015 Plan, the Board of Directors approved an increase of 6,088,461 shares to the total number of shares available for issuance under the 2015 Plan effective as of January 2, 2018. At September 30, 2018, 29,436,374 shares were authorized under the 2015 Plan and 18,553,418 shares were available for future grant.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Volatility
47.8%
 
42.4% - 44.1%
 
38.6% - 47.8%
 
41.7% - 44.2%
Risk-free interest rate
2.8%
 
1.9% - 2.1%
 
2.6% - 2.9%
 
1.9% - 2.2%
Expected term (in years)
6.1
 
5.5 - 6.3
 
5.5 - 6.3
 
5.5 - 6.3
Dividend rate
—%
 
—%
 
—%
 
—%
 

17


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table summarizes the activity for the Company’s options during the nine months ended September 30, 2018 (in thousands except share and per share amounts):
 
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contract Term (in years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2017
7,947,939

 
$
11.02

 
 
 
 
Granted
768,263

 
28.86

 
 
 
 
Exercised
(1,354,886
)
 
11.49

 
 
 
 
Forfeited/Canceled
(245,909
)
 
15.40

 
 
 
 
Outstanding at September 30, 2018
7,115,407

 
12.70

 
8.15
 
$
275,193

Total exercisable at September 30, 2018
2,842,638

 


 
7.34
 
116,034

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 during the three and nine months ended September 30, 2018 and 2017 (in thousands except per share amounts):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average grant date fair value of options granted
$
25.00

 
$
6.50

 
$
15.53

 
$
4.83

Intrinsic value of options exercised
13,493

 
31,361

 
24,690

 
44,227

Fair value of awards vested
8,783

 
5,943

 
23,182

 
16,428

The total unrecognized compensation expense at September 30, 2018 related to the Company’s options was $27.7 million, which will be recognized over an estimated weighted-average amortization period of 2.52 years.
The following table summarizes the activity for the Company’s unvested RSUs during the nine months ended September 30, 2018:
 
Shares
 
Weighted-Average
Grant Date Fair Value
Unvested at December 31, 2017
3,074,247

 
$
11.98

Granted
2,281,143

 
26.13

Vested
(1,148,993
)
 
11.92

Forfeited/Canceled
(414,966
)
 
17.16

Unvested at September 30, 2018
3,791,431

 
20.97

The total unrecognized compensation expense at September 30, 2018 related to the Company’s unvested RSUs was $72.9 million, which will be recognized over an estimated weighted-average amortization period of 3.10 years.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
894

 
$
469

 
$
2,367

 
$
1,231

Marketing
642

 
447

 
1,819

 
1,419

Product development
4,697

 
2,180

 
11,361

 
6,253

General and administrative
2,683

 
4,425

 
8,440

 
11,665

Total stock-based compensation expense
$
8,916

 
$
7,521

 
$
23,987

 
$
20,568


18


Etsy, Inc.
Notes to Consolidated Financial Statements

Total stock-based compensation expense in both the three months ended September 30, 2018 and 2017 includes $0.7 million in acquisition-related stock-based compensation expense. Total stock-based compensation expense in the nine months ended September 30, 2018 and 2017 includes $2.2 million and $3.2 million in acquisition-related stock-based compensation expense, respectively.
Total stock-based compensation expense in the three and nine months ended September 30, 2017 includes $1.0 million and $2.6 million, respectively, of costs associated with the Actions (as defined below) approved by the Board of Directors during the second quarter of 2017 discussed in “Note 13—Restructuring and Other Exit Costs (Income).”
During the three and nine months ended September 30, 2018, the Company incurred non-cash stock-based compensation expense of $1.0 million resulting from the modification of stock options and RSUs in connection with the departure of the Company’s Chief Operating Officer (“COO”), effective January 2, 2019 (the “Departure Date”). As per the agreement between the Company and the COO, all unvested options and RSUs granted in 2016 and 2017 will become fully vested on the Departure Date. The Company will recognize a total of $6.2 million expense relating to the modification, of which $5.2 million of expense will be recognized in the fourth quarter of 2018.
Note 5—Stockholders’ Equity
In November 2017, the Board of Directors approved a stock repurchase program that enabled the Company to repurchase up to $100 million of its common stock. The program was completed in the second quarter of 2018.
Under the stock repurchase program, the Company was able to purchase shares of its common stock through various means, including open market transactions, privately negotiated transactions, tender offers, or any combination thereof. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which permitted common stock to be repurchased at a time that the Company might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions.
The following table summarizes the Company’s share repurchase activity, excluding shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units (in thousands except share and per share amounts):
 
Shares Repurchased
 
Average Price Paid per Share (1)
 
Value of Shares Repurchased (1)
 
Remaining Amount Authorized
Balance as of December 31, 2017
586,231

 
$
17.57

 
$
10,301

 
$
89,699

Repurchases of common stock for the three months ended:
 
 
 
 
 
 
 
March 31, 2018
2,807,393

 
24.43

 
68,586

 
(68,586
)
June 30, 2018
722,941

 
29.15

 
21,113

 
(21,113
)
Balance as of September 30, 2018
4,116,565

 
$
24.28

 
$
100,000

 
$

(1) Average price paid per share excludes broker commissions. Value of shares repurchased includes broker commissions.
All repurchased shares of common stock have been retired.
Subsequent event

On November 1, 2018, the Board of Directors approved a stock repurchase program that enables the Company to repurchase up to $200 million of its common stock. The program does not have a time limit and may be modified, suspended or terminated at any time by the Board of Directors. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume and general market conditions, along with Etsy’s working capital requirements, general business conditions and other factors.

19


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 6—Income Taxes

On December 22, 2017, the U.S. government enacted The Tax Cuts and Jobs Act (“The Act”) which includes significant changes to the taxation of business entities. These changes include, among others, (1) a permanent reduction to the corporate income tax rate, (2) a partial limitation on the deductibility of business interest expense (“163(j) Interest Limitation”), and (3) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a quasiterritorial system (along with certain rules designed to prevent erosion of the U.S. income tax base).

Effective January 1, 2018, the Company is subject to several provisions of The Act including computations under Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), and the Base Erosion and Anti-Abuse Tax (“BEAT”). For the GILTI and FDII computations, the Company included a reasonable estimate in its annual effective tax rate as of September 30, 2018. For the BEAT computations, the Company did not record an estimate in its effective tax rate for the three and nine months ended September 30, 2018 because the Company currently estimates that these provisions of The Act will not apply in 2018. The Company will continue to refine the estimates for the computations of the GILTI, FDII, and BEAT rules as it gathers additional information during the year.

The Company also continues to evaluate the impact of the GILTI provisions under The Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has included an estimate of GILTI in its estimated effective tax rate for 2018, and has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”).
The amount of unrecognized tax benefits included in the Consolidated Balance Sheets increased $1.0 million in the nine months ended September 30, 2018, from $17.0 million at December 31, 2017 to $18.0 million at September 30, 2018. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $18.0 million at September 30, 2018.
Note 7—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 financial instruments where values are derived from techniques in which one or more significant inputs are unobservable.

20


Etsy, Inc.
Notes to Consolidated Financial Statements

The following are the major categories of assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 (in thousands):

 
As of September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$

 
$
2,994

 
$

 
$
2,994

Money market funds
186,583

 

 

 
186,583

 
186,583

 
2,994

 

 
189,577

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
125,976

 

 
125,976

Corporate bonds

 
40,607

 

 
40,607

U.S. Government and agency securities
54,826

 

 

 
54,826

 
54,826

 
166,583

 

 
221,409

Funds receivable and seller accounts:
 
 
 
 
 
 
 
Money market funds
30,433

 

 

 
30,433

 
30,433

 

 

 
30,433

 
$
271,842

 
$
169,577

 
$

 
$
441,419

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

 
$
11,290

 
$

 
$
11,290

Money market funds
204,867

 

 

 
204,867

U.S. Government and agency securities
24,989

 

 

 
24,989

 
229,856

 
11,290

 

 
241,146

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
2,998

 

 
2,998

Corporate bonds

 
12,748

 

 
12,748

U.S. Government and agency securities
9,362

 

 

 
9,362

 
9,362

 
15,746

 

 
25,108

Funds receivable and seller accounts:
 
 
 
 
 
 
 
Money market funds
14,144

 

 

 
14,144

 
14,144

 

 

 
14,144

 
$
253,362

 
$
27,036

 
$

 
$
280,398

Level 1 instruments include investments in debt securities including money market funds and AA-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 investments in debt securities, including 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.
The Company did not have any Level 3 instruments as of September 30, 2018 and December 31, 2017.
See “Note 8—Marketable Securities” for additional information on the Company’s marketable securities measured at fair value.


21


Etsy, Inc.
Notes to Consolidated Financial Statements

Disclosure of Fair Values

Our financial instruments that are not remeasured at fair value include the Notes (see “Note 3—Convertible Debt”). The Company estimates the fair value of the Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Notes was $278.7 million as of September 30, 2018. The estimated fair value of the Notes was determined through consideration of quoted market prices for similar instruments.
Note 8—Marketable Securities
Short-term investments and certain cash equivalents consist of investments in debt 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
September 30, 2018
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
2,994

 
$

 
$

 
$
2,994

 
2,994

 

 

 
2,994

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
125,976

 

 

 
125,976

Corporate bonds
40,610

 
(6
)
 
3

 
40,607

U.S. Government and agency securities
54,832

 
(17
)
 
11

 
54,826

 
221,418

 
(23
)
 
14

 
221,409

 
$
224,412

 
$
(23
)
 
$
14

 
$
224,403

December 31, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
11,290

 
$

 
$

 
$
11,290

U.S. Government and agency securities
24,990

 
(1
)
 

 
24,989

 
36,280

 
(1
)
 

 
36,279

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
2,998

 

 

 
2,998

Corporate bonds
12,754

 
(6
)
 

 
12,748

U.S. Government and agency securities
9,352

 
(1
)
 
11

 
9,362

 
25,104

 
(7
)
 
11

 
25,108

 
$
61,384

 
$
(8
)
 
$
11

 
$
61,387

The Company’s investments in marketable securities consist primarily of investments in debt securities, including AA-rated U.S. Government and agency securities and fixed-income funds. 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.
See “Note 7—Fair Value Measurements” for additional information on the Company’s marketable securities measured at fair value.

22


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 9—Intangible Assets

On June 15, 2018, the Company entered into a referral agreement with DaWanda GmbH (“DaWanda”), a privately held Germany-based marketplace for gifts and handmade items. As part of this agreement, DaWanda agreed to encourage its community of buyers and sellers to migrate to the Etsy platform. DaWanda wound down its operations and shut down its site on August 30, 2018. Etsy did not acquire any of DaWanda’s assets, liabilities, or employees as part of this agreement. The Company accounted for the agreement as an asset acquisition and the referral agreement intangible asset will be amortized on a straight-line basis over a period of 10 years.
At September 30, 2018 and December 31, 2017, the gross book value and accumulated amortization of intangible assets were as follows (in thousands):
 
As of September 30, 2018
 
As of December 31, 2017
 
Gross book
value
 
Accumulated
amortization
 
Net book
value
 
Gross book
value
 
Accumulated
amortization
 
Net book
value
Patents and developed technology
$
7,200

 
$
(4,900
)
 
$
2,300

 
$
7,200

 
$
(3,100
)
 
$
4,100

Referral agreement
35,084

 
(1,024
)
 
34,060

 

 

 

Total intangible assets
$
42,284

 
$
(5,924
)
 
$
36,360

 
$
7,200

 
$
(3,100
)
 
$
4,100

Amortization expense for the three months ended September 30, 2018 and September 30, 2017 was $1.5 million and $0.6 million, respectively, and $2.8 million for both the nine months ended September 30, 2018 and 2017. Based on amounts recorded at September 30, 2018, the Company will recognize intangible asset amortization expense for the three months ending December 31, 2018 and years ending December 31, 2019, 2020, 2021, 2022 and thereafter as follows (in thousands):
2018
$
1,478

2019
5,208

2020
3,508

2021
3,508

2022
3,508

Thereafter
19,150

Total amortization expense
$
36,360



23


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 10—Net Income Per Share
The following table presents the calculation of basic and diluted net income per share for periods presented (in thousands except share and per share amounts):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
19,894

 
$
25,802

 
$
36,240

 
$
37,050

Net income allocated to participating securities under the two-class method
(10
)
 
(25
)
 
(17
)
 
(37
)
Net income applicable to common stockholders—basic
19,884

 
25,777

 
36,223

 
37,013

Dilutive effect of net income allocated to participating securities under the two-class method
10

 
25

 
17

 
37

Change in fair value of liability classified restricted stock

 

 

 
771

Net income attributable to common stockholders—diluted
$
19,894

 
$
25,802

 
$
36,240

 
$
37,821

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic (1)
119,870,711

 
119,592,191

 
120,469,066

 
117,387,714

Common equivalent shares from options to purchase common stock and restricted stock units
4,752,871

 
2,254,792

 
4,134,016

 
2,847,662

Dilutive effect of assumed conversion of restricted stock units
2,368,406

 
1,308,104

 
1,812,373

 
1,075,915

Dilutive effect of assumed conversion of convertible debt
2,004,447

 

 

 

Dilutive effect of assumed conversion of restricted stock from acquisition
89,702

 
69,472

 
81,826

 
35,630

Weighted-average common shares outstanding—diluted
129,086,137

 
123,224,559

 
126,497,281

 
121,346,921

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders—basic
$
0.17

 
$
0.22

 
$
0.30

 
$
0.32

Net income per share attributable to common stockholders—diluted
$
0.15

 
$
0.21

 
$
0.29

 
$
0.31

(1)
57,482 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the three and nine months ended September 30, 2018.
The following potential common shares were excluded from the calculation of diluted net income per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
8,166

 
2,211,038

 
467,072

 
4,980,520

Restricted stock units
52,197

 
185,472

 
1,174,618

 
792,024

Total anti-dilutive securities
60,363

 
2,396,510

 
1,641,690

 
5,772,544




24


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 11—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, (loss) income before income taxes and net income (loss) by geographic area for the periods presented (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
United States
$
106,228

 
$
75,829

 
$
287,956

 
$
220,898

International
44,138

 
30,551

 
115,709

 
84,065

Revenue
$
150,366

 
$
106,380

 
$
403,665

 
$
304,963

 
 
 
 
 
 
 
 
United States (1)
$
(2,527
)
 
$
(9,116
)
 
$
3,224

 
$
(41,421
)
International
17,123

 
22,356

 
28,978

 
55,420

(Loss) income before income taxes
$
14,596

 
$
13,240

 
$
32,202

 
$
13,999

 
 
 
 
 
 
 
 
United States
$
2,478

 
$
3,549

 
$
7,985

 
$
(17,386
)
International
17,416

 
22,253

 
28,255

 
54,436

Net income (loss)
$
19,894

 
$
25,802

 
$
36,240

 
$
37,050

(1)
The loss before income taxes in the three months ended September 30, 2018 was primarily driven by non-cash interest expense related to the amortization of debt discount and transaction costs in connection with the convertible debt issued in the first quarter of 2018 and interest associated with the build-to-suit lease accounting related to our corporate headquarters.
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 12—Commitments and Contingencies
Long-Term Debt
In March 2018, the Company issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes will mature on March 1, 2023, unless earlier converted or repurchased, and there are no contractual payments required until maturity. For more information on the Notes, see “Note 3—Convertible Debt.”
Non-Income Tax Contingencies
The Company had reserves of $2.0 million and $0.4 million at September 30, 2018 and December 31, 2017, respectively, for certain non-income tax obligations, representing management’s best estimate of its probable 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.

25


Etsy, Inc.
Notes to Consolidated Financial Statements

Legal Proceedings
Cervantes and Weiss Cases
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 asserted violations of Sections 11 and 15 of the Securities Act. The complaint alleged 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 sought 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 named 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 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. On February 3, 2016, the court granted the Company’s motion to stay the consolidated actions.  On September 19, 2018, the court granted plaintiffs’ request to dismiss the consolidated Cervantes and Weiss actions with prejudice.
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.

26


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 13—Restructuring and Other Exit Costs (Income)
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 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, a market in France, and closing or consolidating certain international offices.
In connection with the Actions, the Company incurred $13.9 million of restructuring and other exit costs in the year ended December 31, 2017, comprised of employee severance, stock compensation modifications, and other exit costs, largely made up of cash expenditures. The Company generated $0.2 million of income in the nine months ended September 30, 2018 due to changes in estimated severance costs.
The following table displays restructuring and other exit costs (income) recorded related to the Actions and a rollforward of the charges to the accrued expenses balance as of September 30, 2018 (in thousands):
 
Severance Charge
 
Stock-Based Compensation
 
Other Exit Costs
 
Total
Balance, December 31, 2017
$
1,308

 
$

 
$
34

 
$
1,342

Total restructuring and other exit costs (income)
(156
)
 

 
5

 
(151
)
Cash payments
(793
)
 

 

 
(793
)
Balance, March 31, 2018
359

 

 
39

 
398

Total restructuring and other exit costs (income)
(43
)
 

 
2

 
(41
)
Cash payments
(271
)
 

 
(16
)
 
(287
)
Balance, June 30, 2018
45

 

 
25

 
70

Total restructuring and other exit costs (income)
(45
)
 

 
(12
)
 
(57
)
Cash payments

 

 
(13
)
 
(13
)
Balance, September 30, 2018
$

 
$

 
$

 
$

Total restructuring and other exit costs (income) related to the Actions included in the Consolidated Statements of Operations are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
(6
)
 
$
5

 
$
(19
)
 
$
699

Marketing
(12
)
 
337

 
(82
)
 
2,686

Product development
(14
)
 
79

 
(110
)
 
3,180

General and administrative
(25
)
 
1,345

 
(38
)
 
6,461

Total restructuring and other exit costs (income)
$
(57
)
 
$
1,766

 
$
(249
)
 
$
13,026


27


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 March 1, 2018. 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 is the global marketplace for unique and creative goods. We connect creative entrepreneurs with thoughtful consumers looking for items made by real people. Our mission is to “Keep Commerce Human.”
Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. 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. We offer a wide range of services that are specifically designed to help creative entrepreneurs start, manage, and scale their businesses.
Buyers tell us that they come to Etsy because Etsy sellers offer items that they can’t find anywhere else. Our goal is to encourage existing and potential buyers to visit the Etsy marketplace on “special” purchase occasions throughout the year. These special purchase occasions include: shopping that reflects an individual’s unique style; gifting that demonstrates thought and care; and celebrations that express creativity and fun.
Our revenue is diversified, generated from a mix of marketplace activities and other optional services for Etsy sellers.
Marketplace revenue is composed of the fees an Etsy seller pays us for marketplace activities. Marketplace activities include listing an item for sale, completing transactions between a buyer and a seller, and using Etsy Payments to process payments, including foreign currency payments. Revenue from Etsy Payments, our payments processing product, formerly included in Services revenue, is now included in Marketplace revenue because Etsy Payments is required to be used by Etsy sellers in the countries where it is available.
Services revenue, formerly called Seller Services revenue, is composed of the fees an Etsy seller pays us for our optional other services (“Services”). Services include Promoted Listings, our on-site advertising service that allows sellers to pay for prominent placement of their listings in search results; Etsy Shipping Labels, which allows sellers in the United States and Canada to purchase discounted shipping labels; Pattern by Etsy, a service that allows sellers to build custom websites; Etsy Plus, a subscription offering that provides sellers with enhanced tools and credits for use on our platform; and Targeted Offers, a product that allows our sellers to offer discounts and coupons to buyers who have favorited items or added items to their cart.
We generate additional revenue through our commercial partnerships, which is classified as Other revenue.
Our strategy is focused on growing our Etsy.com marketplace in our core geographies, and owning special purchase occasions – style, gifting, and celebrations – throughout the year. We believe that buyers shop for special occasions many times throughout the year, so our goal is to have them think of Etsy more often and return to our marketplace more frequently.
We aim to empower our passionate community of 2.0 million Etsy sellers to compete and win against mass retailers for special shopping occasions. We believe that we can achieve these goals by executing on four key initiatives:
Enhancing search and discovery. Helping buyers better navigate the over 50 million items on Etsy.com is a key area of focus.
Improving trust and reliability. We want to ensure that the Etsy brand delivers trust and reliability throughout the buying experience and improve conversion.

28


Building world-class marketing capabilities. We are focused on driving traffic to Etsy.com utilizing our own marketing efforts and the efforts of our sellers, primarily through digital acquisition marketing, search engine optimization, social and television channels, and email.
Providing best-in-class seller tools and services. We plan to continue to invest in tools and paid services that enable Etsy sellers to start, manage, and scale their businesses.
Quarter Highlights
Total revenue was $150.4 million and $403.7 million in the three and nine months ended September 30, 2018, respectively, driven by growth in both Marketplace and Services revenue. In the three and nine months ended September 30, 2018, we recorded net income of $19.9 million and $36.2 million, respectively, and non-GAAP Adjusted EBITDA of $34.0 million and $88.2 million, respectively. See “–Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated in accordance with GAAP.
As of September 30, 2018, our marketplace connected 2.0 million active Etsy sellers and 37.1 million active Etsy buyers, in nearly every country in the world. In the three and nine months ended September 30, 2018, Etsy sellers generated GMS of $922.5 million and $2.7 billion, respectively, of which approximately 56% and 55%, respectively, came from purchases made on mobile devices. We are a global company and approximately 35% of our GMS in the three and nine months ended September 30, 2018 came from transactions where either an Etsy seller or an Etsy buyer was located outside of the United States.
New Pricing Model
Effective July 16, 2018, we increased our seller transaction fee from 3.5% to 5%, and now apply it to the cost of shipping in addition to the cost of the item. The revised fee structure is intended to support increased investments in the growth and health of the marketplace. We believe our new pricing model will have a positive effect on revenue.
We also announced new subscription packages and enhanced tools that are intended to support global sellers at different stages of their business life cycles. In mid-July, we launched Etsy Plus, which sellers can opt into for $10 per month. Sellers may also choose Etsy Standard and continue to have access to the same tools and services that are already available on Etsy without an additional monthly fee. In 2019, we plan to introduce Etsy Premium, which is expected to be geared towards larger, more established creative businesses. Given that our learnings on subscription packages are still nascent, we are continuing to evaluate and learn from the recent launch of Etsy Plus and will evaluate the best strategy for our current and planned subscription packages going forward as we optimize for seller success.

29


Other Operational Highlights

During the third quarter, we continued to focus on our four key initiatives through our work on the following new features and tools:

Enhancing search and discovery: We continued to launch new product enhancements and build upon prior launches to help buyers find the right product at the right time, or discover inspiration among the items in our marketplace. We continued to improve search relevance using context specific ranking and worked to accelerate home and search page load times. We optimized landing pages by adding more recommendations and notifications, including alerts on listing cards when scarce items appear in other people's carts and introduced a new discovery feed to inspire buyers to explore more products and expand their search beyond their original intent. Additionally, we optimized the desktop browsing experience by opening listing pages in a new tab to reduce the friction of searching through multiple listings.

Improving trust and reliability: We launched several product enhancements aimed at bolstering trust on the platform and improving conversion rates. We made several significant customer support improvements by introducing live chat for our sellers and, in October, we launched inbound phone support for both buyers and sellers. Our service is now a 24x7 offering. We improved our buyer experience to make it easier for buyers to provide information for personalization and customization details on the listing and cart pages, and a notification on our cart page to inform a buyer when they are close to meeting criteria for a shop sale. We added shop review ratings on the cart page to give buyers more confidence in making a purchase decision.

Building world-class marketing capabilities: We continued to focus on utilizing our marketing efforts to drive new and existing buyers to Etsy. We began sending on-site and email notifications to inform buyers when one of their recently favorited items goes on sale. We ran our first-ever television advertising campaign in select regional markets in the U.S and also began to test specific new top of the funnel ad campaigns.
Providing best-in-class seller tools and services: We launched subscription packages designed to give sellers more ways to grow their businesses and their brands, and continued to focus on shipping improvements. In October, we expanded our Etsy Shipping Labels offering to our sellers in the United Kingdom through our new agreement with Royal Mail. Also, we launched our Seller Holiday Campaign, which provides tools and guidance to our sellers as they prepare for the holiday season.
In addition to our four key initiatives, we have focused on growth investments, such as our migration to Google Cloud. In the third quarter of 2018, we achieved a significant milestone in the process by successfully migrating our website and mobile apps to Google Cloud. We believe that moving to Google Cloud is positioning us well for growth by allowing us to focus on strategic initiatives, enhance site performance, and improve engineering efficiency. We expect to complete the migration by the end of 2019.
Reclassification of Revenue Categories
In connection with the adoption of ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) in the first quarter of 2018, we renamed our revenue categories Marketplace and Services revenue. In addition, we reclassified Etsy Payments from Services to Marketplace revenue as described in “Business” above.
The following table provides our Marketplace and Services revenue under our previous and current presentation:
 
Quarter-to-Date Period Ended
 
Year-to-Date Period Ended
 
Previous Presentation
 
Updated Presentation
 
Previous Presentation
 
Updated Presentation
 
Marketplace Revenue
 
Services Revenue
 
Marketplace Revenue
 
Services Revenue
 
Marketplace Revenue
 
Services Revenue
 
Marketplace Revenue
 
Services Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
December 31, 2017
$
54,251

 
$
82,319

 
$
102,261

 
$
34,309

 
$
179,492

 
$
258,453

 
$
326,076

 
$
111,869

September 30, 2017
42,413

 
63,371

 
77,808

 
27,976

 
125,241

 
176,134

 
223,815

 
77,560

June 30, 2017
42,069

 
58,816

 
75,445

 
25,440

 
82,828

 
112,763

 
146,007

 
49,584

March 31, 2017
40,759

 
53,947

 
70,562

 
24,144

 
40,759

 
53,947

 
70,562

 
24,144


30


Key Operating and Financial Metrics
We collect and analyze operating and financial data to evaluate the health and performance of our business and allocate our resources (such as capital, people, and technology investments). The unaudited key operating and financial metrics we use are:
 
Three Months Ended 
 September 30,
 
% Growth
(Decline)
Y/Y
 
Nine Months Ended 
 September 30,
 
% Growth
(Decline)
Y/Y
 
2018
 
2017
 
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
GMS
$
922,513

 
$
766,354

 
20.4
 %
 
$
2,685,273


$
2,234,157

 
20.2
 %
Revenue
$
150,366

 
$
106,380

 
41.3
 %
 
$
403,665

 
$
304,963

 
32.4
 %
Marketplace revenue
$
110,927

 
$
77,808

 
42.6
 %
 
$
290,200

 
$
223,815

 
29.7
 %
Services revenue
$
38,194

 
$
27,976

 
36.5
 %
 
$
110,306

 
$
77,560

 
42.2
 %
Net income
$
19,894

 
$
25,802

 
(22.9
)%
 
$
36,240

 
$
37,050

 
(2.2
)%
Adjusted EBITDA
$
34,035

 
$
22,769

 
49.5
 %
 
$
88,151

 
$
45,187

 
95.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Active sellers
2,043

 
1,891

 
8.0
 %
 
2,043

 
1,891

 
8.0
 %
Active buyers
37,134

 
31,680

 
17.2
 %
 
37,134

 
31,680

 
17.2
 %
Percent mobile GMS
56
%
 
52
%
 
400
 bps
 
55
%
 
51
%
 
400
 bps
Percent international GMS
35
%
 
34
%
 
100
 bps
 
35
%
 
33
%
 
200
 bps
GMS
Gross merchandise sales (“GMS”) is the dollar value of items sold in our marketplace 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 marketplace and is not directly impacted by Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our marketplace, we believe that GMS is an indicator of the success of Etsy sellers, the satisfaction of Etsy buyers, and the health, scale, and growth of our business.
Adjusted EBITDA
Adjusted EBITDA represents our net income adjusted to exclude: interest and other non-operating expense, net; benefit for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain) and restructuring and other exit costs (income). See “Non-GAAP Financial Measures” for more information regarding our use of Adjusted EBITDA, including its limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net 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 Marketplace, Services and Other Revenue fees discussed in “Note 2—Revenue.” 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 business.
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 business.

31


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 A Little Market and Etsy Wholesale and 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.
Currency-Neutral GMS Growth
We calculate currency-neutral GMS growth by translating current period GMS for goods sold that were listed in non-U.S. dollar currencies into U.S. dollars using prior year foreign currency exchange rates.
As reported and currency-neutral GMS growth for the periods presented below is as follows:
 
Quarter-to-Date Period Ended
 
Year-to-Date Period Ended
 
As Reported
 
Currency Neutral
 
FX Impact
 
As Reported
 
Currency Neutral
 
FX Impact
September 30, 2018
20.4
%
 
20.8
%
 
(0.4
)%
 
20.2
%
 
19.2
%
 
1.0
 %
June 30, 2018
20.4
%
 
19.3
%
 
1.1
 %
 
20.1
%
 
18.5
%
 
1.6
 %
March 31, 2018
19.8
%
 
17.6
%
 
2.2
 %
 
19.8
%
 
17.6
%
 
2.2
 %
December 31, 2017
17.8
%
 
16.5
%
 
1.3
 %
 
14.5
%
 
14.3
%
 
0.2
 %
September 30, 2017
13.2
%
 
12.6
%
 
0.6
 %
 
13.0
%
 
13.4
%
 
(0.4
)%

32


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017