10-Q 1 etsy3311910q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2019
 
 
 
OR
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission File Number 001-36911
__________________________________
ETSY, INC.
(Exact name of registrant as specified in its charter)
__________________________________
Delaware
 
 20-4898921
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
117 Adams Street, Brooklyn, NY
 
11201
(Address of principal executive offices)
 
(Zip code)
(718) 880-3660
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
ETSY
The Nasdaq Global Select Market
The number of shares of common stock outstanding as of May 3, 2019 was 120,184,386.




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 March 31, 2019 and December 31, 2018
 
Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
 
Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
 
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 the timing of our cloud migration, the impact of our strategy, marketing and product investments and cloud migration on future GMS and revenue growth, our economic, social and ecological impact strategy, goals and future plans and our expectations regarding increased hosting and bandwidth costs and marketing costs. 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
March 31,
2019
 
As of
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
345,674


$
366,985

Short-term investments
276,432

 
257,302

Accounts receivable, net of allowance for doubtful accounts of $5,822 and $4,720 as of March 31, 2019 and December 31, 2018, respectively
10,789

 
12,244

Prepaid and other current assets
26,859

 
22,686

Funds receivable and seller accounts
64,247

 
21,072

Total current assets
724,001

 
680,289

Restricted cash
5,341


5,341

Property and equipment, net of accumulated depreciation and amortization of $93,159 and $85,440 as of March 31, 2019 and December 31, 2018, respectively
131,650

 
120,179

Goodwill
37,034

 
37,482

Intangible assets, net of accumulated amortization of $8,794 and $7,378 as of March 31, 2019 and December 31, 2018, respectively
33,839

 
34,589

Deferred tax assets
23,000

 
23,464

Other assets
26,303

 
507

Total assets
$
981,168

 
$
901,851

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,325

 
$
26,545

Accrued expenses
40,123

 
49,158

Finance lease obligations—current
9,927

 
3,884

Funds payable and amounts due to sellers
64,247

 
21,072

Deferred revenue
7,787

 
7,478

Other current liabilities
9,266

 
3,925

Total current liabilities
148,675

 
112,062

Finance lease obligations—net of current portion
59,610

 
2,095

Deferred tax liabilities
32,637

 
30,455

Facility financing obligation

 
59,991

Long-term debt, net
280,226

 
276,486

Other liabilities
40,007

 
19,864

Total liabilities
561,155

 
500,953

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 119,933,386 and 119,771,702 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)
120

 
120

Preferred stock ($0.001 par value, 25,000,000 shares authorized as of March 31, 2019 and December 31, 2018)

 

Additional paid-in capital
570,906

 
562,033

Accumulated deficit
(142,238
)
 
(153,442
)
Accumulated other comprehensive loss
(8,775
)
 
(7,813
)
Total stockholders’ equity
420,013

 
400,898

Total liabilities and stockholders’ equity
$
981,168

 
$
901,851

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

4


Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share amounts)
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenue
$
169,339

 
$
120,912

Cost of revenue
52,658

 
41,295

Gross profit
116,681

 
79,617

Operating expenses:
 
 
 
Marketing
35,444

 
26,194

Product development
24,947

 
20,721

General and administrative
24,647

 
18,904

Total operating expenses
85,038

 
65,819

Income from operations
31,643

 
13,798

Other (expense) income:
 
 
 
Interest expense
(4,653
)
 
(3,764
)
Interest and other income
3,385

 
1,097

Foreign exchange gain
1,062

 
1,850

Total other expense
(206
)
 
(817
)
Income before income taxes
31,437

 
12,981

Benefit (provision) for income taxes
142

 
(14
)
Net income
$
31,579

 
$
12,967

Net income per share attributable to common stockholders:
 
 
 
Basic
$
0.26

 
$
0.11

Diluted
$
0.24

 
$
0.10

Weighted-average common shares outstanding:
 
 
 
Basic
119,679,149

 
121,267,092

Diluted
130,237,875

 
125,772,315

 

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

5


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
Net income
$
31,579

 
$
12,967

Other comprehensive (loss) income:
 
 
 
Cumulative translation adjustment
(1,061
)
 
124

Unrealized gains (losses) on marketable securities, net of tax of $0 in both periods
99

 
(26
)
Total other comprehensive (loss) income
(962
)
 
98

Comprehensive income
$
30,617

 
$
13,065



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, 2018
119,771,702

 
$
120

 
$
562,033

 
$
(153,442
)
 
$
(7,813
)
 
$
400,898

Cumulative effect adjustment related to the adoption of the leasing standard

 

 

 
7,116

 

 
7,116

Stock-based compensation

 

 
8,616

 

 

 
8,616

Exercise of vested options
534,693

 
1

 
5,929

 

 

 
5,930

Vesting of restricted stock units, net of shares withheld
159,403

 

 
(5,672
)
 

 

 
(5,672
)
Stock repurchase
(532,412
)
 
(1
)
 

 
(27,491
)
 

 
(27,492
)
Other comprehensive loss

 

 

 

 
(962
)
 
(962
)
Net income

 

 

 
31,579

 

 
31,579

Balance as of March 31, 2019
119,933,386

 
$
120

 
$
570,906

 
$
(142,238
)
 
$
(8,775
)
 
$
420,013

 
 

 
 

 
 

 
 

 
 

 
 


 
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

 

 
6,704

 

 

 
6,704

Exercise of vested options
887,906

 
1

 
10,248

 

 

 
10,249

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

 

 
54,184

 

 

 
54,184

Purchase of capped call, net of taxes

 

 
(26,243
)
 

 

 
(26,243
)
Vesting of restricted stock units, net of shares withheld
104,849

 

 
(1,780
)
 

 

 
(1,780
)
Stock repurchase
(2,807,393
)
 
(3
)
 

 
(68,583
)
 

 
(68,586
)
Other comprehensive income

 

 

 

 
98

 
98

Net income

 

 

 
12,967

 

 
12,967

Balance as of March 31, 2018
119,954,600

 
$
120

 
$
542,554

 
$
(151,906
)
 
$
(6,281
)
 
$
384,487

 
 

 
 

 
 

 
 

 
 

 
 


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

7


Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended 
 March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
31,579

 
$
12,967

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
8,082

 
6,454

Depreciation and amortization expense
10,142

 
6,320

Bad debt expense
1,182

 
912

Foreign exchange gain
(171
)
 
(2,102
)
Other non-cash losses, net
2,928

 
1,115

Deferred income taxes
(142
)
 
91

Changes in operating assets and liabilities:
 
 
 
Current assets
(48,293
)
 
(4,317
)
Non-current assets
1,008

 
7

Current liabilities
25,815

 
2,627

Non-current liabilities
(672
)
 
2,095

Net cash provided by operating activities
31,458

 
26,169

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(683
)
 
(192
)
Development of internal-use software
(3,390
)
 
(3,097
)
Purchases of marketable securities
(158,883
)
 
(59,811
)
Sales of marketable securities
140,952

 
17,447

Net cash used in investing activities
(22,004
)
 
(45,653
)
Cash flows from financing activities
 
 
 
Payment of tax obligations on vested equity awards
(5,672
)
 
(1,780
)
Repurchase of stock
(27,492
)
 
(68,586
)
Proceeds from exercise of stock options
5,930

 
10,249

Proceeds from issuance of convertible senior notes

 
345,000

Payment of debt issuance costs
(1,192
)
 
(9,127
)
Purchase of capped call

 
(34,224
)
Payments on finance lease obligations
(2,745
)
 
(1,850
)
Payments on facility financing obligation

 
(3,122
)
Other financing, net
1,864

 
(2,724
)
Net cash (used in) provided by financing activities
(29,307
)
 
233,836

Effect of exchange rate changes on cash
(1,458
)
 
4,061

Net (decrease) increase in cash, cash equivalents, and restricted cash
(21,311
)
 
218,413

Cash, cash equivalents, and restricted cash at beginning of period
372,326

 
320,783

Cash, cash equivalents, and restricted cash at end of period
$
351,015


$
539,196


8


Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended 
 March 31,
 
2019
 
2018
Supplemental non-cash disclosures:
 
 
 
Stock-based compensation capitalized in development of capitalized software
$
534

 
$
250

Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses
$
1,180

 
$
1,535

Additions to intangible assets included in other current liabilities
$
1,348

 
$

Debt issuance costs included in accounts payable and accrued expenses
$
200

 
$
977

Right-of-use assets obtained in exchange for new lease liabilities:
 
 
 
Finance leases
$
202

 
$
29

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 above:
 
Three Months Ended 
 March 31,
 
2019
 
2018
Beginning balance:
 
 
 
Cash and cash equivalents
$
366,985

 
$
315,442

Restricted cash
5,341

 
5,341

Total cash, cash equivalents, and restricted cash
$
372,326

 
$
320,783

 
 
 
 
Ending balance:
 
 
 
Cash and cash equivalents
$
345,674

 
$
533,855

Restricted cash
5,341

 
5,341

Total cash, cash equivalents, and restricted cash
$
351,015

 
$
539,196

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 fees, and Etsy Plus subscription 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.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of March 31, 2019, the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2019 and 2018, the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 and the Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 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, 2019 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 March 31, 2019, results of operations for the three months ended March 31, 2019 and 2018 and cash flows for the three months ended March 31, 2019 and 2018. 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 month periods are unaudited. These unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019 (the “Annual Report”).
During the first quarter of 2019, the Company adopted the accounting principles outlined within ASU 2016-02—Leases, 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, liabilities, and equity at the date of the Consolidated 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; leases, the incremental borrowing rate; income taxes, including the estimate of annual effective tax rate at interim periods, assessment of valuation allowances, and evaluation of uncertain tax positions; website development costs and internal-use software; purchase price allocations for business combinations and contingent consideration; valuation of goodwill and intangible assets; stock-based compensation; 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.

10


Etsy, Inc.
Notes to Consolidated Financial Statements

Revenue Recognition
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help Etsy sellers to generate more sales and scale their businesses. 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. With the exception of Etsy Shipping Labels, the Company’s revenues are recognized on a gross basis. 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.
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. 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 10—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.
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, U.S. government and agency securities, and corporate bonds 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.

11


Etsy, Inc.
Notes to Consolidated Financial Statements

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
March 31,
2019
 
As of
December 31,
2018
Cash and cash equivalents
$
345,674

 
$
366,985

Short-term investments
276,432

 
257,302

Total cash, cash equivalents, and short-term investments
$
622,106

 
$
624,287

Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating leases are included in other assets, other current liabilities, and other liabilities on our Consolidated Balance Sheets. Finance leases are included in property and equipment, net, finance lease obligations, current, and finance lease obligations, net of current portion on the Company’s Consolidated Balance Sheets.  
Most leases with a term greater than one year are recognized on the Consolidated Balance Sheet as right-of-use assets (“ROU”), lease obligations and, if applicable, long-term lease obligations in the line items cited above. The Company has elected not to recognize leases with terms of one year or less on the Consolidated Balance Sheets. Lease obligations and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The components of a lease should be split into three categories: lease components, including land, building, or other similar components; non-lease components, including common area maintenance, maintenance, consumables, or other similar components; and non-components, including property taxes, insurance, or other similar components. However, the Company has elected to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis.
Recently Issued Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13—Financial Instruments—Credit Losses, and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, which require 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 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 February 2016, the FASB issued ASU 2016-02—Leases (Topic 842), 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 the transparency and comparability. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use assets and corresponding lease

12


Etsy, Inc.
Notes to Consolidated Financial Statements

liabilities. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted this standard in the first quarter of 2019, effective as of January 1, 2019, using the modified retrospective approach utilizing transition guidance introduced in ASU 2018-11—Leases: Targeted Improvements, and elected the ‘package of practical expedients’ permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease identification, classification, and initial direct costs. The Company did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The Company also elected to continue to recognize lease payments related to short-term leases as an expense on a straight-line basis over the lease term. Upon adoption, the Company recognized new ROU assets and lease obligations on the Consolidated Balance Sheet for our operating leases of $25.4 million and $27.8 million, respectively. Additionally, upon adoption the Company renamed its capital lease obligations, current and capital lease obligations, net of current to finance lease obligations, current, and finance lease obligations, net of current portion, respectively, in the Consolidated Balance Sheets.
In 2014 the Company applied build-to-suit accounting treatment to its headquarters lease in Brooklyn, New York, as the Company was deemed the accounting owner of the construction project because of the Company’s involvement in the build-out of the space. Upon transition, the Company derecognized the facility financing obligation and related building assets recorded as a result of the failed sale and leaseback transactions and recorded any difference as a cumulative-effect adjustment to accumulated deficit. The adoption of this standard had a material impact on the Company’s financial position but did not and is not expected to significantly affect the Company’s results of operations. The Company has derecognized the existing facility financing obligation and existing building asset for sale-leaseback transactions that currently do not qualify for sale accounting of $60.0 million and $51.1 million, respectively, and $22.1 million was reclassified from building to leasehold improvements and will be amortized over the remaining term of the lease. The Company recognized a gain of $9.3 million, offset by a tax impact of $2.2 million associated with this change through accumulated deficit as of January 1, 2019, with a net decrease to accumulated deficit of $7.1 million, and recognized a new ROU asset of $66.7 million and a lease liability in the same amount on the Consolidated Balance Sheets for the associated lease, which is accounted for as a financing lease.
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 adopted this standard in the first quarter of 2019 noting that the adoption of the standard had no material impact on its Consolidated Financial Statements.
Note 2—Revenue

The following table summarizes revenue by type of service for the periods presented (in thousands):
 
Three Months Ended 
 March 31,
 
2019
 
2018
Marketplace revenue
$
126,130

 
$
87,967

Services revenue
42,171

 
32,605

Other revenue
1,038

 
340

Revenue
$
169,339

 
$
120,912

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. On July 16, 2018, the Company increased the seller transaction fee from 3.5% to 5% of each completed transaction, and now applies it to the cost of shipping in addition to the cost of the item. Etsy Payments processing fees vary between 3 -

13


Etsy, Inc.
Notes to Consolidated Financial Statements

4.5% 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, and Etsy Plus. 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 her 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 she purchases shipping labels through its platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides its sellers access to purchase shipping labels 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 it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Etsy Seller. Etsy Shipping Label revenue is recorded net of refunds.
Revenue from Pattern 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. Each performance obligation is recognized in accordance with how the benefit is transferred to the customer.
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.
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 4-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 three months ended March 31, 2019 that was included in the deferred balance at the beginning of the period was $7.1 million.

14


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 3—Income Taxes
On December 22, 2017, the U.S. government enacted The Tax Cuts and Jobs Act (“The TCJA”) 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 TCJA including computations under Global Intangible Low Taxed Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”). For the GILTI and FDII computations, the Company recorded tax expense using the current available regulations and the technical guidance on the interpretations of The TCJA. The Company has recorded the impacts of The TCJA in our effective tax rate for the three months ended March 31, 2019 and have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI using the period cost method.
The Company will continue to monitor the forthcoming regulations and additional guidance of the GILTI, FDII and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions under the TCJA, which are complex and subject to continuing regulatory interpretations by the IRS.
The amount of unrecognized tax benefits included in the Consolidated Balance Sheets increased $1.1 million in the three months ended March 31, 2019, from $18.8 million at December 31, 2018 to $19.9 million at March 31, 2019. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $19.9 million at March 31, 2019.
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. For the three months ended March 31, 2019 $0.1 million was included in tax expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2018 was approximately $0.5 million.
Note 4—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 
 March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
31,579

 
$
12,967

Net income allocated to participating securities under the two-class method
(15
)
 
(13
)
Net income applicable to common stockholders—basic
31,564

 
12,954

Dilutive effect of net income allocated to participating securities under the two-class method
15

 
13

Net income attributable to common stockholders—diluted
$
31,579

 
$
12,967

 
 
 
 
Denominator:
 
 
 
Weighted-average common shares outstanding—basic (1)
119,679,149

 
121,267,092

Dilutive effect of assumed conversion of options to purchase common stock
4,849,246

 
2,836,429

Dilutive effect of assumed conversion of restricted stock units
1,970,865

 
1,608,854

Dilutive effect of assumed conversion of convertible debt
3,720,694

 

Dilutive effect of assumed conversion of restricted stock from acquisition
17,921

 
59,940

Weighted-average common shares outstanding—diluted
130,237,875

 
125,772,315

 
 
 
 
Net income per share attributable to common stockholders—basic
$
0.26

 
$
0.11

Net income per share attributable to common stockholders—diluted
$
0.24

 
$
0.10

(1)
23,759 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the three months ended March 31, 2019.

15


Etsy, Inc.
Notes to Consolidated Financial Statements

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 
 March 31,
 
2019
 
2018
Stock options
111,444

 
225,099

Restricted stock units
174,681

 
428,846

Total anti-dilutive securities
286,125

 
653,945

Note 5—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, income (loss) before income taxes, and net income (loss) by geographic area for the periods presented (in thousands):
 
Three Months Ended 
 March 31,
 
2019
 
2018
United States
$
113,264

 
$
84,923

International
56,075

 
35,989

Revenue
$
169,339

 
$
120,912

 
 
 
 
United States (1)
$
4,995

 
$
(2,265
)
International
26,442

 
15,246

Income (loss) before income taxes
$
31,437

 
$
12,981

 
 
 
 
United States (1)
$
8,692

 
$
(2,018
)
International
22,887

 
14,985

Net income (loss)
$
31,579

 
$
12,967

(1)
The United States loss before income taxes and net loss in the three months ended March 31, 2018 was primarily driven by interest associated with the build-to-suit lease accounting related to our corporate headquarters and 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.
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.

16


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 6—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.
The following are the major categories of assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):

 
As of March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$

 
$
12,994

 
$

 
$
12,994

Corporate bonds

 
8,565

 

 
8,565

Money market funds
232,218

 

 

 
232,218

 
232,218

 
21,559

 

 
253,777

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
117,824

 

 
117,824

Corporate bonds

 
48,250

 

 
48,250

U.S. Government and agency securities
110,358

 

 

 
110,358

 
110,358

 
166,074

 

 
276,432

Funds receivable and seller accounts:
 
 
 
 
 
 
 
Money market funds
24,258

 

 

 
24,258

 
24,258

 

 

 
24,258

 
$
366,834

 
$
187,633

 
$

 
$
554,467


17


Etsy, Inc.
Notes to Consolidated Financial Statements

 
As of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$

 
$
7,775

 
$

 
$
7,775

Money market funds
244,856

 

 

 
244,856

 
244,856

 
7,775

 

 
252,631

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
147,860

 

 
147,860

Corporate bonds

 
46,801

 

 
46,801

U.S. Government and agency securities
62,641

 

 

 
62,641

 
62,641

 
194,661

 

 
257,302

Funds receivable and seller accounts:
 
 
 
 
 
 
 
Money market funds
9,229

 

 

 
9,229

 
9,229

 

 

 
9,229

 
$
316,726

 
$
202,436

 
$

 
$
519,162

Level 1 instruments include investments in debt securities including money market funds and 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 March 31, 2019 and December 31, 2018.
See “Note 7—Marketable Securities” for additional information on the Company’s marketable securities measured at fair value.

Disclosure of Fair Values

The Company’s financial instruments that are not remeasured at fair value include the Notes (see “Note 10—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 $292.2 million and $279.1 million as of March 31, 2019 and December 31, 2018, respectively. The estimated fair value of the Notes was determined through consideration of quoted market prices for similar instruments.

18


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 7—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
March 31, 2019
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
12,994

 
$

 
$

 
$
12,994

Corporate bonds
8,565

 

 

 
8,565

 
21,559

 

 

 
21,559

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
117,824

 

 

 
117,824

Corporate bonds
48,226

 
(2
)
 
26

 
48,250

U.S. Government and agency securities
110,327

 

 
31

 
110,358

 
276,377

 
(2
)
 
57

 
276,432

 
$
297,936

 
$
(2
)
 
$
57

 
$
297,991

December 31, 2018
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
7,775

 
$

 
$

 
$
7,775

 
7,775

 

 

 
7,775

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
147,860

 

 

 
147,860

Corporate bonds
46,836

 
(35
)
 

 
46,801

U.S. Government and agency securities
62,638

 
(9
)
 
12

 
62,641

 
257,334

 
(44
)
 
12

 
257,302

 
$
265,109

 
$
(44
)
 
$
12

 
$
265,077

The Company’s investments in marketable securities consist primarily of investments in debt securities, including 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 6—Fair Value Measurements” for additional information on the Company’s marketable securities measured at fair value.

19


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 8—Leases
As the lessee, the Company currently leases 225,135 square feet of real estate space for its corporate headquarters located in Brooklyn, New York, under a noncancelable lease that expires in 2026. The Company uses these facilities for its principal administration, technology and development, and engineering activities. The Company also leases office space for its offices in San Francisco, Hudson (New York), Dublin, and London. Additionally, the Company has short-term leases in other locations around the world that meet short-term lease criteria and are not recognized on the Consolidated Balance Sheets. Most leases include one or more options to renew, and the exercise of these options is at the Company’s sole discretion. The Company determined that its options to break or renew would not be reasonably certain in determining the expected lease term, and therefore are not included as part of its right-of-use assets and lease liabilities.
The Company entered into financing lease agreements with Dell Financial Services, LLC. (“DFS”) and ePlus Group, Inc. (“ePlus”) for hosting and computer equipment leases. The leases through DFS have a 36-month term, zero interest and are payable in equal monthly installments with a buy-out option of $1 at the end of the lease term. The leases through ePlus have a 36-month term, interest rate of 3.71%-6.93% and are payable in equal monthly installments with a fair market value or a $1 buy-out option at the end of the lease term depending on the equipment.
In calculating the present value of the lease payments, the Company has elected to utilize its estimated incremental borrowing rate based on the remaining lease term and not the original lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
The elements of lease expense were as follows (in thousands): 
 
Three Months Ended 
 March 31, 2019
Operating lease cost
$
1,277

Finance lease cost:

Amortization of right-of-use assets
3,370

Interest on lease liabilities
870

Total finance lease cost
4,240

Other lease income, net (1)
(59
)
Total lease cost
$
5,458


(1)
Other lease income, net includes short-term sublease income, short-term lease costs, and variable lease costs, which are immaterial.
The following table presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheet (in thousands):
 
As of March 31, 2019
Operating leases:
 
Other assets
$
24,471

Other current liabilities
$
4,247

Other liabilities
22,836

Total operating lease liabilities
$
27,083

 
 
Finance leases:
 
Property and equipment, net
$
68,810

Finance lease obligations—current
$
9,927

Finance lease obligations—net of current portion
59,610

Total finance lease liabilities
$
69,537


20


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table summarizes the weighted-average remaining lease term and weighted average discount rate for the three months ended March 31, 2019:
 
Three Months Ended 
 March 31, 2019
Weighted average remaining lease term:
 
Operating leases
6.70 years

Finance leases
6.94 years

Weighted average discount rate:
 
Operating leases
4.26
%
Finance leases
4.40
%
Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended 
 March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows used in operating leases
$
(800
)
Operating cash flows used in finance leases
(864
)
Finance cash flows used in finance leases
(2,745
)
Future minimum lease payments under non-cancelable leases for the nine months ending December 31, 2019 and years ending December 31, 202020212022, 2023, and thereafter are as follows (in thousands):
 
Operating Leases
 
Financing Leases
2019
$
3,913

 
$
9,516

2020
4,801

 
11,351

2021
4,192

 
10,911

2022
4,190

 
10,530

2023
4,214

 
10,599

Thereafter
9,782

 
27,715

Total future minimum lease payments
31,092

 
80,622

Less imputed interest
4,009

 
11,085

Total
$
27,083

 
$
69,537


21


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table represents the Company’s commitments under its previous presentation of its capital, operating, and build-to-suit lease agreements as of December 31, 2018 (in thousands):
 
Capital Lease
Obligations
 
Operating
Leases
 
Build-to-Suit
Lease
Periods ending
 
 
 
 
 
2019
$
4,392

 
$
4,904

 
$
9,451

2020
1,754

 
4,783

 
9,522

2021
481

 
4,185

 
10,354

2022

 
4,180

 
10,520

2023

 
4,205

 
10,599

Thereafter

 
9,760

 
27,715

Total minimum payments required
$
6,627

 
$
32,017

 
$
78,161

Amounts representing interest
648

 
 
 
 
Present value of net minimum payments
5,979

 
 
 
 
Current maturities
3,884

 
 
 
 
Long-term payment obligations
$
2,095

 
 
 
 
Note 9—Accrued Expenses
Accrued expenses consisted of the following as of the dates indicated (in thousands):
 
As of March 31,
2019
 
As of December 31,
2018
Vendor accruals
$
14,576

 
$
17,817

Sales and use tax payable
10,384

 
12,232

Accrued bonus
5,651

 
12,906

Accrued vacation
3,113

 
3,787

Payroll-related liabilities
3,603

 
2,406

Other
2,796

 
10

Total accrued expenses
$
40,123

 
$
49,158

Note 10—Debt
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 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.
During the first quarter of 2019, 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 second quarter of 2019. As of March 31, 2019, 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. As of March 31, 2019, the if-converted value of the Notes was approximately $294.4 million higher than the aggregate principal amount, or $639.4 million, offset in part by the capped call transactions described below.
The Company capitalized $10.0 million of debt issuance costs in connection with the Notes. Non-cash interest expense related to the Notes for the three months ended March 31, 2019 and 2018 was $3.7 million and $1.2 million, respectively. Total unamortized debt issuance costs related to the Notes were $6.3 million and $6.7 million as of March 31, 2019 and December 31, 2018, respectively.

22


Etsy, Inc.
Notes to Consolidated Financial Statements

The estimated fair value of the Notes was $292.2 million and $279.1 million as of March 31, 2019 and December 31, 2018, respectively. 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 6—Fair Value Measurements.”
As of March 31, 2019, there were no other material changes related to the Notes and Capped Call Transactions compared to that disclosed in the Annual Report.
Credit Agreement
On February 25, 2019, the Company entered into a $200.0 million senior secured revolving credit facility pursuant to a Credit Agreement (the “2019 Credit Agreement”) with lenders party thereto from time to time, and Citibank N.A., as administrative Agent. The 2019 Credit Agreement will mature in February 2024. The 2019 Credit Agreement includes a letter of credit sublimit of $30.0 million and a swingline loan sublimit of $10.0 million.
Borrowings under the 2019 Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.25% to 0.875% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.875%. Swingline loans under the 2019 Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the senior secured net leverage ratio (defined as secured funded debt, net of unrestricted cash up to $100 million, to EBITDA) for the preceding four fiscal quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee, ranging from 0.20% to 0.35% depending on the Company’s senior secured net leverage ratio, and fees associated with letters of credit. The 2019 Credit Agreement also permits the Company, in certain circumstances, to request an increase in the facility by an amount of up to $100.0 million at the same maturity, pricing and other terms and to request an extension of the maturity date for the facility. In connection with the 2019 Credit Agreement, the Company also paid the lenders certain upfront fees.
The 2019 Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, certain fundamental changes (including mergers), investments, dispositions, restricted payments (including dividends and stock repurchases), prepayments of junior debt, and transactions with affiliates. These restrictions do not prohibit a subsidiary of the Company from making pro rata payments to the Company or any other person that owns an equity interest in such subsidiary. The 2019 Credit Agreement contains financial covenants, that require the Company and its subsidiaries to maintain (i) a secured net leverage ratio not to exceed 3.00 to 1.00, subject to an increase, at the option of the Company, to 3.50 to 1.00 for a specified period of time in the event of certain material acquisitions, tested as of the last day of each fiscal quarter and (ii) an interest coverage ratio (defined as the ratio of EBITDA to cash interest expense) of not less than 2.50 to 1.00, tested for each fiscal quarter.
The 2019 Credit Agreement includes customary events of default, including, but not limited to, nonpayment of principal or interest, breaches of representations and warranties, failure to perform or observe covenants, cross-defaults with certain other indebtedness, final judgments or orders, certain change of control events, and certain bankruptcy-related events or proceedings. Upon the occurrence of an event of default (subject to notice and grace periods), obligations under the 2019 Credit Agreement could be accelerated.

Subject to certain exceptions, to the extent the Company has any material domestic subsidiaries, the obligations under the 2019 Credit Agreement would be required to be guaranteed by such material domestic subsidiaries. The obligations under the 2019 Credit Agreement are secured by all or substantially all of the assets of the Company and any such subsidiary guarantors.
The Company capitalized $1.4 million of debt issuance costs in connection with the 2019 Credit Agreement. Total unamortized debt issuance costs related to the 2019 Credit Agreement were $1.3 million as of March 31, 2019.
At March 31, 2019, the Company did not have any borrowings under the 2019 Credit Agreement, and was in compliance with all financial covenants.

23


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 11—Commitments and Contingencies
Legal Proceedings
From time to time in the normal course of business, various claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation, regardless of their success, could have an adverse effect on the Company’s Consolidated Results of Operations or Cash Flows in the period the claims or litigation are resolved. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business.
Note 12—Stockholders’ Equity
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.
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, 2018
5,032,648

 
$
28.80

 
$
145,000

 
$
155,000

Repurchases of common stock for the three months ended:

 

 

 

March 31, 2019
532,412

 
51.64

 
27,500

 
(27,500
)
Balance as of March 31, 2019
5,565,060

 
$
32.84

 
$
172,500

 
$
127,500

(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.

24


Etsy, Inc.
Notes to Consolidated Financial Statements

Note 13—Stock-based Compensation

During the three months ended March 31, 2019, 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 2,395,434 shares to the total number of shares available for issuance under the 2015 Plan effective as of January 2, 2019. At March 31, 2019, 31,831,808 shares were authorized under the 2015 Plan and 20,476,246 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 
 March 31,
 
2019
 
2018
Volatility
39.5%
 
41.9% - 42.1%
Risk-free interest rate
2.5%
 
2.6% - 2.7%
Expected term (in years)
6.15
 
5.98 - 6.25
Dividend rate
—%
 
—%
 

The following table summarizes the activity for the Company’s options during the three months ended March 31, 2019 (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, 2018
6,890,994

 
$
12.91

 
 
 
 
Granted
275,000

 
69.89

 
 
 
 
Exercised
(534,693
)
 
11.09

 
 
 
 
Forfeited/Canceled
(98,150
)
 
28.36

 
 
 
 
Outstanding at March 31, 2019
6,533,151

 
15.23

 
7.85
 
$
340,424

Total exercisable at March 31, 2019
2,954,939

 


 
7.23
 
166,136

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 months ended March 31, 2019 and 2018 (in thousands except per share amounts):
 
Three Months Ended 
 March 31,
 
2019
 
2018
Weighted-average grant date fair value of options granted
$
29.55

 
$
12.31

Intrinsic value of options exercised
28,523

 
9,799

Fair value of awards vested
6,083

 
2,930

The total unrecognized compensation expense at March 31, 2019 related to the Company’s options was $27.1 million, which will be recognized over an estimated weighted-average amortization period of 2.94 years.

25


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table summarizes the activity for the Company’s unvested RSUs during the three months ended March 31, 2019:
 
Shares
 
Weighted-Average
Grant Date Fair Value
Unvested at December 31, 2018
3,480,368

 
$
22.87

Granted
736,574

 
67.95

Vested
(278,855
)
 
13.54

Forfeited/Canceled
(229,001
)
 
22.88

Unvested at March 31, 2019
3,709,086

 
32.52

The total unrecognized compensation expense at March 31, 2019 related to the Company’s unvested RSUs was $108.6 million, which will be recognized over an estimated weighted-average amortization period of 3.43 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 
 March 31,
 
2019
 
2018
Cost of revenue
$
1,099

 
$
546

Marketing
631

 
478

Product development
3,520

 
2,639

General and administrative
2,832

 
2,791

Total stock-based compensation expense
$
8,082

 
$
6,454


Total stock-based compensation expense in the three months ended March 31, 2019 and 2018 includes $0.3 million and $0.7 million in acquisition-related stock-based compensation expense, respectively.


26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019. 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 two-sided marketplace for unique and creative goods. Our mission is to “Keep Commerce Human,” and we’re committed to using the power of business and technology to strengthen communities and empower people around the world. We connect creative entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflect their sense of style, or represent a meaningful occasion.
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 sellers make money. We offer our sellers a marketplace with millions of buyers along with a range of seller tools and services that are specifically designed to help our creative entrepreneurs generate more sales and scale their businesses.
We are focused on attracting potential buyers to the Etsy marketplace for “special” purchase occasions throughout the year and deepening engagement with our existing buyers by inspiring purchases across multiple categories and special occasions. These special purchase occasions can occur many times throughout the year and include shopping that reflects an individual’s unique style; gifting that demonstrates thought and care; and celebrations that express creativity and fun. Buyers tell us that they come to Etsy because Etsy sellers offer items that they can’t find anywhere else. Special purchase occasions happen throughout the year when a buyer is decorating a home, dressing for an event, celebrating a special moment, or buying a gift for someone special.
Our revenue is diversified, generated from a mix of marketplace activities and other optional services we provide to Etsy sellers to help them generate more sales and scale their businesses.
Marketplace revenue is comprised 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.
Services revenue is comprised 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, Canada, United Kingdom, and Australia to purchase discounted shipping labels; Pattern, a service that allows sellers to build custom websites; and Etsy Plus, a subscription offering that provides sellers with enhanced tools and credits for use on our platform.
We also 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 six core geographies and building a sustainable competitive advantage around four areas of our business that we believe differentiate us from our competitors, or what we call our “Right to Win.”
The foundation of Etsy’s competitive advantage is our collection of unique items, which, we believe, when combined with best-in-class search and discovery, human connections, and a trusted brand, will enable us to continue to stand out among other ecommerce platforms and marketplaces. Our investments in product, marketing, and talent will be focused on capitalizing on these four areas of our business. Ultimately, the goal of our long-term strategy is to drive more new buyers to the website, give existing buyers reasons to come back more often, and fuel success for our sellers.

27


Quarter Highlights
Total revenue was $169.3 million in the three months ended March 31, 2019, driven by growth in both Marketplace and Services revenue. In the three months ended March 31, 2019, we recorded net income of $31.6 million, and non-GAAP Adjusted EBITDA of $49.9 million. 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 March 31, 2019, our marketplace connected 2.2 million active Etsy sellers and 41.0 million active Etsy buyers, in nearly every country in the world. In the three months ended March 31, 2019, Etsy sellers generated GMS of $1.0 billion of which approximately 58% came from purchases made on mobile devices. We are a global company and approximately 38% of our GMS in the three months ended March 31, 2019 came from transactions where either an Etsy seller or an Etsy buyer was located outside of the United States.

Other Operational Highlights

During the first quarter, we continued to build on our sustainable competitive advantage, including the following operational highlights:

Product experiment velocity increased to an all time high during the first quarter. Our initiatives focused on search relevance, listing quality and landing page experience which collectively improved the customer experience and fueled GMS growth.
We continued to develop a search and discovery experience that unlocks the value of the unique items in our marketplace. We improved search relevance by incorporating the item price as one of the many factors that impact listing prominence. We focused on our collection of unique items by enhancing the image quality for listings on desktop, our largest channel by device, which is intended to convert more visits into purchases.
We also focused on growth investments, such as our migration to Google Cloud. During the first quarter of 2019, we began serving our search traffic from Google Cloud, which is a major milestone in our search infrastructure and in our two-year migration plan, which we expect to be complete in early 2020.
Additionally, we progressed on our impact goals, including our ecological goal to build long-term resilience by eliminating our carbon impacts and fostering responsible resource use. In February, we began offsetting 100% of carbon emissions generated by shipping, which represent 98% of Etsy’s total emissions.
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 
 March 31,
 
% Growth
Y/Y
 
2019
 
2018
 
 
 
 
 
 
 
 
(in thousands, except percentages)
GMS
$
1,024,028


$
861,075

 
18.9
%
Revenue
$
169,339

 
$
120,912

 
40.1
%
Marketplace revenue
$
126,130

 
$
87,967

 
43.4
%
Services revenue
$
42,171

 
$
32,605

 
29.3
%
Net income
$
31,579

 
$
12,967

 
143.5
%
Adjusted EBITDA
$
49,867

 
$
26,421

 
88.7
%
 
 
 
 
 
 
Active sellers
2,227

 
1,970

 
13.0
%
Active buyers
41,029

 
34,693

 
18.3
%
Percent mobile GMS
58
%
 
54
%
 
400
 bps
Percent international GMS
38
%
 
35
%
 
300
 bps

28


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) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange gain and restructuring and other exit 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.
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.

29


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
March 31, 2019
18.9
%
 
20.6
%
 
(1.7
)%
 
18.9
%
 
20.6
%
 
(1.7
)%
December 31, 2018
22.3
%
 
23.1
%
 
(0.8
)%
 
20.8
%
 
20.4
%
 
0.4
 %
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
 %

30


Results of Operations
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. For more information regarding the components of our results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations” in the Annual Report, which we incorporate by reference.
 
Three Months Ended 
 March 31,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
Marketplace
$
126,130

 
$
87,967

Services
42,171

 
32,605

Other
1,038

 
340

Total revenue
169,339

 
120,912

Cost of revenue
52,658

 
41,295

Gross profit
116,681

 
79,617

Operating expenses:
 
 
 
Marketing
35,444

 
26,194

Product development
24,947

 
20,721

General and administrative
24,647

 
18,904

Total operating expenses
85,038

 
65,819

Income from operations
31,643

 
13,798

Other expense, net
(206
)
 
(817
)
Income before income taxes
31,437

 
12,981

Benefit (provision) for income taxes
142

 
(14
)
Net income
$
31,579

 
$
12,967

 
 
 
 
 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenue:
 
 
 
Marketplace
74.5
 %
 
72.8
 %
Services
24.9

 
27.0

Other
0.6

 
0.3

Total revenue
100.0

 
100.0

Cost of revenue
31.1

 
34.2

Gross profit
68.9

 
65.8

Operating expenses:
 
 
 
Marketing
20.9

 
21.7

Product development
14.7

 
17.1

General and administrative
14.6

 
15.6

Total operating expenses
50.2

 
54.4

Income from operations
18.7

 
11.4

Other expense, net
(0.1
)
 
(0.7
)
Income before income taxes
18.6

 
10.7

Benefit (provision) for income taxes
0.1

 

Net income
18.6
 %
 
10.7
 %


31


Comparison of Three Months Ended March 31, 2019 and 2018
Revenue
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Revenue:
 
 
 
 
 
 
 
Marketplace
$
126,130

 
$
87,967

 
$
38,163

 
43.4
%
Percentage of total revenue
74.5
%
 
72.8
%
 
 
 
 
Services
$
42,171

 
$
32,605

 
$
9,566

 
29.3
%
Percentage of total revenue
24.9
%
 
27.0
%
 
 
 
 
Other
$
1,038

 
$
340

 
$
698

 
205.3
%
Percentage of total revenue
0.6
%
 
0.3
%
 
 
 
 
Total revenue
$
169,339

 
$
120,912

 
$
48,427

 
40.1
%
GMS increased $163.0 million, or 18.9%, to $1.0 billion in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. On a currency-neutral basis GMS growth for the three months ended March 31, 2019 would have been 20.6%, or approximately 170 basis points higher than the reported 18.9% growth. Supporting this growth in GMS, active sellers increased 13.0% to 2.2 million, driven in large part by growth in international sellers, and active buyers increased 18.3% to 41.0 million at March 31, 2019 compared to March 31, 2018. In the three months ended March 31, 2019, GMS from new buyers grew 14% year-over-year and represented approximately 17% of overall GMS, a slight decrease compared to last year. In the three months ended March 31, 2019, GMS from repeat buyers grew 21% year-over-year and represented approximately 83% of overall GMS, a slight increase compared to last year.
During the three months ended March 31, 2019, mobile GMS increased as a percentage of total GMS to approximately 58%, up from approximately 54% for the three months ended March 31, 2018. We believe this increase was a result of increased mobile traffic, and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers.
For the three months ended March 31, 2019, international GMS increased as a percentage of total GMS to approximately 38%, up from approximately 35% for the three months ended March 31, 2018. International GMS was up approximately 28% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, driven by GMS between U.S. buyers and international sellers and by our fastest growing international trade route, international domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country. International domestic GMS grew approximately 41% in the three months ended March 31, 2019 compared with the three months ended March 31, 2018. The increase in international GMS was partially offset by decreases related to changes in foreign currency rates year-over-year. On a currency-neutral basis international GMS growth for the three months ended March 31, 2019 would have been 33%. We expect international GMS to continue to grow faster than U.S. GMS on a currency-neutral basis, driven by our global product enhancements and marketing.
Revenue increased $48.4 million, or 40.1%, to $169.3 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, of which 74.5% consisted of Marketplace revenue and 24.9% consisted of Services revenue.
Marketplace revenue increased $38.2 million, or 43.4%, to $126.1 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This growth corresponded with a 18.9% increase in GMS to a total of $1.0 billion for the three months ended March 31, 2019. Marketplace revenue increased at a faster rate than GMS primarily due to the increase in transaction revenue in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Transaction revenue increased 94.0% year-over-year, primarily driven by changes in our pricing model, which drove approximately 79% of the 94.0% increase. Etsy Payments revenue increased 17.8%, largely driven by overall GMS growth trends. The share of GMS processed through our Etsy Payments platform was 85% in the three months ended March 31, 2019, slightly down from 86% in the three months ended March 31, 2018. Listing fee revenue grew 15.9%, driven by overall GMS growth. Listing fee revenue increased at a slower rate than GMS primarily due to the issuance of free listings for promotional activities focused on driving growth in our international markets.
Services revenue increased $9.6 million, or 29.3%, to $42.2 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The growth in Services revenue was primarily driven by an increase in Promoted Listings, up 33.1%. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements.

32



Cost of Revenue
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Cost of revenue
$
52,658

 
$
41,295

 
$
11,363

 
27.5
%
Percentage of total revenue
31.1
%
 
34.2
%
 
 
 
 
Cost of revenue increased $11.4 million, or 27.5%, to $52.7 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily driven by hosting and bandwidth costs incurred as a result of our migration to the cloud while also maintaining our current infrastructure. The remaining fluctuation was driven by additional costs as a result of the increase in transactions and related revenue generated on the Etsy platform, which was partially offset by savings in credit card fees as a result of the transition to our redesigned payment account known as simplified shop finances in the fourth quarter of 2018. To a lesser extent, employee-related expenses and depreciation and amortization also increased year-over-year. Cost of revenue decreased as a percentage of revenue largely due to changes in our pricing model. We are ahead of schedule with our planned migration to the cloud and continue to expect that it will be completed in early 2020. We now anticipate spending more than $25 million on cloud migration costs in 2019, which includes implementation costs and costs related to cloud usage for growth initiatives.
Operating Expenses
We had 914 total employees on March 31, 2019, compared with 770 total employees on March 31, 2018 and 874 on December 31, 2018.
Marketing
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Marketing
$
35,444

 
$
26,194

 
$
9,250

 
35.3
%
Percentage of total revenue
20.9
%
 
21.7
%
 
 
 
 
Marketing expenses increased $9.3 million, or 35.3%, to $35.4 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily as a result of increased spend on digital marketing related to buyer acquisition. GMS from paid channels was 15% of overall GMS in the three months ended March 31, 2019, in line with the three months ended March 31, 2018. GMS from paid channels as a percentage of overall GMS decreased approximately 5% in the three months ended March 31, 2019 compared to the three months ended December 31, 2018, largely as a result of our reduction in direct marketing spend across certain channels. We expect increased direct marketing expense in the second quarter of 2019 compared to the first quarter of 2019 as we test new marketing channels, including television and digital video. We expect to generate incremental GMS from our marketing investments in 2019.

33


Product development
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Product development
$
24,947

 
$
20,721

 
$
4,226

 
20.4
%
Percentage of total revenue
14.7
%
 
17.1
%
 
 
 
 
Product development expenses increased $4.2 million, or 20.4%, to $24.9 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily as a result of an increase in employee-related expenses, including stock-based compensation, mainly the result of an increase in average headcount.
General and administrative
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
General and administrative
$
24,647

 
$
18,904

 
$
5,743

 
30.4
%
Percentage of total revenue
14.6
%
 
15.6
%
 
 
 
 
General and administrative expenses increased $5.7 million, or 30.4%, to $24.6 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to increased amortization expense related to the change in accounting treatment for our Brooklyn headquarters lease associated with the adoption of ASU 2016-02—Leases in the first quarter of 2019. The increase in general and administrative expenses is also driven by increased employee-related expenses, mainly the result of an increase in average headcount.
Other Expense, net
 
 
Three Months Ended 
 March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
(in thousands except percentages)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
$
(4,653
)
 
$
(3,764
)
 
$
(889
)
 
23.6
 %
Percentage of total revenue
(2.7
)%
 
(3.1
)%
 
 
 
 
Interest and other income
$
3,385

 
$
1,097

 
$
2,288

 
208.6
 %
Percentage of total revenue
2.0
 %
 
0.9
 %
 
 
 
 
Foreign exchange gain
$
1,062

 
$
1,850

 
$
(788
)
 
(42.6
)%
Percentage of total revenue
0.6
 %
 
1.5
 %
 
 
 
 
Other expense, net
$
(206
)
 
$
(817
)
 
$
611