0001370637-19-000146.txt : 20190802 0001370637-19-000146.hdr.sgml : 20190802 20190801182406 ACCESSION NUMBER: 0001370637-19-000146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 78 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190802 DATE AS OF CHANGE: 20190801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETSY INC CENTRAL INDEX KEY: 0001370637 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36911 FILM NUMBER: 19993948 BUSINESS ADDRESS: STREET 1: 117 ADAMS STREET CITY: BROOKLYN STATE: NY ZIP: 11201 BUSINESS PHONE: 718-855-7956 MAIL ADDRESS: STREET 1: 117 ADAMS STREET CITY: BROOKLYN STATE: NY ZIP: 11201 10-Q 1 etsy6301910q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended
June 30, 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) 
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x 

The number of shares of common stock outstanding as of July 26, 2019 was 120,459,900.




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 June 30, 2019 and December 31, 2018
 
Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018
 
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018
 
Consolidated Statement of Changes in Stockholders' Equity for the three and six months ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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 cost and timing of our cloud migration, the impact of our strategy, marketing and product investments on future gross merchandise sales (“GMS”) and revenue growth, our economic, social and ecological impact strategy, goals and future plans and our expectations regarding increased hosting and bandwidth costs, marketing costs, and the timing and impact of our new and planned initiatives, including our free shipping initiative, the anticipated launch of our new unified ad platform, and our planned acquisition of Reverb Holdings, Inc. 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
June 30,
2019
 
As of
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
359,159


$
366,985

Short-term investments
274,673

 
257,302

Accounts receivable, net of allowance for doubtful accounts of $2,868 and $4,720 as of June 30, 2019 and December 31, 2018, respectively
10,585

 
12,244

Prepaid and other current assets
34,647

 
22,686

Funds receivable and seller accounts
64,589

 
21,072

Total current assets
743,653

 
680,289

Restricted cash
5,341


5,341

Property and equipment, net of accumulated depreciation and amortization of $101,248 and $85,440 as of June 30, 2019 and December 31, 2018, respectively
128,409

 
120,179

Goodwill
37,342

 
37,482

Intangible assets, net of accumulated amortization of $10,332 and $7,378 as of June 30, 2019 and December 31, 2018, respectively
33,142

 
34,589

Deferred tax assets
23,319

 
23,464

Long-term investments
25,438

 

Other assets
25,131

 
507

Total assets
$
1,021,775

 
$
901,851

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,504

 
$
26,545

Accrued expenses
55,687

 
49,158

Finance lease obligations—current
9,306

 
3,884

Funds payable and amounts due to sellers
64,589

 
21,072

Deferred revenue
8,011

 
7,478

Other current liabilities
8,413

 
3,925

Total current liabilities
166,510

 
112,062

Finance lease obligations—net of current portion
57,409

 
2,095

Deferred tax liabilities
32,642

 
30,455

Facility financing obligation

 
59,991

Long-term debt, net
284,011

 
276,486

Other liabilities
38,902

 
19,864

Total liabilities
579,474

 
500,953

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 120,335,524 and 119,771,702 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively)
120

 
120

Preferred stock ($0.001 par value, 25,000,000 shares authorized as of June 30, 2019 and December 31, 2018)

 

Additional paid-in capital
573,611

 
562,033

Accumulated deficit
(124,015
)
 
(153,442
)
Accumulated other comprehensive loss
(7,415
)
 
(7,813
)
Total stockholders’ equity
442,301

 
400,898

Total liabilities and stockholders’ equity
$
1,021,775

 
$
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
181,095

 
$
132,387

 
$
350,434

 
$
253,299

Cost of revenue
58,605

 
45,409

 
111,263

 
86,704

Gross profit
122,490

 
86,978

 
239,171

 
166,595

Operating expenses:
 
 
 
 
 
 
 
Marketing
45,994

 
28,941

 
81,438

 
55,135

Product development
28,765

 
23,568

 
53,712

 
44,289

General and administrative
29,883

 
21,707

 
54,530

 
40,611

Total operating expenses
104,642

 
74,216

 
189,680

 
140,035

Income from operations
17,848

 
12,762

 
49,491

 
26,560

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(4,678
)
 
(6,125
)
 
(9,331
)
 
(9,889
)
Interest and other income
3,391

 
2,438

 
6,776

 
3,535

Foreign exchange (loss) gain
(192
)
 
(4,450
)
 
870

 
(2,600
)
Total other expense
(1,479
)
 
(8,137
)
 
(1,685
)
 
(8,954
)
Income before income taxes
16,369

 
4,625

 
47,806

 
17,606

Benefit (provision) for income taxes
1,854

 
(1,246
)
 
1,996

 
(1,260
)
Net income
$
18,223

 
$
3,379

 
$
49,802

 
$
16,346

Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.03

 
$
0.42

 
$
0.14

Diluted
$
0.14

 
$
0.03

 
$
0.38

 
$
0.13

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
120,198,526

 
119,450,194

 
119,848,289

 
120,819,201

Diluted
130,807,743

 
125,551,759

 
130,463,025

 
126,186,664

 

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

5


Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
18,223

 
$
3,379

 
$
49,802

 
$
16,346

Other comprehensive income (loss):
 
 
 
 
 
 
 
Cumulative translation adjustment
982

 
(276
)
 
(79
)
 
(152
)
Unrealized gains (losses) on marketable securities, net of tax
378

 
9

 
477

 
(17
)
Total other comprehensive income (loss)
1,360

 
(267
)
 
398

 
(169
)
Comprehensive income
$
19,583

 
$
3,112

 
$
50,200

 
$
16,177



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

Stock-based compensation

 

 
11,280

 

 

 
11,280

Exercise of vested options
154,197

 

 
1,910

 

 

 
1,910

Vesting of restricted stock units, net of shares withheld
247,941

 

 
(10,485
)
 

 

 
(10,485
)
Other comprehensive income

 

 

 

 
1,360

 
1,360

Net income

 

 

 
18,223

 

 
18,223

Balance as of June 30, 2019
120,335,524

 
$
120

 
$
573,611

 
$
(124,015
)
 
$
(7,415
)
 
$
442,301

 
 
 
 
 
 
 
 
 
 
 
 


7


 
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

Stock-based compensation

 
$

 
$
9,179

 
$

 
$

 
$
9,179

Exercise of vested options
59,736

 

 
476

 

 

 
476

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

 

 
30

 

 

 
30

Vesting of restricted stock units, net of shares withheld
253,989

 

 
(6,118
)
 

 

 
(6,118
)
Stock repurchase
(722,941
)
 

 

 
(21,075
)
 

 
(21,075
)
Other comprehensive loss

 

 

 

 
(267
)
 
(267
)
Net income

 

 

 
3,379

 

 
3,379

Balance as of June 30, 2018
119,545,384

 
$
120

 
$
546,121

 
$
(169,602
)
 
$
(6,548
)
 
$
370,091

 
 
 
 
 
 
 
 
 
 
 
 

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

8


Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
49,802

 
$
16,346

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
18,919

 
15,071

Depreciation and amortization expense
19,952

 
12,677

Bad debt expense
4,146

 
1,961

Foreign exchange (gain) loss
(1,240
)
 
2,849

Other non-cash losses, net
6,314

 
3,914

Deferred income taxes
(1,996
)
 
(377
)
Changes in operating assets and liabilities:
 
 
 
Current assets
(51,284
)
 
(1,805
)
Non-current assets
2,037

 
32

Current liabilities
37,626

 
11,848

Non-current liabilities
(2,982
)
 
4,245

Net cash provided by operating activities
81,294

 
66,761

Cash flows from investing activities
 
 
 
Cash paid for asset acquisition

 
(35,323
)
Purchases of property and equipment
(3,747
)
 
(304
)
Development of internal-use software
(4,669
)
 
(8,146
)
Purchases of marketable securities
(305,391
)
 
(234,149
)
Sales of marketable securities
265,852

 
50,472

Net cash used in investing activities
(47,955
)
 
(227,450
)
Cash flows from financing activities
 
 
 
Payment of tax obligations on vested equity awards
(16,157
)
 
(7,898
)
Repurchase of stock
(27,492
)
 
(89,661
)
Proceeds from exercise of stock options
7,840

 
10,725

Proceeds from issuance of convertible senior notes

 
345,000

Payment of debt issuance costs
(1,392
)
 
(9,561
)
Purchase of capped call

 
(34,224
)
Payments on finance lease obligations
(5,475
)
 
(3,421
)
Payments on facility financing obligation

 
(5,469
)
Other financing, net
2,072

 
1,023

Net cash (used in) provided by financing activities
(40,604
)
 
206,514

Effect of exchange rate changes on cash
(561
)
 
(3,447
)
Net (decrease) increase in cash, cash equivalents, and restricted cash
(7,826
)
 
42,378

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

 
320,783

Cash, cash equivalents, and restricted cash at end of period
$
364,500


$
363,161


9


Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2019
 
2018
Supplemental non-cash disclosures:
 
 
 
Stock-based compensation capitalized in development of capitalized software
$
977

 
$
812

Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses
$
2,637

 
$
1,663

Additions to intangible assets included in other current liabilities
$
1,720

 
$

Debt issuance costs included in accounts payable and accrued expenses
$

 
$
406

Right-of-use assets obtained in exchange for new lease liabilities:
 
 
 
Finance leases
$
333

 
$
690

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:
 
Six Months Ended 
 June 30,
 
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
$
359,159

 
$
357,820

Restricted cash
5,341

 
5,341

Total cash, cash equivalents, and restricted cash
$
364,500

 
$
363,161

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

10


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.
Correction of Errors
During the three months ended June 30, 2018, the Company recorded $2.8 million of revenue and $1.4 million of cost of revenue as corrections of errors related to the years ended December 31, 2017 and 2016. The Company has concluded that the errors and their correction were not material to the Consolidated Financial Statements for any of the periods impacted nor are they material to the 2018 Consolidated Financial Statements.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of June 30, 2019, the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2019 and 2018, the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 and the Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 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 new accounting standards adopted 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 June 30, 2019, results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 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 and six month periods are unaudited. These unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 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: revenue recognition, determining the nature and timing of satisfaction of performance obligations and stand-alone selling price for use in allocating the subscription price of Etsy Plus; leases, determining 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.

11


Etsy, Inc.
Notes to Consolidated Financial Statements

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.
Revenue Recognition
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help Etsy sellers 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 and Cash Equivalents, and Short- and Long-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, United States 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. Long-term investments, consisting primarily of corporate bonds with original maturities of greater than twelve months but less than 37 months 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.

12


Etsy, Inc.
Notes to Consolidated Financial Statements

The following table provides cash and cash equivalents, and short- and long-term investments within the Consolidated Balance Sheets as of the dates indicated (in thousands):
 
As of
June 30,
2019
 
As of
December 31,
2018
Cash and cash equivalents
$
359,159

 
$
366,985

Short-term investments
274,673

 
257,302

Long-term investments
25,438

 

Total cash and cash equivalents, and short- and long-term investments
$
659,270

 
$
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 the Company’s 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 (“ROU”) assets, 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 ROU 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 ROU 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13—Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, 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—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)—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 ROU assets and lease liabilities on the balance sheet for operating leases to increase the transparency and comparability. Disclosure requirements have been

13


Etsy, Inc.
Notes to Consolidated Financial Statements

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.
Note 2—Revenue

The following table summarizes revenue by type of service for the periods presented (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Marketplace revenue
$
134,403

 
$
91,306

 
$
260,533

 
$
179,273

Services revenue
45,896

 
39,507

 
88,067

 
72,112

Other revenue
796

 
1,574

 
1,834

 
1,914

Revenue
$
181,095

 
$
132,387

 
$
350,434

 
$
253,299

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 - 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. The Company earns additional fees on transactions in which currency conversions are performed.
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.

14


Etsy, Inc.
Notes to Consolidated Financial Statements

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 four-month listing period when used, and any unused credits are recognized when the 30-day subscription period expires. The amount of revenue recognized in the six months ended June 30, 2019 that was included in the deferred balance at January 1, 2019 was $7.5 million.

15


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, 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 and six months ended June 30, 2019 and have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI using the period cost method.
On June 21, 2019, the Internal Revenue Service issued final regulations relating to the GILTI and foreign tax credit provisions of the TCJA and proposed GILTI regulations for high-tax exception. The Company has evaluated the impact of the final and proposed GILTI regulations and concluded they were not material to the financial statements. The Company will continue to monitor the technical guidance of the proposed GILTI regulations.
The Company will continue to monitor the forthcoming regulations and additional guidance of the FDII and Base Erosion and Anti-Abuse Tax (“BEAT”) provisions under the TCJA, which are complex and subject to continuing regulatory interpretations.
The amount of unrecognized tax benefits included in the Consolidated Balance Sheets increased $1.0 million in the six months ended June 30, 2019, from $18.8 million at December 31, 2018 to $19.8 million at June 30, 2019. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $19.8 million at June 30, 2019. Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining subject to examination and the number of matters being examined, at this time we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued in tax expense for the six months ended June 30, 2019 increased by $0.3 million, from $0.5 million at December 31, 2018 to $0.8 million at June 30, 2019.

16


Etsy, Inc.
Notes to Consolidated Financial Statements

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income
$
18,223

 
$
3,379

 
$
49,802

 
$
16,346

Net income allocated to participating securities under the two-class method
(9
)
 
(3
)
 
(24
)
 
(16
)
Net income applicable to common stockholders—basic
18,214

 
3,376

 
49,778

 
16,330

Dilutive effect of net income allocated to participating securities under the two-class method
9

 
3

 
24

 
16

Net income attributable to common stockholders—diluted
$
18,223

 
$
3,379

 
$
49,802

 
$
16,346

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic (1)
120,198,526

 
119,450,194

 
119,848,289

 
120,819,201

Dilutive effect of assumed conversion of options to purchase common stock
4,667,849

 
3,964,746

 
4,764,942

 
3,559,951

Dilutive effect of assumed conversion of restricted stock units
1,693,130

 
2,053,861

 
1,841,363

 
1,733,777

Dilutive effect of assumed conversion of convertible debt
4,226,839

 

 
3,989,402

 

Dilutive effect of assumed conversion of restricted stock from acquisition
21,399

 
82,958

 
19,029

 
73,735

Weighted-average common shares outstanding—diluted
130,807,743

 
125,551,759

 
130,463,025

 
126,186,664

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

 
$
0.03

 
$
0.42

 
$
0.14

Net income per share attributable to common stockholders—diluted
$
0.14

 
$
0.03

 
$
0.38

 
$
0.13


(1)
22,993 and 23,759 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the three and six months ended June 30, 2019, respectively.
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Stock options
337,907

 
642,418

 
224,706

 
421,412

Restricted stock units
716,869

 
118,209

 
424,461

 
1,054,803

Total anti-dilutive securities
1,054,776

 
760,627

 
649,167

 
1,476,215



17


Etsy, Inc.
Notes to Consolidated Financial Statements

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, (loss) income before income taxes, and net (loss) income by geographic area for the periods presented (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
United States
$
119,670

 
$
96,805

 
$
232,934

 
$
181,728

International
61,425

 
35,582

 
117,500

 
71,571

Revenue
$
181,095

 
$
132,387

 
$
350,434

 
$
253,299

 
 
 
 
 
 
 
 
United States (1)
$
(11,897
)
 
$
8,017

 
$
(6,902
)
 
$
5,752

International (2)
28,266

 
(3,392
)
 
54,708

 
11,854

(Loss) income before income taxes
$
16,369

 
$
4,625

 
$
47,806

 
$
17,606

 
 
 
 
 
 
 
 
United States (1)
$
(6,146
)
 
$
7,525

 
$
2,546

 
$
5,507

International (2)
24,369

 
(4,146
)
 
47,256

 
10,839

Net (loss) income
$
18,223

 
$
3,379

 
$
49,802

 
$
16,346


(1)
The United States loss before income taxes in the three and six months ended June 30, 2019 and the net loss in the three months ended June 30, 2019 was primarily driven by a majority of operating expenses being incurred in the United States.
(2)
The International loss before income taxes and net loss in the three months ended June 30, 2018 was primarily driven by a foreign exchange loss related to the U.S. Dollar to Euro exchange rate fluctuations on the Company's intercompany and other non-functional currency balances.
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.

18


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 June 30, 2019 and December 31, 2018 (in thousands):

 
As of June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
272,246

 
$

 
$

 
$
272,246

 
272,246

 

 

 
272,246

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
79,028

 

 
79,028

Corporate bonds

 
83,924

 

 
83,924

U.S. Government and agency securities
111,721

 

 

 
111,721

 
111,721

 
162,952

 

 
274,673

Funds receivable and seller accounts:
 
 
 
 
 
 
 
Money market funds
20,308

 

 

 
20,308

 
20,308

 

 

 
20,308

Long-term investments:
 
 
 
 
 
 
 
Corporate bonds

 
25,438

 

 
25,438

 

 
25,438

 

 
25,438

 
$
404,275

 
$
188,390

 
$

 
$
592,665


19


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