Document

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	March 31, 2020

	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 Act:



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	☐
Non-accelerated Filer		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 May 4, 2020 was 118,677,964.

Etsy, Inc.

Table of Contents



		Page
	Note Regarding Forward-Looking Statements	3
	Part I - Financial Information	4
Item 1.	Consolidated Financial Statements (Unaudited)	4
	Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	4
	Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019	5
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019	6
	Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2020 and 2019	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
	Part II - Other Information	41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
	Signatures	68

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 Operations—Key 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 impact of our strategy, marketing and product investments on future gross merchandise sales (“GMS”) and revenue growth, the impact of our “Right to Win” strategy and levers for growth, the impact of ongoing settlement of intercompany balances on future foreign exchange rate volatility, our free shipping initiative, and our new Offsite Ads service on our future financial performance, and the uncertain impacts that the COVID-19 pandemic may have on our business, strategy, operating results, key metrics, financial condition, profitability, and cash flows and changes in overall level of consumer spending and volatility in the global economy. 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. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic may amplify many of these risks.

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.

Table of Contents

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, 2020			As of December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	442,354		$	443,293
Short-term investments	361,640			373,959
Accounts receivable, net of expected credit losses of $6,734 and $5,033 as of March 31, 2020 and December 31, 2019, respectively	11,712			15,386
Prepaid and other current assets	36,074			38,614
Funds receivable and seller accounts	55,172			49,786
Total current assets	906,952			921,038
Restricted cash	5,341			5,341
Property and equipment, net of accumulated depreciation and amortization of $131,114 and $120,084 as of March 31, 2020 and December 31, 2019, respectively	134,519			144,864
Goodwill	138,305			138,731
Intangible assets, net of accumulated amortization of $13,377 and $16,911 as of March 31, 2020 and December 31, 2019, respectively	194,874			199,236
Deferred tax assets	15,232			14,257
Long-term investments	94,080			89,343
Other assets	28,339			29,542
Total assets	$	1,517,642		$	1,542,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,557		$	26,324
Accrued expenses	68,885			88,345
Finance lease obligations—current	8,000			8,275
Funds payable and amounts due to sellers	55,172			49,786
Deferred revenue	8,250			7,617
Other current liabilities	7,985			8,181
Total current liabilities	158,849			188,528
Finance lease obligations—net of current portion	51,458			53,611
Deferred tax liabilities	63,126			64,497
Long-term debt, net	794,129			785,126
Other liabilities	43,233			43,956
Total liabilities	1,110,795			1,135,718
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 118,376,782 and 118,342,772 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively)	118			119
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of March 31, 2020 and December 31, 2019)	—			—
Additional paid-in capital	657,311			642,628
Accumulated deficit	(239,883		)	(227,414		)
Accumulated other comprehensive loss	(10,699		)	(8,699		)
Total stockholders’ equity	406,847			406,634
Total liabilities and stockholders’ equity	$	1,517,642		$	1,542,352

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

Table of Contents

Etsy, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share amounts)



	Three Months Ended March 31,
	2020			2019
Revenue	$	228,055		$	169,339
Cost of revenue	82,416			52,658
Gross profit	145,639			116,681
Operating expenses:
Marketing	48,505			35,444
Product development	37,782			24,947
General and administrative	33,987			24,647
Total operating expenses	120,274			85,038
Income from operations	25,365			31,643
Other (expense) income:
Interest expense	(9,967		)	(4,653		)
Interest and other income	3,613			3,385
Foreign exchange (loss) gain	(9,318		)	1,062
Total other expense	(15,672		)	(206		)
Income before income taxes	9,693			31,437
Benefit for income taxes	2,829			142
Net income	$	12,522		$	31,579
Net income per share attributable to common stockholders:
Basic	$	0.11		$	0.26
Diluted	$	0.10		$	0.24
Weighted-average common shares outstanding:
Basic	118,138,186			119,679,149
Diluted	123,119,053			130,237,875

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

Table of Contents

Etsy, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)



	Three Months Ended March 31,
	2020			2019
Net income	$	12,522		$	31,579
Other comprehensive loss:
Cumulative translation adjustment	(2,671		)	(1,061		)
Unrealized gains on marketable securities, net of tax expense of $205 and $0, respectively	671			99
Total other comprehensive loss	(2,000		)	(962		)
Comprehensive income	$	10,522		$	30,617

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

Table of Contents

Etsy, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share amounts)



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	Shares		Amount
Balance as of December 31, 2019	118,342,772		$	119		$	642,628		$	(227,414	)	$	(8,699	)	$	406,634
Stock-based compensation	—		—			13,985			—			—			13,985
Exercise of vested options	447,886		—			4,896			—			—			4,896
Vesting of restricted stock units, net of shares withheld	129,230		—			(4,198		)	—			—			(4,198		)
Stock repurchase	(543,106	)	(1		)	—			(24,991		)	—			(24,992		)
Other comprehensive loss	—		—			—			—			(2,000		)	(2,000		)
Net income	—		—			—			12,522			—			12,522
Balance as of March 31, 2020	118,376,782		$	118		$	657,311		$	(239,883	)	$	(10,699	)	$	406,847



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Common Stock
	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

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

Table of Contents

Etsy, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income	$	12,522		$	31,579
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	13,811			8,082
Depreciation and amortization expense	15,163			10,142
Bad debt expense	3,684			1,182
Foreign exchange loss (gain)	8,157			(171		)
Non-cash interest expense	8,570			3,376
Deferred income taxes	(2,829		)	(142		)
Other non-cash expense (income), net	530			(448		)
Changes in operating assets and liabilities:
Current assets	(2,784		)	(48,293		)
Non-current assets	915			1,008
Current liabilities	(27,235		)	25,815
Non-current liabilities	(840		)	(672		)
Net cash provided by operating activities	29,664			31,458
Cash flows from investing activities
Purchases of property and equipment	(567		)	(683		)
Development of internal-use software	(1,261		)	(3,390		)
Purchases of marketable securities	(101,501		)	(158,883		)
Sales of marketable securities	109,422			140,952
Net cash provided by (used in) investing activities	6,093			(22,004		)
Cash flows from financing activities
Payment of tax obligations on vested equity awards	(4,198		)	(5,672		)
Repurchase of stock	(24,992		)	(27,492		)
Proceeds from exercise of stock options	4,896			5,930
Payment of debt issuance costs	(14		)	(1,192		)
Payments on finance lease obligations	(2,566		)	(2,745		)
Other financing, net	(5,804		)	1,864
Net cash used in financing activities	(32,678		)	(29,307		)
Effect of exchange rate changes on cash	(4,018		)	(1,458		)
Net decrease in cash, cash equivalents, and restricted cash	(939		)	(21,311		)
Cash, cash equivalents, and restricted cash at beginning of period	448,634			372,326
Cash, cash equivalents, and restricted cash at end of period	$	447,695		$	351,015

Table of Contents

Etsy, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Three Months Ended March 31,
	2020		2019
Supplemental non-cash disclosures:
Stock-based compensation capitalized in development of capitalized software	$	174	$	534
Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses	$	65	$	1,180
Additions to intangible assets included in other current liabilities	$	—	$	1,348
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases	$	135	$	202

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,
	2020		2019
Beginning balance:
Cash and cash equivalents	$	443,293	$	366,985
Restricted cash	5,341		5,341
Total cash, cash equivalents, and restricted cash	$	448,634	$	372,326

Ending balance:
Cash and cash equivalents	$	442,354	$	345,674
Restricted cash	5,341		5,341
Total cash, cash equivalents, and restricted cash	$	447,695	$	351,015

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

Table of Contents

Etsy, Inc.

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”) operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Our primary marketplace, Etsy.com, is the global marketplace for unique and creative goods. The Company generates revenue primarily from transaction and listing fees, payments processing fees, advertising services, and shipping label sales.

Basis of Consolidation

The Consolidated Financial Statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information and Use of Estimates

The accompanying Consolidated Balance Sheet as of March 31, 2020, the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2020 and 2019, the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, and the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019 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 March 31, 2020, results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019.

The future effects of the COVID-19 pandemic on the Company’s results of operations, cash flows, and financial position are unclear. The Company’s Consolidated Financial Statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions in preparing the Consolidated Financial Statements. The accounting estimates that require management’s most subjective judgments include: leases, including determining the incremental borrowing rate; income taxes, including the estimate of annual effective tax rate at interim periods and evaluation of uncertain tax positions; purchase price allocations for business combinations, valuation of the acquired intangibles purchased in a business combination, and valuation of goodwill and intangible assets; stock-based compensation; fair value of financial instruments; and provision for expected credit losses. Actual results could differ from these estimates and assumptions. 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 due to seasonal and other factors. The financial data and the other information disclosed in the Notes to the interim financial statements related to the quarters ended March 31, 2020 and 2019 and as of March 31, 2020 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 27, 2020 (the “Annual Report”).

There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Annual Report other than those adopted in the quarter ended March 31, 2020 as disclosed below in Recently Adopted Accounting Pronouncements.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12—Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The Company adopted this standard in the first quarter of 2020, effective as of January 1, 2020, on a prospective basis. The effect of this standard was not material to the Company’s Consolidated Financial Statements.

Table of Contents

Etsy, Inc.

Notes to 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 adopted this standard January 1, 2020 on a prospective basis. The effect of this standard was not material to the Company’s Consolidated Financial Statements.

In June 2016, the 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, including accounts receivable and funds receivable and seller accounts, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The Company adopted this standard January 1, 2020 using a modified retrospective transition method. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements on the date of its adoption.

For the three months ended March 31, 2020, our assessment of the provision for expected credit losses considered market disruptions caused by COVID-19 and estimates of expected and emerging credit and collectibility trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict causing variability and volatility that may have a significant impact on our provision for credit losses in future periods.

Accounts Receivable: This standard requires the Company to consider forward-looking information to estimate expected credit losses in addition to its previous policy of determining the allowance by a number of factors, including age of the receivable, current economic conditions, historical losses, and management’s assessment of the financial condition of sellers on its platform.

The following table provides a rollforward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected (in thousands):



	As of March 31, 2020
Balance as of the beginning of period	$	5,033
Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings	—
Provision for expected credit losses	3,684
Amounts written off charged against the allowance	(1,983		)
Balance as of the end of period	$	6,734

Available-For-Sale Debt Securities: The Company’s investment portfolio at any point in time contains investments in U.S. Government and agency securities, corporate bonds, commercial paper, certificates of deposit, cash deposits, and money market funds. The Company's investment policy is to invest in high quality, investment grade securities from diverse issuers with credit ratings higher than BBB. In accordance with its investment policy, the Company’s investments have maturities no longer than 37 months, with the average maturity of these investments maintained at 12 months or less. The Company segments its portfolio based on the underlying risk profiles of the securities and has a zero loss expectation for U.S. treasury and U.S. Government agency securities. The potential of credit losses for the remainder of the portfolio of available-for-sale debt securities is mitigated by the high quality nature of the investments. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors including their credit rating, and current economic conditions. As of March 31, 2020, the Company did not recognize any year-to-date credit loss related to available-for-sale debt securities. The Company evaluates fair values for each individual security in the investment portfolio. See “Note 7—Marketable Securities” for additional information on the Company’s marketable securities.

Table of Contents

Etsy, Inc.

Notes to 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,
	2020		2019
Marketplace revenue	$	155,921	$	127,168
Services revenue	72,134		42,171
Revenue	$	228,055	$	169,339

Contract balances

Deferred revenues

The amount of revenue recognized in the three months ended March 31, 2020 that was included in the deferred balance at January 1, 2020 was $7.3 million.

Note 3—Income Taxes

The Company’s provision or benefit from income taxes in interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The estimate of the annual effective income tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year.

The Company’s quarterly tax provision, and its quarterly estimate of the annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting its income or loss before tax and the mix of jurisdictions to which they relate, taxable income or loss in each jurisdiction, changes in its stock price, audit-related developments, acquisitions, changes in its deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, the effective tax rate can be more or less volatile based on the amount of income or loss before tax. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when income before tax is lower.

For the three months ended March 31, 2020 the Company’s effective income tax rate was (29.2)% representing an income tax benefit recorded on net income before tax. The effective tax rate for the three months ended March 31, 2020 was lower than the U.S. statutory rate of 21% primarily due to excess tax benefits from employee stock-based payments, a benefit related to research and development tax credit and the impact from foreign operations that are subject to lower tax rates, partially offset by additional U.S. taxes on foreign earnings.

Although management believes its tax positions and related provisions reflected in the Consolidated Financial Statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statute of limitations. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in the provision for income taxes.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which the Company

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination, may result in additional taxes or penalties against the Company. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on the Company’s tax provision.

The amount of unrecognized tax benefits included in the Consolidated Balance Sheets increased $0.2 million in the three months ended March 31, 2020, from $19.9 million at December 31, 2019 to $20.1 million at March 31, 2020. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $19.6 million at March 31, 2020. 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, the Company is 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 (benefit)/expense for the three months ended March 31, 2020 was nil, and the total amount accrued as of March 31, 2020 remained flat at $0.2 million from December 31, 2019.

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,
	2020		2019
Numerator:
Net income	$	12,522	$	31,579
Net income allocated to participating securities under the two-class method	—		(15		)
Net income attributable to common stockholders—basic	12,522		31,564
Dilutive effect of net income allocated to participating securities under the two-class method	—		15
Net income attributable to common stockholders—diluted	$	12,522	$	31,579

Denominator:
Weighted-average common shares outstanding—basic (1)	118,138,186		119,679,149
Dilutive effect of assumed conversion of options to purchase common stock	4,000,177		4,849,246
Dilutive effect of assumed conversion of restricted stock units	980,690		1,970,865
Dilutive effect of assumed conversion of convertible debt (2)	—		3,720,694
Dilutive effect of assumed conversion of restricted stock from acquisition	—		17,921
Weighted-average common shares outstanding—diluted	123,119,053		130,237,875

Net income per share attributable to common stockholders—basic	$	0.11	$	0.26
Net income per share attributable to common stockholders—diluted	$	0.10	$	0.24


(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.

(2)

Since the Company expects to settle in cash the principal outstanding under the 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), 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 Company uses the if-converted method when calculating the dilutive effect of the 0% Convertible Senior Notes due 2023 (the “2018 Notes”) for the three months ended March 31, 2020 and used the treasury stock method for the three months ended March 31, 2019. See “Note 9—Debt” for more information on the 2019 Notes and the 2018 Notes.

Table of Contents

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,
	2020	2019
Stock options	624,906	111,444
Restricted stock units	1,144,169	174,681
Convertible senior notes	16,924,593	—
Total anti-dilutive securities	18,693,668	286,125

Note 5—Business Combinations

On August 15, 2019, the Company acquired all of the outstanding capital stock of Reverb, a leading online marketplace dedicated to buying and selling new, used, and vintage musical instruments. The acquisition enables the Company to expand into a new vertical with a company that has a similar strategy and business model. The total cash consideration paid was $270.4 million, net of cash acquired.

The acquisition was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of synergies and acquisition of workforce. The resulting goodwill is not expected to be deductible for tax purposes.

The Company has finalized the valuation of assets acquired and liabilities assumed for the acquisition of Reverb as of December 31, 2019.

Purchase Price Allocation

The following table summarizes the allocation of the purchase price (at fair value) to the assets acquired and liabilities assumed of Reverb as of August 15, 2019 (the date of acquisition) (in thousands):



	Final Fair Value as Adjusted
Short-term investments	$	1,028
Other current assets (1)	2,902
Funds receivable and seller accounts	5,578
Property and equipment other	1,543
Developed technology	30,300
Trademark	79,400
Customer relationships	93,500
Goodwill	101,703
Other assets (1)	6,743
Other net working capital	(208		)
Funds payable and amounts due to sellers	(5,578		)
Other current liabilities (1)	(3,684		)
Other liabilities (1)	(7,333		)
Deferred tax liability, net (1)	(35,485		)
Total purchase price	$	270,409


(1)	Other current liabilities and other liabilities are primarily related to non-income tax related contingency reserves, which are wholly offset by an indemnification asset of $5.5 million and a deferred tax asset.

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

Acquisition-related expenses are expensed as incurred. They were recorded in general and administrative expenses and were $0.7 million for the three months ended March 31, 2020. They primarily related to non-recurring employee-related costs associated with the acquisition.

Unaudited Supplemental Pro Forma Information

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2018 (in thousands):



	Three Months Ended March 31, 2019
Revenue	$	181,159
Net income	28,017

The pro forma financial information includes adjustments that are directly attributable to the business combination and are factually supportable. The pro forma adjustments include incremental amortization of intangible and developed technology assets, based on final values of each asset and acquisition-related expenses and are tax-effected. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.

Table of Contents

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 Sheets 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 the dates indicated (in thousands):



	As of March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	300,279	$	—	$	—	$	300,279
Commercial paper	—		6,291		—		6,291
	300,279		6,291		—		306,570
Short-term investments:
Commercial paper	—		26,079		—		26,079
Certificates of deposit	—		23,933		—		23,933
Corporate bonds	—		110,948		—		110,948
U.S. Government and agency securities	200,680		—		—		200,680
	200,680		160,960		—		361,640
Funds receivable and seller accounts:
Money market funds	19,783		—		—		19,783
	19,783		—		—		19,783
Long-term investments:
Certificate of deposit	—		2,001		—		2,001
Corporate bonds	—		16,633		—		16,633
U.S. Government and agency securities	75,446		—		—		75,446
	75,446		18,634		—		94,080
	$	596,188	$	185,885	$	—	$	782,073

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements



	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	228,859	$	—	$	—	$	228,859
Certificate of deposit	—		2,959		—		2,959
Commercial paper	—		5,794		—		5,794
	228,859		8,753		—		237,612
Short-term investments:
Commercial paper	—		29,320		—		29,320
Certificate of deposit	—		26,132		—		26,132
Corporate bonds	—		114,202		—		114,202
U.S. Government and agency securities	204,305		—		—		204,305
	204,305		169,654		—		373,959
Funds receivable and seller accounts:
Money market funds	18,168		—		—		18,168
	18,168		—		—		18,168
Long-term investments:
Certificate of deposit	—		4,729		—		4,729
Corporate bonds	—		38,563		—		38,563
U.S. Government and agency securities	46,051		—		—		46,051
	46,051		43,292		—		89,343
	$	497,383	$	221,699	$	—	$	719,082

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, corporate bonds, and certificates of deposit, 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, 2020 and December 31, 2019.

The Company evaluates fair value for each individual security in the investment portfolio.

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 2018 Notes and 2019 Notes (see “Note 9—Debt”). The Company estimates the fair value of the 2018 Notes and 2019 Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the 2018 Notes was $289.6 million and $310.3 million as of March 31, 2020 and December 31, 2019, respectively. The estimated fair value of the 2019 Notes was $442.7 million and $522.2 million as of March 31, 2020 and December 31, 2019, respectively.

The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, funds receivable and seller accounts, and funds payable and amounts due to sellers approximate fair value due to the immediate or short-term maturity associated with these instruments.

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

Note 7—Marketable Securities

Short- and long-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, 2020
Cash equivalents:
Commercial paper	$	6,292	$	(2	)	$	1	$	6,291
	6,292		(2		)	1		6,291
Short-term investments:
Commercial paper	26,059		(12		)	32		26,079
Certificates of deposit	23,913		(25		)	45		23,933
Corporate bonds	111,362		(439		)	25		110,948
U.S. Government and agency securities	199,228		—			1,452		200,680
	360,562		(476		)	1,554		361,640
Long-term investments:
Certificate of deposit	2,044		(43		)	—		2,001
Corporate bonds	17,028		(397		)	2		16,633
U.S. Government and agency securities	74,997		(12		)	461		75,446
	94,069		(452		)	463		94,080
	$	460,923	$	(930	)	$	2,018	$	462,011
December 31, 2019
Cash equivalents:
Commercial paper	$	5,794	$	—		$	—	$	5,794
Certificate of deposit	2,958		—			1		2,959
	8,752		—			1		8,753
Short-term investments:
Commercial paper	29,319		(1		)	2		29,320
Certificates of deposit	26,129		(3		)	6		26,132
Corporate bonds	114,068		(22		)	156		114,202
U.S. Government and agency securities	204,246		(8		)	67		204,305
	373,762		(34		)	231		373,959
Long-term investments:
Certificate of deposit	4,727		—			2		4,729
Corporate bonds	38,582		(35		)	16		38,563
U.S. Government and agency securities	46,017		(2		)	36		46,051
	89,326		(37		)	54		89,343
	$	471,840	$	(71	)	$	286	$	472,055

All investments in an unrealized loss position are in an unrealized loss position for less than 12 months as of March 31, 2020. See “Note 6—Fair Value Measurements” for additional information on the Company’s marketable securities measured at fair value.

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

Note 8—Accrued Expenses

Accrued expenses consisted of the following as of the dates indicated (in thousands):



	As of March 31, 2020		As of December 31, 2019
Sales and use tax payable	$	29,289	$	39,250
Vendor accruals	24,452		25,760
Payroll-related liabilities	8,935		3,774
Accrued bonus	6,209		19,561
Total accrued expenses	$	68,885	$	88,345

Note 9—Debt

2019 Convertible Debt

In September 2019, the Company issued $650.0 million aggregate principal amount of the 2019 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 2019 Notes were $639.5 million after deducting the initial purchasers’ discount and offering expenses. The equity component of the 2019 Notes is approximately $154.0 million and is included in additional paid-in capital in the Consolidated Balance Sheets. The Company used $76.2 million of the net proceeds from the 2019 Notes offering to enter into separate capped call transactions (“2019 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates.

During any calendar quarter preceding June 1, 2026 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2019 Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may in the immediate quarter following convert all or a portion of their 2019 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended March 31, 2020, holders of the 2019 Notes are not eligible to convert their 2019 Notes during the second quarter of 2020. Based on the terms of the 2019 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the 2019 Notes in cash and, therefore, the 2019 Notes are classified as long-term debt as of March 31, 2020. As of March 31, 2020, the if-converted value of the 2019 Notes was approximately $365.1 million lower than the aggregate principal amount, or $284.9 million.

The 2019 Notes are general unsecured obligations of the Company. The 2019 Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the 2019 Notes; rank equal in right of payment with all of our liabilities that are not so subordinated, including our 2018 Notes; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.

The Company capitalized $10.5 million of debt issuance costs in connection with the 2019 Notes. Non-cash interest expense, including amortization of debt issuance costs, related to the 2019 Notes for the three months ended March 31, 2020 was $5.3 million. Total unamortized debt issuance costs were $7.5 million and $7.8 million as of March 31, 2020 and December 31, 2019, respectively.

The estimated fair value of the 2019 Notes was $442.7 million and $522.2 million as of March 31, 2020 and December 31, 2019, respectively. The estimated fair value of the 2019 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, 2020, there were no other material changes related to the 2019 Notes and 2019 Capped Call Transactions compared to that disclosed in the Annual Report.

2018 Convertible Debt

In March 2018, the Company issued $345.0 million aggregate principal amount of the 2018 Notes in a private placement to qualified institutional buyers pursuant to the Securities Act. The net proceeds from the sale of the 2018 Notes were $335.0 million after deducting the initial purchasers’ discount and offering expenses. The equity component of the 2018 Notes is

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

approximately $72.8 million and is included in additional paid-in capital in the Consolidated Balance Sheets. The Company used $34.2 million of the net proceeds from the 2018 Notes offering to enter into separate capped call transactions (“2018 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates.

During any calendar quarter preceding November 1, 2022 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2018 Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may in the immediate quarter following convert all or a portion of their 2018 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended March 31, 2020, holders of the 2018 Notes are not eligible to convert their 2018 Notes during the second quarter of 2020. Based on the terms of the 2018 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the 2018 Notes in cash and, therefore, the 2018 Notes are classified as long-term debt as of March 31, 2020. As of March 31, 2020, the if-converted value of the 2018 Notes was approximately $20.6 million higher than the aggregate principal amount, or $365.6 million.

The 2018 Notes are general unsecured obligations of the Company. The 2018 Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment with all of our liabilities that are not so subordinated, including our 2019 Notes; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.

The Company capitalized $10.0 million of debt issuance costs in connection with the 2018 Notes. Non-cash interest expense, including amortization of debt issuance costs, related to the 2018 Notes for the three months ended March 31, 2020 and 2019 was $3.9 million and $3.7 million, respectively. Total unamortized debt issuance costs related to the 2018 Notes were $4.8 million and $5.2 million as of March 31, 2020 and December 31, 2019, respectively.

The estimated fair value of the 2018 Notes was $289.6 million and $310.3 million as of March 31, 2020 and December 31, 2019, respectively. The estimated fair value of the 2018 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, 2020, there were no other material changes related to the 2018 Notes and 2018 Capped Call Transactions compared to that disclosed in the Annual Report.

2019 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 Company capitalized $1.4 million of debt issuance costs in connection with the 2019 Credit Agreement. Non-cash interest expense related to debt issuance costs on the 2019 Credit Agreement for the three months ended March 31, 2020 was $0.1 million. Total unamortized debt issuance costs related to the 2019 Credit Agreement were $1.1 million as of both March 31, 2020 and December 31, 2019.

At March 31, 2020, the Company did not have any borrowings under the 2019 Credit Agreement and was in compliance with all financial covenants.

Table of Contents

Etsy, Inc.

Notes to Consolidated Financial Statements

Note 10—Commitments and Contingencies

Legal Proceedings

From time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation, regardless of their success, could have an adverse effect on the Company’s results of operations, cash flows, or business and financial condition in the period the claims or litigation are resolved. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business.

Note 11—Stockholders’ Equity

In November 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 may 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 would permit 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 cumulative share repurchase activity of the program noted above, excluding shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units (“RSUs”) (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, 2019	1,924,294	$	50.65	$	97,500	$	102,500
Repurchases of common stock for the three months ended:
March 31, 2020	543,106	46.02		25,000		(25,000		)
Balance as of Balance as of March 31, 2020	2,467,400	$