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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
September 30, 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 StreetBrooklynNY11201
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock$0.001 par value per shareETSYThe 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 FilerAccelerated 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 October 23, 2020 was 126,090,966.



Etsy, Inc.
Table of Contents
Page
Note Regarding Forward-Looking Statements
Part I - Financial Information
Item 1.Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Condensed Consolidated Statements of Cash Flows
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 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,” “mobile GMS,” and “currency-neutral GMS growth.”

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 our Offsite Ads offering 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 Part II, Item 1A, “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.
3

PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).
Etsy, Inc.
Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)
As of September 30,
2020
As of December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$1,144,974 $443,293 
Short-term investments379,586 373,959 
Accounts receivable, net of expected credit losses of $7,392 and $5,033 as of September 30, 2020 and December 31, 2019, respectively
16,311 15,386 
Prepaid and other current assets43,590 38,614 
Funds receivable and seller accounts113,370 49,786 
Total current assets1,697,831 921,038 
Restricted cash5,341 5,341 
Property and equipment, net of accumulated depreciation and amortization of $152,335 and $120,084 as of September 30, 2020 and December 31, 2019, respectively
118,141 144,864 
Goodwill139,740 138,731 
Intangible assets, net of accumulated amortization of $21,437 and $16,911 as of September 30, 2020 and December 31, 2019, respectively
189,120 199,236 
Deferred tax assets1,819 14,257 
Long-term investments36,679 89,343 
Other assets25,834 29,542 
Total assets$2,214,505 $1,542,352 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$22,130 $26,324 
Accrued expenses174,206 88,345 
Finance lease obligations—current8,345 8,275 
Funds payable and amounts due to sellers113,370 49,786 
Deferred revenue10,508 7,617 
Other current liabilities12,383 8,181 
Total current liabilities340,942 188,528 
Finance lease obligations—net of current portion47,147 53,611 
Deferred tax liabilities63,448 64,497 
Long-term debt, net1,054,604 785,126 
Other liabilities41,697 43,956 
Total liabilities1,547,838 1,135,718 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 125,660,433 and 118,342,772 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)
126 119 
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of September 30, 2020 and December 31, 2019)
  
Additional paid-in capital886,295 642,628 
Accumulated deficit(217,866)(227,414)
Accumulated other comprehensive loss(1,888)(8,699)
Total stockholders’ equity666,667 406,634 
Total liabilities and stockholders’ equity$2,214,505 $1,542,352 
The accompanying notes are an integral part of these consolidated financial statements.
4

Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share amounts)
 
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2020201920202019
Revenue$451,478 $197,947 $1,108,270 $548,381 
Cost of revenue120,168 68,949 313,965 180,212 
Gross profit331,310 128,998 794,305 368,169 
Operating expenses:
Marketing126,779 50,098 289,991 131,536 
Product development45,908 32,465 128,923 86,177 
General and administrative40,454 32,203 112,717 86,733 
Total operating expenses213,141 114,766 531,631 304,446 
Income from operations118,169 14,232 262,674 63,723 
Other (expense) income:
Loss on extinguishment of debt(16,855) (16,855) 
Interest expense(10,615)(5,077)(30,608)(14,408)
Interest and other income1,158 2,883 6,503 9,659 
Foreign exchange loss(1,464)(1,949)(9,312)(1,079)
Total other expense(27,776)(4,143)(50,272)(5,828)
Income before income taxes90,393 10,089 212,402 57,895 
Benefit (provision) for income taxes1,368 4,712 (11,694)6,708 
Net income$91,761 $14,801 $200,708 $64,603 
Net income per share attributable to common stockholders:
Basic$0.75 $0.12 $1.68 $0.54 
Diluted$0.70 $0.12 $1.59 $0.51 
Weighted-average common shares outstanding:
Basic121,978,272 120,351,095 119,666,841 120,090,291 
Diluted137,560,385 126,243,168 134,376,695 126,471,364 
The accompanying notes are an integral part of these consolidated financial statements.
5

Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
 
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2020201920202019
Net income$91,761 $14,801 $200,708 $64,603 
Other comprehensive income (loss):
Cumulative translation adjustment6,441 (3,948)6,308 (4,027)
Unrealized (losses) gains on marketable securities, net of tax (benefit) expense of $(189), $97, $158, and $97, respectively
(630)(160)503 317 
Total other comprehensive income (loss)5,811 (4,108)6,811 (3,710)
Comprehensive income$97,572 $10,693 $207,519 $60,893 
The accompanying notes are an integral part of these consolidated financial statements.
6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands, except share amounts)
Three Months Ended September 30, 2020
 Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 
 SharesAmount
Balance as of June 30, 2020119,140,637 $119 $675,213 $(143,458)$(7,699)$524,175 
Stock-based compensation— — 17,448 — — 17,448 
Exercise of vested options399,793 — 6,309 — — 6,309 
Issuance of convertible senior notes, net of issuance costs and taxes— — 102,131 — — 102,131 
Purchase of capped calls, net of taxes— — (56,848)— — (56,848)
Settlement of convertible senior notes, net of taxes7,271,632 7 151,303 — — 151,310 
Vesting of restricted stock units, net of shares withheld124,961 1 (9,261)— — (9,260)
Stock repurchase(1,276,590)(1)— (166,169)— (166,170)
Other comprehensive income— — — — 5,811 5,811 
Net income— — — 91,761 — 91,761 
Balance as of September 30, 2020125,660,433 $126 $886,295 $(217,866)$(1,888)$666,667 

Nine Months Ended September 30, 2020
 Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 
 SharesAmount
Balance as of December 31, 2019118,342,772 $119 $642,628 $(227,414)$(8,699)$406,634 
Stock-based compensation— — 48,408 — — 48,408 
Exercise of vested options1,357,792 1 18,485 — — 18,486 
Issuance of convertible senior notes, net of issuance costs and taxes— — 102,131 — — 102,131 
Purchase of capped calls, net of taxes— — (56,848)— — (56,848)
Settlement of convertible senior notes, net of taxes7,271,632 7 151,303 — — 151,310 
Vesting of restricted stock units, net of shares withheld507,933 1 (19,812)— — (19,811)
Stock repurchase(1,819,696)(2)— (191,160)— (191,162)
Other comprehensive income— — — — 6,811 6,811 
Net income— — — 200,708 — 200,708 
Balance as of September 30, 2020125,660,433 $126 $886,295 $(217,866)$(1,888)$666,667 

7

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands, except share amounts)
Three Months Ended September 30, 2019
 Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 
 SharesAmount
Balance as of June 30, 2019120,335,524 $120 $573,611 $(124,015)$(7,415)$442,301 
Stock-based compensation— — 12,323 — — 12,323 
Exercise of vested options85,390 — 1,094 — — 1,094 
Issuance of convertible senior notes, net of issuance costs and taxes— — 115,891 — — 115,891 
Purchase of capped calls, net of taxes— — (58,294)— — (58,294)
Vesting of restricted stock units, net of shares withheld173,660 1 (7,449)— — (7,448)
Stock repurchase(2,144,917)(2)— (127,296)— (127,298)
Other comprehensive loss— — — — (4,108)(4,108)
Net income— — — 14,801 — 14,801 
Balance as of September 30, 2019118,449,657 $119 $637,176 $(236,510)$(11,523)$389,262 

Nine Months Ended September 30, 2019
 Common StockAdditional
Paid-in Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 
 SharesAmount
Balance as of December 31, 2018119,771,702 $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— — 32,219 — — 32,219 
Issuance of convertible senior notes, net of issuance costs and taxes— — 115,891 — — 115,891 
Purchase of capped calls, net of taxes— — (58,294)— — (58,294)
Exercise of vested options774,280 1 8,933 — — 8,934 
Vesting of restricted stock units, net of shares withheld581,004 1 (23,606)— — (23,605)
Stock repurchase(2,677,329)(3)— (154,787)— (154,790)
Other comprehensive loss— — — — (3,710)(3,710)
Net income— — — 64,603 — 64,603 
Balance as of September 30, 2019118,449,657 $119 $637,176 $(236,510)$(11,523)$389,262 

 
 The accompanying notes are an integral part of these consolidated financial statements.
8

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 Nine Months Ended 
 September 30,
 20202019
Cash flows from operating activities
Net income$200,708 $64,603 
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense47,664 31,056 
Depreciation and amortization expense45,088 32,760 
Provision for expected credit losses9,572 7,464 
Foreign exchange loss8,559 25 
Non-cash interest expense26,326 10,500 
Deferred income taxes5,755 (6,708)
Loss on extinguishment of debt16,855  
Other non-cash expense (income), net3,231 (664)
Changes in operating assets and liabilities:
Current assets(75,526)(23,131)
Non-current assets3,395 2,839 
Current liabilities146,634 13,748 
Non-current liabilities(2,972)(4,153)
Net cash provided by operating activities435,289 128,339 
Cash flows from investing activities
Acquisition of businesses, net of cash acquired (271,353)
Cash paid for asset acquisition and intangible assets (1,898)
Purchases of property and equipment(388)(5,889)
Development of internal-use software(3,685)(6,242)
Purchases of marketable securities(300,880)(318,221)
Sales of marketable securities346,596 395,348 
Net cash provided by (used in) investing activities41,643 (208,255)
Cash flows from financing activities
Payment of tax obligations on vested equity awards(19,811)(23,605)
Repurchase of stock(191,162)(154,790)
Proceeds from exercise of stock options18,486 8,934 
Proceeds from issuance of convertible senior notes 650,000 650,000 
Payment of debt issuance costs (9,764)(11,142)
Purchase of capped calls(74,685)(76,180)
Settlement of convertible senior notes(137,166) 
Payments on finance lease obligations(7,056)(8,177)
Other financing, net(8,268)3,148 
Net cash provided by financing activities220,574 388,188 
Effect of exchange rate changes on cash4,175 (3,488)
Net increase in cash, cash equivalents, and restricted cash701,681 304,784 
Cash, cash equivalents, and restricted cash at beginning of period448,634 372,326 
Cash, cash equivalents, and restricted cash at end of period$1,150,315 $677,110 
9

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 Nine Months Ended 
 September 30,
 20202019
Supplemental non-cash disclosures:
Stock-based compensation capitalized in development of capitalized software$744 $1,163 
Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses$2,008 $1,444 
Debt issuance costs included in accounts payable and accrued expenses$795 $900 
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases$641 $657 
During the third quarter of 2020, the Company issued approximately 7.3 million shares of common stock in conjunction with the partial repurchase of the 0% Convertible Senior Notes due 2023 (the “2018 Notes”). See “Note 9—Debt” in the Notes to Consolidated Financial Statements for more information.
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:
Nine Months Ended 
 September 30,
20202019
Beginning balance:
Cash and cash equivalents$443,293 $366,985 
Restricted cash5,341 5,341 
Total cash, cash equivalents, and restricted cash$448,634 $372,326 
Ending balance:
Cash and cash equivalents$1,144,974 $671,769 
Restricted cash5,341 5,341 
Total cash, cash equivalents, and restricted cash$1,150,315 $677,110 
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”) 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, listing, and payments processing fees, and on-site advertising and shipping label services.
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.
Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and notes normally included in complete annual financial statements prepared in accordance with GAAP. These unaudited interim consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2020 (the “Annual Report”). In the opinion of management, all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for the periods presented have been reflected in the consolidated financial statements. The results of operations of any interim period are not necessarily indicative of the results of operations for the full annual period or any future period due to seasonal and other factors.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying Notes. Actual results could differ from these estimates and assumptions. 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 including the fair value of convertible senior notes; and provision for expected credit losses. As of September 30, 2020, the effects of the ongoing COVID-19 pandemic on our business, results of operations, and financial condition continue to evolve. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, our estimates may change materially in future periods.
Reclassifications
Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation reflected in the consolidated financial statements. Specifically, the Company reclassified $10.5 million previously included in other non-cash expense (income), net to non-cash interest expense on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 to conform to the current year presentation.
11


Etsy, Inc.
Notes to Consolidated Financial Statements
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features through equity. Without an initial allocation of proceeds to the conversion option, the debt will likely have a lower discount, thereby resulting in less non-cash interest expense through accretion. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the 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.
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 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 InstrumentsCredit 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 nine months ended September 30, 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.

12


Etsy, Inc.
Notes to Consolidated Financial Statements
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):
September 30,
2020
Balance as of December 31, 2019$5,033 
Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings 
Provision for expected credit losses9,572 
Amounts written off, net of recoveries(7,213)
Balance as of September 30, 2020$7,392 
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 and 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 September 30, 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.
13


Etsy, Inc.
Notes to Consolidated Financial Statements
Note 2—Revenue

The following table summarizes revenue disaggregated by Marketplace revenue and optional Services revenue for the periods presented (in thousands):
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
2020201920202019
Marketplace revenue$341,623 $141,628 $829,575 $403,995 
Services revenue109,855 56,319 278,695 144,386 
Revenue$451,478 $197,947 $1,108,270 $548,381 
On May 4, 2020, Etsy started charging sellers on its marketplace platform for Offsite Ads, whereby sellers pay Etsy an advertising fee of 12% or 15% of the value of a sale based on the seller’s volume of sales, if such sale is generated from an advertisement placed by the Company on third-party internet platforms. The Company recognizes the revenue related to Offsite Ads on a gross basis in Marketplace revenue. The Company recognizes the cost of promoting the seller’s listing on multiple third-party internet platforms as marketing expense.
Our dedicated on-site advertising service for sellers to promote their listings to shoppers on Etsy.com has been renamed Etsy Ads (formerly Promoted Listings). Revenue from Etsy Ads consists of cost-per-click fees an Etsy seller pays for prominent placement of her listings in search results in the Etsy.com marketplace. Etsy Ads fees are based on an auction system, which utilizes the budget that each Etsy seller sets when using Etsy Ads to determine the cost-per-click fee. Etsy Ads fees are nonrefundable and are charged to a seller’s Etsy bill when the Etsy Ad is clicked, at which time the Company recognizes revenue as part of Services revenue.
Contract balances
Deferred revenues
The amount of revenue recognized in the nine months ended September 30, 2020 that was included in the deferred balance at January 1, 2020 was $7.6 million.
14


Etsy, Inc.
Notes to Consolidated Financial Statements
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 income taxes is lower.
For the nine months ended September 30, 2020, the Company’s effective income tax rate was 5.5% representing an income tax provision recorded on net income before tax. The effective tax rate for the nine months ended September 30, 2020 was lower than the U.S. statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, 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 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 $2.2 million in the nine months ended September 30, 2020, from $19.9 million as of December 31, 2019 to $22.1 million as of September 30, 2020. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $21.3 million as of September 30, 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 nine months ended September 30, 2020 was nil, and the total amount accrued as of September 30, 2020 remained flat at $0.2 million from December 31, 2019.
15


Etsy, Inc.
Notes to Consolidated Financial Statements
Note 4—Net Income Per Share
For the 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), the Company used the treasury stock method for the three and nine months ended September 30, 2020 when calculating earnings per share, since the Company expects to settle the outstanding principal in cash. For the 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), the Company used the if-converted method for the three and nine months ended September 30, 2020 and used the treasury stock method for the three and nine months ended September 30, 2019 when calculating earnings per share. For the 0% Convertible Senior Notes due 2023 (the “2018 Notes”), the Company used the if-converted method for the three and nine months ended September 30, 2020 and 2019 when calculating earnings per share.
The 2020 Notes were anti-dilutive for the three and nine months ended September 30, 2020. The 2019 Notes were dilutive for the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2020, the dilutive effect of the 2018 Notes was determined using the remaining principal of $43.9 million, while the $301.1 million principal associated with the partial repurchase in the third quarter of 2020 was anti-dilutive. See “Note 9—Debt” for more information.
The following table presents the calculation of basic and diluted net income per share for the periods presented (in thousands, except share and per share amounts):
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2020201920202019
Numerator:
Net income attributable to common stockholders—basic$91,761 $14,801 $200,708 $64,603 
Add back interest expense, net of tax attributable to assumed conversion of convertible debt4,494  13,348  
Net income attributable to common stockholders—diluted$96,255 $14,801 $214,056 $64,603 
Denominator:
Weighted-average common shares outstanding—basic121,978,272 120,351,095 119,666,841 120,090,291 
Dilutive effect of assumed conversion of convertible debt8,623,473  8,623,473  
Dilutive effect of assumed conversion of options to purchase common stock4,533,426 4,443,408 4,380,663 4,652,088 
Dilutive effect of assumed conversion of restricted stock units2,425,214 1,429,305 1,705,718 1,711,362 
Dilutive effect of assumed conversion of restricted stock from acquisition 19,360  17,623 
Weighted-average common shares outstanding—diluted137,560,385 126,243,168 134,376,695 126,471,364 
Net income per share attributable to common stockholders—basic$0.75 $0.12 $1.68 $0.54 
Net income per share attributable to common stockholders—diluted$0.70 $0.12 $1.59 $0.51 
The following potential common shares were excluded from the calculation of diluted net income per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2020201920202019
Stock options5,769 392,435 341,109 276,803 
Restricted stock units36,260 836,684 66,231