UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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x☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the fiscal year ended | December 31, 20182020 |
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¨☐ | 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
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ETSY, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | | 20-4898921 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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117 Adams Street Brooklyn, NY | 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:
Securities Exchange Act of 1934: |
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | $0.001 par value $0.001 per share | ETSY | The Nasdaq StockGlobal Select Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerx | ☒ | Accelerated filer¨ | ☐ |
Non-accelerated filer¨ | ☐ | Smaller reporting company¨ | ☐ |
| Emerging growth company¨ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 20182020 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $4,991,820,388.$12,574,335,258.
The number of shares of common stock outstanding as of February 21, 201919, 2021 was 119,566,393.126,049,276.
Documents Incorporated By Reference
Portions of the registrant’s Proxy Statement for its 20192021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2018,2020, are incorporated by reference in Part III of this Annual Report on Form 10-K.
Etsy, Inc.
Table of Contents
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| | Page |
| | Page |
| Note Regarding Forward-Looking Statements | |
| Summary Risk Factors | |
| Part I | |
| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
| Part II | |
| Item 5. | Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | Selected Consolidated Financial[Removed and Other DataReserved] | |
| Item 7. | Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets as of December 31, 2018 and 2017 | |
| Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016 | |
| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 2016 | |
| Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017, and 2016 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016 | |
| Notes to Consolidated Financial Statements | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| Part III | |
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accounting Fees and Services | |
| Part IV | |
| Item 15. | Exhibits, Financial Statement Schedules | |
| Exhibit Index | |
| Item 16. | Form 10-K Summary | |
| Signatures | |
Unless the context otherwise requires, we use the terms “Etsy,” the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K (“Annual Report”), to refer to Etsy, Inc. and, where appropriate, our consolidated subsidiaries.
See “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operations—Key Operating and Financial Metrics” for the definitions of the following terms used in this Annual Report: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” “mobile GMS,” and “mobile GMS.“currency-neutral GMS growth.”
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information relating to our anticipated international growth, the timing of product launches and our cloud migration,opportunity, the impact of our strategy, marketing, and product investments and cloud migration on future GMSgross merchandise sales (“GMS”) and revenue growth, our economic, social and ecological impact strategy, goals and future plans, expected conversion and visit growth, the impact of mobile web on conversion rates, effortsour “Right to optimizeWin” strategy and levers for growth, the buyer experience, search and discovery effectiveness and overall marketplace optimization, andimpact of our anticipated expenses and their impactOffsite Ads offering on our future financial performance.performance, our plans for acquisitions and strategic investments and its impact on our growth and results of operations, 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 “aim,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would,”“would” or similar expressions and thederivative forms and/or 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 titledPart I, Item 1A, “Risk Factors” and elsewhere in this Annual Report. Given these uncertainties, you should read this Annual Report in its entirety and not place undue reliance on any forward-looking statements in this Annual 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 Annual 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 Annual Report. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Annual 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 Annual Report. We disclaim any obligation to update forward-looking statements.
SUMMARY RISK FACTORS
Our business is subject to numerous risks. The following summary highlights some of the risks we are exposed to in the normal course of our business activities. This summary is not complete and the risks summarized below are not the only risks we face. You should review and consider carefully the risks and uncertainties described in more detail in the “Risk Factors” section of this Annual Report on Form 10-K which includes a more complete discussion of the risks summarized below as well as a discussion of other risks related to our business and an investment in our common stock.
Financial Performance and Operational Risks Related to Our Business
•We have experienced rapid growth, and we may not have the infrastructure, human resources, or operational resources to sustain continued growth at our recent pace.
•Our business could be adversely affected by economic downturns, natural disasters, public health crises (such as COVID-19), political crises, geopolitical changes (such as Brexit), or other similar events, which have and could continue to have an impact our key metrics including our GMS, and could impact our results of operations in numerous ways that remain volatile and unpredictable.
•Our quarterly operating results may fluctuate, which could cause our stock price to decline. The price of our common stock has been and will likely continue to be volatile and declines in the price of common stock could subject us to litigation.
•We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock price to decline.
•Our business could suffer if we experience a technology disruption that results in a loss of information, if personal data or sensitive information about users or employees is misused or disclosed, or if we or our third-party providers are unable to protect against technology vulnerabilities, service interruptions, security breaches, or other cyber incidents.
•The trustworthiness of our marketplaces and the connections within our community are important to our success. Our business, financial performance, and growth depend on our ability to attract and retain an active and engaged community of buyers and sellers. If we are unable to retain our existing buyers and sellers and activate new ones, our financial performance could decline.
•Our business depends on continued and unimpeded access to third party services, platforms, and infrastructure that we rely upon to maintain and scale our platform.
•We have experienced rapid domestic and global growth, and we may be subject to expanded and potentially uninsured risk, making it more difficult for us to maintain profitability in the future.
•Our ability to attract and hire a diverse pipeline of talent and retain key employees is important to our success. If we experience significant attrition or turnover it could impact our ability to grow our business.
Strategic Risks Related to Our Business and Industry
•We face intense competition and may not be able to compete effectively.
•If we are not able to keep pace with technological changes, and enhance current and develop new offerings to respond to the changing needs of sellers and buyers, our business may be harmed.
•If the widely adopted mobile, social, search and advertising solutions that we, our sellers and our buyers rely on as part of our key offering are no longer available or effective, or if access to these major platforms is limited, the use of our marketplaces could decline.
•If we do not demonstrate progress against our Impact strategy or if our Impact strategy is not perceived to be adequate, our reputation could be harmed. We could also damage our reputation and the value of our brand if we fail to demonstrate that our commitment to our Impact strategy enhances our overall financial performance.
•Expanding our operations outside of the United States is part of our strategy, and the growth of our business could be harmed if our international expansion efforts do not succeed.
•We may expand our business through acquisitions of other businesses or assets or strategic partnerships and investments, which may divert management’s attention and/or prove to be unsuccessful.
•We have a significant amount of convertible debt that may be settled in cash and may incur additional debt in the future.
Regulatory, Compliance, and Legal Risks
•Compliance and protection under evolving global legal and regulatory requirements including privacy and data protection laws, tax laws, product liability laws, antitrust laws, intellectual property and counterfeiting regulations, may materially impact our time, resources, and ability to grow our business.
•We may be involved in litigation and regulatory matters that are expensive and time consuming and that may require changes to our strategy, the features of our platform and how our business operates.
•We may be subject to intellectual property or other claims, which, even if untrue, could damage our brand, require us to pay significant damages, and could limit our ability to use certain technologies or business strategies in the future.
Other Risks
•Future sales and issuances of our common stock, or rights to purchase common stock, including upon conversion of our convertible notes, could result in additional dilution to our stockholders and could cause the price of our common stock to decline.
PART I.
Item 1. Business.
Overview
Etsy is the globaloperates two-sided marketplace for uniqueonline marketplaces that connect millions of passionate and creative goods.buyers and sellers. Our mission is to “Keep Commerce Human,” and we’re committed to using the power of business and technology to strengthen communities and empower people around the world. We connect
Our primary marketplace, Etsy.com, is the global destination for unique and creative goods. The Etsy marketplace connects creative artisans and entrepreneurs with thoughtful consumers looking for items that are intended to bemake both everyday and meaningful occasions feel special as well as reflect their sense of style, or represent a meaningful occasion. Etsy was founded in June 2005 in Brooklyn, New York.
style. Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. We have a seller-aligned business model: we make money when our sellers make money. We offer ourEtsy sellers a marketplace with millions of buyers along with a range of seller tools and services that are specifically designed to help our creative entrepreneurs generate more sales and scale their businesses.
Buyers come to the Etsy marketplace to be inspired and delighted by items that are crafted and curated by our creative entrepreneurs. We are focused on attracting potential buyers to the Etsy marketplace for everyday items that have meaning and those “special” purchase occasions that happen throughout the year and deepening engagement with our existing buyers by inspiring purchases across multiple categories and special occasions.year. These special purchase occasions can occur many times throughout the year and include shoppingitems that reflectsreflect an individual'sindividual’s unique style; gifting that demonstrates thought and care; and celebrations that express creativity and fun. Buyers tell us that they come to Etsy because Etsy sellers offer items that they can’t find anywhere else.They can also happen many times throughout the year when a buyer is decorating a home, selecting an outfit for a special event, planning a celebration for a special moment, or buying a gift for someone special. In fact, in a 20182020 survey of Etsy buyers, 78%88% of buyers agreed that Etsy has items that you can’t find anywhere else.
Special purchase occasions happen throughout the year when a buyer is decorating a home, dressing for an event, celebrating a special moment, or buying a gift for someone special.
During 2020, the COVID-19 pandemic significantly shifted global consumer shopping behavior towards online purchases of many retail categories. Millions of buyers found us for the first time, or discovered Etsy again, for many everyday items, including those that were temporarily unavailable elsewhere. This enabled Etsy to reinforce our brand messaging by aligning “special” with everyday purchase occasions. We highlighted sellers’ merchandise and categories to focus on essentials and developed a thoughtful and powerful strategy to define what “everyday” means for Etsy, bringing it to life in our marketing and product experiences for buyers. We now have the opportunity to focus on deepening our engagement with buyers by inspiring purchases across many retail categories and shopping occasions - and well beyond how they may have thought of Etsy in the past. The graphic below depicts just a few examples of Etsy’s relevance, and we believe we can deepen engagement with buyers by inspiring purchases in additional categories and on additional occasions.
Reverb, which we acquired in 2019, is a leading global online marketplace dedicated to buying and selling new, used, and vintage musical instruments, with a vibrant community of buyers and sellers all over the world. Reverb, now a wholly-owned subsidiary of Etsy, Inc., is included in all financial and other metrics, unless otherwise noted.
As of December 31, 2018, our marketplace2020, the Etsy and Reverb marketplaces connected 2.14.4 million active Etsy sellers to 39.481.9 million active Etsy buyers. EtsyOur buyers and sellers are located all over the world, and our sixseven core geographic markets are the United States, United Kingdom, Germany, Canada, Australia, Germany,France, and France. We will continueIndia, which is the most recent addition to invest in these markets, as this isthe list. In identifying our core geographies, we consider locations that represent our most attractive buyer GMS opportunities, where we currently have our strongest concentrationor believe we can create a vibrant two-sided marketplace, or as in the case of both buyers and sellers, and continue to evaluate geographiesIndia, where we are making strategic investments in which to make strategic investments.domestic growth. There are currently more than 60nearly 87 million items for sale across dozens ofmany retail categories on Etsy.com.in our marketplaces. In 2018,2020, our marketplacesellers generated $3.9$10.3 billion of Gross Merchandise Sales (“GMS”), approximately 61% of which approximately 55% came from purchases made on mobile devices. In 2018,2020, our top six retail categories were:on the Etsy marketplace were homewares and home furnishings, jewelry and personal accessories, apparel, craft supplies, apparel, beauty and personal care, paper and party supplies, and beauty and personal care.with the addition of Reverb, we now have a significant presence in the market for musical instruments. We are a global company, and 35%36% of our 20182020 GMS was generated when the Etsya seller or Etsy buyer, or both, were located outside of the United States.
Our revenue is diversified, generated from a mix of marketplace activities and other optional services we provide to Etsy sellers to help them generate more sales and scale their businesses.
Marketplace revenue is comprised of the fees an Etsya seller pays us for marketplace activities. Marketplace activities include listing an item for sale,sale; completing transactions between a buyer and a seller, which includes, where applicable, beginning in the second quarter of 2020, an additional transaction fee related to offsite advertising; and using Etsy Paymentsour payments platforms to process payments, including foreign currency payments. FeesEtsy fees include the $0.20 listing fee for each item listed (for up to four months), the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, the $0.20 listingwhere applicable, an additional transaction fee she pays for each item she lists (for upof 12% or 15% related to four months) on Etsy.com,offsite advertising, and fees for Etsy Payments, our payment processing product. Etsy began charging for Offsite Ads in May 2020; sellers pay Etsy 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 us on third-party internet platforms. In the second half of 2020, 9% of Etsy GMS was subject to an Offsite Ads transaction fee. Etsy Payments processing fees vary between 3.0% and 4.5% of an item’s total sale price, including shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. We earn additional fees on transactions in which currency conversions are performed. As of December 31, 2020, Etsy Payments was available in 45 countries and 21 currencies, and nearly all sellers in countries where Etsy Payments is available are required to use the service. In fact, 92% of total GMS from the Etsy marketplace (“Etsy.com GMS”) was processed through Etsy Payments in 2020, up from 89% in 2019. By October of 2020, we expanded Etsy Payments to 9 additional countries, so GMS processed through Etsy Payments only reflects a partial year for those countries in 2020. Our ability to expand Etsy Payments into additional countries is dependent upon the third-party providers we use to support this service. Reverb fees include the 5.0% transaction fee that a Reverb seller pays for each completed transaction, inclusive of shipping fees charged, and fees for payment processing. On July 16, 2018, weAugust 4, 2020, Reverb increased ourits seller transaction fee from 3.5% to 5%, and now apply it to. There are no listing fees for the cost of shipping in addition to the cost of the item. The revised fee structure is intended to support increased investments in the growth and health of theReverb marketplace. Revenue from Etsy Payments, included in Services revenue prior to 2018, is now included in Marketplace revenue because Etsy Payments is required to be used by Etsy sellers in the countries where it is available.
Services revenue, formerly called Seller Services revenue is comprised of the fees an Etsya seller pays us for our optional services (“Services”). Services, which help Etsy sellers generate more sales and play a key role in enabling our sellers to scale their businesses. We believe we can grow seller optional paid services in three ways: by expanding the utility of existing services, expanding the geographic reach of existing services, and launching new services offerings. For the Etsy marketplace, primary optional services include Promoted Listings, our on-site advertising service that allowsservices, which allow Etsy sellers to pay for prominent placement of their listings in search results;results, and Etsy Shipping Labels, which allows Etsy sellers in the United States, Canada, United Kingdom, and Australia to purchase discounted shipping labels; Pattern,labels. During 2020, 22% of active Etsy sellers used our advertising platform, up from 17% in 2019. In 2020, we enhanced our dynamic cost-per-click on-site advertising by improving the relevance of ads in search and the speed of incorporating changes in a seller's budget. We also applied our improved search algorithms to Etsy Ads to drive ad relevance and higher click-through rates, leading to accelerated year-over-year revenue growth for this service. Our shipping label service that allowsprovides Etsy sellers the ability to print their shipping labels at home, which reduces the cost and time it takes Etsy sellers to build custom websites;ship items to Etsy buyers and reduces the chance for administrative error through features such as auto population of shipping addresses, and automatically provides buyers with tracking information (when available) and shipping notifications. Our shipping labels service also incorporates logistics solutions that help Etsy Plus,sellers save time and money. During 2020, 22% of active Etsy sellers in regions where Etsy Shipping Labels was offered used this service. While this utilization rate is down from 23% in 2019 as a subscription offeringresult of the year-over-year growth in active Etsy sellers, the total number of active Etsy sellers using the service has increased. For the Reverb marketplace, optional services include Bump, an on-site advertising product that providesenables Reverb sellers with enhanced toolsto determine their own ad rates as a percentage of their item’s final sale price, and credits for use on our platform.
We also generate additional revenue through our commercial partnerships,Reverb Shipping Labels, which is classified as other revenue.
gives Reverb sellers access to discounted shipping rates.
Our Opportunity
We believe that the nature of commerce is continuing to evolve: more people are choosing to purchase goods online and many consumers are looking for uniquespecial items as an alternative to mass produced goods. According to estimates by Euromonitor,In 2019, Etsy conducted a market research company, worldwide retail ecommerce will generate double-digit growth each year through 2022, and worldwide retail ecommerce sales will reach $3 trillion by the end of 2022. (Source: Euromonitor — Worldwide Internet Retailing.) We estimateopportunity analysis. At that in 2018,time we estimated that the online market size across allall relevant retail categories for the Etsy marketplace within six of our sixseven core geographic markets;markets, United States, United Kingdom, Germany, Canada, Australia, Germany, and France, represents a $249 billion market opportunity, and a $1.7 trillion market opportunity when offline is included. We estimated that by 2023, the online market opportunity would expand to $437 billion and $2 trillion when offline is included. We have not updated this market opportunity analysis as a result of the dramatic shift to online that has occurred during 2020, nor have we included India, our seventh core geographic market in this analysis.
We operate in over 50 different retail categories and our top six categories based on GMS (inclusive of masks) in 2020 were: homewares and home furnishings, jewelry and personal accessories, craft supplies, apparel, beauty and personal care, and paper and party supplies. Mask sales, a subcategory of beauty and personal care, added $743 million in GMS in 2020.
*Excludes mask sales.
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| 2020 Category Etsy.com GMS |
Our Platform
Etsy leveragesWe leverage technology to connect people around the world through commerce. Our platform includes our marketplace,the Etsy and Reverb online marketplaces, our seller tools and services, our passionate and engaged sellers and buyers, and our technology. Our commitment to transparency and integrity underpins our platform and establishes trust within our marketplacemarketplaces and our community.
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| Key Components of Our Platform |
Our Marketplaces
The Etsy Marketplace
Our Marketplace
Ourprimary marketplace, Etsy.com, is where thoughtful buyers come to discover a broad selection of unique goods that are hard to find elsewhere. In a world of increasing automation and commoditization, Etsy celebrates creativity and human interaction.
We believe ourthis marketplace is characterized by several unique qualities, including:
•Unique Products: Our marketplace Etsy boasts a large assortment of handmade, customized, personalized, vintage, and craft supply products from all ofover the world. There are currently more than 60approximately 85 million items listed on ourthe Etsy marketplace. We intend to continue to improve the customer experience by investing in our search and discovery capabilities to help buyers efficiently find the special items they are looking for and deliverdelivering a brand promise around shipping to align with our buyers’ expectations of when they can expect to receive our unique items.
•Global Reach: Etsy’s sixseven core geographic markets are the United States, United Kingdom, Germany, Canada, Australia, Germany, and France, and there are people usingIndia, which is the most recent addition to our platformcore markets, in addition to buysellers and sellbuyers in nearly every other country around the world. Our platform makes it easy for Etsy buyers and Etsy sellers to interact across borders even if they do not speak the same language and wish to transact in different currencies. We use innovative machine translation technology to translate listings, reviews, Promoted Listings,Etsy Ads, and conversations between Etsy buyers and Etsy sellers. In addition to language processing we invest in localization within our international markets to create a fully localized experience for all Etsy buyers and sellers. Our payments platform allows Etsy sellers to offer Etsy buyers a wide range of payment options. In 2018, 37%2020, 43% of Etsy sellers were located outside the United States, and 35%38% of our GMS was generated between an Etsy seller, Etsy buyer, or both, located outside of the United States.
•Organic Traffic Base: We’ve organically built a loyal, global base of Etsy buyers on the platform without significant investment in acquisition marketing until 2013, eight years after being founded. Unlike many other ecommerce companies, theplatform. The vast majority of visits to Etsy.com camethe Etsy marketplace come through organic channels. In fact, approximately, 85% of visits in 2018 were from organic sources,channels, including a large portion from buyers visiting Etsy.comEtsy directly as well as from non-paid channels such as search, social, email, and push notifications.
In 2020, 80% of our GMS was generated through organic channels.•Connection Between Etsy Buyers and Sellers: We believe that human connection is central to buyer engagement. On Etsy, weWe emphasize that the items listed for sale on the Etsy marketplace are brought to life by real people. Additionally, buyers are able to connect directly with sellers in order to ask questions and personalize or customize items to their specifications. We also encourage buyers
and sellers to connect in a variety of other ways, such as through sharing reviews on social media or connecting off-line through the Etsy Local feature on our mobile app. We believe that meaningful interactions with Etsy sellers differentiatesdifferentiate us from other e-commerce platforms, drivesdrive buyer engagement, and keepskeep our buyers coming back.back. When buyers and sellers interact on the platform, their conversion rate and average order value is significantly higher. In 2020,we launched listing videos, where sellers showcase their expertise in making and bringing their products to life, reinforcing buyer and seller engagement. Approximately 3.2 million seller videos were uploaded in 2020.
•Marketing: We’ve evolved our marketing strategy to reinforce our core brand promise in the minds of Etsy buyers, and strengthened our capabilities by employing a full-funnel marketing approach and optimizing our investments in each area of the funnel. During 2020 we leaned more heavily into upper funnel strategies through TV, digital video, and paid social,
to create a flywheel that elevates the effectiveness of other channels. In 2020, we launched our innovative advertising program for sellers called Offsite Ads, in which Etsy pays the upfront costs to promote Etsy sellers’ listings on multiple internet platforms without any upfront costs for sellers. When a shopper clicks on an offsite ad featuring a seller’s listing and purchases from their shop within 30 days of that click, the seller will pay Etsy a transaction fee on that order - but only when they make a sale. Our Offsite Ads program is a win-win for Etsy and our sellers: sellers only pay when they make a sale and the additional fee enables Etsy to expand the Lifetime Value, or “LTV,” of buyers and drive more visits to the Etsy marketplace. In 2020, the percentage of GMS attributed to performance marketing was 20%, up from 15% in 2019, with the expansion in paid GMS primarily driven by Offsite Ads. Our investments in performance marketing, which we define as spend related to the digital acquisition of buyers, adjust according to demand and scale based on incremental return.
•Connected Experience Across all Devices: We want to engage Etsy buyers wherever they are and to provide an enjoyable and accessible shopping experience no matter how they come to Etsy.regardless of the format. Our mobile website and our “Buy on Etsy”Etsy mobile app for Etsy buyers include search and discovery, curation, personalization, augmented reality, and social shopping features. Our Etsy.com iOS and Android mobile apps have been downloaded approximately 56 million times as of December 31, 2018. We offer a connected experience through each channel, desktop, mobile web, and mobile app, to help ensure that no matter what device ourEtsy buyers use they will have the best possible experience. Additionally, our “Sell on Etsy” mobile app helps Etsy sellers operate their shops and manage orders. For the year ended December 31, 20182020, approximately 55%62% of ourEtsy.com GMS was generated on a mobile device. This is an increase compared with 2017, during which 51% of our GMS was generated on a mobile device. We are focused on increasing conversion ratesdevice, up from 59% in general; however, we are particularly focused on mobile2019. Mobile web which continued to becontributes the largest drivershare of both overall visits growth and mobile GMS growth. Mobile web conversion rate is about half the conversion rate ontraffic, followed by desktop and the conversion rate on our mobile Buy on Etsy app is about 1.2x the desktop conversion rate. Therefore, if mobile web visits continue to grow as aapp. We believe growth in percentage of overallmobile app visits it could be a headwindtailwind to future conversion rate gains, as our mobile app channel has the highest conversion rate, gains.
followed by desktop and mobile web.•Buyer Intent; People Come to the Etsy Marketplace to Browse and be Inspired: Our platform is designed to provide a personalized search experience to Etsy buyers, adjusting in real timeresults and recommendations based on transaction data and previous browsing history. A large portionMany of our buyers come to Etsy not in search of a specific item, but to browse and be inspired. We are continuing to build more sophisticated algorithms that allow us to deliver more personalized results to our buyers, utilizing browse and transaction data to surface items theybuyers didn’t know they wanted. In 2018,the beginning of 2020, we completed our major migration to Google Cloud and, during the course of 2020, launched a number of productsinitiatives to enhance search including adding recommendations to item landing pages and incorporating more attributes to our search algorithm to improve search ranking. All of this helps bring fun to the discovery and shopping experience.experience, including more relevant recommendations when buyers are further along in the purchase funnel, additional progress with saved searches and favorites, making the site more browsable and increasing site performance, which all improved organic search. We integrated advanced machine learning techniques such as improved model engines in order to drive further search improvements. During 2020, we doubled our utilization of data processed per search query compared to 2019 and continued our efforts to close the semantic gap and leverage buyer attributes to deliver more personalized search results. We believe we have significant opportunities to further enhance our search and discovery capabilities and plan to leverage our machine learning technology, including increased model complexity and further contextual cues to deliver an even more personalized shopping experience. In addition,experience in the future.
The Reverb Marketplace
Reverb, our full migrationwholly-owned subsidiary, operates as a separate marketplace and was founded on the principle that buying and selling musical instruments should be easy. Reverb’s mission is to Google Cloudmake the world more musical. This unique two-sided marketplace connects buyers and sellers of new, used, and vintage musical gear from all over the world, uniting music makers with the gear that inspires them. Reverb’s buyers and sellers range from beginning musicians looking for their first instruments, professional musicians that utilize the platform to expand their tools, local music stores that use Reverb to do more business online and the largest music retailers in the world that use Reverb to reach an even larger audience.
Reverb’s unique characteristics include:
•Depth and Breadth of Inventory: The Reverb marketplace had 1.8 million listings as of December 31, 2020, including unique used and vintage gear, instruments played on tour and on popular albums by well-known musicians, and exclusive, boutique, and handmade items that you can only find on Reverb.
•Range of Sellers: Reverb provides buyers unparalleled access to an expansive inventory because of its wide network of retailers, manufacturers, and individual sellers distributed across the beginningglobe. During the COVID-19 pandemic, while competitors experienced warehouse backlog issues and out-of-stock inventory, Reverb continued to connect buyers with sellers who had in-stock inventory and were able to ship safely. With Reverb’s global footprint and network of 2020 is expected to further improve our search and discovery effectiveness.sellers, it offers players a wider variety of inventory than any single retailer can.
Etsy sellers•Expertise: Reverb’s team of musicians and gear experts has created not only a marketplace built for buying and selling gear, but also one of the largest musical instrument databases in the world, with transaction information for nearly 10 million orders. This extensive data set means that when a seller lists an instrument for sale, the seller can estimate the current market value of the item.
•Community of Players: Reverb has a large and passionate community of musicians and music gear lovers that engage on its platform, resulting in high quality transactions and interactions for both buyers and sellers.
Laying the foundation for further success, we brought on a new Chief Executive to lead Reverb and rolled out a new product experimentation process similar to Etsy’s, enabling the team to iterate much faster. The Reverb team has launched initiatives to accelerate seller sales volume including enhancing the presentation of financing options, adding seller reviews to product pages, offering more competitive shipping rates to buyers that purchase multiple items, and increasing customer support to improve the experience for buyers and sellers. These initiatives are requiredall designed to pay a fixed listing fee of $0.20positively impact conversion rate and order size for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Once a sale is consummated, sellers pay variable transaction fees and Etsy Payments fees. On July 16, 2018, wesellers. To enable further incremental improvements to the marketplace, in August 2020 Reverb increased ourits seller transaction fee for the first time from 3.5% to 5%,. With this change, Reverb increased investments in marketing, expanded its global customer engagement team, and now applygrew the capacity of its product team focused on creating and enhancing seller tools and services.
As the COVID-19 pandemic shifted consumer habits to shopping online and shelter-in-place restrictions increased interest in creating and recording music at home, Reverb experienced an increase in sales and new buyers. Based on which items were popular and a significant increase in new gear sales, it appears that many consumers were picking up musical instruments for the first time. Reverb’s fastest growing categories in 2020 included acoustic guitars, synthesizers and keyboards, audio interfaces (often used for home recording) and drum machines.
Reverb believes that the pandemic accelerated the shift to buying instruments online and that this shift is likely to continue even after retailers fully reopen. Leveraging this momentum, Reverb is making investments in the cost of shipping in additionmarketplace to the cost of the item.drive sustained growth over time.
Additional Etsy Payments processing fees vary between 3% to 4.5% of an item’s total sale price, including shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional 2.5% to 5% fee is applied. As of December 31, 2018, Etsy Payments was available in 36 countries and 12 currencies and nearly all sellers in countries where Etsy Payments is available are required to use the service. In fact, 86% of total GMS was processed through Etsy Payments in 2018, up from 85% in 2017. Our ability to expand Etsy Payments into additional countries is dependent upon the third-party providers we use to support this service.
Our Seller Tools and Services
Seller tools and services help Etsy sellers generate more sales and scale their businesses. In addition to driving incremental revenue streams to Etsy, these offerings play a key role in supporting sellers’ businesses and driving sales. Our optional paid services are (in order of 2018 revenue contribution): Promoted Listings, Etsy Shipping Labels, Pattern, and subscription packages. Services revenue grew 42.1%, and represented 26.3% of our total revenue, up from 25.4% in 2017.
Promoted Listings: Promoted Listings enable Etsy sellers to pay a cost-per-click based fee to feature and promote their goods in our marketplace in search results generated by Etsy buyers. This service allows Etsy sellers to target Etsy buyers who are specifically searching for goods similar to those she offers for sale. During 2018, 15.1% of active sellers used Promoted Listings up from 15.0% in 2017. In 2018, we enhanced Promoted Listings by expanding inventory across all devices and adding context specific search ranking to improve ad relevance and higher click-through rates, which both led to accelerated year-over-year revenue growth for this service. We optimized our sellers’ budgets and generated a positive return on their spend in 2018. We aim for sellers to be ROI positive and often utilize less than their allocated budget.
Etsy Shipping Labels: This service allows sellers in the United States, Canada, United Kingdom, and Australia to purchase discounted United States Postal Service, FedEx, Canada Post, Royal Mail, and DAI Post shipping labels through our platform. The ability to print the shipping labels at home reduces the cost and time it takes Etsy sellers to ship items to Etsy buyers, reduces the chance for administrative error through features such as auto population of shipping addresses, and automatically provides tracking information when available and shipping notifications to buyers. During 2018, 24.7% of active sellers in regions where Etsy Shipping Labels is offered used this product, down from 28.1% in 2017. The reduction in percentage of active sellers using Etsy Shipping Labels was driven by the expansion of the service in the United
Kingdom and Australia in late 2018 where adoption could take some time to develop. Despite this, year-over-year revenue growth for this service accelerated compared to 2017 driven by GMS growth.
Pattern: With Pattern, Etsy sellers can create their own custom websites with unique domain names within minutes. Pattern imports listings and content from Etsy shops, syncs inventory and orders, and utilizes our Etsy Payments and Etsy Shipping Label services. In 2018, we began allowing sellers to sell items or services on their Pattern website that don’t follow the handmade and vintage guidelines within our Etsy.com marketplace. Sellers may use Pattern for free for the first 30 days, then they are charged $15 per month, plus payment processing fees and Etsy Shipping Label fees, if they choose to use this service.
Subscription Packages: Our subscription packages were launched in July 2018 as a way for us to bundle and simplify our offerings for sellers. The Etsy Plus subscription package, which allows sellers to pay for enhanced tools and credits to use on the Etsy.com platform, is $10 per month and features enhanced tools such as advanced shop customization options, targeted restock notifications, discounts on branded packaging and promotional materials, and free or discounted custom web addresses. Additionally, Etsy Plus includes $5 of Promoted Listing credits and 15 free listing credits per month.
We believe we can grow our optional paid services in three ways: expand the utility of existing services, expand the geographic reach of existing services, and launch new services offerings. In addition to our paid services, we provide a wide range of tools and educational resources to give Etsy sellers the support they need to manage the administrative side of their businesses. According to our bi-annual seller survey, most recently conducted in 2018,2021, for every hour that an Etsy seller spends making her products, she spends almost another hour doing business-related tasks, including inventory management, marketing, shipping, customer service, and accounting. Our tools and educational resources help manage these administrative burdens.
As 2020 brought an unparalleled set of challenges for our seller community, we expanded our resources and tools to help sellers grow their businesses during the pandemic. We collected our best practices and published our “Ultimate Guide to Running Your Shop During COVID-19,” which highlights trends and some of the biggest themes that emerged in 2020. During the year we dedicated resources to invest in our seller community and advocated on their behalf. We provided over $13 million of one-time investments and donations to support our sellers and communities, launched a multi-channel campaign titled “Stand with Small” to remind shoppers that a purchase from Etsy supports independent sellers, and advocated on behalf of our sellers to members of the U.S. Congress to ensure that the self-employed were included in major COVID-19 relief bills and legislation.
•Seller Tools: We offer a variety of free tools to Etsy sellers, including marketing tools such as our Google Shopping tool. Google Shopping gives our sellers a complementary way to target buyers outside of the Etsy marketplace at key moments when they are searching for items on Google. Sellers set a daily budget and a target country or a number of geographies through their Shop Manager dashboard, and we optimize their budget and target a return on their spend. Our Shop Manager dashboard, which we launched in 2017, serves as a centralized hub for Etsy sellers to track orders, manage inventory, view metrics and statistics, and have conversations with their customers across all of their Etsy shops. In 2018, we addedThis dashboard is a single, easy-to-use interface that streamlines sellers’ bills and payments accounts. Our Etsy seller analytics pages provide additional insights regarding traffic acquisition for their shops. Other marketing tools include Targeted Offers, our sales and promotions tool, and our social mediamedia tool, which help Etsy sellers with their marketing needs and allows them to stand out on and off the Etsy platform. Also, through a partnership with Intuit, Etsy sellers in the United States and the United Kingdom can simplify their accounting and bookkeeping.
•Education: We provide extensive educational resources to teach Etsy sellers how to start, manage, and scale their businesses on our platform, including blog posts, video tutorials, the Etsy Seller Handbook (available on Etsy.com), Etsy.com online forums, and insights from Etsy.comour support teams. In addition to our resources, Etsy sellers connect through self-organized Etsy Teams to build personal relationships with other Etsy sellers, collaborate, educate, and support each other as they build their independent creative businesses. Currently, over 16,000 Etsy Teams have formed around the world.
Etsy’sOur focus on supporting our sellers in starting, managing, and scaling their businesses strengthens our marketplace and positions it for continued growth. When our sellers succeed, Etsy succeeds.
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| How an Etsy Seller Spends Her Time | 20182021 seller survey |
Reverb Services
Key 2018 Investments
Marketing: In July 2018, we revised our fee structure which enabled us to invest more in marketing while maintaining our return on investment. We increased digital marketing spend by 58.5% in 2018 to $112.2 million, and continued to optimize our marketing attribution model. We experimented with offline marketing and television advertising testsReverb has several services that drive growth in the second halfmarketplace and relieve friction in the purchase funnel.
Advertising: Reverb’s on-site advertising platform, referred to as Bump, enables Reverb sellers to gain prominent placement on Reverb in exchange for a higher percentage of 2018,their items’ final sale price.
Reverb Shipping Labels: Reverb provides sellers access to shipping labels at significant discounts, which reduces the cost and conducted pre-time it takes Reverb sellers to ship musical gear, and post-brand awareness research to supplement our quantitative data.
Google Cloud: We made progress and are on track with our migration to Google Cloud, which weprovides transparency through tracking information about when a buyer can expect to complete byreceive their item. The ability to print the beginning of 2020. Among other anticipated benefits discussed below, we believeshipping labels at home reduces the migration will enhance our overall infrastructure by providing faster processing speed, improved page loadcost and time and more nimble server capacity on an as needed basis.
Search: We continued investing in our machine learning capabilities in order to help buyers find the right selection of products, from the over 60 million items available in our marketplace. In 2018, we improved search relevance and began localizing search results by using context specific ranking.
Customer Support: Our partnership with Zendesk supported improvements to our customer experience and lower costs. We introduced live chat for our sellers, and dedicated 24x7 phone support for both buyers and sellers.
Shipping: We made progress evolving our search algorithms in order to more prominently promote items that have competitively priced shipping, introduced shipping price notifications for sellers, and launched the ability forit takes Reverb sellers to display an expected delivery date. Also, in 2018, we expanded our Etsy Shipping Labels offeringship items to sellers inReverb buyers, reduces the United Kingdomchance for administrative error through features such as auto population of shipping addresses, and Australia.
automatically provides tracking information when available and shipping notifications to buyers.
Our Passionate and Engaged Etsy Sellers and Buyers
Etsy Sellers
Our sellers are the backbone of Etsy’s business and what matters most to them is our community of over 39approximately 81 million buyers. In order to continue to support our sellers’ growth, we are focused on making Etsy the best place to start and run a creative business. We serve those creative artisans and entrepreneurs around the world who choose to pursue their passions, offering them a global base of millions of buyers and a cohesive suite of tools and services to help them run their business and drive sales. Etsy sellers range from hobbyists to professional merchants and have a broad range of personal and professional goals. In 2020, active sellers, those who sold an item or incurred a bill charge in the last 12 months, grew 63.5% compared to 2019. As cloth face coverings became mandatory in many geographies, we mobilized our sellers to make and sell face masks on the Etsy platform, a category that was relatively small entering 2020. Many sellers pivoted their product listings to face masks, and given the ease of starting a shop on Etsy, we acquired new sellers, reaching millions of buyers.
Our 20182021 seller survey found that 60%55% of Etsy sellers are multi-channel sellers and that, on average, Etsy is their primary source of sales. In 2019, the second largest channel was craft fairs and live selling events, but during the COVID-19 pandemic, many sellers focused their efforts in online channels, with Etsy garnering the majority share.
According to the 2018our 2021 seller survey:
87%•81% identify as women;
75%•69% consider their Etsy shop to be a business;
•97% run their shops from their homes;
•82% aspire to grow their sales in the future; and
64%•65% started their Etsy shop as a way to supplement income.
Our 20182021 seller survey found that 32%30% of Etsy sellers were pursuing their creative business as their sole occupation. In addition to our 2018 seller survey, we conducted a separate survey of our top decile sellers in 2017. Key findings included that 95% of our top decile sellers intended to remain with Etsy for the next 12 months.
Etsy Buyers
The Etsy marketplace supports a community of over 39approximately 81 million buyers, who value self expression,self-expression, unique items, and buying directly from creative artisans and entrepreneurs. In a 20182020 survey of Etsy.comEtsy buyers, 78%88% of buyers agreed that Etsy offers products they cannothas items that you can’t find anywhere else. Etsy buyers can enjoy a personalized shopping experience and build relationships through direct interactions with Etsy sellers. Etsy buyers can also purchase customized items, vintage merchandise, and craft supplies from Etsy sellers. By shopping on Etsy.com,the Etsy marketplace, Etsy buyers are supporting creative artisans and entrepreneurs in their local communities and around the world.The vast majority of visits come to the Etsy marketplace from organic channels, including a large portion from buyers visiting Etsy directly as well as from non-paid channels such as search, social, email, and push notifications.
We are focused on driving more new buyers to the platform and encouraging existing buyers to purchase more often. New buyers are considered unique buyers that have never made a purchase on Etsy.the Etsy marketplace. During 2018,2020, we had 17.5over 38 million new Etsy buyers, which represented approximately 18% of overall GMS.up 102% compared to last year. GMS from new buyers was up 94% year-over-year and represented approximately 16% year-over-year. of overall Etsy.com GMS.
GMS from existing Etsy buyers grew 23%101% year-over-year in 20182020 and represented approximately 82%84% of overall Etsy.com GMS, an increasein line with last year. We’ve made significant strides in reactivating buyers, generating purchases from buyers who hadn’t made a purchase in a year or more. We generated over 22 million reactivated buyers in 2020, growing 77% compared to lastthe prior year. Of the 60.7 million new and reactivated buyers in 2020, approximately 17% made four or more purchases across two or more categories, demonstrating encouraging signs for frequency.
Repeat Etsy buyers represent shoppers who have ever boughtmade purchases on Etsy, regardless of when their first purchase day occurred.two or more days in the previous 12 months. We believe repeat purchases demonstrate the loyalty of Etsy buyers. In 2018,2020, on the Etsy marketplace, approximately 40.1%48% of our active buyers made purchases on two or more days in the previous 12 months, a slightwere repeat buyers, an increase compared to last year. Within that category, weWe are particularly focused on increasingconverting our number ofrepeat buyers into habitual buyers, or Etsy buyers who have spent $200 or more and made purchases on six or more days in the previous 12 months. As of December 31, 2018,2020, habitual buyers grew to 2.06.5 million, an increase of 21.7%157% compared to 2017. This2019. The growth in habitual buyers has accelerated for three consecutive quarters and is faster than overall active buyer growth, indicating our efforts to convert buyers into more loyal shoppers on the platform areEtsy marketplace are seeing signs of success.
We’ve attracted nearly 151 million total buyers on the platform (unique buyers who have ever purchased on Etsy) since our launch in 2005.
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| Active Buyers by Purchase Type |
Unlike many other ecommerce companies, the vast majority of visits come to Etsy from organic channels. In 2018, 85% of visits came to Etsy.com from an organic source, including a large portion from buyers visiting Etsy.com directly as well as from non-paid channels such as search, social, email, and push notifications. Paid visits are attributed to visits generated from our marketing efforts. Over the last five years, paid visits have increased as a percentage of total visits as a result of our increased investment in marketing. A visit represents activity from a unique browser or mobile app. A visit ends after 30 minutes of inactivity.
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Visits Contribution by Source Type |
Etsy Seller & Buyer Retention
OurOn the Etsy marketplace, our active sellers and active buyers typically remain so for multiple years. For example, 33.1%42.5% of active sellers and 37.5%41.5% of active buyers as of December 31, 20152017 continued to be active sellers and active buyers through their fourth year on the platform, and 31.8%36.2% of active sellers and 38.7%37.9% of active buyers as of December 31, 20142016 continued to be active sellers and active buyers through their fourth year on the platform. In addition, as of December 31, 2018, 19.6%2020, 18.4% of active sellers have been selling on Etsy for more than four years. Likewise, as of December 31, 2018, 24.5%2020, 20.2% of active buyers have been Etsy buyers for more than four years.
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| | | | | Year 1 | | Year 2 | | Year 3 | | Year 4 | | | | | | | | Year 1 | | Year 2 | | Year 3 | | Year 4 | |
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| AVG GMS | | 2013 | | $1,260 | | $3,110 | | $4,190 | | $4,620 | | | | AVG GMS | | 2013 | | $96 | | $161 | | $168 | | $174 | |
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| PER SELLER | | 2014 | | $1,465 | | $3,325 | | $4,228 | | $4,615 | | | | PER BUYER | | 2014 | | $99 | | $157 | | $164 | | $169 | |
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| | | 2015 | | $1,558 | | $3,296 | | $4,062 | | $4,939 | | | | | | 2015 | | $101 | | $158 | | $163 | | $180 | |
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| | | 2016 | | $1,660 | | $3,198 | | $4,278 | | $5,004 | | | | | | 2016 | | $101 | | $157 | | $174 | | $187 | |
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| | | 2017 | | $1,641 | | $2,875 | | $4,090 | | $6,538 | | | | | | 2017 | | $92 | | $173 | | $186 | | $241 | |
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| | AVG GMS | | 2011 | | $817 | | $2,241 | | $3,314 | | $4,299 | | | | AVG GMS | | 2011 | | $103 | | $177 | | $186 | | $195 | |
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| | PER SELLER | | 2012 | | $1,079 | | $2,598 | | $3,935 | | $4,557 | | | | PER BUYER | | 2012 | | $96 | | $163 | | $173 | | $181 | |
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| | | | 2013 | | $1,260 | | $3,110 | | $4,190 | | $4,620 | | | | | | 2013 | | $96 | | $161 | | $168 | | $174 | |
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| | | | 2014 | | $1,465 | | $3,325 | | $4,228 | | $4,615 | | | | | | 2014 | | $99 | | $157 | | $164 | | $169 | |
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| | | | 2015 | | $1,558 | | $3,296 | | $4,062 | | $4,939 | | | | | | 2015 | | $101 | | $158 | | $163 | | $180 | |
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Cohorts of 2017, 2016, 2015, 2014, 2013, 2012, and 20112013 Active Sellers and Active Buyers |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Performance—Growth and Retention of Active Buyers and Active Sellers” for more information.
*2020 GMS per buyer by cohort from 2015 - 2019 excluding mask GMS
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| Historical Cohorts: 2020 GMS per Buyer |
Our Technology
Our widely respected engineering team has built a sophisticated platform that enables millions of Etsy sellers and Etsy buyers to smoothly transact across borders, languages, and devices. We collect and analyze large volumes of data to enhance the performance of our platform. For example, on average, we capture roughly one billion user-generated events every dayplatform to produce personalized recommendations, improve our search experience, and test features on our website.
Our use of machine learning algorithms on the Etsy marketplace creates an engaging shopping experience and also helps Etsy sellers and Etsy buyers connect across our platform. We apply proprietary machine learning to the search and discovery processes, enabling shoppers to more easily browse, filter, and buy that perfect item, even when they may not have something specific in mind.
Machine translation and machine learning also play an important role in making it easy for Etsy sellers and Etsy buyers to connect even if they don’t speak the same language. We translate listings within our Etsy.com market into 10 languagesEtsy marketplace, which we believe significantly increases the inventory available to non-English speaking Etsy buyers and gives Etsy sellers access to a truly global audience.
OurIn addition, our technology infrastructure allows us to scale our efforts across the platform. In late 2017,February 2020 we announcedcompleted our principal migration to Google Cloud, which we believe will enable us to focus on growing our core Etsy.com marketplace, prioritize the buyer and seller experience, improve our search and discovery effectiveness, and increase the pace of launching new features. We expect the migration will result in increased engineering efficiency, shifting the focus from maintaining on-premise systems to product engineering work that is more strategic. WeAs the COVID-19 pandemic shifted consumer shopping habits to more online commerce, traffic volume increased dramatically, and the cloud migration enabled us to dynamically flex our infrastructure. In addition to its flexible capacity, we also believe the migrationcloud will enhance our overall infrastructure by providing faster processing speed, improved page load time, and more nimble fulfillment to capacitytechnology on an as needed basis. In the third quarter of 2018,For example, during 2020 we achieved a significant milestone by successfully migrating our website and mobile apps to Google Cloud. We expect to complete the migration by the beginning of 2020.processed twice as much data per search query as we did in 2019.
Commitment to Integrity and Transparency
Members of our community rely on us to maintain a trusted marketplace.marketplaces. The trustworthiness of our marketplaces and the connections among people in our community are cornerstones of our business. Our policies are designed to encourage transparency andamong our members by clearly outlineoutlining the rights and responsibilities of Etsy sellers and Etsy buyers participating on our platform. Most fundamentally, we require that goods listed in our marketplace be handmade or unique and assembled with production partners, vintage, or craft supplies.
Transparency within our community reflects and helps to support our own trustworthiness. For example, we publishhave an annual report that details progress toward our ideals and shares our hopes for the years to come. We also annually report statistics regarding shops that do not meet our guidelines or which list items that are alleged to infringe third party rights. In 2018, we closed 3,609 Etsy.com shops that were subject to repeat notices of intellectual property infringement and closed 109,473 Etsy.com accounts for non-IP policy violations.
Additionally, we are focusedImpact strategy on enhancing customer service for Etsy sellers and Etsy buyers, which we believe bolstersprovide our progress in this Annual Report.
On the trustworthiness of our marketplace. In 2018,Etsy marketplace, we migrated our legacy support platform to a new third-party customer service platform, Zendesk, to improve our customer experience. This migration enabled us to introduce live chat for our sellers, and dedicated 24x7 phone support for both buyers and sellers.
We strive to give the Etsy buyer comfort that she is purchasing goods from a shop that adheres to certain principles.principles, which starts with our policies. Fundamentally, we require that goods listed on Etsy be handmade (whether by the seller alone or with the help of a production partner), vintage, or craft supplies. Etsy buyers have a high degree of insight into Etsy sellers’ business practices. Our policies ask Etsy sellers to be transparent about themselves, their businesses, and the goods they sell.
We alsoare focused on enhancing customer service for our sellers and buyers, which we believe bolsters the trustworthiness of our marketplaces. For example, in 2020, we continued to evolve our offerings with Zendesk to improve our customer experience. We expanded 24/7 live chat and phone support for both our buyers and sellers. Our commitment to integrity and transparency came into particular focus in 2020. When the COVID-19 pandemic triggered the sale of masks and other COVID-19-related products, our Policy and Trust and Safety teams agilely calibrated our policy interpretation and enforcement approaches to align with constantly evolving official guidance. When Etsy called for sellers to make masks to meet soaring buyer demand, our Trust and Safety team worked to provide sellers with educational resources highlighting what is permitted to be sold on the Etsy platform and best practices for listing masks in accordance with our policies. In response to the social justice protests and civil unrest that began in the spring of 2020 and continued through a divisive, highly polarized U.S. election cycle, our Policy and Trust and Safety teams closely followed unfolding events and their impact on our marketplaces. These teams re-evaluated content on Etsy in the context of emerging trends to determine whether such content violated our Terms of Use, including our Prohibited Items policy and zero tolerance approach for items that promote, support, or glorify hate or violence or that perpetuate the spread of harmful misinformation.
We have dedicated teams and sophisticated tools to help enforce our policies. For example, ourOur Integrity team uses a combination of machine learning, automated systems, and community-generated flags to review items listed on the Etsy marketplace and Etsy shops that may violate our policies. Our Trust and Safety team helps to prevent and detect fraud through human review and automated tools and algorithms. We also recognize that sometimes transactions don’t go as planned. When that happens, our online Case System provides a way for Etsy sellers and Etsy buyers to communicate with each other to resolve disputes. In 2018, 0.3% of orders resulted in a case. We also establish trust by emphasizing the person behind every transaction. We deepen connections between Etsy sellers and Etsy buyers through our direct communication tools, seller stories on our website and apps, and, when possible, in-person events, highlighting personal relationships as a key part of the Etsy experience. For example, Etsy sellers are encouraged to share their stories to reach Etsy buyers
We publish an annual transparency report, which details our policy enforcement for the year on Intellectual Property, Prohibited Items, and Requests for Member Information policies. We’ve shared this report on our platformcorporate website annually since 2015, and believe that publicly reporting on social media. The trustworthiness ofour enforcement efforts builds trust in our marketplace and the connections among people in our community are cornerstones of our business.community.
Our Strategy
Etsy
Since mid-2017, we haveOur strategy is focused our strategy on growing the Etsy.comEtsy marketplace in our sixseven core geographies and executing upon four key initiatives to make Etsy a better place to shop and sell. These initiatives involved makingsell: We focus our investments and improvements in search and discovery, trust and reliability, marketing capabilities, and seller tools and services. SuccessfullyInvesting in and successfully delivering on these initiatives has resulted in significant improvements to and growth of our marketplace.
In order to deliver sustainable long-term growth, we are building upon this strategy to incorporate additional elements that we believe, over time, will make Etsy a best-in-class marketplace. Our investments in product, marketing, and talent will be focused on capitalizing on what we believe are our core competitive advantages;advantages, or what we think of as our “Right to Win.”
The foundation of Etsy’s competitive advantageRight to Win is our sellers’ collection of unique items, which we believe, when combined with best-in-class search and discovery, human connections, and a trusted brand, will enable us to continue to stand out among other ecommercee-commerce platforms and marketplaces. We will lean into the humanity and vibrancy of our market, increasing the connection between buyers and sellers, establishing strong trust signals for product quality and customer experience, removing barriers to purchase, and giving sellers more ways to generate sales and scale their businesses.
Ultimately, the goal of our long-term strategy is to drive moreattract new buyers, to the website, give existing buyers reasons to come back more often,increase buyer frequency, encourage buyers to spend more per order, and fuel success for our sellers, which we believe willand drive growth. During the COVID-19 pandemic in 2020, we saw the effectiveness of our Right to Win, as our buyers came to Etsy for our sellers’ unique inventory of essentials and everyday items.
The Etsy marketplace has a significant number of habitual buyers (Etsy buyers thatwho have purchased $200 or more on Etsy.comEtsy and have made purchases on six or more purchase days in the last 12 months), and we believe we have the ability to attract many more buyers like them to Etsy and convert them into habitual buyers. For example, weWe believe we can deepen engagement with our existing buyers by inspiring purchases in additional categories and on additional occasions. We also plan to continue supporting our sellers by focusing oncreating and enhancing the seller tools and services that willdesigned to help sellers scale and grow their business and drive buyer demand. We believe that we are just getting started improving this virtuous cycle of growth.
Further expanding on these two primary components of our long-term strategy we will:
1. Focus on the Etsy marketplace in our sixseven core geographies:
The first component and foundation of our growth strategy remains tois our focus on the Etsy marketplace in our sixseven core geographies (the United(United States, United Kingdom, Germany, Canada, Australia, Germany,France, and France)India). These sixOur core geographies are locations are that meet any of the following criteria:
•represent our most attractive buyer GMS opportunities,
•where we currently have our largest concentrations of buyers and sellers and, consequently, where weor believe we have the most significant opportunities forcan create a vibrant two-sided marketplace, or
•where we’re making strategic investments in domestic growth.
We are building local marketplaces globally, deepening local Etsy communities around the world, each with its own ecosystem of Etsy sellers and Etsy buyers.continuing to expand our global reach. A barometer of our local market vibrancy is the performance of our international domestic trade route,routes, measured by which we mean GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country.
Etsy.com GMS from this trade route grew approximately 36%182% in 20182020 compared with 2017,to 2019, making it the fastest growing category of international GMS.
In 2018, we announced a referral agreement with DaWanda, a privately held marketplace for gifts and handmade goods based in Germany, encouraging its community of buyers and sellers to migrate to the Etsy platform. This agreement brought meaningful new breadth and depth of inventory to Etsy, helping to make Germany our second largest international market (after the United Kingdom) by domestic activity. While we focus on our six core markets, we will also continue to evaluate additional geographies in which to make strategic investments. For example, we have made initial investments to explore growth opportunities in India.
We see significant opportunity to deliver a more localized shopping experience to non-U.S. buyers in the future, includingfuture. This opportunity may include making investments in the elevation of local products and sellers in search, improving non-English search, and providing more local specificlocalized marketing and campaigns.
We have buyers and sellers in nearly every country around the world, and while we focus on our seven core markets, we will also continue to evaluate additional geographies for strategic investments. Continued international expansion may require significant financial investment, especially in markets where we have limited operating experience, including in areas such as seller and buyer acquisition marketing, enhancing our machine translation across new languages, and forming relationships with third-party service providers.
Our growth strategy also includes investments for inorganic growth, including our 2018 strategic referral agreement with DaWanda in Germany and the 2019 acquisition of Reverb. We may continue to acquire additional marketplaces or businesses that are a strategic fit for the business and brand.
2. Build a sustainable competitive advantage:
As described above, the second component of our go-forward strategyRight to Win is predicated around building a sustainable competitive advantage centered on these four key elements;elements:
Our Sellers’ Collection of Unique Items: The foundation of Etsy’s competitive advantage is our sellers’ collection of unique items. OurSellers choose to list their collections of unique items on our marketplace because they believe that we are the best place for them to start and grow a creative business and that we have created a community that attracts, supports, and retains some of the world’s most talented makers. The Etsy marketplace features over 60approximately 85 million items listed across dozens ofmultiple retail categories and boasts a large assortment of unique, handmade, vintage, and craft supply products from all over the world. This unique inventory is the result of having created a community that attracts, supports, and retains some of the world’s most talented makers. In a 20182020 survey of Etsy buyers, 78%88% agreed that Etsy has items that you can’t find anywhere else - that something “special in a sea of sameness.” We believe ourthe Etsy marketplace is the only place where you can find thethis depth and breadth of one-of-a-kind items, including millions that can be customized and personalized. The breadth and depth of the special items listed in our marketplace is the linchpin of our long-term strategy. However, the unique nature of these items requires that we invest in the other three partselements of our long-term strategy: search and discovery, human connections, and our trusted brand in order deliver a best-in-class marketplace experience.
Best-in-class search and discovery: We are focused on continuing to develop a search and discovery experience that unlocks the value of the unique items in ourthe Etsy marketplace. With millions of items listed on Etsy.comEtsy that don’t map to a catalog or a stock keeping unit (“SKU”), our challenge is delivering world-class search and discovery technology that surfaces the right unique product to the right buyer at the right time in order to drive sales and buyer satisfaction. We are utilizing artificial intelligence and machine learning to help personalize the search experience and enable Etsy buyers to more easily browse, filter and find the item they desire.
In 2018,2020, we significantly enhanced the search and discovery experience inon the Etsy marketplace. As a result of migrating our marketplace. We leveraged Context Specific Search Ranking (“CSR”) by adding even more attributes such as location and shipping prices intosearch efforts to Google Cloud, we made foundational upgrades to our search ranking algorithmalgorithms, which continues to deliverenable us to provide more relevant results.search results to buyers on the Etsy platform. We also begancontinue to leverage user generated content, introduced a new discovery feedmake progress closing the semantic gap, and discovery badgesduring 2020, we processed two times more data per search query compared to inspirelast year. All of our efforts have enabled us to launch personalized search, where two buyers who enter the same search query may receive different results based on their characteristics. As we continue to explore more products and expand theiriterate on our search beyond their original intent and optimized landing pages by adding more recommendations and notifications, including alerts on listing cards when scarce items appear in other people’s carts.
Weinitiatives, our algorithms will also work to ensure that buyers have more help discovering the perfect item for them. Since our marketplace is built on over two million individual but largely unknown brands, we see significant opportunity to improve how we signal high quality itemslearn and deliver a great customermore personalized shopping experience, to buyers. We believe that by personalizing the Etsy search and discovery experiencewhich we cananticipate will deepen buyer engagement and drive greater visit and purchase frequency. We expect that our transition to cloud-based technology and additional future investments in machine learning and artificial intelligence, among other factors, will enable us to deliver a best-in-class search experience.
The power of human connections: Our mission to “Keep Commerce Human” is a vital part of our strategy.We willstrategy. We continue to emphasize the role that humans play in every aspect of our marketplace.business. What makes the Etsy marketplace special isn’t just the unique items in our marketplace; it’s also the stories of how those items were brought to life by the hands of real people. Our Etsy buyer experience highlights the story behind each item and also allows Etsy buyers to create their own stories by workingwork with a sellerEtsy sellers to personalize or customize items to their exact specifications. In fact, data shows that when aan Etsy buyer reaches out to aan Etsy seller with a question, they are significantly more likely to purchase a listingan item from that seller, and conversion rate goes up as response time gets shorter.
In 2018, we began to streamline the purchase flow for orders that are personalized or customized and made it easier for buyers to connect with sellers to design high quality items on the platform. We plan to invest more to make sure that buyers and sellers know that Etsy is the destination for personalized items, and it is our goal to make buying and selling such items intuitive and easy.
We believe that fostering and elevating the quality of these interactionshuman connections will also enable us to drive buyer engagement, loyalty, and purchase frequency and to continue to differentiate Etsy from other ecommercee-commerce platforms. Shifting over time from
In 2020, we deepened the human connections in our current item-first frameworkmarketplace by launching listing videos, which help sellers showcase their products to one that highlights shops and sellers is a waybuyers in ways they previously could not with photos, while bringing their products to elevatelife. As of the roleend of our makers and their creative processes.2020, approximately 3.2 million sellers’ videos were uploaded. Our goal is to bring human connections to life through improvements in member support, seller forums
management, our brand and marketing campaigns, and other ways that we promote ourthe Etsy marketplace. Lastly, we plan to deepen loyalty by creating opportunities for Etsy buyers to experience Etsy across categories and occasions.
Our trusted brand: We will continue to focus on being a brand that inspires trust in our customers across the buyer journey --— when they search, purchase, anticipate, and receive their special items, and all the steps in between. Since ourEtsy sellers have relatively unknown brands and unbranded items, we aim to ensure that the Etsy brand is recognized and valued for providing an excellent end-to-end experience. There are two key elements to being a trusted brand: standing for something that customers understand and rely on, and delivering a purchasing experience that feels safe and supportive. Our goal is to bolster trust in the Etsy brand, Etsy sellers, the items available in our marketplace,on Etsy, and in the overall Etsy experience. In 2018,2020, we improved buyer confidence withleveraged reviews to help buyers make more informed purchase decisions on items they are searching for. By incorporating machine learning we are now able to prioritize the launch of several new products, including a new iteration of guest checkout on mobile web, an alternative payment option commonmost helpful reviews which are those that have substantial text, images, and are similar to German buyers, and an improved purchase path for items that are personalized or customized.the target listing. We also made significant progress in customercontinue to expand our service offerings and choice of support by partnering with Zendesk, a customer service software company. Our Zendesk partnership has enabled us to launch live chat and dedicated 24x7 phone support, which has improved the support experiencechannels for our buyers and sellers.
Offering a choice of channels continues to resonate well with the community as evidenced by a greater share of our buyers opting to connect with Etsy by phone and chat; 73% of buyer contacts in the fourth quarter of 2020 were managed by phone and chat with the balance handled in email, as compared to 64% and 26% managed by phone and chat in the fourth quarter of 2019 and 2018, respectively. In addition, we continue to focus on the post purchase experience, including free shipping and transparent delivery and returns. As of December 31, 2020, 66% of items on the Etsy marketplace offered free shipping to U.S. buyers, 73% of U.S. listing views were eligible to ship for free, and 46% of global orders were delivered with free shipping. We made significant improvements in shipping transparency; as of December 31, 2020 approximately 34% of U.S. listing views had an expected delivery date.
We plan to continue to optimize the coreEtsy buyer shopping experience, - to make it less fragmented, and to removeminimize friction. This will involve making sure that Etsy buyers can find what they want, can easily keep exploring for inspiration, and have the right information to make a purchase decision at every step along the way. We see significant room for additional improvements to our landing pages, our ability to surface recommendations, so buyers do not hit dead ends, and continued improvements to make sure we are surfacing relevantreduce friction in the purchase information. By focusing on shipping enhancements and transparent delivery and returns we can help buyers better understand what to expect across Etsy.
funnel.
In addition, we plancontinue to evolve our marketing strategy and investments to reinforce our core brand promise in the hearts and minds of Etsy buyers. We believe that we can continue to growbroaden our acquisitionchannel mix in the marketing efforts. Wefunnel from predominately investing in performance marketing, which we expect to addcontinue to drive buyer growth through channels such as product listings ads on Google or search engine marketing. Our performance marketing spend adjusts naturally with demand so as consumer habits evolve and more commerce shifts from offline to online, Etsy stands to benefit by spending more and driving more buyers to the site. We also expect to continue spending on upper funnel strategies like TV to build top of mind awareness, introduce Etsy for more of our buyers’ purchase occasions, and better engage new and existing buyers everywhere they are - on Etsy and off. In addition, we’re expanding into new marketing channels optimizesuch as podcasts and influencer collections to engage with those celebrities and influencers who are passionate about Etsy. Through “Collections,” which are limited edition, exclusively curated items, Etsy and our spend in these channelssellers partner with celebrities and workinfluencers to drive engagement, reach, impressions, and visits. We believe our marketing strategy coupled with sellers to help thema better understand the impact of marketing on their business (for example,user experience on-site will foster improved engagement with improved seller analytics tools), and to promote their shops to Etsy buyers.
Reverb
There are a number of similarities between the levers of growth for the Etsy and Reverb marketplaces, including improving search and discovery, making selling and buying easier, and building a global brand and user community. We believe that we are just getting started in improving the virtuous cycle of growth for our marketplaces.
2020 was also a transformational year for Reverb and its community of buyers and sellers. As the COVID-19 pandemic shifted consumer habits to shopping online, and shelter in place restrictions increased interest in creating music, Reverb experienced an increase in new buyers, many of whom were novice musicians. We are leveraging this momentum by fostering investments in the marketplace to drive sustained growth over time, including in talent, marketing, and enhancing seller tools and services to build on our core strengths.
Our Mission, Guiding Principles, and TeamPeople
Mission
Etsy’sOur mission to “Keep Commerce Human” is rooted in our belief that, although automation and commoditization are parts of modern life, human creativity cannot be automated and human connection cannot be commoditized. We believe that consumers are demanding more of the businesses they support and that companies that build win-win solutions that are good for people, the planet, and profit will be best positioned to succeed. We are committed to growing sustainably by aligning our mission, guiding principles, and business strategy. This is what makes Etsy and our marketplaceus distinct from mass retailers. Our mission guides our daily decisions, sets the path for our long-term success, and reinforces our commitment to make a positive social, economic, and environmentalecological impact.
Guiding Principles
Our guiding principles describe how we, individually and as a team, show up at work. They define who we strive to be, inform our business decisions, inform the qualities we look to recognize, and enable us to achieve our mission. Our guiding principles are:
We commit to our craft. Our work has the power to change lives. That’s why we strive to continuously learn and excel at what we do.
We minimize waste. Time, resources, and energy are precious, so we focus only on what will have the greatest impact.
We embrace differences. Diverse teams are stronger, and inclusive cultures are more resilient. When we seek out different perspectives, we make better decisions and build better products.
We dig deeper. The best solutions to meaningful challenges are rarely easy or obvious. We stay curious, balance our intuition with insights, and decide with confidence.
We lead with optimism. We believe in our mission, and we believe in each other. We see the world as it is, set ambitious goals, and inspire one another with generosity of spirit. Together, we reimagine what’s possible.
Our TeamPeople
We pride ourselvesare focused on employee engagement, which is linked with high performance, retention, innovation, and growth. Our employees have chosen to work at Etsy because they believe in our action-oriented, values-based, and purpose-driven work culture. Nurturing a culture of diversity and inclusivity has always been a part of Etsy’s employeesDNA. We welcome people of all backgrounds and walks of life into our community as employees. They work hard to bring innovative ideas and energy every day to strengthen the experience for our sellers and buyersbuyers. We believe that embracing diverse perspectives makes us stronger, more resilient and enables us to be the best we can be.
In March 2020, Etsy employees moved to a remote work environment due to the COVID-19 pandemic. Despite this shift in work environment, we were able to maintain high experiment velocity and minimal business disruption. The shift to fully remote work was not without personal stress on Etsy.com. many of our employees, but Etsy stepped up to support our team and contractors. We initiated company-wide “rest and recharge” days off, expanded paid family leave, and provided additional resources to help our teams weather the impact of the pandemic. Our company-wide initiatives were among many efforts to provide a safe and sustainable working environment.
As of December 31, 2018,2020, we had 8741,414 employees worldwide, with 545 employees located inincluding Reverb, which had 205 employees.
For further information on our headquarters in Brooklyn, New York. Of those employees, we had 318 in engineering, 121 in product, 162 in member operations, 112 in marketing,approach to Human Capital see “Our Impact Strategy and 161 in facilities, IT, and other corporate teams.
We focus on maximizing our employees’ engagement, and their professional and personal well-being. In July 2018, Etsy conducted an engagement survey of all global employees and seventy percent of respondents reported favorable employee engagement. We believe employee engagement comes from fulfilling work focused on serving the needs of our sellers and buyers and from ample personal and professional growth opportunities. We use the results of our engagement survey guide the development of more dynamic programs that build knowledge and skills and build connectedness between employees.
We also offer our employees paid time off to volunteer so that they can support the causes and organizations they are passionate about. In 2016, we introduced a 26-week gender-blind parental leave policy that is available to all Etsy employees globally. Through this policy we aim to support and enable parents to play equal roles in building successful companies and nurturing their families.
Progress” below.
Our Impact Strategy and Progress
We believe that consumers are demanding more of the businesses they support and that the companies best positioned to succeed will build win-win solutions that are good for people, the planet, and profit. We are committed to growing sustainably by aligning our mission, guiding principles, and business strategy.
We have developed an impactImpact strategy that reflects the positive economic, social, and environmentalecological impact we want to have on the world while advancing and complementing our business strategy.strategy, and we are pleased to provide this update on our progress. Since announcing our impactImpact strategy in 2017, we have updated somecontinued to evolve and update many of our goals to be more specific, measurable, and time bound.bound, all while continuing to expand the transparency of our reporting on these activities. We apply the same focus, discipline, and accountability to our Impact metrics as we do our financial metrics, and together, they make us stronger and more resilient. We expect to continue to evolve our impactImpact strategy and disclosures in the future as we grow and our impactImpact work matures. We are pleasedIn addition, we have made improvements to share our progress as we executeInvestor website to make it easier for investors to find details on thisour Impact strategy and we will continueprogress, including our three primary Impact pillars, as well as more details on human capital management, data privacy and security, and other important ESG disclosure areas.
We acquired Reverb in August 2019 and updated our 2020 Impact goals to reportbe inclusive of Reverb. Except where specifically noted, our results transparently as it relates toImpact data includes the operations of our impact goals.Reverb subsidiary.
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Economic Impact: Impact | | Social Impact | | Ecological Impact |
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Make creative entrepreneurship a path to economic security and personal empowermentempowerment. | | Enable equitable access to the opportunities that we create. | | Build long-term resilience by eliminating our carbon impacts and fostering responsible resource use. |
| We have met our goal to double Etsy sellers’ U.S. economic output by 2023. U.S. Etsy sellers contributed $13 billion to the U.S. economy in 2020, up 142% from our 2018 baseline, created 2.6 million jobs, enough to employ the entire city of Houston, Texas while generating nearly $4 billion in income to U.S. households. | | Etsy continued to attract and retain world-class talent in 2020, with a keen focus on diversity and gender balance. In 2020, Etsy (excluding Reverb) more than doubled the percentage of our leadership level employee population who identify as an underrepresented minority (Black, Latinx, or Native American; collectively, “URM”). URM hires constituted 20% of U.S. hires in 2020, and our U.S. URM employee population has increased from 8.5% in 2018 to 12.5% in 2020. | | We met our 2020 goal to source 100% of our electricity from renewable energy. This includes electricity used to power our global offices, remote electricity used by employees working from home in the United States as a result of COVID-19, and our computing load in colocated data centers and Google Cloud. We also met our goal to run a carbon neutral business for 2020 by investing in over 400,000 verified emissions reductions that protect forests, sponsor wind and solar farms, and help develop greener methods for producing auto parts. |
2020 was an unprecedented year due to the global pandemic and broad social issues impacting our team and the communities we serve. With our Impact strategy as a north star, we were agile and stepped up our efforts well beyond the scope of the original goals we had outlined for 2020, all while working in a completely remote environment. Our additional 2020 Impact work included the following:
•Direct Support for Sellers: Expanded seller education to help them manage their shops through this challenging time, implemented seller fee reductions, expanded our marketing strategies to further support and feature underrepresented minority sellers in our marketplace, and launched advocacy campaigns in the United States, United Kingdom, and Europe, to win government support and economic relief for small businesses, the self-employed, and sole proprietors, such as Etsy sellers.
•Philanthropy: Made personal protective equipment (“PPE”) donations and grants to community organizations and programs that enable creative entrepreneurship, advance racial justice, and help those most impacted by the pandemic, encouraged our employees to participate in charitable organizations through paid volunteer time off and other activities.
•Expanded Diversity, Equity, and Inclusion Investments: We further expanded our already robust Diversity, Equity, and Inclusion (“DEI”) program while pivoting hiring, engagement, mentorship, and our Employee Resource Group (“ERG”) program to a remote environment. Our main goal is to create safe spaces for Etsy employees, strengthen social connections and professional networks, build Etsy’s collective cultural intelligence and increase equitable opportunity. We continue to expand our ERG communities in 2021 which now includes those focused on remote employees, mental health, and a group for Jewish employees called Jetsy. In 2020 our ERGs included:
We have started off 2021 by making some important new commitments related to our ecological impact, including:
•Science Based Goals: In January 2021, we set long-term carbon reduction goals that are aligned with science, doing our fair share to prevent the worst effects of climate change. Our new Net Zero by 2030 goal includes a 50% absolute reduction in our Scope 1 and 2 greenhouse gas emissions and a 13.5% absolute reduction in our Scope 3 greenhouse gas emissions.
•New TCFD Framework: Based upon feedback from the investment community, we have added the Task Force on Climate-Related Financial Disclosures (“TCFD”) framework, in addition to using The Sustainability Accounting Standards Board’s (“SASBs”) framework, to our Impact reporting. You can find this disclosure on pages 32-35 herein.
Looking forward, we have more exciting business strategy-aligned Impact work in the pipeline. Below are details of our economic and social pillars, including longer term diversity goals for Etsy and Reverb, and additional goals related to marketplace and supply chain sustainability and diversity.
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2018 GOALS | 2018 PROGRESS | 2019 GOALSEconomic Impact |
Ensure the | | |
| 2020 Goals | 2020 Progress | 2021 Goals |
Create and grow economic opportunities for creative entrepreneurs. Target: Double U.S. Etsy creates meaningfully benefit a broad swath of our seller communitysellers’ economic output by 2023.
| Commissioned Etsy’s first
Expanding our Economic Impact Target Met: In 2020, Etsy met and exceeded its 2018 goal of doubling sellers’ economic impact by 2023.* In 2020, Etsy sellers: - Contributed $13 billion to the U.S. economy, a 142% increase from our baseline of $5.37 billion in 2018; - Created 2.6 million jobs in the independent worker economy, enough jobs to employ the entire city of Houston, Texas;** - Generated nearly $4 billion in income for sellers; and - Produced $6.8 billion in additional economic value by harnessing their creativity and bringing unique products to market. * To calculate these results, Etsy commissioned its third economic impact study with ECONorthwest, an independent economic consulting firm, to explore the ways Etsy sellers in the United States contribute to the national economic landscape. We found that ** Houston, Texas has a population of 2.3 million.
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Create and grow economic opportunities for creative entrepreneurs.
Target: Set a new target and establish a baseline for delivering economic empowerment to our sellers.
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Foster economic and personal empowerment among our stakeholders. Target: Invest in 2018, Etsy sellers:
social programs that:
- Contributed $5.37 billion to the U.S. economy, more than double their direct business sales; - Created 1.52 million jobs in the independent worker economy, enough jobs to employ the entire city of San Antonio;
- Generated more than $1.76 billion in income;promote economic opportunities for creative entrepreneurs and
- Produced $3 billionprovide musical education to people in additional economic value by harnessing their creativityneed (Reverb).
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Philanthropy In 2020, we invested over $2.6 million in charitable gifts, which supported community organizations and bringing unique productsprograms: - to market. | Double U.S. Etsy sellers’ economic output by 2023 |
Foster economic security and personal empowerment for creative entrepreneurs through charitable and in-kind contributions | Invested $280K in programs and initiatives that enable creative entrepreneurship,
- to advance racial justice, - to help those most impacted by the pandemic (including with personal protection equipment and supportgrants), and - to provide natural disaster relief to Etsy sellers on their pathssellers. We also expanded our employee matching program from $500 to economic security$750 matched annually and, personal empowerment.through Reverb Gives, supported musical education initiatives globally. —
Community Engagement Collectively, Etsy employees donated over 2,7002,000 hours of volunteer time in their communities through Etsy’s Volunteer Time Off program.Impact Hours program, which gives all employees up to 40 hours per year to volunteer.
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Foster economic and personal empowerment among our stakeholders.
Target: Invest in social programs that fosterthat: - promote economic securityopportunities for creative entrepreneurs and personal empowerment for our stakeholders - provide musical education to people in need (Reverb). |
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| Economic Impact (continued) |
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| 2020 Goals | 2020 Progress | 2021 Goals |
Advocate for public policies that advance our commitments to economic empowerment, equity, and ecological sustainability. Target: Advance public policies that increase economic security and reduce administrative burdens for creative entrepreneursentrepreneurs. | Continued
Advocating for Creative Entrepreneurs In 2020, we continued our advocacy for public policies that enable creative entrepreneurs to prioritize seller issues,start and grow their businesses, including tax burdens, financial securityCOVID-19 relief for the self-employed and championing micro-business more broadlysole proprietors, support for the United States Postal Service, portable benefits, and sensible platform regulation. We also supported public policies to reduce carbon emissions in our key markets.the transportation and logistics sector, as well as economic justice policies to support microbusinesses operated by women, indigenous community members, and people of color. —
Focused on policy solutions that help to growActivating the creative economy, advocating for net neutrality and internet sales tax policy.Power of Etsy Sellers
Over 88,000 Etsy sellers advocated on the above issues in Washington, D.C., California, Brussels, France, and the United Kingdom and generated over 140,000333,000 messages to policymakerslawmakers on these issues.behalf of our community.
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Advocate for public policies that advance our commitments to economic empowerment, equity, and ecological sustainability.
Target: Advance public policies that increase economic security and reduce administrative burdens for creative entrepreneursentrepreneurs.
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| Social Impact |
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Social Impact: Enable equitable access to the opportunities that we create
2020 Goals | 2020 Progress | 2021 Goals |
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2018 GOALS | 2018 PROGRESS | 2019 GOALS |
Meaningfully increase representation
Build diverse and inclusive workforces that are broadly representative of underrepresented groups and ensure equity in Etsy’s workforce | Increased our targeted recruiting efforts, created hiring guidelines to ensure that all candidates are evaluated fairly and with objective criteria, and implemented a more formal company-wide performance management process to support consistent and fair evaluations. As a result, female engineers now make up 33.2% of our engineering workforce at Etsy, up 4% from the prior year.their communities.
—Targets:
Commissioned a pay equity study using a third party consulting firm which revealed no influence of age, race, or gender in Etsy’s pay practices.
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Ramped up our targeted recruitment efforts by focusing on growing our employer brand awareness and maximizing our presence at industry conferences and events.
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Focused on growing our strategic and data-driven recruiting efforts, launching employee mentorship and sponsorship programs, tracking our diversity & inclusion efforts through recruiting, hiring, survey, and exit interview data.
| - Approximately double the percentage of Black and Latinx employees at Etsy by 2023. - Set a baseline and goals for Reverb’s performance and pay practices, hiring rubric, and diversity, equity, and inclusion strategy. |
Expanding our Diversity, Equity, and Inclusion (“DEI”) Efforts We continued to expand our robust Diversity, Equity, and Inclusion program while pivoting all of our hiring, engagement, mentorship, sponsorship, and Employee Resource Group (“ERG”) program activities to a remote environment. We drew strength from our programmatic commitments and demonstrated progress during worldwide protests against police violence and racial inequality in May, June, and July 2020.
Attracting Diverse Talent with a Focus on Leadership Representation In 2020, we deepened our work to recruit underrepresented minority (“URM”) candidates, and we amplified our employer brand awareness efforts. As a result, this year Black, Latinx, and Native American people now comprise 8.6% of Etsy and Reverb’s combined leadership-level workforce, up from 4.5% in 2019.
Progress on our DEI Goals We made progress on the goal we set in 2018 to double the percentage of Black, Latinx, and Native American employees at Etsy by 2023. In 2020, Black, Latinx, and Native American people constituted 20.0% of U.S. Etsy hires. As a result, Black, Latinx, and Native American people now make up 12.5% of Etsy’s (excluding Reverb) U.S. workforce, up from 8.6% in 2018 and 11% in 2019. Our 2020 DEI goal for Reverb was to study that business and set baseline DEI goals for Reverb, which we did. This is to approximately double the percentage of U.S. employees who identify as Black, Indigenous, or a Person of Color (collectively, “BIPOC”), and to reach gender parity.
Employee Engagement and Retention We launched the second cohort of our Mentorship Circle Program, an Engineering Sponsorship program for women and underrepresented minority engineers, launched a Company-wide DEI learning platform called Blue Ocean Brain, held community-wide vigils for Black Lives Matter, created grief circles and extra mental health benefits for struggling employees, held anti-racism workshops for parents, created flexible schedules and paid time off options for employees who had expanded caregiving responsibilities due to the pandemic, and donated $1 million to support Black-led organizations that support racial justice, voting rights, and criminal justice reform.
Pay Equity We continued to invest in fair pay practices, and saw positive results in our 2020 Pay Equity analysis, which was conducted by 2023a third-party consulting firm. The analysis found no unexplained pay gaps adverse to women or employees from other marginalized genders, or non-white employees. This was consistent with the findings of our 2018 analysis.
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Build diverse and inclusive workforces that are broadly representative of their communities.
Targets: - Approximately double the percentage of U.S. employees at Etsy who identify as Black, Latinx, or Native American by 2023.
Reverb: Approximately double the percentage of U.S. employees at Reverb who identify as BIPOC by 2026 (from 16.5% to at least 33% by 2026). - Reach gender parity at Reverb by 2026 (increasing women and marginalized genders from 29.3% to at least 50% by 2026).
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| | | | | | | | |
| Social Impact (continued) |
| | |
| 2020 Goals | 2020 Progress | 2021 Goals |
Build a diverse, equitable, and sustainable supply chain to support our operations and bring value to both Etsyour company and our vendorsvendors. Target: Ensure at least 50% of Etsy’s small- and medium-sized enterprise suppliers are owned by women, minorities, or veterans by 2022. | Updated
Supply Chain Responsibility Through our supplier vetting program, we collected impact data from 59% of Etsy’s suppliers, representing 84% of Etsy’s supplier codespend in 2020, and we continued to track our supply chain impact across key indicators. Of suppliers who have provided information through our impact survey, we found that: - 81% of conductEtsy’s spend went to highlightcompanies that have set a greenhouse gas emissions reduction goal; and - 43% of Etsy’s small and medium-sized suppliers (sole proprietors up to 250 employees) are owned by women, minorities, or veterans. We will continue to enhance data collection protocols to increase coverage across more of our full supply chain.
Supplier Diversity In line with Etsy’s commitment to enable equitable access to economic opportunities, we are taking meaningful steps to ensure we have diverse representation across our supply chain. Etsy’s plans to increase the importancepercentage of progressive social, environmental,women-, minority-, and veteran-owned businesses in our supply chain were disrupted in 2020 by the closure of our offices and cancellation of in-person business activities, which in turn disrupted many of our supplier purchases. This led to a decrease in the percentage of women-, minority-, and veteran-owned small- and medium-sized suppliers that we engaged relative to our 2019 baseline. To address the negative impact COVID-19 had on our small- and medium-sized enterprise suppliers, we created a COVID-19 economic relief fund for our suppliers and distributed $100,000 in grant funding to these suppliers, with prioritization going to women-, minority-, and veteran-owned businesses. We also provided small business practices.suppliers with information on how to access COVID-19-related relief funding and support. As we resume in-person business activity, we will continue our work to ensure that by 2022 at least 50% of Etsy’s small- and medium-sized enterprise suppliers are owned by women, minorities, or veterans. We believe there is a pathway to achieve our target, but it is largely dependent on our ability to resume in-person activities, including in-office events, employee programs, and in-person marketing activities. —
Incorporated priority questions into our vendor compliance screening tool in orderOutsourcing Vendor Labor Practices
In 2020, we automated the data collection and assessment of employment practices for Etsy suppliers that provide full-time contractors to developsupport Etsy. We consolidated findings related to their wage, paid leave, and benefits practices and conducted research to inform a comprehensive baselinefuture employment practice standard.
Sustainable Supply Chain In an effort to understand and influence the sustainability of our supply chain, impact.we added purchased goods and services to our greenhouse gas inventory this year. In 2020, emissions from our corporate supply chain were 42,646 tCO2e, or 10.5% of our total footprint. We plan to leverage our negotiating power in our supply chain agreements to contribute to our new Net Zero by 2030 goal.
Influencing Suppliers to Improve their Social, Environmental, and Economic Practices As our purchasing power grows, our ability to influence our suppliers to address pressing social, economic, and environmental challenges also grows. We have always tried to use this leverage to make meaningful progress across our key impact areas. In 2020, we focused on influencing vendors to improve practices, including: (1) wage, benefits, and paid leave standards for their employees; (2) environmentally responsible methods for producing goods and services; and, (3) policies that promote more inclusive workforces.
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Build a diverse, equitable, and sustainable supply chain to support our operations and bring value to both Etsyour company and our vendors |
Increase the presencevendors.
Targets: - Ensure at least 50% of underrepresented populations within the Etsy seller community | Undertook research to understandEtsy’s small- and address barriersmedium-sized enterprise suppliers are owned by women, minorities, or veterans by 2022.
- Achieve a 13.5% absolute reduction in our carbon footprint from purchased goods and activate opportunities for underrepresented populations within the Etsy seller community.services by 2030. —
In 2019, we plan to continue investing in this stream of work, embedding our insights into our product, expanding to focus on both our buyers and our sellers, and building an inviting and inclusive user experience.
| Make Etsy a more inclusive and welcoming marketplace for people from underrepresented backgrounds |
| | | | | | | | |
| Social Impact (continued) |
| | |
Ecological Impact: Build long-term resilience by eliminating our carbon impacts and fostering responsible resource use
2020 Goals | 2020 Progress | 2021 Goals |
Ensure our marketplaces are diverse, welcoming, and inclusive places to sell and shop. Target: By 2021, define a key performance indicator and establish a baseline for marketplace diversity and inclusivity. |
Inclusive Marketing In 2020, we worked to ensure that the images we proactively created and shared in our marketplace were representative of the communities in which we live by committing to a policy to include at least 30% representation of black or brown skin tones in marketing assets. In the fourth quarter of 2020, 59% of the images with a human element developed by our creative team had black or brown skin tone representation. Our award-winning Gift Like You Mean It ad campaign, which aired across the United States during the holiday season, showcased our commitment to diversity and inclusion by featuring Black, Latinx, and LGBTQ community members and storylines, as well as people with disabilities.
Highlighting Diversity as a Core Component of our Brand We embedded diversity into our everyday work to highlight that it is a core component of who Etsy is as a brand and company. We featured and celebrated Black and Latinx owned shops during a time when supporting small businesses was more important than ever before, and we created a Black-owned Business Etsy Community where sellers can opt-in, build community, and support one another.
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Ensure our marketplaces are diverse, welcoming, and inclusive places to sell and shop.
Target: In 2021, define a key performance indicator and establish a baseline for marketplace impact. |
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2018 GOALS | 2018 PROGRESS | 2019 GOALSEcological Impact |
Utilize and source energy responsibly so that we can power our | | |
| 2020 Goals | 2020 Progress | 2021 Goals |
Achieve best-in-class sustainable operations withby sourcing 100% renewable electricity, by 2020 and reducereducing the intensity of our energy use, and running zero waste operations. Targets: - Source 100% of Etsy’s electricity from renewable sources by 2020. - Achieve a 25% reduction in the intensity of Etsy’s energy use by 20252025. - Maintain a 90% waste diversion rate across global operations. | Procured 58%
Renewable Electricity Target met: We met our goal to source 100% of our electricity from renewable sources,energy by 2020. This was up from 30%76% in 2017.2019. This includes electricity used to power Etsy and Reverb’s global offices, remote electricity used by employees working from home in the United States as a result of COVID-19, and Etsy.com’s computing load in colocated data centers and Google Cloud. —
Entered into a virtual power purchase agreement for solar energy to help us meet our goal of powering our operations with 100% renewable electricity by 2020.
—
Began transition to cloud computing to help reduce our energy consumption and selected Google Cloud Platform, a partner that shares our commitment to 100% renewable electricity.
—Energy Use
In 2018,2020, our total operational energy footprint was 13,138 MWh, of which 61% was from electricity. Because our offices were closed for much of the year due to COVID-19, we included estimations of remote energy use for employees working from home totaling 4,482 MWh. Our colocated data centers accounted for 68%1,506 MWh, and we estimate our energy consumption from Google Cloud in 2020 to be 4,169 MWh. In total our energy use for computing was 43% of our total energy consumed, or 7,330 MWh. Due touse in 2020. To address data availability challenges associated with allocating energy consumption from the cloud, Etsy developed an estimation methodology to account for our current energyGoogle Cloud computing footprint, is not inclusivewhich has been reviewed by industry experts. Quantification of cloud computing, but does include our colocated data centers. In 2019, we will continue to explore how to accurately quantify our cloud energy footprint,consumption is allowing us to meaningfully explore and how to activate levers of change to drive further cost and energy efficiencies in our computing footprint. We shared this estimation methodology publicly in 2020. By making this methodology public, we hope to make it easier for peers to use and build on this approach, and to drive transparency, accountability, and progress in efficient computing. —
AchievedEnergy Efficiency
Our 2020 office energy footprint was 2,981 MWh. In offices where Etsy maintains operational control, we achieved a 25%48% reduction in energy intensity (kWh per square foot) across our officeglobal operations based on a 2016 baseline, and an associated 15%baseline. While our efficiency work has driven significant progress since 2016, the magnitude of this reduction was due to COVID-19 office closures. For computing energy use, we achieved a 23% reduction in carbon intensity acrosstotal energy use between 2018 and 2020, despite substantial growth in our business over the same time period.
Diversion from Landfill In 2020, Etsy achieved zero waste operations for the third year in a row by diverting over 90% of waste from landfill. In 2020, we diverted 93% of waste generated from office and data center operations (tCO2e per square foot).from landfill.
| Utilize and source energy responsibly so that we can power our
Achieve best-in-class sustainable operations withby sourcing 100% renewable electricity, by 2020reducing the intensity of our energy use, and reducerunning zero waste operations.
Targets: - Continue to source 100% of electricity from renewable sources. - Achieve a 25% reduction in the intensity of our energy use by 25%2025. - Maintain zero waste across global operations for Etsy. - Run zero waste operations at Reverb by 20252025.
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In 2018, developEcological Impact (continued) |
| | |
| 2020 Goals | 2020 Progress | 2021 Goals |
Run a plancarbon neutral business. Target: Offset 100% of measured Scope 1, 2, and set3 emissions.
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Running a goalCarbon Neutral Business Target Met: We have run a carbon neutral business since we launched carbon-offset shipping in 2019. For 2020, we invested in 404,737 verified emissions reductions (“VERs”), protecting forests, sponsoring wind and solar farms, and developing greener methods for producing auto parts. Being carbon neutral allows us to mitigate the carbon impacts of our marketplace that aligns with business growth | Developed a strategy to mitigate the carbon impacts of our marketplace which includes takingtake immediate action to balance our footprint:footprint while we work toward long-term reductions in our value chain as a part of our new Net Zero by 2030 goal.
- In February 2019,Expanding Accountability for our Carbon Footprint
Each year we announcedevaluate our corporate greenhouse gas boundary to ensure that we will offset 100%are taking responsibility for the climate change impacts of our emissions from shipping through investmentbusiness. Our approach is to be as comprehensive and transparent as possible. That’s why we have expanded our inventory to account for the greenhouse gas impacts from: (1) the packaging our sellers use to ship products to buyers, (2) the energy use of our platforms on consumer devices, and (3) our supply chain. Our full greenhouse gas inventory can be seen below in verified emissions reductions, and,our SASB disclosure.
- Advocating for Climate-Friendly E-commerce
We plan to activate leverstake action in support of changepolicy solutions that will help to drive carbon reduction in the long term, including policy advocacy, vendor negotiationterm. In 2020, we prioritized advocating for ambitious regional policies that have the potential to accelerate the decarbonization of the transportation sector and peer collaboration.drive significant market transformation. We are especially focused on electrification infrastructure and heavy- and medium-duty vehicles that play an important role in e-commerce logistics. We continue to collaborate with peers, vendors, and NGOs on industry-wide efforts to drive efficiency and resilience in the shipping and logistics sector.
| Mitigate the ecological impact of our marketplace
Achieve Net Zero by offering2030 and run a carbon neutral shipping onbusiness now.
Targets: - 50% absolute reduction in Scope 1+2 greenhouse gas emissions by 2030. - 13.5% absolute reduction in Scope 3 greenhouse gas emissions by 2030. - Offset 100% of transactions by 2020measured Scope 1, 2, and 3 greenhouse gas emissions annually.
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Run zero waste operations by
Establish our marketplaces as destinations for sustainably-minded shoppers and conscious living. Target: By 2021, define a key performance indicator and establish a baseline for marketplace sustainability. |
Adding a Local Seller Signal We added a “local seller” signal to listing pages when the buyer is in the same ship-from region as the item. Local purchases can play a significant role in reducing our carbon footprint from shipping. Buyers appreciated being able to shop locally too; we saw a conversion rate increase upon adding the local signal.
A Holistic Approach to Marketplace Impact As we undertook work on this goal in 2020, we realized that the positive impact our marketplace can drive should not be evaluated through a single-issue lens. Instead the potential to leverage our marketplace for meaningful impact is best realized at the intersection of our three strategic Impact pillars - economic, social, ecological. That’s why in 2021 we will continue the work we started this year to develop a more holistic approach to marketplace impact that is integrated across our teams.
| Diverted 95% of waste from global operations from landfill or incineration, up from 87% in 2017. | Run zero waste operations by 2020
Establish our marketplaces as destinations for sustainably-minded shoppers and conscious living.
Target: In 2021, define a key performance indicator and establish a baseline for marketplace impact. |
Etsy’sOur mission is to “Keep Commerce Human” means that we celebrate the uniqueness, authenticity, and richness of the human experience.Human.” Our diversity & inclusion effortsDEI goals are integral to who we are as a company;company: namely, onea marketplace and a workplace that is inare made stronger by the business of servicing and celebrating the vibrant spectrum of unique and special qualities people possess.of our communities.
We are committed to transparent reporting transparently on workforce diversity at Etsy.diversity. All metrics below are as of December 31 of the stated year. Overall metrics include all employees globally. Leadership is defined as Director level and above. Engineering employees are defined as those employees who work within the Engineering Job Family Group. Tech employees are defined as those employees who work on Product, Engineering, Analytics and HR Information and Financial Systems Administration teams. Other business rolesBusiness Roles are defined as those employees who work in roles outside of the Tech definition, and is inclusive of non-tech Leadership positions. Gender and age metrics represent Etsy’sour global employee base, while race and ethnicity metrics represent U.S. employees only. 2019 and 2020 metrics include both Etsy and Reverb employees, while metrics from 2018 do not include Reverb employees.
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| | | | | | | | | | | | | | | | |
| Board | Overall | Leadership | Tech | Engineering | Other Business Roles |
† Etsy commissioned an external third party to perform attest procedures with respect to our diversity metrics for the period from January 1, 2018 toas of December 31, 2018.2020. Full details and data methodology are available at investors.etsy.com.
19‡ Metrics for which historical data has also been subject to previous attest procedures.
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Race & Ethnicity Metrics - U.S. Only
|
| Board | Overall | Leadership | Tech | Engineering | Other Business Roles |
| 2020 | 2018‡ | 2019‡ | 2020† | 2018‡ | 2019‡ | 2020† | 2018‡ | 2019‡ | 2020† | 2018‡ | 2019‡ | 2020† | 2018‡ | 2019‡ | 2020† |
| American Indian or Alaska Native | —% | 0.1% | 0.1% | 0.2% | —% | —% | 0.7% | —% | —% | 0.1% | —% | —% | —% | 0.3% | 0.2% | 0.2% |
| Asian | —% | 16.5% | 15.3% | 17.5% | 19.3% | 15.5% | 14.4% | 22.6% | 21.1% | 25.6% | 21.9% | 20% | 22.6% | 8.5% | 7.7% | 8% |
| Black/African American | 12.5% | 3.7% | 5.2% | 5.9% | 3.4% | 2.7% | 5.8% | 2.6% | 4.6% | 5% | 3.2% | 5.1% | 5.5% | 5.5% | 5.9% | 7.2% |
| Hispanic | —% | 4.8% | 5.2% | 6.1% | —% | 1.8% | 2.2% | 4.7% | 4.7% | 4.6% | 5.1% | 5.5% | 5.5% | 5.2% | 5.7% | 8% |
| Two or More Races | —% | 2.8% | 3.1% | 3.4% | 2.3% | 2.7% | 3.6% | 3% | 3.6% | 4.2% | 3.2% | 4.1% | 4.4% | 2.7% | 2.4% | 2.5% |
| White | 87.5% | 67.0% | 64.6% | 63.0% | 75% | 72.7% | 71.9% | 60.8% | 58.8% | 56.4% | 60.8% | 58.4% | 57.5% | 74.8% | 72.1% | 70.6% |
| Not Declared | —% | 5.1% | 6.5% | 3.8% | —% | 4.6% | 1.4% | 6.3% | 7.2% | 4% | 5.8% | 6.9% | 4.6% | 3% | 6% | 3.3% |
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Age Metrics - Global
|
| 2018‡ | 2019‡ | 2020† |
| 24 years and younger | 5.3% | 4.3% | 3.3% |
| 25-29 years | 27.9% | 27.6% | 25.3% |
| 30-34 years | 32.2% | 34.9% | 33.8% |
| 35-39 years | 20.8% | 19.5% | 21.4% |
| 40-49 years | 11.1% | 11.0% | 12.9% |
| 50+ years | 2.7% | 2.7% | 3.3% |
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| RACE & ETHNICITY METRICS - U.S. ONLY |
| | Overall | Leadership | Tech | Engineering | Other Business Roles |
| | 2016 |
| 2017 |
| 2018† |
| 2016 |
| 2017 |
| 2018† |
| 2016 |
| 2017 |
| 2018† |
| 2016 |
| 2017 |
| 2018† |
| 2016 |
| 2017 |
| 2018† |
|
| American Indian or Alaska Native | — | % | 0.2 | % | 0.1 | % | — | % | — | % | — | % | — | % | — | % | — | % | — | % | — | % | — | % | — | % | 0.3 | % | 0.3 | % |
| Asian | 13.2 | % | 13.9 | % | 16.5 | % | 11.4 | % | 16.9 | % | 19.3 | % | 18.0 | % | 20.9 | % | 22.6 | % | 17.7 | % | 20.4 | % | 21.9 | % | 9.0 | % | 7.0 | % | 8.5 | % |
| Black/African American | 3.9 | % | 4.4 | % | 3.7 | % | 2.5 | % | 3.4 | % | 3.4 | % | 3.2 | % | 3.3 | % | 2.6 | % | 3.3 | % | 4.2 | % | 3.2 | % | 4.5 | % | 5.4 | % | 5.5 | % |
| Hispanic | 4.1 | % | 4.1 | % | 4.8 | % | 1.3 | % | 1.7 | % | — | % | 4.4 | % | 4.5 | % | 4.7 | % | 3.9 | % | 4.2 | % | 5.1 | % | 3.6 | % | 3.8 | % | 5.2 | % |
| Two or More Races | 3.5 | % | 2.7 | % | 2.8 | % | 5.1 | % | 5.1 | % | 2.3 | % | 4.2 | % | 2.1 | % | 3.0 | % | 4.6 | % | 2.0 | % | 3.2 | % | 2.9 | % | 3.5 | % | 2.7 | % |
| White | 73.9 | % | 71.8 | % | 67.0 | % | 78.5 | % | 72.9 | % | 75.0 | % | 68.4 | % | 65.6 | % | 60.8 | % | 68.9 | % | 65.0 | % | 60.8 | % | 78.6 | % | 78.1 | % | 74.8 | % |
| Not Declared | 1.4 | % | 2.9 | % | 5.1 | % | 1.2 | % | — | % | — | % | 1.8 | % | 3.6 | % | 6.3 | % | 1.6 | % | 4.2 | % | 5.8 | % | 1.4 | % | 1.9 | % | 3.0 | % |
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| AGE METRICS - GLOBAL |
| | 2016 |
| 2017 |
| 2018† |
|
| 24 years and younger | 5.7 | % | 4.2 | % | 5.3 | % |
| 25-29 years | 29.2 | % | 28.4 | % | 27.9 | % |
| 30-34 years | 35.8 | % | 34.1 | % | 32.2 | % |
| 35-39 years | 19.0 | % | 21.2 | % | 20.8 | % |
| 40-49 years | 8.3 | % | 9.4 | % | 11.1 | % |
| 50+ years | 1.9 | % | 2.7 | % | 2.7 | % |
† Etsy commissioned an external third party to perform attest procedures with respect to our diversity metrics for the period from January 1, 2018 toas of December 31, 2018.2020. Full details and data methodology are available at investors.etsy.com.
20‡ Metrics for which historical data has also been subject to previous attest procedures.
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SASB Disclosure
The Sustainability Accounting Standards Board’s (SASB) mission is to develop sustainability metrics for public corporations to disclose material, decision-useful information to investors. Etsy supports work that contributes directlyEtsy’s disclosures are designed to generatingprovide comparable and consistent data. We have consideredincluded below the metrics from SASB’s Consumer Goods Sector – E-Commerce industry standard and have provided key details below.that are relevant to our business.
| | | | | | | | | | | | | | | | | |
| SASB Metrics |
| SASB Code | Metric | 2018 | 2019 | 2020 |
| CG-EC-000.A | Entity-defined measure of user activity | Active buyers (thousands) | 39,447 | 46,351 | 81,898 |
| Active sellers (thousands) | 2,115 | 2,699 | 4,365 |
CG-EC-000.B |
Data processing capacity |
•In December 2017, Etsy announced our Google Cloud Partnership, an initiative to transition Etsy.com infrastructure to Google Cloud Platform (“GCP”). •In February 2020, we completed our full migration to GCP. •We believe this transition will result in increased engineering efficiency, and enhance our overall infrastructure by providing faster processing speed, improved page load time, and more nimble fulfillment to capacity on an as needed basis.
|
| Percentage outsourced | | 100% | 100% | 100% |
| | | | | |
| Hardware Infrastructure Energy & Water Management |
| CG-EC-130a.1 | Total energy consumed, MWh | 7,330 | 6,376 | 5,675 |
| Percentage renewable energy | 65% | 89% | 100% |
| Percentage grid electricity | 100% | 100% | 100% |
CG-EC-130a.3 |
Discussion of the integration of environmental considerations into strategic planning for data center needs. •In 2020 we met our goal to source 100% renewable electricity for our operations, and we have a 2025 goal to reduce the intensity of our energy use by 25%. These goals are included as key considerations as we plan for our computing needs, and have been a focus of our sustainability efforts. When transitioning to a cloud computing infrastructure, we selected Google Cloud, a partner that shares our commitment to 100% renewable electricity. Their highly efficient data centers are expected to help us save significant overhead energy. Moreover, moving to flexible cloud-based infrastructure has enabled us to reduce energy consumption. We achieved a 23% reduction in total energy use from computing between 2018 and 2020, despite substantial growth in our business over the same time period. •We actively monitor and manage energy consumption from our computing infrastructure. In 2020, our collocated data centers consumed 1,506 MWh and we estimate that our energy consumption in Google Cloud was 4,169 MWh, based on a methodology developed by Etsy and reviewed by industry experts. Quantification of our cloud energy consumption is allowing us to meaningfully explore and activate levers of change to drive further cost and energy efficiencies in our computing footprint. Our 2020 hardware infrastructure footprint does not include Reverb, but we plan to include Reverb’s energy used from computing in our 2021 analysis. •In 2018, Etsy entered into a virtual power purchase agreement for solar energy in Virginia. This project is providing us with renewable attributes to apply to our operations and computing infrastructure, furthering our goals of creating a cleaner internet and reducing our impact on the planet.
|
| Data Privacy and Advertising Standards |
CG-EC-220a.2 |
Description of the policies and practices relating to behavioral advertising and user privacy. •We care deeply about privacy and we’re committed to being upfront about our privacy practices, including how we treat personal information. Etsy’s Privacy Policy provides a detailed explanation of our privacy practices. Etsy’s transparency report also includes details of our Privacy Principles. •Among other things, our Privacy Policy covers the user information that Etsy collects or receives, the choices and control that a user has in relation to this data including based on type and sensitivity by region and worldwide, the purpose for which Etsy uses such information (including first and third party advertising purposes), our policies relating to our usage and sharing within Etsy, its affiliates and third party partners, disclosures about third party partner privacy policy and options, and user controls for sharing and controlling such information with third parties.
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|
| | | | | | | | |
| SASB Metrics |
| SASB Code | Metric | 2016 |
| 2017 |
| 2018 |
|
| CG-EC-000.A | Entity-defined measure of user activity | Active buyers (thousands) | 28,566 |
| 33,364 |
| 39,447 |
|
| | Active sellers (thousands) | 1,748 |
| 1,933 |
| 2,115 |
|
| CG-EC-000.B | Data processing capacity | In December 2017, we announced our Google Cloud Partnership, an initiative that will transition our infrastructure to the Google Cloud Platform. We are currently in the process of migrating our colocated data centers to Google Cloud. In 2018, we successfully migrated our website and mobile apps to the platform, and we expect to complete the migration by the beginning of 2020. |
| | Percentage outsourced | | 100 | % | 100 | % | 100 | % |
| Hardware Infrastructure Energy & Water Management |
| CG-EC-130a.1 | Total energy consumed, MWh | 6,155 |
| 7,111 |
| 7,330 |
|
| | Percentage renewable energy | — | % | 32 | % | 65 | % |
| | Percentage grid electricity | 100 | % | 100 | % | 100 | % |
| CG-EC-130.a | Discussion of the integration of environmental considerations into strategic planning for data center needs. Etsy’s goals include powering our operations with 100% renewable electricity by 2020, and reducing the intensity of our energy use by 25% by 2025. These goals are included as key considerations as we plan for our computing needs, and have been a focus of our sustainability efforts. When transitioning to a cloud computing infrastructure, we selected Google Cloud Platform, a partner that shares our commitment to 100% renewable electricity. Their highly efficient data centers are expected to help us save significant energy. Moreover, moving to flexible cloud-based infrastructure should enable us to reduce major idle time and associated energy consumption.
In 2018, Etsy entered into a virtual power purchase agreement for solar energy in Virginia. Once operational, this project is expected to provide us with renewable attributes to apply to our operations and computing infrastructure, furthering our goals of creating a cleaner internet and reducing our impact on the planet. We actively monitor and manage energy consumption from our computing infrastructure. In 2018, our colocated data centers accounted for 68% of total energy consumed, or 7330 MWh. |
| Data Privacy and Advertising Standards |
| CG-EC-220a.2 | Description of the policies and practices relating to behavioral advertising and user privacy. We care deeply about privacy and we’re committed to being upfront about our privacy practices, including how we treat personal information. Etsy’s Privacy Policy provides a detailed explanation of our privacy practices. Among other things, our Privacy Policy covers the user information that Etsy collects or receives, the choices and control that a user has in relation to this data including based on type and sensitivity, the purpose for which Etsy uses such information (including first and third party advertising purposes), our policies relating to our usage and sharing within Etsy and its affiliates, and user controls for sharing and controlling such information with third parties. |
| Data Security |
| CG-EC-230a.1 | Description of approach to identifying and addressing data security risks. Data security is overseen by our Chief Information Security Officer who reports to our Chief Technical Officer. We strive to protect sensitive information through various means, such as technical safeguards, procedural requirements and policies, an intensive program of monitoring on both our web platform and within our corporate network, continuous testing of aspects of our security posture internally and with outside vendors, a robust incident response program, and regular training for employees. |
| Employee Recruitment, Inclusion and Performance |
| CG-EC-330a.1 | Employee engagement as a percentage | 80 | % | 60 | % | 70 | % |
| | Employee engagement as a percentage and discussion of methodology. In July 2018, Etsy conducted an engagement survey of all global employees. Of employees surveyed, 82% submitted a response. The survey was conducted through the Culture Amp platform and consisted of 48 questions - 45 rating questions on which employees were asked to indicate their level of agreement with a statement based on a five-point scale from Strongly Agree to Strongly Disagree, and three free-text questions to which employees were asked to write out a response. The responses were analyzed against the results from a similar survey conducted in 2017, as well as Culture Amp's 2018 New Tech - 500+ Benchmark, which consists of survey results from companies that are primarily internet-based or focused on creating new technologies, and that have between 500 and 5,000 employees. |
| CG-EC-330a.3 | Gender and racial/ethnic group representation for leadership, technical staff and other business functions | See Impact Strategy section for detailed metrics. | |
| Discussion of diversity and inclusion strategy and performance | See Impact Strategy - Social Impact for details. | |
| CG-EC-330a.4 | Percentage of technical employees who are H-1B visa holders | | | 2.5 | % |
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| SASB Metrics |
| SASB Code | Metric | 2018 | 2019 | 2020 |
| Data Security |
CG-EC-230a.1 |
Description of approach to identifying and addressing data security risks. •Data security is overseen by our Chief Information Security Officer (“CISO”) who reports to our Chief Technology Officer (“CTO”). •We strive to protect sensitive information through various means, such as technical safeguards, procedural requirements and policies, an intensive program of monitoring on both our web platform and within our corporate network, continuous testing of aspects of our security posture internally and with outside vendors, a robust incident response program, and regular training for employees.
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| Employee Recruitment, Inclusion and Performance |
| CG-EC-330a.1 | Employee engagement as a percentage (Etsy) | 70% | 76% | 81% |
| Employee engagement as a percentage (Reverb) | | | 75% |
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Employee engagement as a percentage and discussion of methodology. •In September 2020, Etsy conducted an engagement survey of all global employees. Of all employees surveyed across Etsy and Reverb, 92% submitted a response, and 81% of Etsy respondents and 75% of Reverb respondents reported favorable employee engagement. The survey was conducted through the Culture Amp platform and consisted of 57 questions - 53 rating questions on which employees were asked to indicate their level of agreement with a statement based on a five-point scale from Strongly Agree to Strongly Disagree, two free-text questions to which employees were asked to write out a response, and two demographic questions. •The responses were analyzed against the results from a similar survey conducted in 2019, as well as Culture Amp’s 2020 New Tech - 500+ Benchmark, which consists of survey results from approximately 650 companies that are primarily internet-based or focused on creating new technologies, and that have between 500 and 5,000 employees.
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| CG-EC-330a.3 | Gender and racial/ethnic group representation for leadership, technical staff and other business functions | See Impact Strategy section for detailed metrics. |
| Discussion of diversity and inclusion strategy and performance | See Impact Strategy - Social Impact for details. |
| CG-EC-330a.4 | Percentage of technical employees who are H-1B visa holders | 2.5% | 3.5% | 5.1% |
| Product Packaging and Distribution |
| CG-EC-410a.1 | Total greenhouse gas (“GHG”) footprint of product shipments in metric tons CO2e | 135,459‡ | 154,078‡ | 303,218† |
Total greenhouse gas (GHG) footprint of packaging in metric tons CO2e | | | 53,489† |
CG-EC-410a.2 |
Discussion of strategies to reduce the environmental impact of product delivery. •The delivery of products sold on our marketplace represents the majority of Etsy’s carbon footprint. As a peer-to-peer marketplace, Etsy does not directly control seller shipping or the associated logistics networks; however, we are committed to addressing carbon emissions from shipping. •In 2019, we announced immediate action to balance our footprint by offsetting 100% of our emissions generated from Etsy.com shipping through investment in verified emissions reductions. In April 2020, we announced 100% carbon-offset shipping for Reverb.com. •We added a “local seller” signal to listing pages when the buyer is in the same ship-from region as the item. Local purchases can play a significant role in reducing our carbon footprint from shipping. •In addition, we take action in support of policy solutions that will help to drive carbon reduction from product delivery in the long term. In 2020, we prioritized advocating for ambitious regional policies that have the potential to accelerate the decarbonization of the transportation sector and drive significant market transformation. We are especially focused on electrification infrastructure and heavy- and medium-duty vehicles that play an important role in e-commerce logistics. •We continue to collaborate with peers, vendors, and NGOs on industry-wide efforts to drive efficiency and resilience in the shipping and logistics sector.
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| SASB Metrics |
| SASB Code | Metric | 2016 |
| 2017 |
| 2018 |
|
| Product Packaging and Distribution |
| CG-EC-410a.1 | Total greenhouse gas (GHG) footprint of product shipments in metric tons CO2e | 103,646 | ‡ | 118,153 | ‡ | 135,459 | † |
| CG-EC-410a.2 | Discussion of strategies to reduce the environmental impact of product delivery. The delivery of products sold on our marketplace represents the majority of Etsy’s carbon footprint. As a peer-to-peer marketplace, Etsy does not directly control seller shipping or the associated logistics networks, however, we are committed to addressing carbon emissions from shipping. We have identified a number of levers that we expect to help to drive carbon reduction in the long term, including policy advocacy, vendor negotiation, and peer collaboration. In the near term, Etsy recognizes the need to act on climate change and we are taking immediate action to help balance our footprint. In 2019, we are committing to offset 100% of our emissions from shipping through investments in verified emissions reductions. |
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Greenhouse Gas (“GHG”) Emissions Summary (tCO2e) | 2018 | 2019 | 2020 |
| GHG Emissions by Scope | | | |
| Scope 1 | 372‡ | 371‡ | 294† |
| Scope 2 - Market | 1,213‡ | 652‡ | 4† |
| Scope 2 - Location | 2,923‡ | 1,859‡ | 914† |
| Scope 3 - Market | 137,042 | 155,967 | 404,439 |
| Scope 3 - Location | 137,042 | 155,967 | 407,021 |
| Scope 3 GHG Emissions by Activity Source | | | |
| Category 1: Purchased Goods & Services | | | |
| Purchased Goods & Services | | | 42,646† |
| Category 5: Waste Generated in Operations | | | |
| Waste | 6 | 13 | 3 |
| Water | 3 | 6 | 9 |
| Category 6: Business Travel | | | |
| Air Travel | 943‡ | 1,217‡ | 153† |
| Other Business Travel | | | 10 |
| Category 7: Employee Commuting | | | |
| Commuting | 544 | 510 | 111 |
| Remote Workers - Market | | | 672 |
| Remote Workers - Location | 87 | 114 | 1,136 |
| Category 8: Upstream Leased Assets | | | |
| Cloud Computing - Market (Etsy only) | | 29‡ | 0† |
| Cloud Computing - Location (Etsy only) | | | 2,355† |
| Category 9: Downstream Transportation & Distribution | | | |
| Shipping | 135,459‡ | 154,078‡ | 303,218† |
| Packaging | | | 53,489† |
| Category 11: Use of Sold Products | | | |
| End User Energy Use - Market | | | 4,127† |
| End User Energy Use - Location | | | 3,890† |
| Our 2020 greenhouse gas emissions include both Etsy and Reverb, unless otherwise stated. Our 2019 greenhouse gas emissions include both Etsy and Reverb, except for Shipping and Cloud Computing. Reverb’s footprint has been accounted for from the date of acquisition in 2019 forward. Our 2018 greenhouse gas emissions include only Etsy. Etsy has included emissions generated from our colocated data centers as Scope 2 emissions, consistent with prior years. Emissions generated from cloud computing are classified as Scope 3 - Category 8 emissions. In 2020, we expanded our inventory to account for the Scope 3 greenhouse gas emissions from: (1) The packaging our sellers use to ship products to buyers, (2) the use of our platforms on consumers’ personal devices, and (3) our corporate supply chain. |
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| | | | | | |
Greenhouse Gas (“GHG”) Emissions Summary (tCO2e) | 2016 |
| 2017 |
| 2018 |
|
| GHG Emissions by Scope | | | |
| Scope 1 | 410 | ‡ | 467 | ‡ | 372 | † |
| Scope 2 - Market | 2,946 | ‡ | 2,209 | ‡ | 1,213 | † |
| Scope 2 - Location | 3,076 | ‡ | 3,152 | ‡ | 2,923 | † |
| Scope 3 | 105,295 |
| 119,444 |
| 137,042 |
|
| Scope 3 GHG Emissions by Activity Source | | | |
| Shipping | 103,646 | ‡ | 118,153 | ‡ | 135,459 | † |
| Air Travel | 967 | ‡ | 550 | ‡ | 943 | † |
| Commuting | 597 |
| 663 |
| 544 |
|
| Remote Workers | 49 |
| 64 |
| 87 |
|
| Waste | 18 |
| 7 |
| 6 |
|
| Water | 9 |
| 4 |
| 3 |
|
| Electricity, Transmission and Distribution Losses | 9 |
| 3 |
| <1 |
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† Etsy commissioned an external third party to perform attest procedures with respect to our carbon and energy metrics for the period from January 1, 20182020 to December 31, 2018.2020. Full details and data methodology are available at investors.etsy.com.
‡ Metrics for which historical data has also been subject to previous attest procedures.
The Task Force on Climate-Related Financial Disclosures
The Financial Stability Board established the Task Force on Climate-Related Financial Disclosures (“TCFD”), which is committed to market transparency and stability, to develop recommendations for more effective climate-related disclosures. Beginning this year, Etsy is providing enhanced climate-related disclosures using the TCFD framework. The following table summarizes specific information that addresses the disclosures recommended in the TCFD, including the publicly available source where each disclosure is referenced. Etsy plans to leverage the TCFD framework and recommendations as we continue our focus on climate-related disclosures and management.
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| Core Elements | TCFD Disclosure Recommendation | Disclosure |
Governance |
a) Describe the board’s oversight of climate-related risks and opportunities |
Etsy’s Board is responsible for reviewing and approving Etsy’s Annual Operating Plan, which includes both climate-related strategy, goals and targets, and associated budgets required to meet those goals. The Nominating and Corporate Governance Committee of the Board, within its charter, has responsibility for the periodic review of progress against the company's economic, social and ecological impact goals, which includes climate-related issues. The Audit Committee of the Board oversees Etsy’s 10-K disclosure, which includes our climate-related and impact disclosures.
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b) Describe management’s role in assessing and managing climate-related risks and opportunities |
Etsy’s annual Impact goals are set by our Executive Team at the corporate level, aligned with its three Pillars of economic, social and ecological activities. Within these pillars, the Executive Team sets specific and measurable goals. Etsy also has a Risk Steering Committee, a cross functional team that meets at least quarterly and is responsible for the management and oversight of key financial, operational, legal and strategic risks facing Etsy, including any risks that are climate-related. Etsy’s Impact Committee meets monthly to set and drive company-wide impact strategy, including our climate-related goals. It ensures organization-wide internal and external accountability for climate-related goals. The Impact Committee also assesses climate-related issues and develops management plans to address these issues accordingly. The Impact Committee includes cross-functional membership from major business functions at Etsy, including legal, workplace, strategic sourcing, sustainability, advocacy, product analytics, marketing, public relations, and investor relations. Etsy’s Impact Committee provides periodic updates to the Risk Steering Committee and the Etsy board.
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| Core Elements | TCFD Disclosure Recommendation | Disclosure |
Strategy |
a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term |
Etsy’s Sustainability and Legal/Advocacy teams help to assess regulatory issues associated with current or emerging climate-related legislation and the potential impacts on Etsy's ability to meet our short and long-term goals. These teams, as well as the Impact Committee and our Executive Team, also monitor ESG trends, market trends, and other issues that might impact Etsy's brand and reputation. Etsy considers ESG risks and opportunities in the short-term (0-1 years), medium-term (1-3 years), and long-term (3-5 years). In our ESG risk analysis, Etsy considers both transitional and physical risks. Transitional risks include the assessment of current and emerging regulatory, technology, legal, market, and reputational risks. Physical risk assessment includes both acute and chronic risks. Etsy considers natural disasters and other weather and climate-related risks, which could impact operations, internet or mobile networks, or the operations of one or more of our third-party service providers. Etsy has identified climate-related opportunities in the short term (0-1 years) that may have financial or strategic impacts on the business, including participation in renewable energy programs and adopting energy-efficiency measures, using lower-emission sources of energy, and being prepared for any climate-related shift in consumer preferences.
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b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning |
Etsy evaluates climate-related risks and opportunities across the value chain including direct operations, upstream, and downstream. This evaluation is integrated into a multi-disciplinary company-wide risk management process. We conduct interviews and roundtable discussions with internal stakeholders across the business to gather perspectives on these factors and associated strategies. Assessment of size and scope, and risk management strategy is overseen by the Risk Steering Committee. At this time, we have not identified near-term climate-related risks with the potential to have a substantive financial or strategic impact on our business. Etsy's buyer and seller base is distributed globally, and as a two-sided marketplace we are not directly responsible for production of goods sold or for holding inventory. We will continue to look at additional ways to incorporate assessment of these factors in our risk management processes.
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c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2 degree or lower scenario |
Etsy has set a long-term carbon reduction goal aligned with science to be Net Zero by 2030, which includes absolute reduction targets for Scope 1, 2, and 3. We are currently undertaking exploratory research to understand the best way to apply climate-related scenario analysis to inform business strategy. The Etsy Impact Committee and Sustainability team continue to coordinate with other teams to determine the appropriate scope of this analysis, involving a preliminary exploration of how climate change will impact Etsy and its community. We plan to use this research to inform relevant scenario selection for broader analysis, and evaluate impacts accordingly, including potential opportunities for our business. We also take action in support of policy solutions that will help to drive carbon reduction in the long term. In 2020, we prioritized advocating for ambitious regional policies that have the potential to accelerate the decarbonization of the transportation sector and drive significant market transformation. We are especially focused on policies to improve the electrification infrastructure and to reduce emissions for heavy- and medium-duty vehicles that play an important role in e-commerce logistics.
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| Core Elements | TCFD Disclosure Recommendation | Disclosure |
Risk Management |
a) Describe the organization’s processes for identifying and assessing climate-related risks |
The Etsy Sustainability team, along with others in relevant functions within the Company, evaluates climate-related risks and opportunities, analyzes them in the context of our business, develops recommendations as appropriate, and escalates them for oversight senior management. For example, the Sustainability team has conducted a geographic analysis in selected geographic segments of projected physical climate impacts on Etsy sellers and buyers. The Sustainability team, in consultation with the Legal/Advocacy team, assesses regulatory issues associated with current or emerging climate-related legislation.
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b) Describe the organization’s processes for managing climate-related risks |
The Sustainability team, in addition to their role outlined in Section (a) above, develops management plans to address these issues accordingly.
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c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management |
Etsy’s Impact Committee is a cross-functional group with representation from major business functions across the company, including: legal, workplace, strategic sourcing, sustainability, advocacy, product analytics, marketing, public relations, and investor relations. This ensures that climate-related issues are considered strategically and integrated throughout the business, as appropriate. Since 2018, Etsy has used an integrated annual report structure, and has included ESG-related topics in our Annual Reports and Proxy Statements. These reporting structures ensure that climate-related issues are considered holistically from a risk and opportunity perspective by a cross-functional group and are appropriately elevated to senior management through defined channels.
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| Core Elements | TCFD Disclosure Recommendation | Disclosure |
Metrics and Targets |
a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process |
Etsy tracks climate-related metrics related to total energy consumed, percentage renewable, percentage grid electricity, total GHG footprint of scope 1, 2 and 3 emissions including product shipments, packaging, end user energy use, water, and outgoing waste material streams. For a historical view on our metrics, please view pages 29-31 of this Integrated Annual Report. As a result of offsetting 100% of carbon emissions across all measured Scope 1, 2, and 3 categories, Etsy.com became a carbon neutral business and put an internal price on our emissions, creating a financial incentive to support decisions through the business that reduce greenhouse gas emissions, from driving operational efficiencies to integrating sustainability into our procurement process. We continue to act in support of solutions that will help drive carbon reduction in the long term, including advocating at the federal and state level for comprehensive climate and carbon reduction policies and collaborating with peers on industry-wide efforts to drive efficiency and resilience in the shipping and logistics sector. For all teams at Etsy, compensation is tied to the company’s financial performance, as well as individual employee contributions. While responsibility for delivering on our impact goals is distributed across the company, each goal owner is responsible for ensuring that the work associated with advancing their goal is incorporated into team members’ individual goals, which is in turn directly tied to compensation. The annual performance goals of our Executive Team are often directly tied to some of our Impact goals. They also serve as executive sponsors for specific goals to help ensure that teams stay on track and have the value of executive leadership and expertise as plans are executed.
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b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks
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Please view pages 29-31 of this Integrated Annual Report for our Greenhouse Gas (“GHG”) Emissions Summary.
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c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets |
Our climate-related targets include: •Achieve Net Zero by 2030 through a 50% absolute reduction in our Scope 1 and 2 greenhouse gas emissions and a 13.5% absolute reduction in our Scope 3 greenhouse gas emissions. This target is aligned with current climate science. •Continue to source 100% of Etsy’s electricity from renewable sources. This is an absolute-based target set from a 2016 base year. •Achieve a 25% reduction in the intensity of Etsy’s energy use by 2025. This is an intensity-based target set from a 2016 base year. •Maintain a 90% waste diversion rate across global operations. This is an intensity-based target set from a 2017 base year.
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Competition
We compete for Etsy sellers with both retailers and companies that sell software to small businesses. An Etsy sellerSellers can list hertheir goods for sale with online retailers or sell hertheir goods through local consignment and vintage stores and other venues and marketplaces, including through commerce channels on social networks like Facebook and Instagram. SheThey may also sell wholesale directly to traditional retailers, including large national retailers, who discover hertheir goods in our marketplacemarketplaces or otherwise. We also compete with companies that sell software and services to small businesses, enabling an Etsy sellersellers to sell from hertheir own website or otherwise run hertheir business independently of our platform. We are able to compete for Etsy sellers based on our brand awareness, the global scale of our marketplacemarketplaces and the breadth of our online presence, the number and engagement of Etsy buyers, our seller tools and services, our seller education resources, our policies and fees, our mobile apps, the strength of our community, and our values.
We also compete with retailers for the attention of the Etsy buyer. An EtsyA buyer has the choice of shopping with any online or offline retailer, whether large marketplaces or national retail chains or local consignment and vintage stores or other venues or marketplaces. We are able to compete for Etsy buyers based on the unique goods that Etsy sellers list in our marketplace,marketplaces, our brand awareness, the person-to-person commerce experience, customer service, our reputation as a trusted marketplace,for trustworthiness, our mobile apps, the availability of fair and free shipping offered by Etsy sellers, ease of payment, and the availability and reliability of our platform.
Intellectual Property
Protection of our technology and intellectual property is an important component of our success. We rely on intellectual property laws, including patent, trade secret, copyright, and trademark laws, in the United States and abroad. We also use confidentiality procedures, defensive licensing and acquisitions, non-disclosure agreements, invention assignment agreements, and other contractual rights to protect Etsyus and our intellectual property.
We file patents and register domain names, trademarks, copyrights, and service marks in the United States and abroad. We rely upon unregistered copyrights and common law protection for certain trademarks. We also use internal and external brand protection mechanisms that are intended to protect Etsy’s brandour brands from misuse by third parties.
Government Regulation
As with any company operating on the internet, we are subject to a growing number of local, national, and international laws and regulations. These laws are often complex, sometimes contradict other laws, and are frequently changing. Compliance is costly and can require changes to our business practices and significant amounts of management time and focus. Laws may be interpreted and enforced in different ways in various locations around the world, posing a significant challenge to our global business. For example, U.S. federal and state laws in the United States, E.U. directives, and other national laws govern the processing of payments, consumer protection, and the privacy of consumer information; other laws define and regulate unfair and deceptive trade practices. Still other laws dictate when and how sales or other taxes must be collected. Laws of defamation apply online and vary by country. The growing focus on data privacy and regulation of e-commerce worldwide could impose additional compliance burdens and costs on us or on Etsy sellers and could subject us to significant liabilityoperational costs for any failureinternal compliance and risk to comply.our business. In addition, some of these requirements may introduce friction into the buying and selling experience on our platform and may impact the scope and effectiveness of our marketing efforts, which could negatively impact our business and future outlook. Additionally, because we operate internationally, we need to comply with various laws associated with doing business outside of the United States, including anti-money laundering, sanctions, anti-corruption, and export control laws.
Non-compliance with any applicable laws and regulations could result in penalties or significant legal liability. See “Risk Factors—Regulatory, Compliance, and Legal Risks.”
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, (“the Exchange(the “Exchange Act”), and file or furnish reports, proxy statements and other information with the Securities and Exchange Commission, (the “SEC”). Ourincluding our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). These reports are available free of charge on our website at investors.etsy.com as soon as reasonably practicable after we have filed or furnished them to the SEC. The information on our website is not incorporated into this Annual Report and investors should not rely on such information in deciding whether to invest in our common stock. Copies of our SEC reports and other documents are also available, without charge, by sending a letter to Investor Relations, Etsy, Inc., 117 Adams Street, Brooklyn, NY 11201, by sending an email to ir@etsy.com or by calling (347) 382-7582.
Our SEC reports are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after we have filed or furnished them to the SEC. For information regarding classes of products or services that accounted for 10% or more of consolidated revenue in the last three fiscal years, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
Item 1A. Risk Factors.
Investing in our common stocksecurities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, our Consolidated Financial Statements and related notes, and the other information in this Annual Report on Form 10-K. If any of these risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. As a result, the price of our common stocksecurities could decline and you could lose part or all of your investment. In addition, factors other than those discussed below or in other of our reports filed with or furnished to the SEC also could adversely affect our business, financial condition or results of operations. We cannot assure you that the risk factors described below or elsewhere in our reports address all potential risks that we may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Annual Report. See “Note Regarding Forward-looking Statements.”
Operational Risks Related to Our Business
We have experienced rapid growth, and Industrywe may not have the infrastructure, human resources, or operational resources to sustain continued growth at our recent pace.
We have experienced rapid growth in our business, in the number of buyers and sellers and purchase frequency. Our revenue growth may not be sustainable and our rate of growth may decrease. Even if our revenue continues to grow, we may not be able to maintain profitability in the future. In addition, our costs may increase as we continue to invest in the development of our marketplaces, including our services and technological enhancements, and increase our marketing efforts, expand our operations, and hire additional employees. Further, the growth of our business places significant demands on our management team and pressure to expand our operational, compliance, payments, and financial infrastructure. For example, we may need to continue to develop and improve our operational, financial, compliance, payments and management controls and enhance our reporting systems and procedures to support our current and future growth.
Our rapid growth may make us a more attractive target to bad actors and fraudsters targeting our marketplaces and our community, civil litigants, and those seeking to enforce questionable intellectual property rights. Our increased visibility may also lead to attempts to misrepresent or mischaracterize us or our marketplaces, such as on social media, or via individual or coordinated campaigns. This may lead to increased risks that shift more quickly than our policies, enforcement mechanisms and systems can react. We may not be successful in defending against these types of claims which, if successful, could damage our brand and our business. Even if we are successful in defending against these types of claims, we may be required to spend significant resources in those efforts which may distract our management and otherwise negatively impact our results of operations
If we do not manage our growth effectively, the increases in our operating expenses could outpace any increases in our revenue and our business could be harmed. In addition, our revenue may decline and our revenue growth rate may decelerate for a number of reasons, including the abatement of COVID-19 pandemic and other factors described elsewhere in these Risk Factors. For further information about the rate of revenue and GMS growth, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Revenue.” You should not rely on growth rates of prior periods as an indication of our future performance.
The COVID-19 pandemic is unprecedented and has impacted, and may continue to impact, our GMS, key metrics, and results of operations in numerous ways that remain volatile and unpredictable.
The impact of the ongoing COVID-19 pandemic is severe and widespread, and, while the rollout of vaccines has begun, the timing of vaccinations and lifting of shelter in place requirements and movement restrictions is unknown. The pandemic and related government and private sector responsive actions have affected the broader economies and financial markets, triggering an economic downturn, which has at points adversely affected, and could again adversely affect demand for products sold in our marketplaces. It is impossible to predict all effects and the ultimate impact of the COVID-19 pandemic, as the situation continues to evolve. The COVID-19 pandemic has disrupted the global supply chain and the preventative and protective measures currently in place, or which may be instituted or re-instituted in the future, such as quarantines, closures and movement restrictions, may interfere with the ability of our sellers to deliver products to our buyers. If delivery services are delayed or shut down, our GMS and revenue could be negatively impacted. As pandemic-related restrictions on movement ease, competition may intensify as buyers return to traditional brick and mortar retail stores. Additionally, our sales may decline if pent-up demand for other discretionary spending replaces demand for online shopping.
As a result of the COVID-19 pandemic, our employees continue to work remotely, and it is possible that this could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working for employees, vendors or contractors may also result in increased consumer privacy, IT security, and fraud concerns. Further, as certain businesses return to on-site operations, we may experience disruptions if our employees or third-party service providers’ employees become ill despite the availability of vaccines, and are unable to perform their duties. This may impact our operations, internet, or mobile networks, or the operations of one or more of our third-party service providers.
Our results of operations may be materially affected by adverse conditions in the capital markets and the economy generally, both in the United States and internationally. Uncertainty in the economy could adversely impact consumer purchases of discretionary items across all of our product categories, and demand for products available in our marketplaces may be reduced. Our results of operations have also been positively impacted by several trends related to the COVID-19 pandemic, including the shift from offline to online shopping, fast moving dynamics in the e-commerce space, retail business closures, stimulus checks, and emerging categories such as face masks. However, we expect demand for certain items, like handmade masks, to diminish significantly with the rollout of the vaccine, and as medical grade masks become widely available. It is also difficult to predict how our business might be impacted by changing consumer spending patterns when the pandemic abates. Factors that could affect consumers’ willingness to make discretionary purchases include, among others: levels of employment, interest rates, tax rates, the availability of consumer credit, consumer confidence in future economic conditions, and stimulus checks. In the event of a prolonged economic downturn or acute recession, consumer spending habits could be adversely affected, and we could experience lower than expected GMS, revenue, net income, and Adjusted EBITDA.
The uncertainty around the duration of business disruptions and the timing of vaccine rollouts, herd immunity and the lifting of shelter in place restrictions in the United States and other areas of the world will likely continue to adversely impact the national and/or global economy and negatively impact consumer discretionary spending, even in the e-commerce space, which experienced growth during the pandemic. The full extent of COVID-19’s impact on our operations, key metrics, and financial performance depends on future developments that are uncertain and unpredictable, including the timing of vaccine rollouts and herd immunity, the occurrence of virus mutations and variants, the pandemic’s impact on capital and financial markets, and any new information that may emerge concerning the virus, vaccines, and containment, all of which may vary across regions. Any of these factors could have a material adverse impact on our business, financial condition, operating results, and ability to execute and capitalize on our strategies.
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
Our quarterly operating results, as well as our key metrics, may fluctuate for a variety of reasons, many of which are beyond our control, including:
•fluctuations in GMS or revenue, generated from Etsy sellers on our platform, including as a result of adverse market conditions due to the COVID-19 pandemic and the re-opening of traditional brick and mortar retail and other options for discretionary spending as and when restrictions on movement are loosened, the seasonality of market transactions, and Etsyour sellers’ use of services;
•our ability to convert visits to Etsy.com into sales for our sellers;
•the amount and timing of our operating expenses;
•our success in attracting and retaining Etsy sellers and Etsy buyers;
•our success in executing on our strategy and the impact of any changes in our strategy;
•the timing and success of product launches, including new services and features we may introduce;
•the success of our marketing efforts;
•the success of our acquired businesses, such as Reverb, which we acquired in 2019;
•adverse economic and market conditions, such as those related to the current COVID-19 pandemic, currency fluctuations, and adverse global events;
•disruptions or defects in our marketplace,marketplaces, such as privacy or data security breaches, errors in our software, or other incidents that impact the availability, reliability, or performance of our platform;
•the impact of competitive developments and our response to those developments;
•our ability to manage our existing business and future growth; and
•our ability to recruit and retain employees;employees.
Fluctuations in our quarterly operating results, key metrics, and
the impactprice of our revised global corporate structure that was implementedcommon stock may be particularly pronounced in the current economic environment due to the uncertainty caused by, and the unprecedented nature of, the current COVID-19 pandemic, consumer spending patterns, and the impacts of the gradual reopening of the offline economy and lessening of restrictions on January 1, 2015.
movement. Fluctuations in our quarterly operating results and key metrics may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish, and other unanticipated issues may arise.
In addition, weWe believe that our quarterly operating results and key metrics may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our overall historical growth rate and the impacts of the COVID-19 pandemic may have overshadowed the effect of seasonal variations on our historical operating results. These seasonal effects may become more pronounced over time, which could also cause our operating results and key metrics to fluctuate. You should not rely on the results of one quarter as an indication of future performance.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.
From time to time, we release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. For example, we historically have provided annual guidance, but we withdrew our 2020 annual guidance on April 2, 2020 given the economic uncertainty caused by the COVID-19 pandemic and have been providing only quarterly guidance since.
On February 25, 2021, we provided guidance for the first quarter of 2021. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions include the impact of the COVID-19 pandemic and its duration, particularly once a vaccine becomes widely available and restrictions on movement are lifted, future consumer spending patterns, and the associated economic uncertainty on our business. These assumptions are inherently difficult to predict, particularly in the long term. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the ongoing COVID-19 pandemic, and the impacts of reduced movement, which could adversely affect our business and future operating results. There are no comparable recent events that provide insights on the probable effect of the COVID-19 pandemic, and, as a result, the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We are relying on the reports and models of economic and medical experts in making assumptions relating to the duration of this crisis, resumption of freedom of movement and predictions as to timing and pace of any future economic recovery. If these models are incorrect or incomplete, or if we fail to accurately predict the full impact that the COVID-19 pandemic will have on all aspects of our business or the duration of those impacts, the guidance and other forward-looking statements we provide may also be incorrect or incomplete. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors, or other interested parties, the price of our common stock could decline.
Given the uncertainty surrounding the impacts and duration of COVID-19, the efficacy of a vaccine, and the timing and impacts of the opening of freedom of movement, we may continue not to provide guidance, or continue to provide more limited quarterly guidance, as we did in 2020. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this Risk Factors section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
If we experience a technology disruption or failure that results in a loss of information, if personal data or sensitive information about members of our community or employees is misused or disclosed, or if we or our third-party providers are unable to protect against software and hardware vulnerabilities, service interruptions, cyber incidents, ransomware, security incidents, or security breaches, then members of our community may curtail use of our platform, we may be exposed to liability or incur additional expenses, and our reputation could suffer.
Like all online services, we are vulnerable to power outages, telecommunications failures, and catastrophic events, as well as computer viruses, break-ins, phishing attacks, denial-of-service attacks, ransomware, and other cyber incidents. Any of these occurrences could lead to interruptions or shutdowns of our platform, loss of data, or unauthorized disclosure of personal or financial information of our members or employees. As we grow our business, expand internationally, and gain greater public visibility, we may face a higher risk of being targeted by cyber attacks. Although we have integrated a variety of recovery systems, security protocols, network protection mechanisms and other security measures into our systems, networks and physical facilities, which are designed to protect against, detect and minimize security breaches, including security testing, encryption of sensitive information, and authentication technology, we cannot assure you that such measures will be adequate to prevent or detect service interruption, system failure, data loss or theft, or other material adverse consequences, particularly given the increasingly sophisticated tools and methods used by hackers, organized cyber criminals, and cyber terrorists.
In addition, we have experienced in the past, and may experience in the future, security breaches as a result of non-technical issues, including intentional, inadvertent, or social engineering breaches occurring through our employees or employees of our third-party service providers. In addition, if our employees or employees of our third-party service providers fail to comply with our internal security policies and practices, member or employee data may be improperly accessed, used, or disclosed.
Our security and access controls for our systems may not be adequate, which may heighten the risk of a cyber attack or security breach. Among other things, our applications, systems, networks, software and physical facilities could have material vulnerabilities, be breached or the personal or confidential information that we store could be otherwise compromised due to employee error or malfeasance, if, for example, third parties attempt to fraudulently induce our employees or our members to disclose information or user names and/or passwords, or otherwise compromise the security of our networks, systems and/or physical facilities. Additionally, employees or service providers may inadvertently misconfigure resources or misdirect certain communications in manners that may lead to security incidents on which we must then expend effort and expenses to correct.
As we have moved to a fully remote work environment due to the COVID-19 pandemic, and as the industry generally moves to online remote infrastructure for core work, we and our partners may be more vulnerable to cyber attacks. Cyber attacks could also result in the theft of our intellectual property or user data.
A successful cyber attack could occur and persist for an extended period of time before being detected. Because the techniques used by hackers change frequently, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, because any investigation of a cybersecurity incident would be inherently unpredictable, the extent of a particular cybersecurity incident and the path of investigating the incident may not be immediately clear. It may take a significant amount of time before an investigation can be completed and full and reliable information about the incident is known. While an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered and remediated, and communication to the public, regulators, members of our community, and other stakeholders may be inaccurate, any or all of which could further increase the costs and consequences of a cybersecurity incident. Applicable rules regarding how to respond, notice to users and reporting to regulators vary by jurisdiction, and may subject Etsy to additional liability and reputational harm.
Our production systems rely on internal technology, along with cloud services and software provided by our third-party service providers. In the event of a cyber-incident, even partial unavailability of our production systems could impair our ability to serve our customers, manage transactions, or operate our marketplaces. We have implemented disaster recovery mechanisms, including systems to back up key data and production systems, but these systems may be inadequate or incomplete. For example, these disaster recovery systems may be susceptible to cyber-incidents if not sufficiently separated from primary systems, not comprehensive, or not at a scale sufficient to replace our primary systems. Insufficient production and disaster recovery systems could, in the event of a cyber-incident, harm our growth prospects, our business, and our reputation for maintaining trusted marketplaces.
The costs and effort to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service, negative publicity, and other harm to our business and our competitive position. We could be required to fundamentally change our business activities and practices in response to a security breach or related regulatory actions or litigation, which could have an adverse effect on our business.
Cyber attacks aimed at disrupting our and our third-party service providers’ services have occurred regularly in the past, and we expect they will continue to occur in the future. If we or our third-party service providers experience security breaches that result in marketplace performance or availability problems or the loss, compromise, or unauthorized disclosure of personal data or other sensitive information, or if we fail to respond appropriately to any security breaches that we may experience, people may become unwilling to provide us the information necessary to set up an account with us. Existing sellers and buyers may stop listing new items for sale, decrease their purchases, or close their accounts altogether. We could also face damage to our reputation, potential liability, regulatory investigations in multiple jurisdictions, and costly remediation efforts and litigation, which may not be adequately covered by insurance. Any of these results could harm our growth prospects, our business, and our reputation for maintaining trusted marketplaces.
We are also reliant on the security practices of our third party service providers, which may be outside of our direct control. Additionally, some of our third party service providers, such as identity verification and payment processing providers, regularly have access to payment card information and other confidential and sensitive member data. We may have contractual and regulatory obligations to supervise the security and privacy practices of our third-party service providers. Despite our best efforts, if these third parties fail to adhere to adequate security practices, or experience a cyber attack such as a breach of their networks, our members’ data may be improperly accessed, used, or disclosed. More generally, our third-party service providers may not have adequate security and privacy controls, may not properly exercise their compliance, regulatory or notification requirements, including as to personal data, or may not have the resources to properly respond to an incident. Many of our service providers have moved to a remote work environment and may, as a result, be more vulnerable to cyber attacks.
Our software is highly complex and may contain undetected errors.
The software underlying our platform is highly interconnected and complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. We rely heavily on a software engineering practice known as “continuous deployment,” meaning that we typically release software code many times per day. This practice may result in the more frequent introduction of errors or vulnerabilities into the software underlying our platform, which can impact the user experience and functionality of our marketplaces. Additionally, due to the interconnected nature of the software underlying our platform, updates to parts of our code, third party code, and APIs, on which we rely and that maintain the functionality of our marketplaces and business, could have an unintended impact on other sections of our code, which may result in errors or vulnerabilities to our platform that negatively impact the user experience and functionality of our marketplaces. In some cases, such as our mobile apps, errors may only be correctable through updates distributed through slower, third party mechanisms, such as app stores, and may need to comply with third party policies and procedures to be made available, which may add additional delays due to app review and user delay in updating their mobile apps. In addition, our systems are increasingly reliant on machine learning systems, which are complex and may have errors or inadequacies that are not easily detectable. These systems may inadvertently reduce the efficiency of our systems, or may cause unintentional or unexpected outputs that are incorrect, do not match our business goals, do not comply with our policies, or otherwise are inconsistent with our brand, guiding principles and mission. Any errors or vulnerabilities discovered in our code after release could also result in damage to our reputation, loss of our community members, loss of revenue, or liability for damages, any of which could adversely affect our growth prospects and our business.
We rely on Google Cloud for a substantial portion of the computing, storage, data processing, networking, and other services for Etsy.com.
Google Cloud Platform provides a distributed computing infrastructure as a service platform for business operations, and we have migrated Etsy’s primary production environment and data centers to Google Cloud, increasing our reliance on cloud infrastructure. Any transition of the cloud services currently provided by Google Cloud to another cloud provider would be difficult to implement and will cause us to incur significant time and expense. Our products and services are in significant part reliant on continued access to, and the continued stability, reliability and flexibility of Google Cloud. Any significant disruption of, or interference with, our use of Google Cloud would negatively impact our operations, and our business would be seriously harmed. In addition, if hosting costs increase over time and if we require more computing or storage capacity, our costs could increase disproportionately. If we are unable to successfully execute ongrow our revenues faster than the cost of utilizing the services of Google or similar providers, our business strategy or ifand financial condition could be adversely affected. To a lesser extent, Reverb relies on Amazon Web Services for some business operations, and is thus subject to similar risks.
The trustworthiness of our strategy provesmarketplaces and the connections within our community are important to be ineffective, our success. Our business, financial performance, and growth could be adversely affected.
Our ability to execute our strategy is dependentdepend on a number of factors, including the ability of our senior management team and key team leaders to execute our strategy, our ability to maintain our paceattract and retain an active and engaged community of product experiments coupled with the success of such initiatives and introduce offerings that meet the changing needs of our sellers and buyers and the ability of our employees to perform at a high-level.sellers. If we are unable to executeretain our strategy,existing buyers and sellers and activate new ones, our financial performance could decline.
We are focused on ensuring that our marketplaces embody our mission and values, and that we deliver trust and reliability throughout the buyer and seller experiences. Our reputation and brand depend, in part, upon our ability to maintain trustworthy marketplaces, and also upon our sellers, the quality of their offerings, their adherence to our policies, and their ability to deliver a trusted purchasing experience.
We view the trustworthiness and reliability of our marketplaces, as well as the connections we foster in our buyer/seller communities, to be cornerstones of our business and key to our success. Many things could undermine these cornerstones, such as:
•complaints or negative publicity about us, our platform, or our policies and guidelines, even if factually incorrect or based on isolated incidents;
•an inability to gain the trust of prospective buyers;
•disruptions or defects in our strategy doesmarketplaces, privacy or data security incidents, website outages, payment disruptions or other incidents that impact the reliability of our platform;
•lack of awareness of our policies or confusion about how they are applied;
•changes to our policies that members of our community perceive as inconsistent with their best interests or our mission, or that are not driveclearly articulated;
•inadequacies in our terms of use;
•frequent product launches, updates, and experiments that could deteriorate member trust;
•a failure to enforce our policies effectively, consistently, and transparently, including, for example, by allowing the growthwidespread listing of prohibited items in our marketplaces;
•inadequate or unsatisfactory customer service experiences;
•a failure on the part of our sellers to fulfill their orders in accordance with our policies, their own shop-specific policies, or buyer expectations;
•a failure to respond to feedback from our community; or
•a failure to operate our business in a way that weis consistent with our guiding principles and mission.
anticipate,the key elements of our strategy. In particular, we are focused on enhancing the customer experience for both sellers and buyers. We continue to evolve our offerings and invest to improve our customer experience on our marketplaces. If our efforts are unsuccessful, or if our market opportunity is not as large ascustomer service platform or our trust and safety program fails to meet our requirements, legal requirements, or our customers’ requirements, we have estimated, itmay need to quickly invest significant additional resources. If we are unable to do so, our ability to maintain trustworthy marketplaces, attract buyers and sellers, and maintain our trusted brand, could adversely affect our business, financial performance and growth.be harmed.
Our business, financial performance and growth depends on our ability to attract and retain an active and engaged community of Etsy buyers and Etsy sellers.
Our financial performance has been and will continue to be significantly determined by our success in attracting and retaining active buyers and active sellers. For example, our revenue is driven by the number of the number of active buyers and buyer engagement, as well as the number of active sellers and seller engagement. We must encourageIf we are not successful in encouraging buyers to return to Etsyus and purchase items in our marketplacemarketplaces more frequently. We must also continue to encourage Etsyfrequently and sellers to list items for sale and use our services.services, our financial performance may be negatively impacted.
Our GMS and revenue is concentrated in our most active buyers and sellers. The pandemic has fueled an unprecedented increase in the growth of new buyers and reactivated lapsed buyers. We have also seen a higher than recent historic growth rate of new sellers. If we lose those buyers, or sellers, due to the abatement of pandemic restrictions or otherwise, our financial performance and growth could be harmed. Even if we are able to attract new buyers and sellers to replace the ones that we lose,
we may not be able to do so at 2020 levels, they may not maintain the same level of activity, and the GMS and revenue generated from new buyers and sellers may not be as high as the GMS and revenue generated from the ones who leave our marketplaces. If we are unable to retain existing buyers and sellers and attract new buyers and sellers who contribute to an active community, our business, financial performance, and growth could be harmed.
Additionally, the demand for the goods listed in our marketplaces is dependent on consumer preferences which can change quickly and may differ across generations and cultures, or due to other macro events. If demand for the goods that our sellers offer declines, we may not be able to attract and retain our buyers and our business could be harmed. A shift in trends away from socially-conscious consumerism or unique or vintage goods, could also make it more difficult to attract new buyers and sellers. Our growth would also be harmed if the shift from brick and mortar retail to e-commerce does not continue, or reverses when the COVID-19 pandemic abates. We believe that many new Etsy buyers and Etsy Sellerssellers find Etsyus by word of mouth and other non-paid referrals from existing Etsy buyers and Etsy Sellers.sellers. If existing Etsy buyers do not find our platform appealing, whether because of a negative experience, lack of competitive shipping costs, delayed shipping times, inadequate customer service, lack of buyer-friendly features, declining interest in the nature of the goods offered by Etsyour sellers, or other factors, they may make fewer purchases and they may stop referring others to us. Likewise, if existing Etsy sellers are dissatisfied with their experience on our platform, or feel they have more attractive alternatives, they may stop listing items in our marketplacemarketplaces and using our services and may stop referring others to us. Under any of these circumstances, we may have difficulty attracting new Etsy buyers and Etsy sellers without incurring additional expense.
Our GMSWe rely on our sellers to provide a fulfilling experience to our buyers.
A small portion of buyers complain to us about their experience on our platform. As a pure marketplace, our sellers manage their shops, most policies, products and revenue is concentratedproduct descriptions, shipping and returns. As a result, we may not have the ability to control important aspects of buyers’ experiences on our platform. For example, buyers may report that they have not received the items that they purchased, that the items received were not as represented by a seller, or that a seller has not been responsive to their questions. Similarly, we occasionally identify sellers who are unable to fulfill orders in a time frame or manner consistent with buyer expectations. Trending sellers may experience an influx of orders that may be beyond their ability to fulfill in a timely manner. For example, a subset of sellers who offered cloth masks during 2020 may have experienced periods of high activity beyond their ability to fulfill as a small business. While we have procedures designed to mitigate spikes in orders, we cannot guarantee those procedures will be effective.
Negative publicity and sentiment generated as a result of these types of complaints, or any associated enforcement action taken against sellers, could reduce our most activeability to attract and retain our sellers and buyers and sellers. If we lose those buyers andor damage our reputation. We take action against sellers our financial performance and growth could be harmed. Even ifwho we are ableaware may have violated our policies. However, our actions may be insufficient, may not be timely, and may not be effective in creating a good purchase experience for our buyers.
As our marketplaces grow, our controls over fraud and policy violations are important to attract new Etsy buyers and Etsy sellers to replace the ones that we lose,maintaining user trust, but they may not maintain the same level of activity,be adequate and the GMS and revenue generated from new Etsy buyers and Etsy sellers may not be as high as the GMSsufficient to keep up with quickly-shifting techniques used by those attempting to undertake fraudulent activity on our platform. While we regularly update our processes for handling complaints and revenue generated from the ones who leavedetecting policy violations, these processes are by their nature imperfect in a dynamic, quickly growing marketplace, and include risk to us, our marketplace. If we are unable to retain existing Etsy buyers and Etsy sellers, and attract new Etsyour buyers from both under-enforcement and Etsyover-enforcement.
A perception that our levels of responsiveness and support for our sellers who contributeand buyers are inadequate could have similar results. In some situations, we may choose to an active community,reimburse our business, financial performance, and growth wouldbuyers for their purchases to help avoid harm to our reputation. While we take steps such as requiring reserves, including to cover such reimbursements, from some sellers based on indicia they may not be harmed.
Additionally, the demand for the goods listed in our marketplace is dependent on consumer preferences which can change quickly and may differ across generations and cultures. If demand for the goods that Etsy sellers offer declines,able to fulfill orders, we may not be able to recover the funds we expend for those reimbursements. When we do recover funds used to reimburse buyers from sellers, it may increase general seller dissatisfaction and reduce their desire to continue selling using our platform. Although we are focused on enhancing customer service, our efforts may be unsuccessful and our sellers and buyers may be disappointed in their experience and not return.
Anything that prevents the timely processing of orders or delivery of goods to our buyers could harm our sellers. Service interruptions and delivery delays may be caused by events that are beyond the control of our sellers, such as interruptions in order or payment processing, interruptions in sellers’ supply chain, transportation disruptions, natural disasters, inclement weather, terrorism, public health crises, or political unrest. For example, many countries continue to experience delays in shipping due to the COVID-19 pandemic. If buyers have a negative purchase experience, whether due to delay or other reasons, our reputation could be damaged.
Our business depends on third party services and technology which we utilize to maintain and scale the technology underlying our platform and our business operations.
Our business operations are dependent upon a number of third-party service providers, such as cloud service providers, marketing platforms and providers, payments and shipping providers, and contingent labor teams, and network and mobile infrastructure providers. Any disruption in their services, any failure on their part to deliver their services in accordance with our scale and expectations, or any failure on our part to maintain appropriate oversight on these third-party providers during the course of our engagement with them, could significantly harm our business.
We are unable to exercise significant oversight over some of these providers, which increases our vulnerability to their financial conditions and to problems with the services they provide, such as technical failures, deprecation of key services, privacy or security concerns. Our efforts to update our infrastructure or supply chain may not be successful as we may not sufficiently distribute our risk across providers or geographies or our efforts to do so may take longer than anticipated. If we experience failures in our technology infrastructure or supply chain or do not expand our technology infrastructure or supply chain successfully, then our ability to run our marketplaces could be significantly impacted, which could harm our business.
Our business depends on continued and unimpeded access to third party services, platforms and infrastructure that we rely upon to maintain and scale our platform.
Our sellers and buyers rely on access to the internet or mobile networks to access our marketplaces. Internet service providers may choose to disrupt or degrade access to our platform or increase the cost of such access. Mobile network operators or operating system providers could block or place onerous restrictions on the ability to download and use our mobile apps.
Internet service providers or mobile network operators could also attempt to charge us for providing access to our platform. In addition, we could face discriminatory or anticompetitive practices that could impede both our and our sellers’ growth prospects, increase our costs, and harm our business.
Outside of the United States, it is possible that governments of one or more countries may seek to censor content available on our platform or may even attempt to block access to our platform. If we are restricted from operating in one or more countries, our ability to attract and retain Etsysellers and buyers and our business wouldmay be harmed. Trends in socially-conscious consumerism and buying unique rather than mass produced goods could also shift or slow which would make it more difficult to attract new Etsy buyers and Etsy sellers. Our growth would also be harmed if the shift to ecommerce does not continue.
We have a history of lossesadversely affected and we may not achievebe able to grow our business as we anticipate.
In addition, our sellers rely on continued and unimpeded access to postal services and shipping carriers to deliver their goods reliably and timely to buyers. As a result of the COVID-19 pandemic and other factors, our sellers have experienced increased delays in delivery of their goods. If these shipping delays continue or maintain profitabilityworsen, or if shipping rates increase significantly, our sellers may have increased costs, and/or our buyers may have a poor purchasing experience and may lose trust in our marketplaces, which could negatively impact our business, financial performance, and growth.
Our payments systems have both operational and compliance risks, including in-house execution risk, dependency on third-party providers, and a complex landscape of evolving laws, regulations, rules, and standards.
Our buyers primarily pay for purchases using our payments services (i.e., Etsy Payments and Reverb Payments) or PayPal, and in the future.United States, may pay in installments with Klarna. In the United States and other countries where our payments services are available, our sellers accept various forms of payments such as credit cards, debit cards, gift cards, PayPal, Google Wallet and Apple Pay. We plan to invest ongoing internal resources into our payments tools and infrastructure to maintain existing availability, expand into additional markets, and offer new payment methods and tools to our buyers and sellers. If we fail to invest adequate resources into our payments platform, or if our investment efforts are unsuccessful or unreliable, our payments services may not function properly, keep pace with competitive offerings, or comply with applicable laws and regulatory requirements, any of which could negatively impact their usage and our marketplaces, as well as our trusted brand, which, in turn, could adversely affect our GMS and results of operations.
We generated net income of $77.5 million and $81.8 million and incurred a net loss of $29.9 million for the years ended December 31, 2018, 2017, and 2016, respectively. We may not maintain profitability in the future. Our costs may increase as we continuerely upon third-party service providers to invest in the developmentperform key components of our payments platform, including payments processing and payments disbursing, compliance, currency exchange, identity verification, sanctions screening, and fraud analysis. If these service providers do not perform adequately, or if our relationships with these service providers were to change or terminate, it could negatively affect our sellers’ ability to receive orders or payments, our buyers’ ability to complete purchases, and our ability to operate our payments program, including maintaining certain compliance measures, including fraud prevention and detection tools. This could decrease revenue, increase costs, lead to potential legal liability, and negatively impact our brand and business. If we (or a third-party payment processor) suffer a security breach affecting payment card information, we could be subjected to fines, penalties and assessments arising out of the major card brands’ rules and regulations, contractual indemnification obligations or other obligations contained in merchant agreements and similar contracts, and we may lose our ability to accept payment cards as payment for our services and technological enhancements,our sellers’ goods and increase our marketing efforts, expand our operations, and hire additional employees. These efforts may be more costly thanservices.
In addition, we expect and our revenuethird-party service providers may not increase sufficientlyexperience service outages from time to offset these additional expenses. In addition,time that negatively impact payments on our revenueplatform. We have in the past experienced, and may decline for a number of reasons, including those described elsewhere in these Risk Factors.
Further, our revenue growth rate may decelerate in the future for a number of reasons, includingexperience, such payments-related service outages and, if we are unable to promptly remedy or provide an alternative payment solution, our business could be harmed. In addition, if our third-party providers increase the decelerationfees they charge us, our operating expenses, or those of our GMS growth rate. For further information aboutsellers, could increase, and it could negatively impact our sellers’ businesses or our business.
Further, our ability to expand our payments services into additional countries is dependent upon the rate of revenue and GMS growth, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Revenue.” You should not rely on growth rates of prior periods as an indicationthird-party providers we use to support these services. As we expand the availability of our payments services to additional markets or offer new payment methods to our sellers and buyers in the future, performance.we, along with our sellers, may become subject to additional and evolving regulations, compliance requirements, and may be exposed to heightened fraud risk, which could lead to an increase in our operating expenses.
Various laws and regulations govern payments, and these laws are complex, evolving, and subject to change and vary across different jurisdictions in the United States and globally. Moreover, even in regions where such laws have been harmonized, regulatory interpretations of such laws may differ. As a result, we are required to spend significant time and effort determining whether various licensing and registration laws relating to payments apply to us as our business strategy and operations evolve. Any failure or claim of our failure to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, result in liabilities, cause us significant reputational damage, or force us to stop offering our payments services in certain markets. Additionally, changes in payment regulation may occur that could render our payments systems non-compliant and/or less profitable.
Further, through our agreements with our third-party payments service providers, we are and could be subject to evolving rules and certification requirements (including the Payment Card Industry Data Security Standard), or other contractual requirements that may materially negatively impact our payments business. Failure to comply with these rules and requirements could impact our ability to meet our contractual obligations with our third-party payment processors and could result in potential fines or negatively impact our relationship with our third-party payments processors.
We are also subject to rules governing electronic funds transfers. Any change in these rules and requirements, including as a result of a change in our designation by major payment card providers, could make it difficult or impossible for us to comply and could require a change in our business operations. In addition, similar to a potential increase in costs from third-party providers described above, any increased costs associated with compliance with payment card association rules or payment card provider rules could lead to increased fees for us or our sellers, which may negatively impact payments on our platform, usage of our payments services, and our marketplaces.
Our business could be adversely affected by economic downturns, natural disasters, public health crises such as the COVID-19 pandemic, political crises, geopolitical changes such as Brexit, or other unexpectedsimilar events.
Macroeconomic conditions may adversely affect our business. If general economic conditions deteriorate in the United States or other markets where we operate, consumer discretionary spending may decline and demand for the goods and services available inon our platform may be reduced. This would cause our Marketplace and Services revenue to decline and adversely impact our business. Conversely, ifFor example, the ongoing COVID-19 pandemic has caused significant uncertainty and volatility in the global economy, and may cause consumer discretionary spending to decline for an unknown period of time. We have also seen significant and rapid shifts in consumer purchasing behavior as this pandemic has evolved, particularly as it relates to items sought on Etsy. It is difficult to predict how our business might be impacted by changing consumer spending patterns.
If recent trends supporting self-employment, and the desire for supplemental income were to reverse, the number of Etsy sellers offering their goods in our marketplace could declinemarketplaces and the number of goods listed in our marketplacemarketplaces could decline. In addition, currency exchange rates may directly and indirectly impact our business. For example, continuedcontinuing uncertainty aroundover rollout of the January 1, 2021 trade deal between the United Kingdom’s decision to exitKingdom and the European Union or E.U.(“Brexit”), commonly referredas well as uncertainty about areas not covered under the agreement, such as cross-border services, may lead to as Brexit, may result in future exchange rate volatility or changes in tariffs, taxes, and cross-border regulations, any of which may strengthen the U.S. dollar against foreign currencies. could negatively impact us or our sellers.
If the U.S. dollar strengthens or weakens against foreign currencies, particularly if there is short term volatility, our translation of foreign currency denominated GMS and revenue, will result in lowerwhen translated into U.S. denominated GMS and revenue.dollars, could fluctuate significantly. Currency exchange rates may also dampen demand from buyers outside the United
States for goods denominated in U.S. dollars,cross-border purchases, which could impact GMS and revenue. For the year ended December 31, 2018,2020, approximately 83%78% of our GMS was denominated in U.S. dollars.
NaturalAny events causing significant disruption or distraction to the public or to our workforce, such as natural disasters and other adverse weather and climate conditions, public health crises, political instability or crises, terrorist attacks, war, social unrest, or other unexpected events, could disrupt our operations, internet, or mobile networks, or the operations of one or more of our third-party service providers. CertainThese events, such as hurricanes and other natural disasters and political instability, are likely toif they occur, may impact buyer behaviordemand for discretionary goods, andimpact sellers’
ability to run their businesses on our marketplacemarketplaces and ship their goods. These kinds of events may alsogoods, and impact consumer perceptions of well-being and security, which may adversely impact consumer discretionary spending. Ifour ability to execute on our strategy, any of thesewhich could negatively impact our business and financial performance.
Further expansion outside of the United States will subject us to risks associated with operations abroad.
Doing business outside of the United States subjects us to increased risks and burdens such as:
•complying with different (and sometimes conflicting) laws and regulatory standards (particularly including those related to the use and disclosure of personal information, online payments and money transmission, intellectual property, product liability, consumer protection, online platform liability, e-commerce marketplace regulation, labor and employment laws, and taxation of income, goods and services);
•conforming to local business or cultural norms;
•barriers to international trade, such as tariffs, customs, or other taxes, or, when applicable, cross-border limits placed on U.S. technology companies;
•uncertainties on the continuing impact of pandemic-related quarantines, closures, delayed or shut down delivery services, and movement restrictions on operations, and geopolitical events occurs,such as natural disasters, pandemics, terrorism, and acts of war;
•varying levels of internet, e-commerce, and mobile technology adoption and infrastructure;
•potentially heightened risk of fraudulent or other illegal transactions;
•limitations on the repatriation of funds;
•exposure to liabilities under anti-corruption, anti-money laundering and export control laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.K. Bribery Act of 2010, trade controls and sanctions administered by the U.S. Office of Foreign Assets Control of the U.S. Treasury Department, and similar laws and regulations in other jurisdictions;
•our ability to enforce contracts, our terms of use and policies, and intellectual property rights in jurisdictions outside the United States;
•fluctuations of foreign exchange rates; and
•uncertainties and instability in U.K. and E.U. markets caused by ongoing negotiations of cross-border service agreements triggered by Brexit.
Our sellers face similar risks in conducting their businesses across borders. Even if we are successful in managing the risks of conducting our business across borders, if our sellers are not, our business could be adversely affected.
Our ability to recruit and retain a diverse group of employees is important to our success.
Our ability to attract, retain, and motivate a diverse group of employees, including our management team, is important to our success. We strive to attract, retain, and motivate our employees, from our office administrators to our engineers, to our management team, who share our dedication to our community and our mission to “Keep Commerce Human.” We cannot guarantee we will continue to attract and retain the number or caliber of employees we need to maintain our competitive position.position, particularly in the uncertainty of the current macroeconomic environment. We may not meet our impact goal of building diverse and inclusive workforces that are broadly representative of their communities.
Some of the challenges we face in attracting and retaining employees include:
perceived uncertainties as to our commitment to our mission, guiding principles and culture;
•skepticism regarding our ability to continue to accelerate GMS growth in the future;
•continuing ability to offer competitive compensation and benefits;
•evolving expectations regarding the ability to work remotely;
•enhancing engagement levels among existing employees and supporting their work-life balance;
•attracting and high quality talent in a timely fashion;
•retaining qualified employees who support our mission and guiding principles;principles, and continuing to do so in a remote or hybrid work environment;
•continuing to find promotion opportunities to retain key employees for employees into leadership positions ;positions;
•hiring employees in multiple locations globally;globally, and building a diverse equitable and inclusive workforce; and
•responding to competitive pressures and changing business conditions in ways that do not divert us from our guiding principles.
Filling key strategic roles, including engineering and product management, and other technical positions, particularly in New York City, and San Francisco, Dublin, and Chicago is challenging. Qualified individuals are limited and in high demand, and we may incur significant costs to attract, develop, retain and motivate them. Even if we were to offer higher compensation and other benefits, people with suitable technical skills may choose not to join us or to continue to work for us. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, particularly in this volatile macroeconomic environment, it may adversely affect our ability to recruit and retain highly skilled employees.
Our employees are currently almost fully remote. As stay-at-home orders and movement restrictions are lifted and we reopen our offices, we may need to reexamine our long term remote versus in-office model. If our needs are not aligned with our employees’ preferences, it may adversely affect our ability to recruit and retain employees. If we do move to a more remote work model, it may negatively impact our company culture.
In general, our employees, including our management team, work for us on an at-will basis. The unexpected loss of or failure to retain one or more of our key employees, such as our Chief Executive Officer, Chief Financial Officer, or Chief Technology Officer, or unsuccessful succession planning, could adversely affect our business. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Other companies, including our competitors, may be successful in recruiting and hiring our employees, and it may be difficult for us to find suitable replacements on a timely basis or on competitive terms.
If we experience increased voluntary attrition in the future, andand/or if we are unable to attract and retain qualified employees in a timely fashion, particularly in critical areas of operations such as engineering, we may not achieve our strategic goals and our business and operations could be harmed.
The trustworthinessWe may be unable to adequately protect our intellectual property.
Our intellectual property is an essential asset of our marketplacebusiness. To establish and protect our intellectual property rights, we rely on a combination of trade secret, copyright, trademark, and patent laws, as well as confidentiality procedures and contractual provisions. The efforts we have taken to protect our intellectual property may not be sufficient or effective. We generally do not elect to register our copyrights, relying instead on the connections withinlaws protecting unregistered intellectual property, which may not be sufficient. We rely on both registered and unregistered trademarks, which may not always be comprehensive in scope. In addition, our communitycopyrights and trademarks, whether or not registered, and patents may be held invalid or unenforceable if challenged, and may be of limited territorial reach. While we have obtained or applied for patent protection with respect to some of our intellectual property, patent filings may not be adequate alone to protect our intellectual property. From time to time we acquire intellectual property from third parties, but these acquired assets, like our internally developed intellectual property, may be held invalid, be unenforceable, or may otherwise not be effective in protecting our platform. We rely on trade secret protection for parts of our technology and intellectual property. To the extent we do seek patent protection, any U.S. or other patents issued to us may not be sufficiently broad to protect our proprietary technologies.
In addition, we may not be effective in policing unauthorized use of our intellectual property and authorized uses may not have the intended effect. Even if we do detect violations, we may need to engage in litigation or licensing to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive and could divert our management’s attention. In addition, our efforts may be met with defenses and counterclaims challenging the validity and enforceability of our intellectual property rights or may result in a court determining that our intellectual property rights are importantunenforceable. The legal framework surrounding protection of intellectual property changes frequently throughout the world, particularly as to technologies used in e-commerce, and these changes may impact our success.ability to protect our intellectual property and defend against third party claims. If we are unable to maintain them,cost-effectively protect our intellectual property rights, then our business could be harmed.
We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to a variety of taxes and tax collection obligations in the United States and in numerous other foreign jurisdictions. We record tax expense, including indirect taxes, based on current tax payments and our estimates of future tax payments, which may include reserves for estimates of probable or likely settlements of tax audits. We may recognize additional tax expense and be subject to additional tax liabilities, including tax collection obligations, due to changes in tax law, such as digital sales taxes, or online sales taxes. During his election campaign, President Joseph R. Biden, released a roadmap of his tax plan that identified several significant modification to key provisions, as well as introduction of new provisions, to the U.S. internal revenue code. Although it is uncertain if some or all of the identified provisions will be enacted, a change in U.S. tax law may materially and adversely impact our income tax liability, provision for income taxes and effective tax rate. We may also be subject to increased requirements for marketplaces to report, collect, remit, and hold liability for their customers’ direct and indirect tax obligations, or as a result of changes to regulations, administrative practices, outcomes of court cases, and changes to the global tax framework. Our effective tax rate and cash taxes paid in a given financial statement period may be adversely impacted by results of our business operations including changes in the mix of revenue among different jurisdictions, acquisitions, investments, entry into new geographies, the relative amount of foreign earnings, changes in foreign currency exchanges rates, changes in our stock price, intercompany transactions, changes to accounting rules, expectation of future profits, changes in our deferred tax assets and liabilities and our assessment of their realizability, and changes to our ownership or capital structure. Fluctuations in our tax obligations and effective tax rate could adversely affect our business.
In the ordinary course of our business, there are numerous transactions and calculations for which the ultimate tax determination is uncertain. Although we believe that our tax positions and related provisions reflected in the financial statements are fully supportable, we recognize 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 our original or adjusted estimates, our effective tax rate can be adversely affected.
The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us 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 we operate. 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 us. If the ultimate result of these audits differs from original or adjusted estimates, they could have a material impact on our effective tax rate and tax liabilities.
At any one time, multiple tax years could be subject to audit by various taxing jurisdictions. As a result, we could be subject to higher than anticipated tax liabilities as well as ongoing variability in our quarterly tax rates as audits close and exposures are re-evaluated.
The terms of our debt instruments may restrict our ability to pursue our business strategies.
We do not currently have any obligations outstanding under our credit facility. While the indentures governing our outstanding convertible notes do not include material restrictions on our ability to pursue our business strategy, our credit facility requires us to comply with, and future debt instruments may require us to comply with, various covenants that limit our ability to take actions such as:
•disposing of assets;
•completing mergers or acquisitions;
•incurring additional indebtedness;
•encumbering our properties or assets;
•paying dividends, making other distributions or repurchasing our common stock;
•making specified investments; and
•engaging in transactions with our affiliates.
These restrictions could limit our ability to pursue our business strategies. If we default under our credit facility and if the default is not cured or waived, the lenders could terminate their commitments to lend to us and cause any amounts outstanding to be payable immediately. Such a default could also result in cross defaults under other debt instruments. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.
Our insurance may not cover or mitigate all the risks facing our business.
While we have insurance coverage for most aspects of our business risk, this insurance coverage may be incomplete or inadequate, or in some cases may not be available. Our business has evolving risks that may be unpredictable. For certain risks we face, we may be required to, or may elect to, self-insure or rely on insurance held by third parties, legal defenses and immunities, indemnification agreements or limits on liability, which may be insufficient.
For example, we may not have adequate insurance coverage related to the actions of third party sellers on our platform. In evolving areas such as platform products liability, recent decisions such as Bolger v. Amazon suggest that platforms, if they undertake certain types of retailer-like activity, could be responsible for some or all liability for the actions by, or products of, sellers on their platform, even if the platform has little or no control over those sellers’ actions or products. In some circumstances, a platform might be held liable for violations by sellers or their products, intellectual property laws, privacy and security laws, product regulation, or consumer protection law. Court decisions and regulatory changes in these areas may shift quickly, both in the United States and worldwide, and our insurance may be inadequate or unavailable to protect us from existing or newly developing legal risks. Finally, while some sellers on our platform may be insured for some or all of these risks, many small businesses do not carry any or sufficient insurance, and, even if a seller is insured, the insurance may not cover the relevant loss.
These factors may lead to increased costs for insurance, our increased liability, increased liability or requirements on sellers on our platform, changes to our marketplace or business model, or other damage to our brand and reputation.
Strategic Risks Related to Our Business and Industry
We face intense competition and may not be able to compete effectively.
Operating e-commerce marketplaces is highly competitive and we expect competition to increase in the future. To be successful, we need to attract and retain Etsy sellers and Etsy buyers could suffer.buyers. As a result, we face competition from a wide range of online and offline competitors.
We have builtcompete for sellers with marketplaces, retailers and companies that sell software and services to small businesses. For example, in addition to listing her goods for sale on Etsy, an Etsy seller can list her goods with other online retailers, such as Amazon, eBay, Google, or Alibaba, or sell her goods through local consignment and vintage stores and other venues or marketplaces, including through commerce channels on social networks like Facebook, Instagram, and TikToc. She may also sell wholesale directly to traditional retailers, including large national retailers, who discover her goods in our marketplaces or otherwise.
We also compete with companies that sell software and services to small businesses, enabling a trusted marketplace that embodiesseller to sell from her own website or otherwise run her business independently of our values-based cultureplatform, or enable her to sell through multiple channels, such as BigCommerce, Wix, and continueShopify.
We compete to focusattract, engage, and retain sellers based on ensuring that we deliver trustmany factors, including:
•the value of our brand and reliability throughout its awareness;
•effectiveness of our marketing;
•the buyer experience on Etsy.com. Our reputation depends uponglobal scale of our Etsy sellers, their unique offeringsmarketplaces and their adherencethe breadth of our online presence;
•our tools, education, and services, which support a seller in running her business;
•the number and engagement of buyers;
•our policies and fees;
•the ability of a seller to scale her business;
•the effectiveness of our policies.
mobile apps;
The trustworthiness•the strength of our marketplacecommunity; and
•our mission.
In addition, we compete with retailers for the connections amongattention of buyers. A buyer has the memberschoice of shopping with any online or offline retailer, including large e-commerce marketplaces, such as Amazon, eBay, or Alibaba, national retail chains, such as West Elm, Walmart, or Target, local consignment and vintage stores, social commerce channels like Instagram or Facebook, event-driven platforms and vertical experiences like Zola and Wayfair, resale commerce and streaming video commerce sites and apps, and other venues or marketplaces. Many of these competitors offer low-cost or free shipping, fast shipping times, favorable return policies, and other features that may be difficult or impossible for our sellers to match. As pandemic-related restrictions on movement ease, competition may intensify as buyers return to traditional brick and mortar retail stores.
We compete to attract, engage, and retain buyers based on many factors, including:
•the breadth and quality of items that sellers list in our marketplaces;
•the ease of finding items;
•the value of our community are brand, its trust and awareness;
•the cornerstonesperson-to-person commerce experience;
•customer service;
•our reputation for trustworthiness;
•the effectiveness of our business. Many things could undermine these cornerstones, such as:mobile apps;
complaints or negative publicity about us, our platform or our policies•the availability of timely, fair, and guidelines, even if factually incorrect orfree shipping offered by Etsy sellers to Etsy buyers;
•ease of payment;
•localization and experiences targeted based on isolated incidents;regional preferences, and
an inability to gain •the trust of prospective buyers;
disruptions or defects in our marketplace, such as the increased pace of product experimentation, privacy or data security breaches, website outages, payment disruptions or other incidents that impact theavailability and reliability of our platform;platform.
lack of awarenessMany of our competitors and potential competitors have longer operating histories, greater resources, better name recognition, or more customers than we do. They may invest more to develop and promote their services than we do, and they may offer lower fees to sellers than we do. Large, widely adopted platforms may benefit from significant user bases, access to user or industry-wide data, the ability to unilaterally set policies and standards, and control over complementary services such as fulfillment, advertising or confusion about howon-platform apps or e-commerce transactions. To the extent Etsy and our sellers may rely on these competitors’ services, they are applied;
changes to our policies that members of our community perceive as inconsistent with their best interests or our mission, or that are not clearly articulated;
inadequacies in our terms of use;
a failure to enforce our policies effectively, fairly and transparently, including, for example, by allowing the widespread listing of prohibited items in our marketplace;
inadequate or unsatisfactory customer service experiences;
a failure to respond to feedback from our community; or
a failure to operate our business in a way that is consistent with our guiding principles and mission.
In particular, we are focused on enhancing customer service for Etsy sellers and Etsy buyers and have migrated our legacy support platform to a new third-party customer service platform. We plan to introduce new customer service features and tools to support a positive user experience on our platform. If our efforts to enhance customer service are unsuccessful or if our new customer service platform fails to meet our needs, we may need to invest additional resources in customer service andunintentionally reduce our ability to maintainservice our users, or intentionally seek to disintermediate Etsy.
We believe that it is, and that it should continue to be, relatively easy for new businesses to create online commerce offerings or tools or services that enable entrepreneurship. However, as the technology space is increasingly subject to regulation, there is a trustworthy marketplacerisk that legislation, and regulatory or competition inquiries, even if focused on large, widely adopted platforms, may inadvertently impede smaller platforms and small businesses, including us and our sellers. For example, legislation and inquiries may result in obligations with which only large platforms are situated to comply. If legislation or inquiries, even if focused on other entities, requires us to expend significant resources in response or results in the imposition of new obligations, our business and results of operations could be harmed.adversely affected.
Local companies or more established companies based in markets where we operate outside of the United States may also have a better understanding of local customs, providing them a competitive advantage. For example, in certain markets outside the United States, we compete with smaller, but similar, local online marketplaces with a focus on unique goods that are attempting to attract sellers and buyers in those markets.
If we are unable to maintain a trustworthy marketplacecompete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business and encourage connections among membersresults of our community, then our ability to attract and retain Etsy sellers and Etsy buyers could be impaired and our reputation and businessoperations could be adversely affected.
If we are not able to keep pace with technological changes and enhance our current offerings and develop new offerings to respond to the changing needs of Etsy sellers and Etsy buyers, our business, financial performance, and growth may be harmed.
Our industry is characterized by rapidly changing technology, new service and product introductions, and changing customer demands and preferences, and we are not able to predict the effect of these changes on our business. The technologies that we currently use to support our platform may become inadequate or obsolete, and the cost of incorporating new technologies into our products and services may be substantial. We strive to respond to evolving customer needs and regularly launch new products, features and services including, for example, our recently announced seller subscription packages and tools. EtsyOur sellers and Etsy buyers, however, may not be satisfied with our enhancements or new offerings or may perceive that these offerings do not respond to their needs or create value for them. Additionally, as we invest in and experiment with new offerings or changes to our platform, Etsyour sellers and Etsy buyers may find these changes to be disruptive and may perceive them negatively. In addition, developing new services and features is complex, and the timetable for public launch is difficult to predict and may vary from our historical experience. As a result, the introduction of new offerings may occur after anticipated release dates, or they may be introduced as pilot programs, which may not be continued for various reasons. In addition, new offerings may not be successful due to defects or errors, negative publicity, or our failure to market them effectively.
New offerings may not drive GMS or revenue growth, may require substantial investment and planning, and may bring us more directly into competition with companies that are better established or have greater resources than we do.
If we do not continue to cost-effectively develop new offerings that satisfy Etsy sellers and Etsy buyers, then our competitive position and growth prospects may be harmed. In addition, new offerings may not drive the GMS or revenue that we anticipate, may have lower margins than we anticipate or than existing offerings, and our revenue from the new offerings may not be enough to offset the cost of developing and maintaining them, which could adversely affect our business, financial performance, and growth.
Our marketing efforts to help growIf the widely adopted mobile, social, search, and/or advertising solutions that we, our business may not be effective.
Maintainingsellers and promoting awarenessour buyers rely on as part of our marketplace and services is important to our ability to attract and retain Etsy sellers and Etsy buyers. One of the key parts of our strategy is to create more habitual buyers by inspiring purchases across multiple categories and special occasions. In addition, one of the primary goals of our 2018 pricing increase was to enable us to make further investments in marketing designed to attract more buyers to Etsy. Generating a meaningful return on our investments in marketing initiatives, however, may be difficult, particularly as we anticipate that our marketing investments will be more speculative in the future. In addition, there can beoffering are no assurance that we will deploy additional funds resulting from our 2018 pricing increase effectively.
The marketing efforts we implement may not succeed for a variety of reasons, including our inability to execute and implement our plans. External factors beyond our control may also impact the success of our marketing initiatives. Our primary marketing efforts currently include search engine optimization, search engine marketing, affiliate marketing and display advertising, as well as, social media, mobile push notifications, and email. Additionally, we have begun experimenting with television and digital video advertising. We obtain a significant number of visits via search engines such as Google. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, which can negatively affect the placement of links to our marketplace and, therefore, reduce the number of visits to our marketplace. In addition, search engines and other third-parties typically require compliance with their policies and procedures, which may be subject to changelonger available or new interpretation with limited ability to negotiate, which could negatively impact our marketing capabilities and GMS. The growing use of online ad-blocking software, including on mobile devices, may also impact the success of our marketing efforts because we may reach a smaller audience and fail to bring more Etsy buyers to our platform. In addition, ongoing privacy regulatory changes, such as the E.U. General Data Protection Regulation, may impact the scope and effectiveness of marketing and advertising services generally, including those used on our platform.
We also obtain a significant number of visits through email. If we are unable to successfully deliver emails to Etsy sellers and Etsy buyers,effective, or if Etsy sellers and Etsy buyers do not open our emails, whether by choice, because those emails are marked as low priority or spam, or for other reasons, our business could be adversely affected. Social networking websites, such as Facebook and Pinterest, are another important source of visitsaccess to our marketplace. As ecommerce and social networking evolve, we must continue to evolve our marketing tactics accordingly and, if we are unable to do so, our business could be adversely affected.
If the mobile solutions available to Etsy sellers and Etsy buyers are not effective,these major platforms is limited, the use of our marketplacemarketplaces could decline.
Purchases madeWe are dependent on widely-adopted third party platforms to reach our customers, such as popular mobile, devices by consumers, including Etsy buyers, have increased significantly in recent years. The smaller screen sizesocial, search and reduced functionality associated with some mobile devices may make the use of our platform more difficult or less appealing. Etsy sellers are also increasingly using mobile devices to operate their businesses on our platform.advertising offerings. If we are not able to deliver a rewarding experience on mobile devices, Etsythese platforms, or if our or our sellers’ access to these platforms is limited, or if these large platforms implement features that compete with us or our sellers, then our products and marketing efforts may suffer, and our sellers’ ability to manage and scale their businessesbusiness may be harmedharmed. In addition, we may not be able to deliver a rewarding experience, we may have limited access to, or we may be unable to invest significant time and consequently,resources towards, integration with and offering our services through new or updated devices, operating system versions, social networks, or search platforms (including Internet of Things (IoT) based or voice based platforms). If our solutions and integrations are ineffective or unavailable, then our products and marketing efforts may suffer, and our sellers’ ability to manage and scale their business may be harmed. As a consequence, our sellers may choose to sell elsewhere, and our business may suffer. Further, although we strive to provide engaging mobile experiences for both Etsy sellers and Etsy buyers who visit our mobile website using a browser on their mobile device, we depend on Etsy sellers and Etsy buyers using our mobile apps for the optimal mobile experience. Mobile
Conversion rates differ between web, conversion rate is about half the conversion rate on desktop and the conversion rate on our mobile Buy on Etsy app is about 1.2x the desktop conversion rate. Therefore, if mobile web, and mobile app traffic. If visits continue to growour platform from sources with lower conversion rates (such as mobile web) were to increase as a percentage of overall visits, it could be a headwind to futureadversely impact our conversion rate gains and result in lessreduce GMS on our platform which could adversely affect our business, financial performance and revenue for us.
As new mobile devices and mobile platforms are released, we may encounter problems in developing or supporting apps for them. In addition, supporting new devices and mobile device operating systems may require substantial time and resources.growth.
The success of our mobile appsmarketplaces could also be harmed by factors outside our control, such as:
as actions taken by providers of mobile and desktop operating systems, social networks, or search and advertising platforms, including:
•policy changes that interfere with, add tolls to, or otherwise limit our ability to provide users with a full experience of our platform, such as for our mobile app download stores;apps or social network presence;
•unfavorable treatment received by our mobile apps,platform, especially as compared to competing apps,platforms, such as the placement of our mobile apps in a mobile app download store;
•increased costs to distribute or use our platform via mobile apps;apps, social networks, or established search and advertising systems;
•changes in mobile operating systems, such as iOS and Android, that degrade the functionality of our mobile website or mobile apps or that give preferential treatment to competitive products.products;
•changes to social networks that degrade the e-commerce functionality, features or marketing of us or our sellers’ shops and products; or
•implementation and interpretation of regulatory or industry standards by these widely adopted platforms that, as a side effect, degrade the e-commerce functionality, features or marketing of us or our sellers’ shops and products.
If Etsy sellers and Etsy buyers encounter difficulty accessing or using our platform on their mobile devices, or if they choose not to use our platform on their mobile devices,marketplaces through these widely adopted access providers, our business, financial performance, and growth may be adversely affected.
Expanding our communityoperations outside of the United States is part of our strategy and the growth of our business could be harmed if our expansion efforts do not succeed.
Our vision is both global and local and weWe are focused on growing our business both inside and outside of the United States.Although we have a significant number of Etsy sellers and Etsy buyers outside of the United States, we are a U.S.-based company with less experience developing local markets outside the United Statesinternationally and may not execute our strategy successfully. Operating outside of the United States also requires significant management attention, including managing operations and people over a broaddiverse geographic areaareas with varying cultural norms and customs, and adapting our platform and business operations to local markets.
Despite our execution efforts, the goods that Etsy sellers list on Etsy.com may not appeal to non-U.S. consumers in the same way as they do to consumers in the United States. In addition, non-U.S. buyers are not as familiar with the Etsy brand as buyers in the United States and may not perceive us as relevant or trustworthy. Also, visits to Etsy.com from Etsy buyers outside the United States may not convert into sales as often as visits from within the United States, including due to the impact of the strong U.S. dollar relative to other currencies and the fact that most of the goods listed on our platform are denominated in U.S. dollars.
Our ability to grow our international operations may also be adversely affected by any circumstances that reduce or hinder cross-border trade. For example, the shipping of goods cross-border is typically more expensive and slower than domestic shipping and often involves complex customs and duty inspections and the dependency of national postal carrier systems. If jurisdictions become increasingly fragmented, with additional regulation of small sellers and platforms, tariffs and customs that increase the cost or complexity of cross-border trade, whether on the seller’s sourcing of materials or between the seller and buyer, our business could be adversely impacted. In addition, varying quarantines, closures, delayed or terminated delivery services, and movement restrictions related to the ongoing COVID-19 pandemic may interfere with our international growth strategy.
Our success outside the United States also depends upon our ability to attract Etsy sellers and Etsy buyers from the same countries in order to enable the growth of local markets. If we are not able to expand outside of the United States successfully, our growth prospects could be harmed. An inability to develop Etsy’sour community globally or to otherwise grow our business outside of the United States onin a cost-effective basismanner could adversely affect our GMS, revenue, and operating results.
Competition is also likely to intensify outside of the United States, both where we operate now and where we plan to expand our operations.expand. Local companies based outside the United States may have a substantial competitive advantage because of their greater understanding of, and focus on, their local markets.markets, along with regulations that may favor local companies. Some of our competitors may also be able to develop and grow internationally more quickly than we will.
Continued expansionDespite our execution efforts, the goods that sellers list on our sites may not appeal to non-U.S. consumers in the same way as they do to consumers in the United States. In addition, non-U.S. buyers are not as familiar with the Etsy and Reverb brands as buyers in the United States and may not perceive us as relevant or trustworthy. Also, visits to our marketplaces from buyers outside the United States may not convert into sales as often as visits from within the United States, including due to the impact of the United Statesstrong U.S. dollar relative to other currencies and the fact that most of the goods listed on our platform are denominated in U.S. dollars.
Continued international expansion may also require significant financial investment. For example, in June 2018, we announced a referral agreement with DaWanda, a German e-commerce marketplace, which encouraged the migration of DaWanda buyers and sellers to Etsy’s marketplace and helped expand Etsy’s presence in Central Europe. Etsy alsohas made initial investments to explore growth opportunities in India, a dynamic market where we have limited operating experience. WeTo facilitate continued international expansion, we plan to invest in seller and buyer acquisition marketing, enhancing our machine translation and machine learning to help sellers and buyers connect even if they do not speak the same language, forming relationships with third-party service providers, supporting operations in multiple countries, and potentially acquiring companies based outside the United States and integrating those companies with our operations. Our investment outside of the United States may be more costly than we expect or unsuccessful.
Further expansion outside of the United States will subject us to risks associated with operations abroad.
Doing business outside of the United States subjects us to increased risks and burdens such as:
complying with different (and sometimes conflicting) laws and regulatory standards (particularly including those related to the use and disclosure of personal information, online payments and money transmission, intellectual property, consumer protection, online platform liability and taxation of goods and services);
fluctuations of foreign exchange rates;
potentially heightened risk of fraudulent or other illegal transactions;
limitations on the repatriation of funds;
exposure to liabilities under anti-corruption, anti-money laundering and export control laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.K. Bribery Act of 2010, trade controls and sanctions administered by the U.S. Office of Foreign Assets Control, and similar laws and regulations in other jurisdictions;
varying levels of internet, e-commerce, and mobile technology adoption and infrastructure;
our ability to enforce contracts and intellectual property rights in jurisdictions outside the United States;
geopolitical events such as natural disasters, terrorism and acts of war;
uncertainties and instability in European markets caused by Brexit; and
barriers to international trade, such as tariffs, customs or other taxes.
Etsy sellers face similar risks in conducting their businesses across borders. Even if we are successful in managing the risks of conducting our business across borders, if Etsy sellers are not, our business could be adversely affected. In particular, Etsy buyers and sellers seeking to engage in cross-border sales may become subject to an increasing number of barriers to international trade such as tariffs, customs or other taxes.
If we invest substantial time and resources to expand our operations outside of the United States and cannot manage these risks effectively, the costs of doing business in those markets may be prohibitive or our expenses may increase disproportionately to the revenue generated in those markets.
Legal, political and economic uncertainty surrounding the planned exit of the United Kingdom from the European Union may be a source of instability in international markets, create significant currency fluctuations, adversely affect our operations in the United Kingdom and pose additional risks to our business, revenue, financial condition, and results of operations.
On March 29, 2017, the United Kingdom formally notified the European Council of its intention to leave the E.U. It is unclear how long it will take to negotiate a withdrawal agreement, but it appears likely that Brexit will continue to involve a process of lengthy negotiations between the United Kingdom and E.U. member states to determine the future terms of the United Kingdom’s relationship with the E.U.
Lack of clarity about future U.K. laws and regulations as the United Kingdom determines which E.U. rules and regulations to replace or replicate in the event of a withdrawal, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the United Kingdom, increase costs, depress economic activity, and restrict access to capital. In addition, depending on the terms of the United Kingdom’s withdrawal from the E.U., the United Kingdom could lose the benefits of global trade agreements negotiated by the E.U. on behalf of its members. The long-term effects of Brexit will depend on any agreements (or lack thereof) between the United Kingdom and the E.U. and, in particular, any arrangements for the United Kingdom to retain access to E.U. markets either during a transitional period or more permanently.
Such a withdrawal from the E.U. is unprecedented, and it is unclear how the United Kingdom’s access to the European single market for goods, capital, services and labor within the E.U., or the European single market, and the wider commercial, legal and regulatory environment, will impact our U.K. operations, including our sellers and buyers in the United Kingdom. We may also face new regulatory costs and challenges that could have an adverse effect on our operations. The announcement of Brexit has already created economic uncertainty, and its consequences could adversely impact our business, revenue, financial condition, and results of operations.
Regulation in the areas of privacy and protection of user data could harm our business.
In addition to the actual and potential changes in law described elsewhere in these Risk Factors, global developments in privacy and data security regulations are changing some of the ways we and our vendors collect, use, and share personal information. Compliance with these changing regulations have necessitated some specific product changes for our non-U.S. activities. In May 2018, the General Data Protection Regulation (“GDPR”) went into effect in the E.U., effectively extending the scope of E.U. data protection law to all non-E.U. companies processing data of E.U. persons. The GDPR seeks to harmonize the data protection regulations throughout the entire E.U. The regulation contains numerous requirements and changes from existing E.U. law, including more robust obligations on data processors, greater rights for data subjects (requiring potentially significant changes to both our technology and operations), security and accountability obligations, and significantly heavier documentation and record-keeping requirements for data protection compliance programs. Specifically, the GDPR introduced numerous privacy-related changes for companies operating in the E.U., including greater control over personal data by data subjects (e.g., the “right to be forgotten”), increased data portability, access and redress rights for E.U. consumers, data breach notification requirements, increased rules for online and e-mail marketing, and stronger regulatory enforcement regimes. The
GDPR requirements apply to some third-party transactions (such as commercial contracts with partners and vendors) and to transfers of information between us and our subsidiaries, including user and employee information. GDPR requirements may also apply, depending on interpretation of its reach, to some users in Etsy’s worldwide community of sellers. We may experience difficulty retaining or obtaining new E.U. sellers or new sellers selling into the E.U. due to the legal requirements, compliance cost, potential risk exposure, and uncertainty for them in respect of their own compliance obligations with respect to GDPR. In addition, although Etsy sellers are independent businesses, it is possible that a privacy authority could deem Etsy jointly and severally liable for actions of Etsy sellers, which would increase our potential liability exposure and costs of compliance, which could negatively impact our business. We could face potential liability, regulatory investigation, and costly litigation, which may not be adequately covered by insurance.
GDPR, the recently passed California Consumer Privacy Act, and similar laws coming into effect in other jurisdictions may continue to change the data protection landscape globally and could result in potentially significant operational costs for internal compliance and risk to our business. Some of these requirements introduce friction into the buying and selling experience on Etsy and may impact the scope and effectiveness of our marketing efforts, which could negatively impact our business and future outlook. Non-compliance with these laws could result in proceedings against us by data protection authorities, other public authorities, third-parties, or individuals. Under GDPR alone, noncompliance could result in fines up to 20 million Euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater.
In addition, the laws relating to the transfer of personal data outside of the E.U. continue to evolve and remain uncertain.Although we are taking steps to comply and mitigate the potential impact to us, the efficacy and longevity of these steps are uncertain. We may find it necessary to establish systems to maintain personal data originating from the E.U. in the European Economic Area, which may involve substantial expense and distraction from other aspects of our business. In the meantime, the evolving data protection landscape also creates uncertainty as to how to comply with E.U. privacy law, including potentially inconsistent guidance, rulings or requirements from multiple authorities in the E.U., as well as in the U.S. and worldwide. Further, we may not be entirely successful in our compliance efforts due to various factors either within our control (such as limited internal resource allocation) or outside our control (such as a lack of vendor cooperation, new regulatory interpretations, or lack of regulatory guidance in respect of certain GDPR requirements).
Our payments system depends on third-party providers, requires ongoing investment, and is subject to evolving laws, regulations, rules, and standards.
Etsy buyers primarily pay for purchases using Etsy Payments or PayPal. In the United States and other countries where Etsy Payments is available, Etsy Payments enables our sellers to accept various forms of payments such as credit cards, debit cards, PayPal, Google Wallet, Apple Pay, and Etsy Gift Cards.
We rely upon third-party service providers to perform underlying compliance, credit card processing and payment disbursing, currency exchange, identity verification, sanctions screening, and fraud analysis services. If these service providers do not perform adequately or if our relationships with these service providers were to terminate, Etsy sellers’ ability to receive orders or payment could be adversely affected and certain fraud prevention and detection tools may not be effective, which could lead to potential legal liability and negatively impact our business. In addition, Etsy and our third-party service providers may experience service outages from time to time that negatively impact payments on Etsy. We have in the past experienced, and may in the future experience, such service outages and, if we are unable to provide an alternative payment solution, our business could be harmed. In addition, if our third-party providers increase the fees they charge us, our operating expenses could increase. If we respond by increasing the fees we charge to Etsy sellers, some Etsy sellers may stop listing new items for sale or even close their accounts altogether.
The laws and regulations that govern payments are complex, evolving, and subject to change and vary across different jurisdictions in the United States and globally. Moreover, even in regions where such laws have been harmonized, regulatory interpretations of such laws may differ. As a result, we are required to spend significant time and effort to determine whether various laws and licensing regulations relating to payments apply to Etsy and to comply with applicable laws and licensing regulations. Any failure or claim of our failure to comply, or any failure by our third-party service providers to comply, could cost us substantial resources, could result in liabilities, could cause us significant reputational damage, or could force us to stop offering Etsy Payments in certain markets. Additionally, changes in payment regulation may occur that could render our payments systems less profitable. For example, any significant change in credit or debit card interchange rates in the United States or other markets, including as a result of changes in interchange fee limitations, may negatively impact payments on Etsy.
We plan to invest ongoing internal resources into our payments tools in order to maintain its existing availability, expand into additional markets and offer new payment methods and tools to Etsy buyers and sellers. If we fail to invest adequate resources
into payments on Etsy, or if our investment efforts are unsuccessful or unreliable, payments on Etsy may not function properly or keep pace with competitive offerings, which could negatively impact Etsy Payments usage and our marketplace. Further, our ability to expand Etsy Payments into additional countries is dependent upon the third-party providers we use to support this service. As we expand the availability of Etsy Payments to additional markets or offer new payment methods to Etsy sellers and Etsy buyers in the future, we may become subject to additional regulations, compliance requirements, and exposed to heightened fraud risk, which could lead to an increase in our operating expenses.
Further, through our agreements with our third-party payment processors, we are indirectly subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard, which are subject to change. Failure to comply with these rules and certification requirements could impact our ability to meet our contractual obligations with our third-party payment processors and could result in potential fines. We are also subject to rules governing electronic funds transfers. Any change in these rules and requirements, including as a result of a change in our designation by major payment card providers, could make it difficult or impossible for us to comply and could require a change in our business operations. In addition, similar to a potential increase in costs from third-party providers described above, any increased costs associated with compliance with payment card association rules or payment card provider rules could lead to increased fees for Etsy or Etsy sellers, which may negatively impact payments on our platform, usage of Etsy Payments, and our marketplace.
If sensitive information about members of our community or employees is misused or disclosed, or if we or our third-party providers are subject to cyber attacks, members of our community may curtail use of our platform, we may be exposed to liability, and our reputation could suffer.
Like all online services, our platform is vulnerable to power outages, telecommunications failures, and catastrophic events, as well as computer viruses, break-ins, phishing attacks, denial-of-service attacks, and other cyber attacks. Any of these incidents could lead to interruptions or shutdowns of our platform, loss of data or unauthorized disclosure of personal or financial information of our members or employees. Cyber attacks could also result in the theft of our intellectual property. As we grow our business, expand internationally, and gain greater public visibility, we may face a higher risk of being targeted by cyber attacks. Although we rely on a variety of security measures, including security testing, encryption of sensitive information, and authentication technology, we cannot assure you that such measures will provide absolute security, particularly given the increasingly sophisticated tools and methods used by hackers and cyber terrorists. In addition, we have experienced in the past, and may experience in the future, security breaches as a result of non-technical issues, including intentional, inadvertent, or social engineering breaches occurring through our employees or employees of our third-party service providers. In addition, if our employees or employees of our third-party service providers fail to comply with our internal security policies and practices, member or employee data may be improperly accessed, used, or disclosed.
We are also reliant on the security practices of our third party service providers, which may be outside of our direct control. Additionally, some of our third party service providers, such as identity verification and payment processing providers, regularly have access to some confidential and sensitive member data. If these third parties fail to adhere to adequate security practices, or experience a breach of their networks, our members’ data may be improperly accessed, used or disclosed.
Cyber attacks aimed at disrupting our and our third-party service providers’ services have occurred regularly in the past, and we expect they will continue to occur in the future. If we or our third-party service providers experience security breaches that result in marketplace performance or availability problems or the loss or unauthorized disclosure of sensitive information, or if we fail to respond appropriately to any security breaches that we may experience, people may become unwilling to provide us the information necessary to set up an account with us. Existing Etsy sellers and Etsy buyers may stop listing new items for sale, decrease their purchases or close their accounts altogether. We could also face potential liability, regulatory investigation, costly remediation efforts and litigation, which may not be adequately covered by insurance. Any of these results could harm our growth prospects, our business, and our reputation for maintaining a trusted marketplace.
Adherence to our guiding principles and our focus on our mission and long-term sustainability may negatively influence our financial performance. Further, our reputation could be harmed if we fail to meet our impact strategy goals.
We intend to operate in line with our guiding principles, focus on the long-term sustainability of our business, and work toward our mission to “Keep Commerce Human.” We may take actions in line with our mission and guiding principles that we believe will benefit our business and, therefore, our stockholders over a longer period of time, even if those actions do not maximize short- or medium-term financial performance. However, these longer-term benefits may not materialize within the time frame we expect or at all. For example:
we may choose to prohibit the sale of items in our marketplace that are inconsistent with our policies even though we could benefit financially from the sale of those items; or
we may choose to revise our policies in ways that we believe will be beneficial to our community in the long term even though the changes may be perceived unfavorably, such as updates to the way we define “handmade.”
Additionally, we have developed an impact strategy that focuses on leveraging Etsy’s core business to generate value for our community and stakeholders through positive economic, social and environmental efforts. Our impact strategy aims to create more economic opportunity for sellers, greater diversity in our workforce and build long-term resilience by reducing our carbon footprint. If we don’t demonstrate progress against our impact strategy or if our impact strategy is not perceived to be adequate, our reputation could be harmed.
Failure to deal effectively with fraud or other illegal activity could harm our business.
Although we have measures in place to detect and limit the occurrence of fraudulent and other illegal activity in our marketplace, those measures may not always be effective.
For example, Etsy sellers occasionally receive orders placed with fraudulent or stolen credit card data. Under current credit card chargeback rules, we could be held liable for orders placed through Etsy Payments with fraudulent credit card data even if the associated financial institution approved the credit card transaction. Although we attempt to detect or challenge fraudulent transactions, we may not be able to do so effectively. As a result, our business could be adversely affected. We could also incur significant fines or lose our ability to give the option of paying with credit cards if we fail to follow payment card industry data security standards or payment card association rules or fail to limit fraudulent transactions conducted in our marketplace.
We have adopted policies and procedures that are intended to ensure compliance with anti-corruption, anti-money laundering, export controls, and trade sanctions requirements. In addition, as stated elsewhere in these Risk Factors, we rely upon third-party service providers to perform certain underlying compliance, credit card processing identity verification, and fraud analysis services. If we or our service providers do not perform adequately, certain of our fraud prevention and detection tools may not be effective, which could lead to potential legal liability and negatively impact our business.
Negative publicity and sentiment resulting from fraudulent, illegal, or deceptive conduct by members of our community or the perception that our levels of responsiveness and support for Etsy sellers and Etsy buyers are inadequate could reduce our ability to attract and retain Etsy sellers and Etsy buyers and damage our reputation.
We are subject to risks related to our corporate social responsibility metrics.
We voluntarily report certain corporate social responsibility metrics. This transparency is consistent with our commitment to executing on a strategy that reflects the positive economic, social, and environmental impact we want to have on the world while advancing and complementing our business strategy. These metrics, whether it be the standards we set for ourselves and/or our failure to meet such metrics, may influence our reputation and the value of our brand. For example, the perception held by Etsy buyers or sellers, our partners or vendors, other key stakeholders, or the communities in which we do business may depend, in part, on the metrics we have chosen to aspire to and whether or not we meet these metrics on a timely basis, if at all. While selected metrics receive limited assurance from an independent third party, this is inherently a less rigorous process than reasonable assurance sought in a typical auditing engagement. Our failure to achieve progress on our metrics on a timely basis, or at all, could adversely affect our business, financial performance, or growth.
By electing to set and share publicly these corporate social responsibility metrics, our business may also face increased scrutiny related to environmental, social, and governance activities. As a result, we could damage our reputation and the value of our brand if we fail to act responsibly in the areas in which we report, such as economic security and personal empowerment, diversity and inclusion, energy and water management, carbon footprint, and data privacy or if we are perceived not to have rigorously measured our achievement against such metrics. Any harm to our reputation resulting from setting these metrics or our failure or perceived failure to meet such metrics could impact: employee engagement and retention; the willingness of Etsy buyers and sellers and our partners and vendors to do business with us; or investors willingness to purchase or hold shares of our common stock, any of which could adversely affect our business, financial performance, and growth.
We face intense competition and may not be able to compete effectively.
Our industry is highly competitive and we expect competition to increase in the future. To be successful, we need to attract and retain Etsy sellers and Etsy buyers. As a result, we face competition from a wide range of online and offline competitors.
We compete for Etsy sellers with both retailers and companies that sell software and services to small businesses. In addition to listing her goods for sale on Etsy, an Etsy seller can list her goods with other online retailers, such as Amazon, eBay, or Alibaba, or sell her goods through local consignment and vintage stores and other venues or marketplaces, including through
commerce channels on social networks like Facebook and Instagram. She may also sell wholesale directly to traditional retailers, including large national retailers, who discover her goods in our marketplace or otherwise. We also compete with companies that sell software and services to small businesses, enabling an Etsy seller to sell from her own website or otherwise run her business independently of our platform, such as Bigcommerce, and Shopify.
We compete to attract, engage, and retain Etsy sellers based on many factors, including:
our brand awareness;
the extent to which our tools and services can ease the administrative tasks that an Etsy seller might encounter in running her business;
the global scale of our marketplace and the breadth of our online presence;
the number and engagement of Etsy buyers;
our seller education resources and tools;
our policies and fees;
the ability to scale her business, including through Pattern or with a production partner;
our mobile apps;
the strength of our community; and
our mission.
In addition, we compete with retailers for the attention of the Etsy buyer. An Etsy buyer has the choice of shopping with any online or offline retailer, including large e-commerce marketplaces, such as Amazon, eBay or Alibaba, national retail chains, such as West Elm or Target, local consignment and vintage stores, social commerce channels like Instagram, event-driven platforms and vertical experiences like Zola and Wayfair, and other venues or marketplaces. Many of these competitors offer low-cost or free shipping, fast shipping times, favorable return policies, and other features that may be difficult or impossible for Etsy sellers to match.
We compete to attract, engage, and retain Etsy buyers based on many factors, including:
the breadth of unique goods that Etsy sellers list in our marketplace;
the ease of finding the special item a buyer is looking for;
our brand awareness;
the person-to-person commerce experience;
customer service;
our reputation for trustworthiness;
our mobile apps;
the availability of fair and free shipping offered by Etsy sellers;
ease of payment; and
the availability and reliability of our platform.
Many of our competitors and potential competitors have longer operating histories, greater resources, better name recognition, or more customers than we do.
They may invest more to develop and promote their services than we do, and they may offer lower fees to sellers than we do. Additionally, we believe that it is relatively easy for new businesses to create online commerce offerings or tools or services that enable entrepreneurship.
Local companies or more established companies based in markets where we operate outside of the United States may also have a better understanding of local customs, providing them a competitive advantage. For example, in certain markets outside the United States, we compete with smaller, but similar, local online marketplaces with a focus on unique goods that are attempting to attract sellers and buyers in those markets.
If we are unable to compete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business could be adversely affected.
We rely on Etsy sellers to provide a fulfilling experience to Etsy buyers.
A small portion of Etsy buyers complain to us about their experience with our platform. For example, Etsy buyers may report that they have not received the items that they purchased, that the items received were not as represented by an Etsy seller or that an Etsy seller has not been responsive to their questions.
Negative publicity and sentiment generated as a result of these types of complaints could reduce our ability to attract and retain Etsy sellers and Etsy buyers or damage our reputation. A perception that our levels of responsiveness and support for Etsy sellers and Etsy buyers are inadequate could have similar results. In some situations, we may choose to reimburse Etsy buyers for their purchases to help avoid harm to our reputation, but we may not be able to recover the funds we expend for those reimbursements. Although we are focused on enhancing customer service, our efforts may be unsuccessful and Etsy sellers and Etsy buyers may be disappointed in their Etsy experience and not return.
Anything that prevents the timely processing of orders or delivery of goods to Etsy buyers could harm Etsy sellers. Service interruptions and delivery delays may be caused by events that are beyond the control of Etsy sellers, such as interruptions in order or payment processing, transportation disruptions, natural disasters, inclement weather, terrorism, public health crises, or political unrest. Disruptions in the operations of a substantial number of Etsy sellers could also result in negative experiences for a substantial number of Etsy buyers, which could harm our reputation and adversely affect our business.
Our reputation may be harmed if members of our community use illegal or unethical business practices.
Our emphasis on our mission and guiding principles makes our reputation particularly sensitive to allegations of illegal or unethical business practices by Etsy sellers or other members of our community. Our policies promote legal and ethical business practices, such as encouraging Etsy sellers to work only with manufacturers who do not use child or involuntary labor, who do not discriminate, and who promote sustainability and humane working conditions. However, we do not control Etsy sellers or other members of our community or their business practices and cannot ensure that they comply with our policies. If members of our community engage in illegal or unethical business practices or are perceived to do so, we may receive negative publicity and our reputation may be harmed.
Our business depends on network and mobile infrastructure provided by third parties and on our ability to maintain and scale the technology underlying our platform.
The reliability of our platform is important to our reputation and our ability to attract and retain Etsy sellers and Etsy buyers. As the number of Etsy sellers and Etsy buyers, volume of traffic, number of transactions, and the amount of information shared on our platform grow, our need for additional network capacity and computing power will also grow. The operation of the technology underlying our platform is expensive and complex, and we could experience operational failures. If we fail to accurately predict the rate or timing of the growth of our platform, we may be required to incur significant additional costs to maintain reliability. The investments we make in our platform are designed to grow our business and to improve our operating results in the long term, but these investments could also delay our ability to achieve profitability or reduce profitability in the near term.
We also depend on the development and maintenance of the internet, cloud and mobile infrastructure, and increasingly rely on the availability, features, cost, and reliability of third-party service providers and platforms. For example, this includes maintenance of reliable internet and mobile networks with the necessary speed, data capacity, and security, as well as timely development of complementary products.
Third-party providers host much of our technology infrastructure and are likely to host more in the future. Any disruption in their services, or any failure of our providers to handle the demands of our marketplace could significantly harm our business. We exercise little control over these providers, which increases our vulnerability to their financial conditions and to problems with the services they provide, such as security concerns. Our efforts to update our infrastructure may not be successful or may take longer than anticipated. If we experience failures in our technology infrastructure or do not expand our technology
infrastructure successfully, then our ability to attract and retain Etsy sellers and Etsy buyers could be adversely affected, which could harm our growth prospects and our business.
We will rely on Google Cloud for a substantial portion of our computing, storage, data processing, networking, and other services. Any disruption of or interference with our use of the Google Cloud operation would adversely affect our business, financial performance, and growth.
Google Cloud Platform provides a distributed computing infrastructure as a service platform for business operations, and we are in the process of migrating our data centers to Google Cloud, increasing our reliance on cloud infrastructure. As we implement the transition to the cloud, there will be occasional planned or unplanned downtime for our websites and apps and potential site delays, all of which will impact our sellers’ ability to conduct transactions and our buyers’ ability to purchase items. We may also need to divert engineering resources away from other important business operations, which could significantly harm our business and growth. Additionally, if the costs to migrate to Google Cloud are greater than we expect or take significantly more time than we anticipate, our business could be harmed.
Any transition of the cloud services currently provided by Google Cloud to another cloud provider would be difficult to implement and will cause us to incur significant time and expense. Any significant disruption of, or interference with, our use of Google Cloud would negatively impact our operations and our business would be seriously harmed. In addition, if hosting costs increase over time and if we require more computing or storage capacity, our costs could increase disproportionately. If we are unable to grow our revenues faster than the cost of utilizing the services of Google or similar providers, our business and financial condition could be adversely affected.
We may be subject to claims that items listed in our marketplace are counterfeit, infringing or illegal.
Although we do not create or take possession of the items listed in our marketplace by Etsy sellers, we frequently receive communications alleging that items listed in our marketplace infringe third-party copyrights, trademarks, patents, or other intellectual property rights. We have intellectual property complaint and take-down procedures in place to address these communications, and we believe such procedures are important to promote confidence in our marketplace. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from our marketplace and, in certain cases, closing the shops of Etsy sellers who repeatedly violate our policies.
Our procedures may not effectively reduce or eliminate our liability. In particular, we may be subject to civil or criminal liability for activities carried out by Etsy sellers on our platform, especially outside the United States where laws may offer less protection for intermediaries and platforms than the United States. Under current U.S. copyright law and the Communications Decency Act, we may benefit from statutory safe harbor provisions that protect us from copyright liability for content posted on our platform by Etsy sellers and Etsy buyers. However, trademark and patent laws do not include similar statutory provisions, and liability for these forms of intellectual property is often determined by court decisions. These safe harbors and court rulings may change unfavorably. In that event, we may be held secondarily liable for the intellectual property infringement of Etsy sellers.
Regardless of the validity of any claims made against us, we may incur significant costs and efforts to defend against or settle them. If a governmental authority determines that we have aided and abetted the infringement or sale of counterfeit goods or if legal changes result in us potentially being liable for actions by Etsy sellers on our platform, we could face regulatory, civil, or criminal penalties. Successful claims by third-party rights owners could require us to pay substantial damages or refrain from permitting any further listing of the relevant items. These types of claims could force us to modify our business practices, which could lower our revenue, increase our costs or make our platform less user-friendly. Moreover, public perception that counterfeit or other unauthorized items are common in our marketplace, even if factually incorrect, could result in negative publicity and damage to our reputation.
Our business and our Etsy sellers and Etsy buyers may be subject to sales and other taxes.
The application of indirect taxes, such as sales and use tax, value-added tax, provincial taxes, goods and services tax, business tax, withholding tax, digital service tax, and gross receipt tax, to businesses like ours and to Etsy sellers and Etsy buyers is a complex and evolving issue. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear when and how new and existing statutes might apply to our business or to Etsy sellers’ businesses. If Etsy is found to be deficient in how it has addressed its tax obligations, our business could be adversely impacted.
One or more states, the federal government, or other countries are seeking to, or have recently imposed additional reporting, record-keeping, or indirect tax collection and remittance obligations on businesses like ours that facilitate online commerce. If requirements like these become applicable in additional jurisdictions, our business could be harmed. For example, taxing authorities in certain U.S. states and in other countries have identified e-commerce platforms as a means to calculate, collect, and remit indirect taxes for transactions taking place over the internet, and are considering related legislation. Additionally, the Supreme Court’s recent decision in South Dakota v. Wayfair, Inc. et al overturned existing law that sellers are not required to collect sales and use tax unless they have a physical presence in the buyer’s state. As a result of the Wayfair decision, states or the federal government may adopt, or begin to enforce laws requiring Etsy sellers to calculate, collect, and remit taxes on their sales. Such changes to current law or new legislation could adversely affect our business if the requirement of tax to be charged on items sold on Etsy causes our marketplace to be less attractive to current and prospective Etsy buyers, which could materially impact our business, financial performance, and growth. Additionally, new legislation could require us or Etsy sellers to incur substantial costs in order to comply, including costs associated with tax calculation, collection, remittance, and audit requirements, which could make selling in our marketplace less attractive.
Our business is subject to a large number of U.S. and non-U.S. laws, many of which are evolving.
We are subject to a variety of laws and regulations in the United States and around the world, including those relating to traditional businesses, such as employment laws and taxation, and laws and regulations focused on ecommerce and online marketplaces, such as online payments, privacy, anti-spam, data security and protection, online platform liability, intellectual property, and consumer protection. In light of our international operations, we need to comply with various laws associated with doing business outside of the United States, including anti-money laundering, sanctions, anti-corruption, and export control laws. In some cases, non-U.S. privacy, data security, consumer protection, e-commerce, and other laws and regulations are more detailed than those in the United States and, in some countries, are actively enforced.
These laws and regulations are continuously evolving, and compliance is costly and can require changes to our business practices and significant management time and effort.
Additionally, it is not always clear how existing laws apply to online marketplaces as many of these laws do not address the unique issues raised by online marketplaces or ecommerce. For example, as described elsewhere in these Risk Factors, laws relating to privacy are evolving differently in different jurisdictions. Federal, state, and non-U.S. governmental authorities, as well as courts interpreting the laws, continue to evaluate and assess the privacy requirements that are applicable to Etsy.
Some providers of consumer devices and web browsers have implemented, or have announced plans to implement, ways to block tracking technologies which, if widely adopted, could also result in online tracking methods becoming significantly less effective. Any reduction in our ability to make effective use of such technologies could harm our ability to personalize the experience of Etsy buyers, increase our costs and limit our ability to attract and retain Etsy sellers and Etsy buyers on cost-effective terms. As a result, our business could be adversely affected.
Existing and future laws and regulations enacted by federal, state, or non-U.S. governments or the inconsistent enforcement of such laws and regulations could impede the growth of ecommerce or online marketplaces, which could have a negative impact on our business and operations. Examples include data localization requirements, limitation on marketplace scope or ownership, intellectual property intermediary liability rules, regulation of online speech, limits on network neutrality, and rules related to security, privacy, or national security, which may impede Etsy or our users. We could also face regulatory challenges or be subject to discriminatory or anti-competitive practices that could impede both our and Etsy sellers’ growth prospects, increase our costs, and harm our business.
We strive to comply with all applicable laws, but they may conflict with each other, and by complying with the laws or regulations of one jurisdiction, we may find that we are violating the laws or regulations of another jurisdiction. Despite our efforts, we may not have fully complied in the past and may not in the future. If we become liable under laws or regulations applicable to us, we could be required to pay significant fines and penalties, our reputation may be harmed and we may be forced to change the way we operate. That could require us to incur significant expenses or to discontinue certain services, which could negatively affect our business.
Additionally, if third parties with whom we work violate applicable laws or our policies, those violations could result in other liabilities for us and could harm our business. Furthermore, the circumstances in which we may be held liable for the acts, omissions or responsibilities of our sellers is uncertain, complex, and evolving. For example, certain laws have recently been enacted seeking to hold marketplaces like ours responsible for certain compliance obligations for which sellers have traditionally been responsible. If an increasing number of such laws are passed, the resulting compliance costs and potential liability risk could negatively impact our business.
Our software is highly complex and may contain undetected errors.
The software underlying our platform is highly interconnected and complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. We rely heavily on a software engineering practice known as “continuous deployment,” meaning that we typically release software code many times per day. This practice may result in the more frequent introduction of errors or vulnerabilities into the software underlying our platform, which can impact the user experience on Etsy.com. Additionally, due to the interconnected nature of the software underlying our platform, updates to certain parts of our code, including changes to Etsy or third party APIs on which Etsy relies, could have an unintended impact on other sections of our code, which may result in errors or vulnerabilities to our platform that negatively impact the user experience and functionality of our marketplace. Any errors or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of our community members, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.
Our business depends on continued and unimpeded access to the internet and mobile networks.
Etsy sellers and Etsy buyers rely on access to the internet or mobile networks to access our marketplace. Internet service providers may choose to disrupt or degrade access to our platform or increase the cost of such access. Mobile network operators or operating system providers could block or place onerous restrictions on the ability to download and use our mobile apps.
Internet service providers or mobile network operators could also attempt to charge us for providing access to our platform. In addition, we could face discriminatory or anticompetitive practices that could impede both our and Etsy sellers’ growth prospects, increase our costs, and harm our business. In 2015, rules approved by the Federal Communications Commission (“FCC”) went into effect that prohibited internet service providers from charging content providers higher rates in order to deliver their content over certain “fast traffic” lanes; however, those rules were repealed in June 2018. This repeal may make it more difficult or costly for many small businesses such as our community of sellers, as well as our buyers, to access our platform and may result in increased costs for us, which could significantly harm our business, and the millions of microbusinesses that utilize our platform. We, along with other companies and public interest groups, are challenging this repeal in the courts, but these efforts may not be successful and may be costly.
Outside of the United States, it is possible that governments of one or more countries may seek to censor content available on our platform or may even attempt to block access to our platform. If we are restricted from operating in one or more countries, our ability to attract and retain Etsy sellers and Etsy buyers may be adversely affected and we may not be able to grow our business as we anticipate.
Our business could be negatively affected as a result of actions of activist stockholders.
The actions of activist stockholders could adversely affect our business. Specifically, responding to common actions of an activist stockholder, such as requests for special meetings, potential nominations of candidates for election to our Board of Directors, requests to pursue a strategic combination, or other transaction or other special requests, could disrupt our operations, be costly and time-consuming, or divert the attention of our management and employees. In addition, perceived uncertainties as to our future direction in relation to the actions of an activist stockholder may result in the loss of potential business opportunities or the perception that we are unstable as a company, which may make it more difficult to attract and retain qualified employees. Actions of an activist stockholder may also cause fluctuations in our stock price based on speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
We may be subject to intellectual property claims, which are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies in the future.
Companies in the internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. We periodically receive communications that claim we have infringed, misappropriated, or misused others’ intellectual property rights. To the extent we gain greater public recognition, we may face a higher risk of being the subject of intellectual property claims. Third-parties may have intellectual property rights that cover significant aspects of our technologies or business methods and prevent us from expanding our offerings. Third parties may also allege a company is secondarily liable for intellectual property infringement, or that it is a joint infringer with another party. Any intellectual property claim against us, with or without merit, could be time consuming and expensive to settle or litigate and could divert the attention of our management. Litigation regarding intellectual property rights is inherently uncertain due to the complex issues involved, and we may not be successful in defending ourselves in such matters. In addition,
some of our competitors have extensive portfolios of issued patents. Many potential litigants, including some of our competitors and patent holding companies, have the ability to dedicate substantial resources to enforcing their intellectual property rights. Any claims successfully brought against us could subject us to significant liability for damages and we may be required to stop using technology or other intellectual property alleged to be in violation of a third party’s rights in one or more jurisdictions where Etsy does business. We also might be required to seek a license for third-party intellectual property. Even if a license is available, we could be required to pay significant royalties or submit to unreasonable terms, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, which could require significant time and expense. If we cannot license or develop technology for any allegedly infringing aspect of our business, we would be forced to limit our service and may be unable to compete effectively. Any of these results could harm our business.
We may be unable to protect our intellectual property adequately.
Our intellectual property is an essential asset of our business. To establish and protect our intellectual property rights, we rely on a combination of trade secret, copyright, trademark, and patent laws, as well as confidentiality procedures and contractual provisions. The efforts we have taken to protect our intellectual property may not be sufficient or effective. We generally do not elect to register our copyrights, relying instead on the laws protecting unregistered intellectual property, which may not be sufficient. We rely on both registered and unregistered trademarks, which may not always be comprehensive in scope. In addition, our copyrights and trademarks, whether or not registered, and patents may be held invalid or unenforceable if challenged, and may be of limited territorial reach. While we have obtained or applied for patent protection with respect to some of our intellectual property, we generally do not rely on patents as a principal means of protecting intellectual property. To the extent we do seek patent protection, any U.S. or other patents issued to us may not be sufficiently broad to protect our proprietary technologies.
In addition, we may not be effective in policing unauthorized use of our intellectual property and authorized uses may not have the intended effect. Even if we do detect violations, we may need to engage in litigation to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive and could divert our management’s attention. In addition, our efforts may be met with defenses and counterclaims challenging the validity and enforceability of our intellectual property rights or may result in a court determining that our intellectual property rights are unenforceable. The legal framework surrounding protection of intellectual property changes frequently throughout the world, and these changes may impact our ability to protect our intellectual property and defend against third party claims. If we are unable to cost-effectively protect our intellectual property rights, then our business could be harmed.
We are subject to the terms of open source licenses because our platform incorporates open source software.
The software powering our marketplace incorporates software covered by open source licenses. In addition, we regularly contribute source code to open source software projects and release internal software projects under open source licenses, and we anticipate doing so in the future. The terms of many open source licenses relied upon by Etsy and the internet and technology industries have been interpreted by only a few court decisions and there is a risk that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our marketplace. Under certain open source licenses, if certain conditions were met, we could be required to publicly release aspects of the source code of our software or to make our software available under open source licenses. To avoid the public release of the affected portions of our source code, we could be required to expend substantial time and resources to re-engineer some or all of our software. In addition, use of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to determine how to compromise our platform. Additionally, because any software source code we contribute to open source projects is publicly available, while we may benefit from the contributions of others, our ability to protect our intellectual property rights in such software source code may be limited or lost entirely, and we will be unable to prevent our competitors or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage and, if not addressed, could adversely affect our business, financial performance and growth.
We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to taxation in the United States and in numerous other jurisdictions. We record tax expense based on current tax payments and our estimates of future tax payments, which may include reserves for estimates of probable settlements of tax audits. At any one time, multiple tax years could be subject to audit by various taxing jurisdictions. As a result, we could be subject to higher than anticipated tax liabilities as well as ongoing variability in our quarterly tax rates as audits close and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be adversely impacted by
changes in tax laws, changes in the mix of revenue among different jurisdictions, changes to accounting rules, and changes to our ownership or capital structure. Fluctuations in our tax obligations and effective tax rate could adversely affect our business.
In December 2017, the U.S. government enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, (1) a permanent reduction to the corporate income tax rate, (2) a partial limitation on the deductibility of business interest expense, (3) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a quasi-territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base), and (4) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected.
In January 2015, we implemented a revised corporate structure to more closely align our structure with our global operations and future expansion plans outside of the United States. Our new corporate structure changed how we use our intellectual property and implemented certain intercompany arrangements. We believe this may result in a reduction in our overall effective tax rate over the long term and other operational efficiencies; however, the tax laws of the jurisdictions in which we operate are subject to interpretation, and their application may depend on our ability to operate our business in a manner consistent with our corporate structure. Moreover, these tax laws are subject to change. Tax authorities may disagree with our position as to the tax treatment of our transfer of intangible assets or determine that the manner in which we operate our business does not achieve the intended tax consequences. If our new corporate structure does not achieve our expectations for any of these or other reasons, we may be subject to a higher overall effective tax rate and our business may be adversely affected.
We may be involved in litigation matters that are expensive and time consuming.
In addition to intellectual property claims, we may become involved in other litigation matters, including class action lawsuits. For example, as described further in “Note 14—Commitments and Contingencies—Legal Proceedings” in the Notes to Consolidated Financial Statements, a purported securities class action lawsuit was recently dismissed that named Etsy and certain of our officers and/or directors as defendants. Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of current and former directors, officers, and underwriters. Any lawsuit to which we are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation, or adverse changes to our offerings or business practices. Any of these results could adversely affect our business. In addition, defending claims is costly and can impose a significant burden on our management.
We may expand our business through acquisitions of other businesses or assets or strategic partnerships and investments, which may divert management’s attention and/or prove to be unsuccessful.
We have acquired a number of other businesses in the past and may acquire additional businesses or technologies, or enter into strategic partnerships, in the future. AcquisitionsWe may not realize the anticipated benefits of our acquisitions or any partnerships, and possible future acquisitions or relationships may disrupt our business and divert management’s time and focus from operating our business.attention. Acquisitions also may require us to spend a substantial portion of our available cash, issue stock, incur debt or other liabilities, amortize expenses related to intangible assets, or incur write-offs of goodwill or other assets. In addition, integrating an acquired business or technology is risky. Completed andAny future acquisitions or partnerships may result in unforeseen operational difficulties and expenditures associated with:
•integrating new businesses and technologies into our infrastructure;
consolidating operational and•clearing any required regulatory review that may be complex, costly, time consuming, or place additional requirements on the business;
•implementing growth initiatives;
•integrating administrative functions;
coordinating outreach to our community;
maintaining morale and culture and•hiring, retaining, and integrating key employees;
•supporting and enhancing morale and culture;
•retaining key customers, merchants, vendors, and other key business partners;
•maintaining or developing controls, procedures, and policies (including effective internal control over financial reporting and disclosure controls and procedures)procedures, as well as information privacy controls); and
•assuming liabilities related to the activities of the acquired business before and after the acquisition, including liabilities for violations of laws and regulations, intellectual property infringement, commercial disputes, cyber attacks, taxes, and other matters.
Moreover, we may not benefit from our acquisitions as we expect, or in the time frame we expect. We also may issue additional equity securities in connection with an acquisition or partnership, which could cause dilution to our stockholders. Finally, acquisitions or partnerships could be viewed negatively by analysts, investors, or the members of our community.
IfOur marketing efforts to help grow our insurance coverage is insufficient or our insurers are unable to meet their obligations, our insurance may not mitigate the risks facing our business.
Our insurance policies cover a number of risks and potential liabilities, such as general liability, property coverage, errors, and omissions liability, employment liability, business interruptions, data breaches, crime, product liability, and directors’ and officers’ liability. For certain types of business risk, we may not be ableeffective.
Maintaining and promoting awareness of our marketplaces and services is important to or may choose notour ability to acquire insurance. In addition,attract and retain sellers and buyers. One of the key parts of our insurancestrategy for the Etsy marketplace is to bring more new buyers to the marketplace and create more habitual buyers by inspiring more frequent purchases across multiple categories and purchase occasions. We continue to iterate on and invest in our marketing strategies, which may not adequately mitigate the riskssucceed for a variety of reasons, including our inability to execute and implement our plans.
Our marketing efforts currently include search engine optimization, search engine marketing, affiliate marketing, display advertising, as well as social media, mobile push notifications, and email marketing. If we face or we may havefail to pay high premiums and/or deductibles for the coverage we do obtain. Additionally, ifscale and deliver an effective return on investment in any of these marketing efforts, it may harm our insurers becomes insolvent, it would be unable to pay any claims that we make.
The growthbusiness. We also engage with celebrities and influencers as part of our business may strain our management teammarketing efforts, and our operational and financial infrastructure.
We have experienced rapid growth in our business,perceived affiliation with these individuals could cause us brand or reputational damage in the number of Etsy sellersevent they undertake actions inconsistent with our brand and the number of countriesvalues.
Additionally, we invest significantly in which we have Etsy sellersbrand advertising via channels such as television and Etsy buyers, and we plan to continue to grow in the future, both in the United States and abroad. The growth of our business places significant demands on our management team and pressure to expand our operational and financial infrastructure. For example, we may need to continue to develop and improve our operational, financial, and management controls and enhance our reporting systems and procedures.digital video advertising. If we do not manageproduce effective content or purchase effective air time and placement for that content, it could fail to deliver a return on our growth effectively, the increasesinvestment, and damage our brand and/or business. Many of our marketing efforts include our sellers and products from their shops selected via automated systems. These automated systems may not always operate effectively. While both our manual and automated systems have tools and procedures designed to account for our and our partners’ policies, despite our best efforts, we may inadvertently include in our marketing efforts sellers or their products inconsistent with our policies, brand and values, which could result in failure to deliver a return on our investment, media or regulatory scrutiny, and damage to our brand and/or business.
We obtain a significant number of visits via search engines such as Google. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search, or make other changes to the way results are displayed, which can negatively affect the placement of links to our marketplaces and reduce the number of visits or otherwise negatively impact our marketing efforts.
We also obtain a significant number of visits from social media platforms such as Facebook, Instagram, and Pinterest. Search engines, social networks, and other third parties typically require compliance with their policies and procedures, which may be subject to change or new interpretation with limited ability to negotiate, which could negatively impact our marketing capabilities (including marketing services for our sellers), GMS and revenue. Etsy-provided controls for users to limit third party advertising features, the growing use of online ad-blocking software and technological changes to browsers and mobile operating expenses could outpace any increasessystems, may impact the effectiveness of our marketing efforts because we may reach a smaller audience, fail to bring more buyers, or fail to increase frequency of visits to our platform. In addition, ongoing legal and regulatory changes in the data privacy sphere, such as the E.U. General Data Protection Regulation (“GDPR”) the California Consumer Privacy Act of 2018 (“CCPA”), and the California Privacy Rights Act of 2020 (“CPRA”), may impact the scope and effectiveness of marketing and advertising services generally, including those used on our revenueplatform.
We also obtain a significant number of visits through email marketing. If we are unable to successfully deliver emails to our sellers and buyers, if our email subscription tools do not function correctly, or if our sellers and buyers do not open our emails, whether by choice, because those emails are marked as low priority or spam, or for other reasons, our business could be harmed.adversely affected. As e-commerce, search, and social networking, as well as related regulatory regimes, evolve, we must continue to evolve our marketing tactics and technology accordingly and, if we are unable to do so, our business could be adversely affected.
OperatingSome providers of consumer devices, mobile or desktop operating systems, and web browsers have implemented, or have announced plans to implement, ways to block tracking technologies which, if widely adopted, could also result in online tracking methods becoming significantly less effective. Similarly, our vendors, particularly those providing advertising and analytics products and services have, and may continue to, modify their products and services based on legal and technical changes relating to privacy in ways that could reduce the efficiency of our marketing efforts and our access to data about use of our platform. Any reduction in our ability to make effective use of such technologies could harm our ability to personalize the experience of buyers, increase our costs, and limit our ability to attract and retain our sellers and buyers on cost-effective terms. As a result, our business and results of operations could be adversely affected.
Enforcement of our marketplace policies may negatively impact our brand, reputation, and/or our financial performance.
We maintain and enforce policies that outline expectations for users while they engage with our services, whether as a public company requires usseller, a buyer or a third party. Additionally, we prohibit a range of items on our marketplaces, including (but not limited to): drugs, alcohol, tobacco, weapons, endangered animal products, hazardous materials, recalled items, highly-regulated items, items violating intellectual property rights of others, illegal products, pornography, items from federally-sanctioned jurisdictions, hateful content, and items that promote or glorify violence.
We enforce these policies in order to incur substantial costsuphold the safety and requires substantial management attention.
integrity of our marketplaces, engender trust in the use of our services, and encourage positive connections among members of the community. We strive to enforce these policies in a consistent and principled manner that is transparent and explicable to stakeholders. However, even with a principled and objective approach, policy enforcement is a combination of human and technological review. As a result, there could be errors, it could be subject to different or inconsistent regional consensus or regulatory standards in different jurisdictions, or it could be perceived to be arbitrary, unclear, or inconsistent. This could lead to negative public company,perception of our enforcement, distrust from members, or lack of confidence in the use of our services, and could negatively impact our brand reputation. In particular, certain enforcement decisions, even those we incur substantial legal, accounting,deem necessary for the health and other expensessafety of our marketplaces, may be received negatively by stakeholders or the public, such as:
•we may choose to limit or prohibit the sale of items in our marketplaces based on our policies, even though we could benefit financially from the sale of those items;
•from time to time, we may revise our policies in ways that we did not incurbelieve will enhance trust in our platform, even though the changes may be perceived unfavorably, such as a private company. For example,updates to the way we define handmade.
We are subject to risks related to our environmental, social and governance activities and disclosures.
We have developed an Impact strategy that focuses on leveraging Etsy’s core business to generate value for our community and stakeholders through positive economic, social, and ecological efforts (our “ESG metrics”). Our Impact strategy aims to create more economic opportunity for our stakeholders, ensure equitable access to the reporting requirements ofopportunities we create, and build long-term resilience by fostering responsible resource use and reducing our carbon footprint. We have also elected to publicly share these ESG metrics and include them in this Annual Report on Form 10-K, and, as a result, our business may face heightened scrutiny for these activities. See “Business—Our Impact Strategy and Progress.” While selected metrics receive limited assurance from an independent third party, this is inherently a less rigorous process than reasonable assurance sought in connection with a financial statement audit and such review process may not identify errors and may not protect us from potential liability under the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act of 2002, (“the Sarbanes-Oxley Act”),securities laws.
If we do not demonstrate progress against our Impact strategy or if our Impact strategy is not perceived to be adequate, our reputation could be harmed. We could also damage our reputation and the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulationsvalue of the Securities and Exchange Commission (“SEC”). The rules and regulations of the Nasdaq Global Select Market (“Nasdaq”) also applyour brand if we fail to us. As part of these requirements, we have established and maintained effective disclosure and financial controls and made changes to our corporate governance practices. Continued compliance with these requirements may increase our legal and financial compliance costsact responsibly in the future and may make some activities more time-consuming. In addition, as described elsewhere in these Risk Factors, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management, and impact the mannerareas in which we operatereport and demonstrate that our commitment to our Impact strategy enhances our overall financial performance.
Any harm to our reputation resulting from setting these metrics or our failure or perceived failure to meet such metrics could impact employee engagement and retention, the willingness of our buyers and sellers and our partners and vendors to do business with us, or investors’ willingness to purchase or hold shares of our common stock, any of which could adversely affect our business, in ways we cannot currently anticipate.financial performance, and growth.
If we are unable to maintain effective internal control oversuccessfully execute on our business strategy or if our strategy proves to be ineffective, our business, financial reporting, investors may lose confidence inperformance, and growth could be adversely affected.
Our ability to execute our strategy is dependent on a number of factors, including the accuracyability of our financial reports.
Assenior management team and key team leaders to execute the strategy, our ability to iterate in a public company, we are required torapidly evolving e-commerce landscape, maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404our pace of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting. It also requires our independent registered public accounting firm to attest to our evaluation of our internal controls over financial reporting. Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2018, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal control in the future.
If we have a material weakness in our internal control over financial reporting in the future, we may not detect errors on a timely basis. If we are not able to complyproduct experiments coupled with the requirementssuccess of Section 404 of the Sarbanes-Oxley Act, or if we identify a material weakness in our internal control over financial reporting in the future, it could harm our operating results, cause us to fail to meet our SEC reporting obligations or Nasdaq listing requirements, adversely affect our reputation, cause our stock price to decline, or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements. Further, if there are material weaknesses or failures insuch initiatives, our ability to meet any of the requirements related to the maintenance and reportingchanging needs of our internal controls, such as Section 404 ofsellers and buyers, and the Sarbanes-Oxley Act, investors may lose confidence in the accuracy and completenessability of our financial reports and that could cause the price of our common stockemployees to decline. We could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.
In addition, our internal control over financial reporting will not prevent or detect all errors and fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
We haveperform at a significant amount of debt and may incur additional debt in the future. We may not have sufficient cash flow from our business to pay our substantial debt when due.
Our ability to pay our debt when due or to refinance our indebtedness, including the 0% Convertible Senior Notes due 2023 we issued in March 2018, (the “Notes”), depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. In addition, any required repurchase of the Notes for cash as a result of a fundamental change would lower our current cash on hand such that we would not have those funds available for us in our business.high level. If we are unable to generate such cash flow,execute our strategy, if our strategy does not drive the growth that we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on termsanticipate, if the public perception is that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We maywe are not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a defaultexecuting on our debt obligations.
In addition,strategy, or if our market opportunity is not as large as we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. If, for example, we incur additional debt, secure existing or future debt or recapitalize our debt, these actions may diminish our ability to make payments on our substantial debt when due.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20—Debt with Conversion and Other Options, (“ASC 470-20”). Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our Consolidated Balance Sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, whichestimated, it could adversely affect our reported or futurebusiness, financial results, the trading price of our common stockperformance and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.
The terms of our debt instruments may restrict our ability to pursue our business strategies.
We do not currently have any obligations outstanding under our credit facility. However, our credit facility requires us to comply with various covenants that limit our ability to take actions such as:
disposing of assets;
completing mergers or acquisitions;
incurring additional indebtedness;
encumbering our properties or assets;
paying dividends or making other distributions;
making specified investments; and
engaging in transactions with our affiliates.
These restrictions could limit our ability to pursue our business strategies. If we default under our credit facility and if the default is not cured or waived, the lenders could terminate their commitments to lend to us and cause any amounts outstanding to be payable immediately. Such a default could also result in cross defaults under other debt instruments. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.growth.
We may need additional capital, which may not be available to us on acceptable terms or at all.
We believe that our existing cash and cash equivalents and short-term investments, together with cash generated from operations will be enough to meet our anticipated cash needs for at least the next 12 months. However, we may require additional cash resources due to changes in business conditions or other developments, such as acquisitions or investments we may decide to pursue. We may seek to borrow funds under our credit facility or sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in dilution to our existing stockholders. Any debt financing that we may secure in the future could result in additional operating and financial covenants that would limit or restrict our ability to take certain actions, such as incurring additional debt, making capital expenditures, repurchasing our stock or declaring dividends. It is also possible that financing may not be available to us in amounts or on terms acceptable to us, if at all. Weakness and volatility in capital markets and the economy in general could limit our access to capital markets and increase our costs of borrowing.
Risks RelatedWe have a significant amount of debt and may incur additional debt in the future. We may not have sufficient cash flow from our business to Ownershippay our substantial debt when due.
Our ability to pay our debt when due or to refinance our indebtedness, including the 0% Convertible Senior Notes due 2023 we issued in March 2018 (the “2018 Notes”), the 0.125% Convertible Senior Notes due 2026 we issued in September 2019 (the “2019 Notes”) and the 0.125% Convertible Senior Notes due 2027 we issued in August 2020 (the “2020 Notes” and together with the 2018 Notes and the 2019 Notes, the “Notes”), depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. In addition, any required repurchase of the Notes for cash as a result of a fundamental change would lower our current cash on hand such that we would not have those funds available for use in our business or could require us to obtain additional financing to fund the repurchase. Our Common Stockability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to
engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Based on the daily closing prices of our stock during the quarter ended December 31, 2020, holders of the 2018 Notes and the 2019 Notes are eligible to convert their 2018 Notes and 2019 Notes, as applicable, during the first quarter of 2021. See “Note 13—Debt” in the Notes to Consolidated Financial Statements for more information on the 2018 Notes and 2019 Notes.
In addition, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. If, for example, we incur additional debt, secure existing or future debt, or recapitalize our debt, these actions may diminish our ability to make payments on our substantial debt when due.
Regulatory, Compliance, and Legal Risks
Failure to deal effectively with constantly evolving fraud or other illegal activity could harm our business.
We have adopted policies and procedures that are intended to ensure compliance with law, including, for example anti-corruption, anti-money laundering, export control, and trade sanctions requirements, and we have measures in place to detect and limit the occurrence of fraudulent and other illegal activity in our marketplaces, however, those policies, procedures, and measures may not always be effective. Further, the measures that we use to detect and limit the occurrence of fraudulent and other illegal activity must be dynamic and require significant investment and resources, particularly as our marketplaces increase in public visibility and size. Bad actors constantly apply continually evolving technologies and ways to commit fraud and other illegal activity, and regulations requiring marketplaces to detect and limit these activities are increasing. Our measures may not always keep up with these changes. If we fail to limit the impact of illegal activity in our marketplaces, we could be subject to penalties, fines, other enforcement actions and/or significant expenses and our business, reputation, financial performance, and growth could be adversely affected.
We rely upon third-party service providers to perform certain compliance services. If we or our service providers do not perform adequately, our compliance tools may not be effective, which could increase our expenses, lead to potential legal liability, and negatively impact our business.
Our brand may be harmed if third parties or members of our community use or attempt to use Etsy as part of their illegal or unethical business practices.
Our emphasis on our mission and guiding principles makes our reputation particularly sensitive to allegations of illegal or unethical business practices by our sellers or other members of our community. We expect our vendors to comply with our Vendor Code of Conduct. Our seller policies promote legal and ethical business practices. Etsy expects sellers to work only with manufacturers who comply with all applicable laws, who do not use child or involuntary labor, who do not discriminate, and who promote sustainability and humane working conditions. Although we seek to influence, we do not directly control our sellers, vendors, or other members of our community or their business practices, and cannot ensure that they comply with our policies. If members of our community engage in illegal or unethical business practices, or are perceived to do so, we may receive negative publicity and our reputation may be harmed.
We may be subject to claims that items listed by sellers in our marketplace are counterfeit, infringing, illegal, harmful or otherwise violate our policies.
We frequently receive communications alleging that items listed in our marketplaces infringe upon third-party copyrights, trademarks, patents, or other intellectual property rights. We have intellectual property complaint and take-down procedures in place to address these communications, and we believe such procedures are important to promote confidence in our marketplaces, along with both proactive and reactive anti-counterfeiting measures that we use and continue to develop. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from our marketplaces and, in certain cases, closing the shops of sellers who violate our policies.
Our procedures may not effectively reduce or eliminate our liability. For example, on the Etsy marketplace we use a combination of automatic and manual tools and depend upon human review in many circumstances. Our tools and procedures may be subject to error or enforcement failures and may not be adequately staffed, and we may be subject to an increasing number of erroneous or fraudulent demands to remove content. In addition, we may be subject to civil or criminal liability for activities carried out by sellers on our platform, especially outside the United States where laws may offer less protection for intermediaries and platforms than the United States.
Under current U.S. copyright laws such as the Digital Millennium Copyright Act § 512 et. seq., we may benefit from statutory safe harbor provisions that protect us from copyright liability for content posted on our platform by sellers and buyers, and we rely upon user content platform protections under 47 U.S.C. § 230 (commonly referred to as CDA § 230), that limits most non-intellectual property law claims against Etsy based upon content posted by users on our platform. However, trademark and patent laws do not include similar statutory provisions, and limits on platform liability for these forms of intellectual property are primarily based upon court decisions. Similarly, laws related to product liability vary by jurisdiction, and the liability of marketplace platforms for products and services of sellers, while traditionally limited, is subject to increasing debate in courts, legislatures, and with regulators. These safe harbors and court rulings, including analogous ones in other state and international jurisdictions, may change unfavorably. Moreover, changes focused on actions by very large platforms that perform retailer-like functions may directly or indirectly also impact us, our sellers, buyers and vendors.
Proposed laws in Europe and the United States may change the scope of platform liability, and ongoing case law developments may unpredictably increase our liability as a platform for user activity. In that event, we may be held directly or secondarily liable for the intellectual property infringement, product compliance deficiencies, consumer protection deficiencies, privacy and data protection incidents, or regulatory issues of our sellers, including potentially for their conduct over which we have no control or influence.
Regardless of the validity of any claims made against us, we may incur significant costs and efforts to defend against or settle them. If a governmental authority determines that we have aided and abetted the infringement or sale of counterfeit, harmful or unlawful goods or if legal changes result in us potentially being liable for actions by sellers on our platform, we could face regulatory, civil, or criminal penalties. Successful claims by third-party rights owners could require us to pay substantial damages or refrain from permitting any further listing of the relevant items. These types of claims could force us to modify our business practices, which could lower our revenue, increase our costs, or make our platform less user-friendly. These claims, or legal and regulatory changes, could require the removal of non-infringing, lawful or completely unrelated content, which could negatively impact our business and our ability to retain sellers. Moreover, public perception that unlicensed, counterfeit, harmful or unlawful items are commonly offered by sellers in our marketplaces, even if factually incorrect, could result in negative publicity and damage to our reputation.
We may be involved in litigation and regulatory matters that are expensive and time consuming and that may require changes to our strategy, the features of our platform and/or how our business operates.
In addition to intellectual property claims, we may become involved in other litigation matters, including consumer protection, product liability, security and privacy, commercial, or shareholder derivative lawsuits, either individually or, where available, on a class-action basis. We may become subject to heightened regulatory scrutiny, inquiries, or investigations, including with respect to our sellers, vendors or third parties, relating to broad, industry-wide concerns, such as antitrust, product liability, and privacy, that could lead to increased expenses or reputational damage. For example, while we have stated on our platform that items offered by sellers on Etsy, such as masks and hand sanitizers, are not medical-grade, and that our sellers cannot make substantive medical or health claims, we may nevertheless be subject to claims based in whole or in part on the actions of sellers in violation of that directive.
Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of current and former directors, officers, and underwriters. Any lawsuit or regulatory action to which we are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits or regulatory actions, even if non-meritorious, on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation, or adverse changes to our offerings or business practices. Any of these results could adversely affect our business. In addition, defending claims is costly and can impose a significant burden on our management.
We limit certain claims against us under our Terms of Use, including through requirements for arbitration, limits on class actions, limitations of liability, venue selection, and indemnification requirements. These requirements may be subject to differing interpretations and legal frameworks in different U.S. federal, state, and foreign jurisdictions or courts, and may have reduced or no enforceability in some jurisdictions. If these claim limitations are unavailable to us, it could significantly increase our costs, require significant resources across multiple jurisdictions, result in complex or inconsistent decisions, and subject us to forum shopping by third parties seeking jurisdictions amenable to their claims.
Actions brought against us may result in lawsuits, enforcement actions, injunctions, settlements, damages, fines, or penalties, which could have a material adverse effect on our financial condition or results of operations or require changes to our business. Although we establish accruals for our litigation and regulatory matters in accordance with applicable accounting guidance when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable, there may be a material exposure to loss in excess of any amounts accrued, or in excess of any loss contingencies disclosed as
reasonably possible. Such loss contingencies may not be probable and reasonably estimable until the proceedings have progressed significantly, which could take several years and occur close to resolution of the matter.
Expanding and evolving regulations in the areas of privacy and user data protection could create technological, economic and complex cross-border business impediments to our business and those of our sellers.
We collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of and share personal information, confidential information and other potentially protected information necessary to provide our service, to operate our business, for legal and marketing purposes, and for other business-related purposes.
Data protection has become a significant issue in the United States, countries in the European Union, and in many other countries in which we operate. In addition to the actual and potential changes in law described elsewhere in these Risk Factors, global developments in privacy and data security regulations are changing some of the ways we, our sellers, our vendors and other third parties collect, use, and share personal information and other proprietary or confidential information. Compliance with these changing regulations have necessitated some specific product changes for our non-U.S. activities, and required additional compliance obligations for us and for our relationships with sellers, vendors, and other third parties.
In the European Union, the GDPR contains strict requirements for processing the personally identifiable information of individuals residing in the European Economic Area (“EEA”), Switzerland and (in a form frozen as of December 31, 2020 and as further separately domestically amended), the United Kingdom. The GDPR seeks to harmonize the data protection regulations throughout these jurisdictions. The regulation contains numerous requirements and changes from previous E.U. law, including more robust obligations on data processors, greater rights for data subjects (requiring potentially significant changes to both our technology and operations), security and accountability obligations, and significantly heavier documentation and record-keeping requirements for data protection compliance programs. Specifically, the GDPR introduced numerous privacy-related changes for companies operating in the European Union, including greater control over personal data by data subjects (e.g., the “right to be forgotten”), increased data portability, access, and redress rights for E.U. consumers, data breach notification requirements, increased rules for online and email marketing, compliance requirements related to our sellers, vendors and third parties, and stronger regulatory enforcement regimes. The GDPR is subject to changing interpretations due to decisions of data protection authorities, courts, and related legislative efforts both E.U.-wide and in particular jurisdictions. The GDPR requirements apply to some third-party transactions (such as commercial contracts with partners and vendors) and to transfers of information between us and our subsidiaries, including user and employee information. GDPR requirements may also apply, depending on interpretation of its reach, to some users in our worldwide community of sellers. We may experience difficulty retaining or obtaining new E.U. sellers, or current and new sellers may limit their selling into the European Union, due to the legal requirements, compliance cost, potential risk exposure, and uncertainty for them in respect of their own compliance obligations with respect to GDPR. In addition, although our sellers are independent businesses, it is possible that a privacy authority could deem us jointly and severally liable for actions of our sellers or vendors, which would increase our potential liability exposure and costs of compliance, which could negatively impact our business. We could face potential liability, regulatory investigation, and costly litigation, which may not be adequately covered by insurance.
In the United States, rules and regulations governing data privacy and security include those promulgated under the authority of the Federal Trade Commission Act, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, California’s CCPA (effective January 1, 2020) and CPRA (effective January 1, 2023), and other state and federal laws relating to privacy, consumer protection, and data security. The CCPA and CPRA introduce new requirements regarding the handling of personal information of California consumers and households, including compliance and record keeping obligations, the right to request access to and deletion of their personal information, and the right to opt out of the sale of their personal information and provides a private right of action and statutory damages for data breaches.
Other jurisdictions in the United States are beginning to expand existing regulations, or propose laws similar to the CCPA. If more stringent privacy legislation arises in the United States, it could increase our potential liability and adversely affect our business, results of operations, and financial condition. Additionally, other countries outside of Europe have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency, and strict limitations to the processing of personal information, which could increase the cost and complexity of delivering our services and operating our business. In the past year, for example, Brazil recently enacted the General Data Protection Law, New Zealand recently enacted the New Zealand Privacy Act, China released its draft Personal Information Protection Law, and Canada introduced the Digital Charter Implementation Act.
GDPR, CCPA, and similar laws coming into effect in other jurisdictions may continue to change the data protection landscape globally, may be potentially inconsistent or incompatible, and could result in potentially significant operational costs for internal compliance and risk to our business. Some of these requirements may introduce friction into the buying and selling experience on our platform and may impact the scope and effectiveness of our marketing efforts, which could negatively impact
our business and future outlook. Beyond GDPR and CCPA/CPRA, individual jurisdictions continue to pass laws related to data protection, such as data privacy and data breach notification, resulting in a diverse set of requirements across states, countries, and regions. Non-compliance with these laws could result in proceedings against us by one or more data protection authorities, other public authorities, third parties, or individuals. Under GDPR alone, noncompliance could result in fines of up to 20 million Euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater. We may not be entirely successful in our compliance efforts due to various factors either within our control (such as limited internal resource allocation) or outside our control (such as a lack of vendor cooperation, new regulatory interpretations, or lack of regulatory guidance in respect of certain GDPR requirements).
In addition, E.U. data protection laws, including the GDPR, also generally prohibit the transfer of personal information from Europe to the United States and most other countries unless the recipient country has been deemed to have adequate privacy protections in place to protect the personal information. Parties transferring protected personal data to jurisdictions deemed inadequate must establish a legal basis for, and implement specific safeguards for, such intra-party or inter-party transfers. A recent judgment of the Court of Justice of the European Union found a common basis for such transfers, the E.U.-U.S. Privacy Shield, insufficient, and a parallel arrangement with Switzerland may similarly be deemed insufficient. While Etsy did not rely upon Privacy Shield for cross-border transfers, Reverb previously had done so. While effective solutions may be available to permit these transfers, such as Standard Contractual Clauses (“SCCs”) continuing changes to the rules related to cross-border transfers may nonetheless impede Etsy and Reverb’s ability to effectively transfer data between jurisdictions with parties such as partners, vendors and users, or may make such transfers of personal data more costly. In particular, another recent decision and related European Commission guidance and updates to the SCCs may impose additional obligations on companies seeking to rely on the SCCs and may require significant expense and resources associated with compliance. For example, transfers with the United Kingdom might be deemed inadequate after its departure from the European Union and European Economic Area and require substantial expense and resources to comply with based upon adequacy mechanisms such as SCCs. Transfers by us or our vendors of personal information from Europe pursuant to SCCs may not comply with E.U. data protection law, may increase our exposure to the GDPR’s heightened sanctions for violations of its cross-border data transfer restrictions, and may result in lower sales on our platform because of difficulty of establishing a lawful basis for personal information transfers out of Europe.
We also publish privacy policies and other documentation regarding our collection, processing, use, and disclosure of personal data. Although we endeavor to comply with our published policies and documentation, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance, such as if our employees or vendors fail to comply with our published policies and documentation. Such failures can subject us to potential international, local, state, and federal action under both data protection and consumer protection laws. We are or may also be subject to the terms of our own and third party external and internal privacy and security policies, codes, representations, certifications, industry standards, publications and frameworks and contractual obligations to third parties related to privacy, information security, including contractual obligations to indemnify and hold harmless third parties from the costs or consequences of non-compliance with data protection laws or other obligations.
Our sellers and vendors may be subject to similar privacy requirements, which may significantly increase costs and resources dedicated to their compliance with such requirements. We may have contractual and other legal obligations to notify relevant stakeholders of security breaches related to us or, in some cases, our third-party service providers. Many jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities, and others of security breaches involving certain types of data. In addition, our agreements with certain stakeholders may require us to notify them in the event of such a security breach. Such mandatory disclosures, even if only related to actions of a third-party vendor, are costly, could lead to negative publicity, may cause our community members to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach, and may cause us to breach customer contracts. Our contracts, our representations, or industry standards, may require us to use industry-standard or reasonable measures to safeguard sensitive personal information or confidential information. A security breach could lead to claims by our community members, or other relevant stakeholders that we have failed to comply with such legal or contractual obligations. As a result, we could be subject to legal action or our community members could end their relationships with us. There can be no assurance that any indemnifications, limitations of liability or other remedies in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages.
We may not have adequate insurance coverage for security incidents or breaches, including fines, judgments, settlements, penalties, costs, attorney fees and other impacts that arise out of incidents or breaches. If the impacts of a security incident or breach, or the successful assertion of one or more large claims against us that exceeds our available insurance coverage, is of a type not subject to insurance, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), it could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage, cyber coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to all or part of any future claim or loss. Our risks are likely to
increase as we continue to expand, grow our customer base, and process, store, and transmit increasingly large amounts of proprietary and sensitive data.
Our business and our sellers and buyers may be subject to evolving sales and other tax regimes in various jurisdictions, which may harm our business.
The application of indirect taxes, such as sales and use tax, value-added tax, provincial tax, goods and services tax, business tax, withholding tax, digital service tax, gross receipt tax, and tax information reporting obligations to businesses like ours and to our sellers and buyers is a complex and evolving issue. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear when and how new and existing statutes might apply to our business or to our sellers’ businesses. In some cases it may be difficult or impossible for us to validate information provided to us by our sellers on which we must rely to ascertain any obligations that may apply to us related to our sellers’ businesses, given the intricate nature of these regulations as they apply to particular products or services and that many of the products and services sold in our marketplace are unique or handmade. If we are found to be deficient in how we have addressed our tax obligations, our business could be adversely impacted.
Various jurisdictions (including the U.S. states and E.U. member states) are seeking to, or have recently imposed additional reporting, record-keeping, indirect tax collection and remittance obligations, or revenue-based taxes on businesses like ours that facilitate online commerce. If requirements like these become applicable in additional jurisdictions, our business, collectively with Etsy sellers’ businesses, could be harmed. For example, taxing authorities in many U.S. states and in other countries have targeted e-commerce platforms as a means to calculate, collect, and remit indirect taxes for transactions taking place over the internet, and have enacted laws and others are considering similar legislation. Such changes to current law or new legislation could adversely affect our business if the requirement of tax to be charged on items sold on our marketplaces causes our marketplaces to be less attractive to current and prospective buyers, which could materially impact our business and Etsy sellers’ businesses. This legislation could also require us or our sellers to incur substantial costs in order to comply, including costs associated with tax calculation, collection, remittance, and audit requirements, which could make selling on our marketplaces less attractive. Additionally, the European Union, certain member states, and other countries have proposed or enacted taxes on online advertising and marketplace service revenues. Our results of operations and cash flows could be adversely effected by additional taxes of this nature imposed on us prospectively or retroactively or additional taxes or penalties resulting from the failure to provide information about our buyers, sellers, and other third parties for tax reporting purposes to various authorities. In some cases, we also may not have sufficient notice to enable us to build solutions and adopt processes to properly comply with new reporting or collection obligations by the applicable effective date.
Our business is subject to a large number of U.S. and non-U.S. laws, many of which are evolving.
We are subject to a variety of laws and regulations in the United States and around the world, including those relating to traditional businesses, such as employment laws and taxation, and laws and regulations focused on e-commerce and online marketplaces, such as online payments, privacy, anti-spam, data security and protection, online platform liability, intellectual property, product liability, and consumer protection. In light of our international operations, we need to comply with various laws associated with doing business outside of the United States, including anti-money laundering, sanctions, anti-corruption, and export control laws. In some cases, non-U.S. privacy, data security, consumer protection, e-commerce, and other laws and regulations are more detailed or comprehensive than those in the United States and, in some countries, are actively enforced.
These laws and regulations are continuously evolving, and compliance is costly and can require changes to our business practices and significant management time and effort. In some jurisdictions, these laws and regulations may be subject to attempts to apply such domestic rules world-wide against Etsy or its subsidiaries, and occasionally may subject us to inconsistent obligations across jurisdictions.
Additionally, it is not always clear how existing laws apply to online marketplaces as many of these laws do not address the unique issues raised by online marketplaces or e-commerce. For example, as described elsewhere in these Risk Factors, laws relating to privacy are evolving differently in different jurisdictions. Federal, state, and non-U.S. governmental authorities, as well as courts interpreting the laws, continue to evaluate and assess the privacy requirements that are applicable to Etsy.
New platform liability laws, potential amendments to existing laws, and ongoing regulatory and judicial interpretation of these laws imparting liability for conduct by users of a platform may create costs and uncertainty for both Etsy and sellers on our platform. This may even be the case for new laws or regulations focused on other technology areas or other third parties that nonetheless indirectly or unintentionally impact us, our sellers or our vendors. For example, the European Union’s recent e-Copyright and Platform to Business directives, and pending Digital Services Act and Digital Markets Act, may impact us directly, as well as impacting our sellers and vendors. In addition, there have been various Congressional efforts to restrict the
scope of the protections available to online platforms for third party user content under intellectual property laws such as the Digital Millennium Copyright Act § 512 et. seq., or user content platform protections under 47 U.S.C. § 230 (commonly referred to as CDA § 230) and our current protections from liability for third-party content in the United States could significantly decrease or change. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages.
We also operate under an increasing number of regulatory regimes protecting us and our sellers and buyers worldwide, such as intellectual property and anti-counterfeiting laws, payments and taxation, competition, marketplace platform regulation, hate speech laws, and general commerce regulation. These laws, and court or regulatory interpretations of these laws, may shift quickly in the United States and worldwide. We may not have the resources or scale to effectively adapt to and comply with any changes to these regulatory regimes which may limit our ability to take advantage of the protections these regimes offer. In addition, some of these changes may be at least partially inconsistent with how our platform operates, especially if they are adopted in the context of, or in a manner best suited for, larger platforms, which may make it harder for us to utilize these regimes to protect our marketplaces. If we are unable to cost-effectively protect our platform, sellers and buyers under these regulatory regimes, such as if the regulations place requirements on our sellers that they find difficult or impossible to comply with, limit the functions or features our marketplace can offer, or require us to take actions at a scale inconsistent with the size, investment, and operation of our marketplace, our business could be harmed.
Existing and future laws and regulations enacted by federal, state, or non-U.S. governments or the inconsistent enforcement of such laws and regulations could impede the growth of e-commerce or online marketplaces, which could have a negative impact on our business and operations. Examples include data localization requirements, limitation on marketplace scope or ownership, intellectual property intermediary liability rules, regulation of online speech, limits on network neutrality, and rules related to security, privacy, or national security, which may impede us, our users, or our vendors. We could also face regulatory challenges or be subject to allegations of discriminatory or anti-competitive practices that could impede both our and our sellers’ growth prospects, increase our costs, and harm our business. We may be subject to regulatory requests for information or testimony related to regulatory challenges of third parties, such as our competitors or our vendors, which could cause us to incur significant costs and expend significant resources in response, and could impact our relationship with those third parties.
We strive to comply with all applicable laws, but they may conflict with each other, and by complying with the laws or regulations of one jurisdiction, we may find that we are violating the laws or regulations of another jurisdiction. Despite our efforts, we may not have fully complied in the past and may not fully comply in the future, particularly where the applicable regulatory regimes have not been broadly interpreted. If we become liable under laws or regulations applicable to us, we could be required to pay significant fines and penalties, our reputation may be harmed, and we may be forced to change the way we operate. That could require us to incur significant expenses or to discontinue certain services, which could negatively affect our business.
Additionally, if third parties with whom we work violate applicable laws or our policies, those violations could result in other liabilities for us and could harm our business. Our ability to rely on insurance, or indemnification and other contractual remedies to limit these liabilities, may be insufficient or unavailable in some cases. Furthermore, the circumstances in which we may be held liable for the acts, omissions, or responsibilities of our sellers is uncertain, complex, and evolving. For example, certain laws have recently been enacted seeking to hold marketplaces like ours responsible for certain compliance obligations for which sellers have traditionally been responsible. If an increasing number of such laws are passed, the resulting compliance costs and potential liability risk could negatively impact our business.
We may be subject to intellectual property claims, which, even if untrue, could be extremely costly to defend, damage our brand, require us to pay significant damages, and limit our ability to use certain technologies in the future.
Companies in the internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. We periodically receive communications that claim we have infringed, misappropriated, or misused others’ intellectual property rights. To the extent we gain greater public recognition and scale worldwide, we may face a higher risk of being the subject of intellectual property claims. Third parties may have intellectual property rights that they claim cover significant aspects of our technologies or business methods and prevent us from expanding our offerings. Third parties may also allege a company is secondarily liable for intellectual property infringement, or that it is a joint infringer with another party, including claims that Etsy is liable, either directly, indirectly, or vicariously, for infringement claims against sellers using Etsy’s platform, our vendors, or other third parties, and that statutory, judicial, or other immunities and defenses do not protect us. Any intellectual property claim against us, with or without merit, could be time consuming and expensive to settle or litigate and could divert the attention of our management. Litigation regarding intellectual property rights is inherently uncertain due to the complex issues involved, and we may not be successful in defending ourselves in such matters. For claims against us, insurance may be insufficient or unavailable, and for claims related to actions of third parties, either indemnification or remedies against those parties may be insufficient or unavailable.
Some of our competitors have extensive portfolios of issued patents. Many potential litigants, including some of our competitors, patent holding companies, and other intellectual property rights holders, have the ability to dedicate substantial resources to enforcing their perceived intellectual property rights. Any claims successfully brought directly against us, or implicating us as part of an action against third parties, such as our sellers or vendors, could subject us to significant liability for damages, and we may be required to stop using technology or other intellectual property alleged to be in violation of a third party’s rights in one or more jurisdictions where we do business. We also might be required to seek a license for third-party intellectual property. Even if a license is available, we could be required to pay significant royalties or submit to unreasonable terms, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, which could require significant time and expense. If we cannot license or develop technology for any allegedly infringing aspect of our business, we would be forced to limit our service and may be unable to compete effectively. Any of these results could harm our business.
We are subject to the terms of open source licenses because our platform incorporates, and we contribute to, open source software, potentially impairing our ability to adequately protect our intellectual property.
The software powering our platform incorporates software covered by open source licenses. In addition, we regularly contribute source code to open source software projects and release internal software projects under open source licenses, and we anticipate doing so in the future. The terms of many open source licenses relied upon by us and the internet and technology industries have been interpreted by only a few court decisions and there is a risk that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our marketplaces. Under certain open source licenses, if certain conditions were met, we could be required to publicly release aspects of the source code of our software or to make our software available under open source licenses. In addition, certain pending cases, such as the Google v. Oracle litigation currently before the Supreme Court, may impact the breadth of software API copyright protection and thus could alter the perceived scope of some open source licenses.
To avoid the public release of the affected portions of our source code, we could be required to expend substantial time and resources to re-engineer some or all of our software. In addition, use of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to determine how to compromise our platform, and availability of patches or fixes may not be consistent or quickly available, as it may be subject to the continued community engagement in a particular open source project. Additionally, because any software source code we contribute to open source projects is publicly available, while we may benefit from the contributions of others, our ability to protect our intellectual property rights in such software source code may be limited or lost entirely, and we will be unable to prevent our competitors or others from using such contributed software source code. Similarly, we may be subject to third party intellectual property claims as a user of or contributor to such open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could adversely affect our business, financial performance, and growth.
There remains pronounced legal, economic and implementation uncertainty surrounding the United Kingdom’s departure from the European Union, which may be a source of instability in international markets, create significant currency fluctuations, adversely affect our operations in the United Kingdom, and pose additional risks to our business, revenue and financial condition.
On January 1, 2021, the United Kingdom left the E.U. single market and customs union. While the United Kingdom and the European Union have agreed to the terms of the United Kingdom’s departure in a trade agreement, there remains a continued lack of clarity about future U.K. laws and regulations as the United Kingdom determines which E.U. rules and regulations to replace or replicate, including financial and banking laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, privacy and information security laws, payments regulations, environmental, health, and safety laws and regulations, immigration laws, and employment laws, all of which could decrease foreign direct investment in the United Kingdom, increase costs and depress economic activity. Additionally, under the terms of the United Kingdom’s departure, the European Union retains the right to impose tariffs if the United Kingdom violates certain “level playing field” standards relating to working conditions and environmental requirements. The long-term effects of Brexit will depend on how U.K. laws and relationships evolve, as well as the United Kingdom’s adherence to the “level playing field” standards, and how that impacts its ability to negotiate favorable trade agreements with other countries.
The United Kingdom is one of our core markets. We continue to monitor Brexit developments so that we may adjust our business and operations as appropriate with the goal of continuing to provide services to our U.K. and E.U. buyers and sellers. A failure by the United Kingdom and the European Union to smoothly implement the trade agreement or to negotiate favorable arrangements governing cross-border services and trade, and ongoing uncertainty with respect to potential divergent regulatory standards, however, could significantly increase friction on cross-border trade involving U.K. buyers and sellers or reduce the
number of sellers on our platform offering products between the United Kingdom and the European Union. It may also result in additional operational, financial, regulatory, and compliance costs to us as well as decreased revenue, all of which could adversely affect our business.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy of our financial reports.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting. It also requires our independent registered public accounting firm to attest to our evaluation of our internal controls over financial reporting. Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2020, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future.
If we have a material weakness in our internal control over financial reporting in the future, we may not detect errors on a timely basis. If we have difficulty implementing and maintaining effective internal control over financial reporting at businesses that we may acquire, or if we identify a material weakness in our internal control over financial reporting in the future, it could harm our operating results, adversely affect our reputation, cause our stock price to decline, or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements. We could be required to implement expensive and time consuming remedial measures. Further, if there are material weaknesses or failures in our ability to meet any of the requirements related to the maintenance and reporting of our internal controls, such as Section 404 of the Sarbanes-Oxley Act, investors may lose confidence in the accuracy and completeness of our financial reports and that could cause the price of our common stock to decline. We could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect our business.
In addition, our internal control over financial reporting will not prevent or detect all errors and fraud, and individuals, including employees and contractors, could circumvent such controls. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Changes to the accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20—Debt with Conversion and Other Options, (“ASC 470-20”), which is the accounting standard applied in the financial statements included in this report, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The equity components of the Notes are required to be included in the additional paid-in capital section of stockholders’ equity on our Consolidated Balance Sheets, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we recorded interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We plan to adopt 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 effective as of January 1, 2021 which we expect will result in our recognizing less non-cash interest expense relating to the Notes in future periods.
In addition, under the accounting standard applied to the financial statements included in this report, our 2020 Notes which may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method. Under the treasury stock method, shares issuable upon conversion of the 2020 Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the 2020 Notes exceeds their principal amount. In connection with our adoption of ASU 2020-06 we will be required to adopt the if-converted method for computing diluted earnings per share which will result in the inclusion of additional shares in the calculation of and may adversely impact our diluted earnings per share. For a discussion of certain other expected impacts of adoption of this ASU, see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in the Notes to Consolidated Financial Statements.
Other Risks
The price of our common stock has been and will likely continue to be volatile and declines in the price of common stock could subject us to litigation.
The price of our common stock has been and is likely to continue to be volatile. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities litigation. We have experienced securities class action lawsuits in the past and may experience more such litigation following future periods of volatility or declines in our stock price. Any securities litigation could result in substantial costs and divert our management’s attention and resources, which could adversely affect our business.
For example, since January 1, 2018,2020, our common stock’s daily closing price on Nasdaq has ranged from a low of $17.73$31.69 to a high of $57.43$233.86 through February 21, 2019.19, 2021. The price of our common stock may fluctuate significantly for numerous reasons, many of which are beyond our control, such as:
•variations in our operating results and other financial and operational metrics, including the key financial and operating metrics disclosed in this Annual Report, as well as how those results and metrics compare to analyst and investor expectations;
•forward-looking statements related to our financial guidance or projections, our failure to meet or exceed our financial guidance or projections or changes in our financial guidance or projections;
•failure of analysts to initiate or maintain coverage of our company, changes in their estimates of our operating results or changes in recommendations by analysts that follow our common stock or a negative view of our financial guidance or projections and our failure to meet or exceed the estimates of such analysts;
•entry into or exit from stock market indices;
•announcements of new services or enhancements, strategic alliances or significant agreements or other developments by us or our competitors;
•announcements by us or our competitors of mergers or acquisitions or rumors of such transactions involving us or our competitors;
•the amount and timing of our operating expenses and the success of any cost-savings actions we take;
•changes in our Board of Directors or senior management team;
•disruptions in our marketplacemarketplaces due to hardware, software or network problems, security breaches, or other issues;
•the strength of the global economy or the economy in the jurisdictions in which we operate, particularly during the current COVID-19 pandemic, currency fluctuations, and market conditions in our industry and those affecting members of our community;
•the trading activity of our largest stockholders;
•the number of shares of our common stock that are available for public trading;
•litigation or other claims against us;
•stockholder activism;
the performance of the equity markets in general and in our industry;
•the operating performance of other similar companies;
•changes in legal requirements relating to our business; and
•any other factors discussed in this Annual Report.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the price of our common stock could decline for reasons unrelated to our business, financial performance, or growth. Stock prices of many internet and technology companies have historically been highly volatile. Some companies that have experienced volatility in the trading price
If analysts do not publish research about our business, or if they publish inaccurate or unfavorable research, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If few analysts cover us, demand for our common stock could decrease and our common stock price and trading volume may decline. Similar results may occur if one or more of these analysts stop covering us in the future or fail to publish reports on us regularly.
Our stock repurchases may not achieve the desired objectives.
In November 2018, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $200 million of our common stock. Previously, in November 2017, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $100 million of our common stock, which we completed in the second quarter of 2018. There can be no assurance that these stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. In addition, there is no guarantee that our stock repurchases in the past or in the future will be able to successfully mitigate the dilutive effect of recent and future employee stock option exercises and restricted stock vesting.
We do not intend to pay dividends on our capital stock, so any returns will be limited to increases in the value of our common stock.
We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain future earnings for the operation and expansion of our business and do not anticipate declaring any dividends in the foreseeable future. In addition, our ability to pay cash dividends on our capital stock is restricted by the terms of our credit facility. As a result, stockholders will not receive dividends or other distributions and may only receive a return on their investment if the trading price of our common stock increases.
Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution to our stockholders and could cause the price of our common stock to decline.
We may issue additional common stock, convertible securities, or other equity in the future.future, including as a result of conversion of the outstanding Notes. We also issue common stock to our employees, directors, and other service providers pursuant to our equity incentive plans. Such issuances could be dilutive to investors and could cause the price of our common stock to decline. New investors in such issuances could also receive rights senior to those of current stockholders.
Anti-takeover provisionssome or all of the Notes would dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the Notes. Each series of Notes is convertible at the option of their holders prior to their scheduled maturity in our charter documents and under Delaware law could make an acquisitionthe event the conditional conversion features of such series of Notes are triggered. Based on the daily closing prices of our companystock during the quarter ended December 31, 2020, holders of the 2018 Notes and the 2019 Notes are eligible to convert their 2018 Notes and 2019 Notes, as applicable, during the first quarter of 2021. If one or more difficult,holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely cash to converting holders of such Notes, we could limit attemptsbe required to make changes in our management and could depress the pricedeliver to them a significant number of shares of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control of our company or limiting changes in our management. Among other things, these provisions:
provide for a classified board of directors so that not all members of our Board of Directors are elected at one time;
permit our Board of Directors to establishstock, increasing the number of directors and fill any vacancies and newly created directorships;
provide that directors may only be removed for cause;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which means all stockholder actions must be taken at a meeting of our stockholders;
provide that our Board of Directors is expressly authorized to amend or repeal any provision of our bylaws;
restrict the forum for certain litigation against us to Delaware; and
require advance notice for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, Section 203 of the Delaware General Corporation Law (“DGCL”) may delay or prevent a change in control of our company. Section 203 of the DGCL imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or moreoutstanding shares of our common stock. Anti-takeover provisionsThe issuance of such shares of common stock and any sales in the public market of the common stock issuable upon such conversion of the Notes could depress the priceadversely affect prevailing market prices of our common stock by actingstock. See “Note 13—Debt” in the Notes to delay or prevent a change in control of our company.Consolidated Financial Statements for more information on the Notes.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the DGCL,Delaware General Corporation Law, our certificate of incorporation or our bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
Our business could be negatively affected as a result of actions of activist stockholders.
The actions of activist stockholders could adversely affect our business. Specifically, responding to common actions of an activist stockholder, such as requests for special meetings, potential nominations of candidates for election to our Board of Directors, requests to pursue a strategic combination, or other transaction or other special requests, could disrupt our operations, be costly and time-consuming, or divert the attention of our management and employees. In addition, perceived uncertainties as to our future direction in relation to the actions of an activist stockholder may result in the loss of potential business opportunities or the perception that we are unstable as a company, which may make it more difficult to attract and retain qualified employees. Our ability to continue to commit to our mission, guiding principles, and culture may also be questioned, which could impact our ability to attract and retain buyers and sellers. Actions of an activist stockholder may also cause fluctuations in our stock price based on speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our stock repurchases are discretionary and even if effected, they may not achieve the desired objectives.
Our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $250 million of our common stock. There can be no assurance that these stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. In addition, there is no guarantee that our stock repurchases in the past or in the future will be able to successfully mitigate the dilutive effect of recent and future employee stock option exercises and restricted stock vesting. The amounts and timing of the repurchases may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock. If our financial condition deteriorates or we decide to use our cash for other purposes, we may suspend repurchase activity at any time.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, could limit attempts to make changes in our management and could depress the price of our common stock.
Provisions in our certificate of incorporation and bylaws and the Delaware General Corporation Law may have the effect of delaying or preventing a change in control of our company or limiting changes in our management. Among other things, these provisions:
•provide for a classified board of directors so that not all members of our Board of Directors are elected at one time;
•permit our Board of Directors to establish the number of directors and fill any vacancies and newly created directorships;
•provide that directors may only be removed for cause;
•require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
•authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan;
•eliminate the ability of our stockholders to call special meetings of stockholders;
•prohibit stockholder action by written consent, which means all stockholder actions must be taken at a meeting of our stockholders;
•provide that our Board of Directors is expressly authorized to amend or repeal any provision of our bylaws; and
•require advance notice for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, Section 203 of the Delaware General Corporation Law may delay or prevent a change in control of our company by imposing certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock. Anti-takeover provisions could depress the price of our common stock by acting to delay or prevent a change in control of our company.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters are located in Brooklyn, New York where we occupy approximately 198,635225,135 square feet under a lease that expires in 2026. We use these facilities for our principal administration, technology and development, and engineering activities. Our European headquarters are located in Dublin, Ireland.
We believe that our current facilities are suitable and adequate to meet our ongoing needs and that, if we require additional space, we will be able to obtain additional facilities.
Item 3. Legal Proceedings.
See “Note“Note 14—Commitments and Contingencies—Legal Proceedings”Proceedings” in the Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Etsy’s Common Stock
Our common stock has been listed on the Nasdaq Global Select Market under the symbol “ETSY” since April 16, 2015. Prior to that date, there was no public trading market for our common stock.
Holders of Record
As of the close of business on February 21, 2019,19, 2021, there were approximately 168526 stockholders of record of our common stock. The number of stockholders of record is based upon the actual number of holders registered on this date and does not include holders of common stock in “street name” by brokers or other entities on behalf of stockholders.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings and do not anticipate paying cash dividends in the foreseeable future. Any future decision to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our Board of Directors thinksthink are relevant.
Unregistered Sales of Equity Securities
On September 19, 2016, we issued 685,749 shares of our common stock to the former stockholders of Blackbird Technologies, Inc. (“Blackbird”), a machine learning company, in connection with the acquisition of Blackbird. This transaction was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Regulation D.
On May 5, 2016, we issued and sold an aggregate of 80,011 shares of our common stock upon the net exercise of warrants to purchase 97,931 shares of our common stock. The shares of common stock were issued pursuant to Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
The table below provides information with respect to repurchases of shares of our common stock during the three months ended December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share(2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3)(5) | | Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs
(in thousands)(3)(4) |
| October 1 - 31, 2020 (1) | 191,235 | | | $ | 131.69 | | | — | | | $ | 77,500 | |
| November 1 - 30, 2020 (1) | 628,294 | | | 125.18 | | | 618,841 | | | — | |
| December 1 - 31, 2020 (1) | 10,203 | | | 154.67 | | | — | | | 250,000 | |
| Total | 829,732 | | | 127.04 | | | 618,841 | | | 250,000 | |
(1) The total number of shares purchased includes 210,891 shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units (“RSUs”).
(2) Average price paid per share excludes broker commissions.
(3) In November 2018, our Board of Directors approved a stock repurchase program for the repurchase of up to $200 million of our common stock. The program was completed in the fourth quarter of 2020.
(4) Our Board of Directors approved a new stock repurchase program for the repurchase of up to $250 million of our common stock. The stock repurchase program has no expiration date. As of the date of this Annual Report, there have been no repurchases under such program.
(5) A portion of these shares were purchased pursuant to a 10b5-1 trading plan. Share repurchases may be executed through open market repurchases, privately negotiated transactions or by other means, including repurchase plans designed to comply with Rule 10b5-1 and other derivative, accelerated share repurchase and other structured transactions. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, common stock trading price, our liquidity and financial performance and legal considerations.
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share(2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3)(4) | | Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs
(in thousands)(3) |
| October 1 - 31, 2018 (1) | 138,695 |
| | $ | 49.96 |
| | — |
| | $ | — |
|
| November 1 - 30, 2018 | 676,955 |
| | 47.27 |
| | 676,955 |
| | 168,000 |
|
| December 1 - 31, 2018 | 239,128 |
| | 54.37 |
| | 239,128 |
| | 155,000 |
|
| Total | 1,054,778 |
| | $ | 49.23 |
| | 916,083 |
| | $ | 155,000 |
|
| |
(1) | The total number of shares purchased includes 138,695 shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units (“RSUs”). |
| |
(2) | Average price paid per share excludes broker commissions. |
| |
(3) | On November 6, 2018, we announced that our Board of Directors had approved a stock repurchase program for the repurchase of up to $200 million of our common stock. The stock repurchase program has no expiration date. |
| |
(4) | A portion of these shares were purchased pursuant to a 10b5-1 trading plan. |
Performance Graph
TheOur 2019 Annual Report on Form 10-K included a comparison of the cumulative total return of our common stock with the S&P MidCap 400 and the Russell 1000 Index since our initial public offering on April 16, 2015. In 2020 there were changes to the indices that Etsy is included in, and, as a result, we believe that the S&P 500 Index is a more appropriate index than the S&P MidCap 400 for comparison of our stock performance. If a company selects a different index from that used in the immediately preceding fiscal year, the company’s stock performance must be compared with both the newly-selected index and the index used in the immediately preceding year. Accordingly, the following graph shows a comparison from April 16,December 31, 2015 (the date our common stock commenced trading on Nasdaq) through December 31, 2018,2020, of the cumulative total returns for our common stock, the Nasdaq CompositeS&P MidCap 400, the Russell 1000 Index, and the Russell 2000S&P 500 Index. The graph assumes $100 was invested at the market close on April 16,December 31, 2015 in the common stock of Etsy, Inc. Such returns are based on historical results and are not intended to suggest future performance. The Nasdaq CompositeS&P Mid Cap 400, the Russell 1000 Index, and Russell 2000the S&P 500 Index assume reinvestment of any dividends.
This performance graph shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Securities Act or the Exchange Act.
Item 6. [Removed and Reserved].
Item 6. Selected Consolidated Financial and Other Data.
The following tables show selected consolidated financial data. The selected Consolidated Statements of Operations data for the years ended December 31, 2018, 2017, and 2016, and the selected Consolidated Balance Sheet data as of December 31, 2018 and 2017, are derived from our audited Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statement of Operations data for the years ended December 31, 2015 and 2014, and the selected Consolidated Balance Sheets data as of December 31, 2016, 2015, and 2014 is derived from our audited Consolidated Financial Statements and related notes not included in this Annual Report.
The following tables also show certain unaudited operational and non-GAAP financial measures as well as a reconciliation between certain GAAP and non-GAAP measures. The selected consolidated financial data and key metrics should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes included elsewhere in this Annual Report. 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: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” and “mobile GMS.”
Our historical results and key metrics are not necessarily indicative of future results.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (in thousands except share and per share amounts) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Marketplace (1) | $ | 440,740 |
| | $ | 326,076 |
| | $ | 269,628 |
| | $ | 204,333 |
| | $ | 156,821 |
|
| Services (1) | 158,928 |
| | 111,869 |
| | 89,433 |
| | 64,923 |
| | 34,413 |
|
| Other | 4,025 |
| | 3,286 |
| | 5,906 |
| | 4,243 |
| | 4,357 |
|
| Total revenue | 603,693 |
| | 441,231 |
| | 364,967 |
| | 273,499 |
| | 195,591 |
|
| Cost of revenue (2)(3) | 190,762 |
| | 150,986 |
| | 123,328 |
| | 96,979 |
| | 73,633 |
|
| Gross profit | 412,931 |
| | 290,245 |
| | 241,639 |
| | 176,520 |
| | 121,958 |
|
| Operating expenses: | | | | | | | | | |
| Marketing (2)(3) | 158,013 |
| | 109,085 |
| | 82,248 |
| | 66,771 |
| | 39,655 |
|
| Product development (2)(3) | 97,249 |
| | 74,616 |
| | 55,083 |
| | 42,694 |
| | 36,634 |
|
| General and administrative (2)(3) | 82,883 |
| | 91,486 |
| | 86,180 |
| | 68,939 |
| | 51,920 |
|
| Asset impairment charges | — |
| | 3,162 |
| | 551 |
| | — |
| | — |
|
| Total operating expenses | 338,145 |
| | 278,349 |
| | 224,062 |
| | 178,404 |
| | 128,209 |
|
| Income (loss) from operations | 74,786 |
| | 11,896 |
| | 17,577 |
| | (1,884 | ) | | (6,251 | ) |
| Other (expense) income, net | (19,708 | ) | | 20,369 |
| | (20,453 | ) | | (26,110 | ) | | (4,009 | ) |
| Income (loss) before income taxes | 55,078 |
| | 32,265 |
| | (2,876 | ) | | (27,994 | ) | | (10,260 | ) |
| Benefit (provision) for income taxes (4) | 22,413 |
| | 49,535 |
| | (27,025 | ) | | (26,069 | ) | | (4,983 | ) |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | | $ | (54,063 | ) | | $ | (15,243 | ) |
| Net income (loss) per share attributable to common stockholders: |
| Basic | $ | 0.64 |
| | $ | 0.69 |
| | $ | (0.26 | ) | | $ | (0.59 | ) | | $ | (0.38 | ) |
| Diluted | $ | 0.61 |
| | $ | 0.68 |
| | $ | (0.26 | ) | | $ | (0.59 | ) | | $ | (0.38 | ) |
| Weighted average common shares outstanding: | | | | | | | | | |
| Basic | 120,146,076 |
| | 118,538,687 |
| | 113,562,738 |
| | 91,122,291 |
| | 40,246,663 |
|
| Diluted | 127,084,785 |
| | 122,267,673 |
| | 113,562,738 |
| | 91,122,291 |
| | 40,246,663 |
|
| |
(1) | In connection with the adoption of ASU 2014-09—Revenue from Contracts with Customers (“ASC 606”) in the first quarter of 2018, we renamed our revenue categories Marketplace and Services revenue. In addition, we reclassified Etsy Payments from Services to Marketplace revenue as described in “Note 2—Revenue.” The following table provides our Marketplace and Services revenue under our previous and current presentation:
|
|
| | | | | | | | | | | | | | | |
| | Year-to-Date Period Ended |
| | Previous Presentation | | Updated Presentation |
| | Marketplace Revenue | | Services Revenue | | Marketplace Revenue | | Services Revenue |
| | | | | | | | |
| | (in thousands) |
| December 31, 2017 | $ | 179,492 |
| | $ | 258,453 |
| | $ | 326,076 |
| | $ | 111,869 |
|
| December 31, 2016 | 158,204 |
| | 200,857 |
| | 269,628 |
| | 89,433 |
|
| December 31, 2015 | 132,648 |
| | 136,608 |
| | 204,333 |
| | 64,923 |
|
| December 31, 2014 | 108,732 |
| | 82,502 |
| | 156,821 |
| | 34,413 |
|
| |
(2) | Includes total stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (in thousands) |
| Cost of revenue | $ | 3,357 |
| | $ | 1,739 |
| | $ | 1,057 |
| | $ | 871 |
| | $ | 1,113 |
|
| Marketing | 2,507 |
| | 1,933 |
| | 971 |
| | 560 |
| | 216 |
|
| Product development | 21,234 |
| | 8,274 |
| | 5,079 |
| | 2,860 |
| | 1,461 |
|
| General and administrative | 11,133 |
| | 14,613 |
| | 8,794 |
| | 6,550 |
| | 7,260 |
|
| Total stock-based compensation expense | $ | 38,231 |
| | $ | 26,559 |
| | $ | 15,901 |
| | $ | 10,841 |
| | $ | 10,050 |
|
| |
(3) | Includes the impact of $0.2 million in restructuring and other exit income recognized in the year ended December 31, 2018 and $13.9 million in restructuring and other exit costs recognized in the year ended December 31, 2017. For a summary of restructuring and other exit costs (income), see “Note 17—Restructuring and Other Exit Costs (Income)” in the Notes to Consolidated Financial Statements.
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| |
(4) | In the year ended December 31, 2018, we recognized an income tax benefit associated with the release of a valuation allowance on certain deferred tax assets. The valuation allowance release resulted in a non-recurring benefit for income taxes of $23.4 million for the year ended December 31, 2018. In the year ended December 31, 2017, we recognized an income tax benefit associated with the enactment of the Tax Cuts and Jobs Act (the “TCJA”). As a result of the TCJA, our deferred taxes at December 31, 2017 have been revalued at the reduced 21% corporate income tax rate. The revaluation resulted in a non-recurring benefit for income taxes of approximately $31.1 million for the year ended December 31, 2017. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (in thousands except percentages) |
| Other Operational and Non-GAAP Financial Data: | | | | | | | | | |
| GMS | $ | 3,931,745 |
| | $ | 3,253,609 |
| | $ | 2,841,985 |
| | $ | 2,388,387 |
| | $ | 1,931,981 |
|
| Adjusted EBITDA | $ | 139,510 |
| | $ | 80,009 |
| | $ | 57,124 |
| | $ | 31,007 |
| | $ | 23,081 |
|
| Active sellers | 2,115 |
| | 1,933 |
| | 1,748 |
| | 1,563 |
| | 1,353 |
|
| Active buyers | 39,447 |
| | 33,364 |
| | 28,566 |
| | 24,046 |
| | 19,810 |
|
| Percent mobile GMS | 55 | % | | 51 | % | | 48 | % | | 43 | % | | 37 | % |
| Percent international GMS | 35 | % | | 33 | % | | 30 | % | | 30 | % | | 31 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (in thousands) |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | | $ | (54,063 | ) | | $ | (15,243 | ) |
| Excluding: | | | | | | | | | |
| Interest and other non-operating expense, net | 13,221 |
| | 8,736 |
| | 5,502 |
| | 1,202 |
| | 549 |
|
| (Benefit) provision for income taxes | (22,413 | ) | | (49,535 | ) | | 27,025 |
| | 26,069 |
| | 4,983 |
|
| Depreciation and amortization | 26,742 |
| | 27,197 |
| | 22,525 |
| | 18,550 |
| | 17,223 |
|
| Stock-based compensation expense (1) | 34,477 |
| | 19,953 |
| | 13,168 |
| | 8,981 |
| | 5,920 |
|
| Stock-based compensation expense—acquisitions | 3,754 |
| | 3,904 |
| | 2,733 |
| | 1,860 |
| | 4,130 |
|
| Foreign exchange loss (gain) | 6,487 |
| | (29,105 | ) | | 14,951 |
| | 21,775 |
| | 3,049 |
|
| Restructuring and other exit costs (income) | (249 | ) | | 13,897 |
| | — |
| | — |
| | — |
|
| Asset impairment charges | — |
| | 3,162 |
| | 551 |
| | — |
| | — |
|
| Acquisition-related expenses | — |
| | — |
| | 570 |
| | — |
| | 2,059 |
|
| Net unrealized loss on warrant and other liabilities | — |
| | — |
| | — |
| | 3,133 |
| | 411 |
|
| Contribution to Good Work Institute (formerly Etsy.org) | — |
| | — |
| | — |
| | 3,500 |
| | — |
|
| Adjusted EBITDA | $ | 139,510 |
| | $ | 80,009 |
| | $ | 57,124 |
| | $ | 31,007 |
| | $ | 23,081 |
|
| |
(1) | $2.7 million of restructuring-related stock-based compensation expense has been excluded from the year ended December 31, 2017, and is included in the restructuring and other exit costs (income) line. |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| | (in thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 624,287 |
| | $ | 340,550 |
| | $ | 282,086 |
| | $ | 292,864 |
| | $ | 88,843 |
|
| Net working capital | 568,227 |
| | 336,787 |
| | 287,024 |
| | 278,932 |
| | 85,608 |
|
| Total assets | 901,851 |
| | 605,583 |
| | 581,193 |
| | 553,061 |
| | 246,203 |
|
| Deferred revenue | 7,478 |
| | 6,262 |
| | 5,648 |
| | 4,712 |
| | 3,452 |
|
| Long-term debt, net (1) | 276,486 |
| | — |
| | — |
| | — |
| | — |
|
| Long-term liabilities | 388,891 |
| | 106,212 |
| | 152,428 |
| | 142,441 |
| | 57,450 |
|
| Convertible preferred stock | — |
| | — |
| | — |
| | — |
| | 80,212 |
|
| Total stockholders’ equity | 400,898 |
| | 396,894 |
| | 344,757 |
| | 330,498 |
| | 67,088 |
|
| |
(1) | In March 2018, we issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. For more information on the Notes, see “Note 13—Debt” in the Notes to Consolidated Financial Statements.
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statementsconsolidated financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in thePart I, Item 1A, “Risk Factors” section.Factors.” For more information regarding key factors affecting our performance, see “Key Factors Affecting Our Performance” below. We have omitted discussion of 2018 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2019 Annual Report on Form 10-K.
Overview
Business
Etsy is the globaloperates two-sided marketplace for uniqueonline marketplaces that connect millions of passionate and creative goods.buyers and sellers. Our mission is to “Keep Commerce Human,” and we’re committed to using the power of business and technology to strengthen communities and empower people around the world. We connect
Our primary marketplace, Etsy.com, is the global destination for unique and creative goods. The Etsy marketplace connects creative artisans and entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflect their sense of style, or represent a meaningful occasion.
Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. We have a seller-aligned business model: we make money when our sellers make money. We offer ourEtsy sellers a marketplace with millions of buyers along with a range of seller tools and services that are specifically designed to help our creative entrepreneurs generate more sales and scale their businesses.
We are focused on attracting potential buyers to the Etsy marketplace for everyday items that have meaning and those “special” purchase occasions that happen throughout the year andyear. We are also focused on deepening our engagement with our existing buyers by inspiring purchases across multipleour many retail categories and special occasions. These specialSpecial purchases for use in the everyday include handmade or vintage unique clothing, accessories, household items, or furniture that the buyer wants to reflect her sense of style. Special purchase occasions can occur many times throughout the year and include shopping for special occasions that reflects an individual'sindividual’s unique style; gifting that demonstrates thought and care; and celebrations that express creativity and fun. Buyers tell us that they come to Etsy because Etsy sellers offer items that they can’t find anywhere else. Special purchase occasions happen throughout
On August 15, 2019, we acquired all of the year whenoutstanding capital stock of Reverb Holdings, Inc. (“Reverb”) for $270.4 million, net of cash acquired. The Reverb marketplace is a buyerleading global online marketplace dedicated to buying and selling new, used, and vintage musical instruments, with a vibrant community of buyers and sellers all over the world. Reverb, now a wholly-owned subsidiary of Etsy, Inc., is decorating a home, dressing for an event, celebrating a special moment, or buying a gift for someone special.included in all financial and other metrics from August 15, 2019 (the date of acquisition), unless otherwise noted.
Our revenue is diversified, generated from a mix of marketplace activities and other optional services we provide to Etsy sellers to help them generate more sales and scale their businesses.
Marketplace revenue is comprised of the fees an Etsya seller pays us for marketplace activities. Marketplace activities include listing an item for sale,sale; completing transactions between a buyer and a seller, which includes, beginning in the second quarter of 2020, an additional transaction fee related to offsite advertising; and using Etsy Paymentsour payments services to process payments, including foreign currency payments. Revenue fromtransactions. Etsy fees include the $0.20 listing fee for each item listed (for up to four months); the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged; where applicable, an additional transaction fee of 12% or 15% related to offsite advertising; and fees for Etsy Payments, our payment processing product, included in Services revenue prior to 2018, is now included in Marketplace revenue because Etsy Payments is required to be used by Etsy sellers in the countries where it is available.
product.
Services revenue called Seller Services revenue prior to 2018, is comprised of the fees an Etsya seller pays us for our optional other services (“Services”). Services primarily include Promoted Listings, our on-site advertising service thatservices, which allows sellers to pay for prominent placement of their listings in search results; Etsy Shipping Labels,and shipping labels, which allows sellers in the United States, Canada, United Kingdom, and Australia to purchase discounted shipping labels; Pattern, a service that allows sellers to build custom websites; and Etsy Plus, a subscription offering that provides sellers with enhanced tools and credits for use on our platform.labels.
We also generate additional revenue through our commercial partnerships, which is classified as other revenue.
Our strategy is focused on growing our Etsy.comthe Etsy marketplace in our sixseven core geographies and building a sustainable competitive advantage around four areaselements of our business that we believe differentiate us from our competitors, or what we call our “Right to Win.”
The foundation of Etsy’s competitive advantage is our collection of our sellers’ unique items, which, we believe, when combined with best-in-class search and discovery, human connections, and a trusted brand, will enable us to continue to stand out among other ecommercee-commerce platforms and marketplaces. Our investments in product, marketing, and talent will be focused on capitalizing on these four areaselements of our business. Ultimately, the goal of our long-term strategy is to drive more new buyers to the website, give existing buyers reasons to come back more often, encourage buyers to spend more per order, and fuel success for our sellers. We see a number of similarities between the levers of growth for the Etsy and Reverb marketplaces, including improving search and discovery, making selling and buying easier, and building a global brand and user community.
While current macroeconomic conditions have had a dramatic effect on the global economy and on our business, these impacts have led us to reaffirm our long-term strategy and strengthen our commitment to it.
Year Financial Highlights
Total revenue was $603.7As of December 31, 2020, our marketplaces connected 4.4 million active sellers and 81.9 million active buyers in nearly every country in the world. In the year ended December 31, 2020, sellers generated GMS of $10.3 billion of which approximately 61% came from purchases made on mobile devices. We are a global company and approximately 36% of our GMS in the year ended December 31, 2018,2020 came from transactions where either a seller or a buyer was located outside of the United States.
Total revenue was $1.7 billion in the year ended December 31, 2020, driven by strong growth in both Marketplace and Services revenue. In the year ended December 31, 2018,2020, we recorded net income of $77.5$349.2 million, and non-GAAP Adjusted EBITDA of $139.5$549.1 million. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable financial measure calculated in accordance with GAAP.
AsCash and cash equivalents, and short-term investments were $1.7 billion as of December 31, 2018, our marketplace connected 2.12020. Etsy has $650.0 million active Etsy sellersaggregate principal amount of 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), and 39.4$43.9 million active Etsy buyers, in nearly every country inaggregate principal amount of 0% Convertible Senior Notes due 2023 (the “2018 Notes” and together with the world.2020 Notes and the 2019 Notes, the “Notes”). Additionally, we have the ability to draw down on its $200.0 million senior secured revolving credit facility. In the year ended December 31, 2018, Etsy sellers generated GMS2020, we had positive operating cash flows of $3.9 billion, of which approximately 55% came from purchases made on mobile devices. We are a global company and 35% of our GMS in the year ended December 31, 2018 came from transactions where either an Etsy seller or an Etsy buyer was located outside of the United States.$679.0 million.
2018 Pricing Updates
Effective July 16, 2018, we increased our seller transaction fee from 3.5% to 5%, and now apply it to the cost of shipping in addition to the cost of the item. The revised fee structure is intended to support increased investments in the growth and health of the marketplace. We believe these pricing updates will continue to have a positive effect on revenue.
We also announced new subscription packages and enhanced tools that are intended to support global sellers at different stages of their business life cycles. In mid-July, we launched Etsy Plus, which sellers can opt into for $10 per month. Sellers may also choose Etsy Standard and continue to have access to the same tools and services that are already available on Etsy without an additional monthly fee. Given that our learnings on subscription packages are still nascent, we are continuing to evaluate and learn from the recent launch of Etsy Plus and will evaluate the best strategy for our current and planned subscription packages going forward as we optimize for seller success.
Other Operational Highlights
In 2018 we focusedThe impacts of the ongoing COVID-19 pandemic on growingthe global economy and on our Etsy.com marketplacebusiness continue to evolve. Etsy’s performance for the year was extremely strong, with GMS growth of 106.7% and revenue growth of 110.9%. Factors contributing to this performance included our investments in our core geographies,brand and owning special purchase occasions – style,marketplace; our agility in supporting our global seller community; our quick and successful transition to remote work; and guarding the health and safety of our team — all of which mitigated risk and maximized our financial performance. In addition, Etsy benefited from several tailwinds including the shift from offline to online shopping, specific competitive dynamics, retail business closures, new buyer cohorts, pent-up demand, emerging categories such as face masks, gifting trends, and celebrations – throughoutgovernment stimulus.
We have continued to invest in product development, making key improvements to the customer experience during the year. BelowHighlights of our business initiatives during the year, including those related to COVID-19, are key operational highlights:outlined below:
•Etsy assembled a COVID-19 task force in January and moved to a fully remote workforce for both Etsy and Reverb by early March. Despite this shift in working environment, our team remains highly productive. During this time we allocated resources to critical infrastructure improvements to more accurately categorize our inventory and are investing in longer-term initiatives such as search and frequency and are seeing encouraging data from our recent product launches.
•In living up to our mission to “Keep Commerce Human,” we introduced several initiatives during the year to support our seller community during this challenging time. These included waiving fees for our new Offsite Ads service, extending our free trial into May; a one-month grace period to give sellers extra time to pay their bills; a seller guide to managing an Etsy shop during COVID-19; and 24/7 member support to address any questions with their businesses, delivery times, and shipping issues.
•We continuedcompleted the migration of seller listings to launchour new product enhancements and build upon prior launchesOffsite Ads, an iteration on our advertising offerings, to help buyers findsellers more effectively drive traffic to their listings. Etsy pays the right product atupfront costs to promote Etsy sellers’ listings on multiple internet platforms without any upfront costs for sellers. We added enhancements to our Etsy Ads (formerly Promoted Listings) service, improving the right time, or discover inspiration among the itemsrelevance of ads in our marketplace. We improved search relevance using context specific ranking (“CSR”), optimized landing pages by adding more recommendations and notifications, including alerts on listing cards when scarce items appear in other people’s carts, and reduced friction in the search and discoverythe speed of incorporating changes in a seller’s budget. We also made our Etsy Ads infrastructure more efficient, providing better search results while simultaneously using fewer cloud resources. To add to the seller experience, by accelerating home and search page load times.
Wewe launched several product enhancements aimed at bolstering trustperformance graphs in the Etsy brand,Ads dashboard, helping to make advertising on Etsy sellers, the items available in our marketplace, and the overall Etsy experience. We made customer support improvements by introducing live chatas easy as possible for our sellers and inbound phone support for both buyers and sellers.
•We improved our checkout experience to make it easier for buyers to provide information for personalization and customization details on the listing and cart pages, enhanced guest checkout on mobile web and introduced Klarna, a pay later option for buyers in Germany. We also added trust signals to give more confidence in making a purchase decision, including best-seller badges on listing cards and shop review ratings on the cart page.
We continued to focus on utilizingadjusted our marketing effortsstrategies and spend for the Etsy marketplace during the year to drive newrespond quickly to the changing macro dynamics. Performance marketing spend adjusts naturally with demand, and existing buyers to Etsy. We made structural improvements to Search Engine Optimization, one ofwe significantly increased our largest channels, to drive incremental traffic to Etsy. We began sending on-site and email notifications to inform buyers when one of their recently favorited items goes on sale. Additionally, followinginvestments in marketing, launching several TV ad campaigns throughout the increase in our marketplace transaction fee, we were able to invest a portion of our incremental revenue into marketing. We ran our first-ever television advertising campaign in the U.S and also began to test offline marketing campaigns.
We continued to enhance, expand and introduce new product offerings and seller tools. We optimized Promoted Listings by using context specific ranking to surface more relevantyear, including both direct response ads and launched a toolthose designed to better utilize seller’s budgets. We focused on shipping improvements, including the expansion of the Etsy Shipping Labels offering to our sellerscreate an emotional connection with consumers, as well as holiday campaigns in the United Kingdom and Australia through ourGermany. Over the year we have made significant progress with full funnel marketing and optimization across channels.
•GMS excluding mask sales for the Etsy marketplace was $8.7 billion, up 84% year-over-year, and 8% of the Etsy marketplace’s overall GMS was from mask sales. The Etsy marketplace saw an influx of 60.7 million new agreements with Royal Mailbuyers and DAI Post. reactivated buyers during the year, the latter being those who haven’t purchased in a year or more.
•We also launched Etsy Plus and Targeted Offers, new products and tools designed to give sellers more ways to grow their businesses and brands. Additionally, we launched a redesigned payment account intendedbuy now, pay later option for U.S. buyers through a partnership with Klarna, an online payments company, which offers buyers the flexibility to pay for an item in installments, making higher priced items more accessible.
•In search and discovery, we made additional progress by improving our query-listing matching and continuing to iterate on ranking algorithms to deliver more relevant recommendations further along in the purchase funnel and by leaning into saved searches and favorites to capture data on what buyers like and their tastes and preferences, which we believe we can leverage to make itthe site more organized and easier to managesearch.
•We continued to strengthen the buyer experience by:
◦adding a more prominent “In Stock” indicator to increase buyer confidence that an item is not mass-produced;
◦collapsing the item information section on the listing page, allowing for buyers to more easily find items that interest them;
◦launching listing videos, which help sellers showcase their products to buyers in ways they previously could not with photos, showing their expertise in making and bringing their products to life, with approximately 3.2 million listing videos uploaded in 2020; and
◦improving shipping transparency and post-purchase experiences by helping buyers better understand when they should expect an item to arrive by expanding listing coverage of expected delivery dates.
•Reverb benefited from similar macroeconomic e-commerce tailwinds to Etsy, as well as a strong increase in GMS from new buyers, many of whom were novice musicians. We continued to execute on product and marketing initiatives to bolster Reverb’s two-sided marketplace. Beginning on August 4, 2020, Reverb increased its seller transaction fee for the first time from 3.5% to 5%, which will enable Reverb to increase investments in marketing, expand its global customer engagement team, and grow the capacity of its team that creates and enhances seller tools and services to increase visibility of seller shops and inventory.
Convertible Debt
all seller shop financesIn August 2020, we issued $650.0 million aggregate principal amount of the 2020 Notes in one place, and have beguna private placement to process charges inqualified institutional buyers pursuant to Rule 144A under the seller’s ledger currency and automatically deduct fees and applicable taxesSecurities Act of 1933 (the “Securities Act”). The initial conversion price of the 2020 Notes represented a premium of approximately 52.5% over the price of our common stock. The net proceeds from the seller’s money earned through sales using Etsy Payments.sale of the 2020 Notes were $639.5 million after deducting the offering expenses. The 2020 Notes will mature on September 1, 2027, unless earlier converted or repurchased.
We have also focused on growth investments, such as our migrationused $74.7 million of the net proceeds from the 2020 Notes offering to Google Cloud. In 2018, we achieved a significant milestone in the process by successfully migrating our website and mobile apps to Google Cloud. We expect to complete the migration by the beginning of enter into separate capped call instruments (“2020 and anticipate spending approximately $25 million on cloud migration in 2019. Additionally, during the migration we will maintain some of our existing data center infrastructure to ensure the reliability of our platform. We believe that moving to Google Cloud is positioning us well for growth by allowing us to focus on strategic initiatives, enhance site performance, and improve engineering efficiency.
Reclassification of Revenue Categories
In connectionCapped Call Transactions”) with the adoptioninitial purchasers and/or their respective affiliates. The 2020 Capped Call Transactions effectively limit the premium for conversion of ASU 2014-09—Revenue from Contracts with Customers (“ASC 606”) in the first quarter2020 Notes to 150% and are generally expected to reduce potential dilution to our common stock upon any conversion of 2018,the 2020 Notes and/or offset any payments we renamed our revenue categories Marketplace and Services revenue. make upon conversion.
In addition, we reclassified Etsy Paymentspaid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of the outstanding 2018 Notes through privately negotiated transactions.
We intend to use the remainder of the net proceeds from Servicesthe 2020 Notes offering for general corporate purposes. For more information on the 2020 Notes, 2020 Capped Call Transactions, and the 2018 Notes, see “Note 13—Debt” in the Notes to Marketplace revenue as described in “Business” above.Consolidated Financial Statements.
74
The following table provides our Marketplace and Services revenue under our previous and current presentation for the years ended December 31, 2017 and 2016: |
| | | | | | | | | | | | | | | |
| | Year-to-Date Period Ended |
| | Previous Presentation | | Updated Presentation |
| | Marketplace Revenue | | Services Revenue | | Marketplace Revenue | | Services Revenue |
| | | | | | | | |
| | (in thousands) |
| December 31, 2017 | $ | 179,492 |
| | $ | 258,453 |
| | $ | 326,076 |
| | $ | 111,869 |
|
| December 31, 2016 | 158,204 |
| | 200,857 |
| | 269,628 |
| | 89,433 |
|
Key Operating and Financial Metrics
We collect and analyze operating and financial data to evaluate the health and performance of our business and allocate our resources (such as capital, people, and technology investments). The unaudited non-GAAP financial measure andresults of Reverb have been included in our consolidated financial results from August 15, 2019 (the date of acquisition). We are providing Etsy.com standalone information in certain instances where particularly relevant. The key operating and financial metrics we use are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | % Growth
Y/Y | | Year Ended December 31, | | % Growth
Y/Y |
| | | 2020 | | 2019 | | | 2018 | |
| | | | | | | | | | |
| | | (in thousands, except percentages) |
GMS (1) | | $ | 10,281,101 | | | $ | 4,974,944 | | | 106.7 | % | | $ | 3,931,745 | | | 26.5 | % |
| Revenue | | $ | 1,725,625 | | | $ | 818,379 | | | 110.9 | % | | $ | 603,693 | | | 35.6 | % |
| Marketplace revenue | | $ | 1,303,126 | | | $ | 593,646 | | | 119.5 | % | | $ | 444,765 | | | 33.5 | % |
| Services revenue | | $ | 422,499 | | | $ | 224,733 | | | 88.0 | % | | $ | 158,928 | | | 41.4 | % |
| Net income | | $ | 349,246 | | | $ | 95,894 | | | 264.2 | % | | $ | 77,491 | | | 23.7 | % |
Adjusted EBITDA (Non-GAAP) (1) | | $ | 549,116 | | | $ | 186,268 | | | 194.8 | % | | $ | 139,510 | | | 33.5 | % |
| | | | | | | | | | |
Active sellers (1) | | 4,365 | | | 2,699 | | | 61.7 | % | | 2,115 | | | 27.6 | % |
Active buyers (1) | | 81,898 | | | 46,351 | | | 76.7 | % | | 39,447 | | | 17.5 | % |
| | | | | | | | | | |
Percent mobile GMS (1) | | 61 | % | | 58 | % | | 300 | bps | | 55 | % | | 300 | bps |
Percent international GMS (1) | | 36 | % | | 36 | % | | — | bps | | 35 | % | | 100 | bps |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | % Growth (Decline)
Y/Y | | Year Ended December 31, | | % Growth
Y/Y |
| | | 2018 | | 2017 | | | 2016 | |
| | | | | | | | | | | |
| | | (in thousands except percentages) |
| GMS | | $ | 3,931,745 |
| | $ | 3,253,609 |
| | 20.8 | % | | $ | 2,841,985 |
| | 14.5 | % |
| Revenue | | $ | 603,693 |
| | $ | 441,231 |
| | 36.8 | % | | $ | 364,967 |
| | 20.9 | % |
| Marketplace revenue | | $ | 440,740 |
| | $ | 326,076 |
| | 35.2 | % | | $ | 269,628 |
| | 20.9 | % |
| Services revenue | | $ | 158,928 |
| | $ | 111,869 |
| | 42.1 | % | | $ | 89,433 |
| | 25.1 | % |
| Net income (loss) | | $ | 77,491 |
| | $ | 81,800 |
| | (5.3 | )% | | $ | (29,901 | ) | | 373.6 | % |
| Adjusted EBITDA | | $ | 139,510 |
| | $ | 80,009 |
| | 74.4 | % | | $ | 57,124 |
| | 40.1 | % |
| | | | | | | | | | | |
| Active sellers | | 2,115 |
| | 1,933 |
| | 9.4 | % | | 1,748 |
| | 10.6 | % |
| Active buyers | | 39,447 |
| | 33,364 |
| | 18.2 | % | | 28,566 |
| | 16.8 | % |
| Percent mobile GMS | | 55 | % | | 51 | % | | 400 | bps | | 48 | % | | 300 | bps |
| Percent international GMS | | 35 | % | | 33 | % | | 200 | bps | | 30 | % | | 300 | bps |
GMS
Gross merchandise sales (“GMS”) is the dollar value of items sold in our marketplacemarketplaces within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by Etsy.us. GMS is largely driven by transactions in our marketplacemarketplaces and is not directly impacted by Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our marketplace, we believe that GMS is an indicator of the success of Etsyour sellers, the satisfaction of Etsyour buyers, and the health, scale, and growth of our business. We track “Paid GMS” for the Etsy marketplace and define it as Etsy.com GMS that is attributable to our performance marketing efforts, which excludes most of our marketing investments focused on brand awareness like TV and digital video.
currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2020 would have been 105.7%, or approximately 100 basis points lower than the reported 106.7% growth. Supporting this growth in GMS, active sellers increased 61.7% to 4.4 million, driven by strong growth in both international and U.S. sellers, and active buyers increased 76.7% to 81.9 million at December 31, 2020 compared to December 31, 2019. In the year ended December 31, 2020, GMS from new buyers grew 105% year-over-year and represented approximately 16% of overall GMS, a slight decrease compared to last year. In the year ended December 31, 2020, GMS from existing buyers grew 107% year-over-year and represented approximately 84% of overall GMS, a slight increase compared to last year. While it is difficult to predict how our business will be impacted as the COVID-19 pandemic runs its course and abates, we currently expect a contraction of mask sales as masks become more widely available, and a deceleration of new buyer growth as businesses return to on-site operations and as mask sales contract.
Adjusted EBITDA
Adjusted EBITDA represents our net income (loss) adjusted to exclude: interest and other non-operating expense, net; provision (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition-related expenses; non-ordinary course disputes; loss on extinguishment of debt; and restructuring and other exit costs (income) related to the Actions discussed in “Non-GAAP Financial Measures;” asset impairment charges; acquisition-related expenses; net unrealized loss on warrant and other liabilities; and contributions to Good Work Institute (formerly Etsy.org).income. See “Non-GAAP Financial Measures” for more information regarding our use of Adjusted EBITDA, including its limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable financial measure calculated in accordance with GAAP.
Active Sellers
An active seller is an Etsya seller who has incurred at least one charge from us in the last 12 months. Charges include Marketplace and Services and Other Revenuerevenue fees discussed in “Note“Note 1—Basis of Presentation and Summary of Significant Accounting Policies —Revenue Recognition” in the Notes to Consolidated Financial Statements. An EtsyA seller is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple Etsy seller accounts.accounts and can count as a distinct active seller in each of our marketplaces. We succeed when Etsy sellers succeed, so we view the number of active sellers as a key indicator of the awareness of our brand, the reach of our platform, the potential for growth in GMS and revenue, and the health of our business.
Active Buyers
An active buyer is an Etsya buyer who has made at least one purchase in the last 12 months. An EtsyA buyer is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple Etsy buyer accounts.accounts and can count as a distinct active buyer in each of our marketplaces. We generate revenue when Etsy buyers order items from Etsy sellers, so we view the number of active buyers as a key indicator of our potential for growth in GMS and revenue, the reach of our platform, awareness of our brand, the engagement and loyalty of Etsy buyers, and the health of our business.
Mobile GMS
Mobile GMS is GMS that results from a transaction completed on a mobile device, such as a tablet or a smartphone. Mobile GMS excludes A Little Market (“ALM”) and Etsy Wholesale and orders initiated on mobile devices but ultimately completed on a desktop. When calculating percentthe percentage of mobile GMS, we do not take into account refunds associated with canceled transactions. We believe that mobile GMS indicates our success in converting mobile activity into mobile purchases and demonstrates our ability to grow GMS and revenue.
During the year ended December 31, 2020, mobile GMS increased as a percentage of total GMS to approximately 61% up from approximately 58% for the year ended December 31, 2019. Mobile GMS growth during the year ended December 31, 2020 was approximately 116%, with mobile web and mobile app GMS each continuing to grow faster than desktop GMS during the year.
International GMS
International GMS is GMS from transactions where either the billing address for the Etsy seller or the shipping address for the Etsy buyer at the time of sale is outside of the United States. When calculating percent international GMS, we do not take into account refunds associated with canceled transactions. We believe that international GMS shows the level of engagement of our community outside the United States and demonstrates our ability to grow GMS and revenue.
For the years ended December 31, 2020 and 2019, international GMS remained flat as a percentage of total GMS at approximately 36%. International GMS was up approximately 105% in the year ended December 31, 2020 compared to the year ended December 31, 2019, driven by our fastest growing international trade route, international domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country, and by GMS between U.S. buyers and international sellers. International domestic GMS grew approximately 185% in 2020 compared with 2019. The increase in international GMS included increases related to changes in foreign currency rates year-over-year. On a currency-neutral basis international GMS growth for the year ended December 31, 2020 would have been 102%.
Currency-Neutral GMS Growth
We calculate currency-neutral GMS growth by translating current period GMS for goods sold that were listed in non-U.S. dollar currencies into U.S. dollars using prior year foreign currency exchange rates.
As reported and currency-neutral GMS growth for the periods presented below is as follows:follows and include the operations of Reverb since August 15, 2019 (the date of acquisition):
| | | | | | | | | | | | | | | | | | | | |
| | |
| Year-to-Date Period Ended | | As Reported | | Currency-Neutral | | FX Impact |
| December 31, 2020 | | 106.7 | % | | 105.7 | % | | 1.0 | % |
| December 31, 2019 | | 26.5 | % | | 27.5 | % | | (1.0) | % |
| December 31, 2018 | | 20.8 | % | | 20.4 | % | | 0.4 | % |
|
| | | | | | | | |
| | Year-to-Date Period Ended |
| | As Reported | | Currency-Neutral | | FX Impact |
| December 31, 2018 | 20.8 | % | | 20.4 | % | | 0.4 | % |
| December 31, 2017 | 14.5 | % | | 14.3 | % | | 0.2 | % |
| December 31, 2016 | 19.0 | % | | 20.0 | % | | (1.0 | )% |
Non-GAAP Financial Measures
Adjusted EBITDA
In this Annual Report on Form 10-K, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income (loss) adjusted to exclude: interest and other non-operating expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); restructuring and other exit costs (income) related to the Actions as defined below; asset impairment charges; and acquisition-related expenses. Below is a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA because it is a key measure used by our management and Board of Directors to evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans, determine incentive compensation, and assess the health of our business. As our Adjusted EBITDA increases, we are able to invest more in our platform.
We believe that Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business as it removes the impact of certain non-cash items and certain variable charges.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense;
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not consider the impact of stock-based compensation expense;
Adjusted EBITDA does not consider the impact of foreign exchange loss (gain);
Adjusted EBITDA does not consider the impact of restructuring and other exit costs (income) related to the Actions as described below;
Adjusted EBITDA does not consider the impact of asset impairment charges;
Adjusted EBITDA does not reflect acquisition-related expenses; and
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results.
The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) |
| Excluding: | | | | | |
| Interest and other non-operating expense, net (1) | 13,221 |
| | 8,736 |
| | 5,502 |
|
| (Benefit) provision for income taxes | (22,413 | ) | | (49,535 | ) | | 27,025 |
|
| Depreciation and amortization (1) | 26,742 |
| | 27,197 |
| | 22,525 |
|
| Stock-based compensation expense (2) | 34,477 |
| | 19,953 |
| | 13,168 |
|
| Stock-based compensation expense—acquisitions | 3,754 |
| | 3,904 |
| | 2,733 |
|
| Foreign exchange loss (gain) (3) | 6,487 |
| | (29,105 | ) | | 14,951 |
|
| Restructuring and other exit costs (income) (4) | (249 | ) | | 13,897 |
| | — |
|
| Asset impairment charges (5) | — |
| | 3,162 |
| | 551 |
|
| Acquisition-related expenses | — |
| | — |
| | 570 |
|
| Adjusted EBITDA | $ | 139,510 |
| | $ | 80,009 |
| | $ | 57,124 |
|
(1) Included in interest and depreciation expense amounts above are interest and depreciation expense related to our headquarters under build-to-suit accounting requirements, which commenced in May 2016. For the years ended December 31, 2018, 2017, and 2016 those amounts are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Interest expense | $ | 8,996 |
| | $ | 9,000 |
| | $ | 5,337 |
|
| Depreciation | 3,276 |
| | 3,276 |
| | 2,186 |
|
(2) $2.7 million of restructuring-related stock-based compensation expense has been excluded from the year ended December 31, 2017 and is included in the restructuring and other exit costs (income) line. See footnote (4) below. Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Cost of revenue | $ | 3,357 |
| | $ | 1,739 |
| | $ | 1,057 |
|
| Marketing | 2,507 |
| | 1,933 |
| | 971 |
|
| Product development | 21,234 |
| | 8,274 |
| | 5,079 |
|
| General and administrative | 11,133 |
| | 14,613 |
| | 8,794 |
|
| Total stock-based compensation expense | $ | 38,231 |
| | $ | 26,559 |
| | $ | 15,901 |
|
| |
(3) | See “Results of Operations—Other (Expense) Income, net” for more information on the fluctuation in foreign exchange loss (gain) in the years ended December 31, 2018, 2017, and 2016. |
(4) Total restructuring and other exit costs (income) included in the Consolidated Statements of Operations are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Cost of revenue | $ | (19 | ) | | $ | 738 |
| | $ | — |
|
| Marketing | (82 | ) | | 2,950 |
| | — |
|
| Product development | (110 | ) | | 3,232 |
| | — |
|
| General and administrative | (38 | ) | | 6,977 |
| | — |
|
| Total restructuring and other exit costs (income) | $ | (249 | ) | | $ | 13,897 |
| | $ | — |
|
| |
(5) | In the fourth quarter of 2017, we made the decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing, which resulted in the recognition of a $3.2 million impairment charge to write the related capitalized web development and internal-use software assets down to zero. This decision was based on our strategy to focus on the growth of the Etsy.com marketplace. |
Consolidated Statement of Operations Line Items Excluding Restructuring and Other Exit Costs (Income)
In the second quarter of 2017, the Board of Directors approved plans to increase efficiency and streamline our cost structure and improve focus on key strategic growth opportunities (the “Actions”). In this Annual Report, we discuss certain financial statement line items excluding restructuring and other exit costs (income), each non-GAAP financial measure that represents the income statement line item adjusted to exclude restructuring and other exit costs (income) incurred in the years ended December 31, 2018 and 2017.
We have included these financial statement line items excluding restructuring and other exit costs (income) because the Actions were unusual and do not necessarily reflect the ongoing trends in these financial statement line items. We believe that these non-GAAP measures can provide a useful measure for period-to-period comparisons of our business as they remove the impact of the Actions.
These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
many of these costs were settled in cash;
there is no certainty that restructuring and other exit costs (income) will not recur; and
other companies, including companies in our industry, may adjust for similar items in a different manner, or may not exclude such charges, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider these non-GAAP measures alongside other financial performance measures, including the GAAP financial statement line items.
Reconciliation of GAAP Consolidated Statement of Operations Line Items to Non-GAAP Line Items Excluding Restructuring and Other Exit Costs (Income)
The following table reflects the reconciliation of each affected GAAP line item of the Consolidated Statement of Operations to the non-GAAP line item excluding restructuring and other exit costs (income) for each of the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | As Reported | | Restructuring and Other Exit Costs (Income) | | Excluding Restructuring and Other Exit Costs (Income) |
| | | | | | |
| | (in thousands) |
| Revenue | $ | 603,693 |
| | $ | — |
| | $ | 603,693 |
|
| Cost of revenue | 190,762 |
| | (19 | ) | | 190,781 |
|
| Gross profit | 412,931 |
| | (19 | ) | | 412,912 |
|
| Operating expenses: | | | | | |
| Marketing | 158,013 |
| | (82 | ) | | 158,095 |
|
| Product development | 97,249 |
| | (110 | ) | | 97,359 |
|
| General and administrative | 82,883 |
| | (38 | ) | | 82,921 |
|
| Total operating expenses | 338,145 |
| | (230 | ) | | 338,375 |
|
| Income from operations | $ | 74,786 |
| | $ | (249 | ) | | $ | 74,537 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Reported | | Restructuring and Other Exit Costs (Income) | | Excluding Restructuring and Other Exit Costs (Income) |
| | | | | | |
| | (in thousands) |
| Revenue | $ | 441,231 |
| | $ | — |
| | $ | 441,231 |
|
| Cost of revenue | 150,986 |
| | 738 |
| | 150,248 |
|
| Gross profit | 290,245 |
| | 738 |
| | 290,983 |
|
| Operating expenses: | | | | | |
| Marketing | 109,085 |
| | 2,950 |
| | 106,135 |
|
| Product development | 74,616 |
| | 3,232 |
| | 71,384 |
|
| General and administrative | 91,486 |
| | 6,977 |
| | 84,509 |
|
| Asset impairment charges | 3,162 |
| | — |
| | 3,162 |
|
| Total operating expenses | 278,349 |
| | 13,159 |
| | 265,190 |
|
| Income from operations | $ | 11,896 |
| | $ | 13,897 |
| | $ | 25,793 |
|
Key Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part I, Item 1A, “Risk Factors.” Our primary marketplace, Etsy.com, is the section titled “Risk Factors.”largest driver of our business and thus the following key factors affecting our performance most significantly relate to the Etsy marketplace.
Growth and Retention of Active Buyers and Active Sellers on the Etsy Marketplace
Our success depends in part on the growth and retention of our active buyers and active sellers. Our revenue is driven by the number of active buyers, buyer engagement, active sellers, seller engagement, and our ability to maintain a trusted marketplace. As of December 31, 2018, our marketplace had grown to 39.4 million active buyers and 2.1 million active sellers, up from 33.4 million active buyers and 1.9 million active sellers as of December 31, 2017. We believe two of our most significant opportunities to drive growth in our primary marketplace are to bring new buyers to EtsyEtsy.com and encourage repeatexisting Etsy buyers to purchase more frequently. We are particularly focused on increasing our number of habitual buyers, or buyers who have spent $200 or more and made purchases on six or more purchase days in the year. We are also focused on keeping our best sellers on the platform and helping them grow their businesses by enhancing the seller tools and services that help drive buyer demand.
During 2018,2020, the Etsy marketplace had 17.538 million new Etsy buyers, or buyers who made their first-ever purchase on Etsy.Etsy, compared to 19 million new Etsy buyers in 2019. GMS from new buyers was up 16%94% year-over-year and represented approximately 18%16% of overall Etsy.com GMS, a slight decrease compared toin line with last year. Etsy.com GMS from existing buyers grew 23%101% year-over-year in 20182020 and represented approximately 82%84% of overall Etsy.com GMS, an increase compared toin line with last year. Repeat purchases demonstrate the loyalty of Etsy buyers. In 2018,2020, on the Etsy marketplace, approximately 40.1%48% of our active buyers made purchases on two or more days in the previous 12 months, up from 39.6%41% in 2017.2019.
Habitual buyers arerepresented approximately 5.2%8% of ourEtsy.com’s active buyers as of December 31, 2018.2020. Habitual buyers grew to 2.06.5 million as of December 31, 2018,2020, an increase of 21.7%157% compared to 2017.2019. We aim to increase repeat purchases and habitual buyers by inspiring purchases in additional categories and on additional occasions, building trust in the Etsy brand, and removing friction from the buying experience to improve conversion rates.
To analyze our retention rates on the Etsy marketplace, we measure repeat activity by Active Buyers (buyers who have made at least one purchase through Etsy in the last 12 months) and Active Sellers (sellers who have incurred at least one charge in the last 12 months).
Cohort of 2015, 2014, 2013, 2012 and 2011 Active Buyers
We refer to active buyers as of December 31, 2015 as “2015 Active Buyers,” as of December 31, 2014 as “2014 Active Buyers,” as of December 31, 2013 as “2013 Active Buyers,” as of December 31, 2012 as “2012 Active Buyers,” and as of December 31, 2011 as “2011 Active Buyers.” Of total 2015 Active Buyers, 37.5% remained active buyers through their fourth year on the platform, compared to 38.7% for 2014 Active Buyers, 41.1% for 2013 Active Buyers, 42.5% for 2012 Active Buyers, and 44.7% for 2011 Active Buyers. The average annual GMS per 2015 Active Buyer during their fourth year on the platform was 78% higher than their first year, compared to 70% for 2014 Active Buyers, 81% for 2013 Active Buyers, 88% for 2012 Active Buyers, and 89% for 2011 Active Buyers. We note that 2013 was the first year we started to significantly invest in our paid acquisition marketing efforts to grow our buyer base.sellers.
|
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | AVG GMS | | 2011 | | $103 | | $177 | | $186 | | $195 | |
| | | | | | | | | | | | | |
| | PER BUYER | | 2012 | | $96 | | $163 | | $173 | | $181 | |
| | | | | | | | | | | | | |
| | | | 2013 | | $96 | | $161 | | $168 | | $174 | |
| | | | | | | | | | | | | |
| | | | 2014 | | $99 | | $157 | | $164 | | $169 | |
| | | | | | | | | | | | | |
| | | | 2015 | | $101 | | $158 | | $163 | | $180 | |
| | | | | | | | | | | | | |
|
|
Cohort of 2015, 2014, 2013, 2012, and 2011 Active Buyers |
These cohort data demonstrate our ability to consistently retain buyers over a multi-year period and reflects the loyalty of our buyer base. We have identified our ability to increase purchase frequency among these long-term and habitual buyers as one of our significant opportunities for growth and we are focused on improving search and recommendations to better match our buyers with the 60 million items listed on Etsy.com, driving buyer growth and retention.
Cohort of 2015, 2014, 2013, 2012 and 2011 Active Sellers
We refer to active sellers as of December 31, 2015 as “2015 Active Sellers,” as of December 31, 2014 as “2014 Active Sellers,” as of December 31, 2013 as “2013 Active Sellers,” as of December 31, 2012 as “2012 Active Sellers” and December 31, 2011 as “2011 Active Sellers.” Of the 2015 Active Sellers, 33.1% remained active through their fourth year on the platform, compared to 31.8% for 2014 Active Sellers, 31.5% for 2013 Active Sellers, 32.3% for 2012 Active Sellers, and 32.3% for 2011 Active Sellers. The average annual GMS per 2015 Active Seller during their fourth year on the platform was over three times higher than their first year, compared to over three times higher for 2014 Active Sellers, almost four times higher for 2013 Active Sellers, over four times higher for 2012 Active Sellers, and over five times higher for 2011 Active Sellers.
|
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | AVG GMS | | 2011 | | $817 | | $2,241 | | $3,314 | | $4,299 | |
| | | | | | | | | | | | | |
| | PER SELLER | | 2012 | | $1,079 | | $2,598 | | $3,935 | | $4,557 | |
| | | | | | | | | | | | | |
| | | | 2013 | | $1,260 | | $3,110 | | $4,190 | | $4,620 | |
| | | | | | | | | | | | | |
| | | | 2014 | | $1,465 | | $3,325 | | $4,228 | | $4,615 | |
| | | | | | | | | | | | | |
| | | | 2015 | | $1,558 | | $3,296 | | $4,062 | | $4,939 | |
| | | | | | | | | | | | | |
|
|
Cohort of 2015, 2014, 2013, 2012, and 2011 Active Sellers |
These cohort data demonstrate our success in retaining sellers over a multi-year period, with the sellers that remain on our platform maintaining consistent GMS growth. We believe there is significant opportunity for growth by fueling seller success through continued investment in paid services and tools to help Etsy sellers generate more sales on our platform.
Services Growth
We have a seller-aligned business model: we make money when Etsyour sellers make money. Our goal is to enhance the seller tools and services that will drive buyer demand. To achieve this, we continue to invest our resources in developing a cohesive platform of paid services and free tools specifically designed to help our creative entrepreneurs generate more sales and scale their businesses. We believe we can grow our optional paid services in three ways: expand the utility of existing services, expand the geographic reach of existing services, and launch new services offerings. Forofferings. As of December 31, 2018, 15.1%2020, on the Etsy marketplace, 22% of active sellers used Promoted Listings,on-site advertising services, and 24.7%22% of active sellers in the United States, Canada, United Kingdom, and Australia used Etsy Shipping Labels.
Investment in Marketing
We are focusing on initiatives to drive traffic to Etsy.comEtsy and shape perceptions of ourthe Etsy marketplace as the go-to shopping destination for specialeveryday items that have meaning and those “special” purchase occasions by investing primarily in digital and other marketing initiatives, such as search engine optimization and television channels, and in our team to support marketing activities. We believe that we can continue to grow our acquisition marketing efforts, both in scaling and improving our current efforts and by expanding into new marketing channels. In 2018, paid GMS attributable to our marketing efforts was 17% of GMS and grew 53% compared to 2017. Additionally, followinghappen throughout the increase in our marketplace transaction fee, we were able to invest a portion of our incremental revenue into marketing. year.In 2018, we ran our first-ever Etsy television advertising campaign in the United States and also began to test offline marketing campaigns. We continued these marketing campaigns during 2019 and 2020, expanding our campaigns to the United Kingdom and Germany. During 2020 we leaned more heavily into upper funnel strategies through TV, digital video, and paid social. In 2020, we ran several campaigns and broadened our U.S. reach to include both direct response ads and those designed to create an emotional connection with consumers and make Etsy top-of-mind. We believe these campaigns can increase brand awareness, visits, and purchase intent. In 2018,2020, Paid GMS was 20% of total Etsy.com GMS and grew 158% compared to 2019.
In 2020, we spent $158.0$500.8 million on marketing expenses, or 26.2%29.0% of revenue, up 44.9%132.3% over 2017.2019. In 2017,2019, we spent $109.1$215.6 million on marketing expenses, or 24.7%26.3% of revenue, up 32.6%36.4% over 2016.2018. We increased digital marketing spend, which excludes brand marketing channels such as TV, by 157% in 2020 to $344.7 million, including $332.2 million of which was spend for the Etsy marketplace, up 157% from 2019.
Investment in Technology
Our engineering team has built a sophisticated platform that enables millions of Etsy sellers and Etsy buyers to smoothly transact across borders, languages and devices. We have made, and will continue to make, significant investments in our platform to attract buyers and sellers to ourthe Etsy marketplace and enhance their experience.
In September 2016, we acquired Blackbird Technologies, Inc., (“Blackbird”), a machine learning company,We completed our principal migration to Google Cloud in February 2020, and during 2017, fully integrated it into our search team. During 2017, we launched CSR, which leverages our internal data to create a more personalized search experience. We continued to improve the search experience using CSR throughout 2018 and will continue to leverage artificial intelligence and machine learning to enable shoppers to more easily browse, filter and transact, even when they may not have something specific in mind.
Our technology infrastructure allows us to scale our efforts across the platform. As the COVID-19 pandemic shifted consumer shopping habits to more online commerce, traffic volume increased dramatically and the cloud migration enabled us to dynamically flex our infrastructure. In addition to its flexible capacity, we also believe that the fourth quarter of 2017, we began workingcloud will enhance our overall infrastructure by providing faster processing speed, improved page load time, and more nimble technology on an initiativeas-needed basis. We expect to migrate our data centerscontinue to the cloud. We believe that moving to Google Cloud will enable us to focus on growing our core Etsy.com marketplace, prioritizing the buyer and seller experience, improvingenhance our search and discovery effectiveness,capabilities and increasing the pace of launching new features. In the third quarter of 2018, we achieved a significant milestoneleverage our machine learning technology to deliver an even more personalized shopping experience in the process by successfully migrating our website and mobile apps to Google Cloud. While this initiative is underway, we will incur implementation costs in addition to costs associated with maintaining our current infrastructure. We expect to complete the migration by the beginning of 2020.future.
In 2018,2020, we spent $97.2$180.1 million on product development expenses, or 16.1%10.4% of revenue, up 30.3%47.8% over 20172019, and in 2017,2019 we spent $74.6$121.9 million on product development expenses, or 16.9%14.9% of revenue, up 35.5%25.3% over 2016. In addition, we capitalized website development and internal-use software costs, including stock-based compensation, of $22.1 million and $10.8 million in 2018 and 2017, respectively.2018. We plan to continue to invest in innovation to address the needs of our community and increase our efforts to recruit and hire employees to work on our engineering teams.
Investment in Connected Experience—Mobile and Desktop
We want to engage Etsy buyers wherever they are and to provide an enjoyable and accessible shopping experience no matter what device they use to access our marketplace.regardless of the format. Mobile is integrated into everything that we do, and expanding our mobile capabilities is an important focus area. Our mobile websitewebsites and our “Buy on Etsy” mobile apps for Etsy buyers include search and discovery, curation, personalization, augmented reality, and social shopping features, optimized for a personal mobile experience. Our Etsy.com iOS and Android mobile apps have been downloaded approximately 56 million times as of December 31, 2018. Mobile GMS was 55%62% of total Etsy.com GMS in 2018,2020, up from 51% of total GMS59% in 2017.2019. We are focused on increasingincreasing conversion rates in general; however, we are particularly focused on mobilerates. Mobile web which continued to becontributes the largest drivershare of both overall visits growth and mobile GMS growth. Mobile web conversion rate is about half the conversion rate ontraffic, followed by desktop and the conversion rate on our
mobile Buy on Etsy app is about 1.2x the desktop conversion rate. Therefore, if mobile web visits continue to grow as aapp. We believe growth in percentage of overallmobile app visits it could be a headwindtailwind to future conversion rate gains. We are focused on continuing to enhancegains, as our mobile app channel has the buyer experience throughhighest conversion rate, followed by desktop and mobile offering improvements in 2019.web.
International Growth
Our growth will depend in part on international Etsy sellers and international Etsy buyers constituting an increasing portion of our community. Our vision is global and local. Etsy.com isOur websites are available in 10many languages and supports buyers and sellers in nearly every country in the world. In 2018, we entered into a referral agreement with DaWanda GmbH (“DaWanda”), a privately held Germany-based marketplace for gifts and handmade items. As part of this agreement, DaWanda agreed to encourage its community of buyers and sellers to migrate to the Etsy platform. The referral agreement with DaWanda allowed us to grow our international business by expanding our footprint in Central Europe, particularly in Germany, one of our core geographic markets. International
On a consolidated basis, international GMS was 35%was 36% of total GMS in 2018 compared to 33% in 2017. We expect international GMS to grow faster than U.S. GMS in 2019, assuming that currency rates remain stable compared to average levels in December 2018, driven by our efforts to build local communitiesboth 2020 and foster local connections. 2019.
In 2018, 37.5%2020, 43% of Etsy sellers were located outside the United States. Cross-border transactions is the largest component of international GMS and we remain committed to reducing barriers such as language and currency so that sellers and buyers from different countries can easily connect and transact. For the Etsy marketplace, GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country grew approximately 36%182% in 20182020 compared with 2017,2019, making it the fastest growing category of international GMS. The Reverb marketplace has a smaller percent of international GMS relative to the Etsy marketplace.
We are also focused on buildingsee significant opportunity to deliver a more localized shopping experience to non-U.S. buyers in the future. This opportunity may include making investments in the elevation of local marketplaces globally,products and deepening local Etsy communities around the world, each with its own ecosystem of Etsy sellers in search, improving non-English search, and Etsy buyers. To execute on our international strategy, we plan to continue to invest in localproviding more localized marketing and other locally-relevant tools and enhancements, such as local search boost, to encourage these connections around the world.campaigns.
Our Company Culture
Our success depends, in part, on our ability to attract, retain, and motivate exceptional employees who share our dedication to our community and our mission to “Keep Commerce Human.” We believe that our action-oriented, values-based and purpose-driven work culture is a competitive advantage in attracting and retaining top talent.
We are focused on employee engagement, which is linked with high performance, retention, innovation, and growth. Each year, Etsy conducts an internal survey to measure employee engagement. In 2018, our overall engagement score was 70% favorable, up 10% from the prior year. We are also committed to fostering a diverse and inclusive workplace because we firmly believe that diverse backgrounds, thoughts, and experiences are beneficial to innovation, decision making, and our business as a whole. We are proud that as of December 31, 2018,
For further information related to our Board of Directorsapproach to Human Capital see “Item 1. Business—Our Impact Strategy and leadership were at least 50% female.Progress.”
Components of Our Results of Operations
Revenue
Our revenue consistsis diversified, generated from a mix of Marketplace revenue, Services revenue,marketplace activities and Other revenue.other optional services we provide to sellers to help them generate more sales and scale their businesses.
Marketplace revenue.Marketplace revenue is primarily comprised of the fees a seller pays us for marketplace activities. Marketplace activities include listing an item for sale; completing transactions between a buyer and a seller, which includes, beginning in the second quarter of 2020, an additional transaction fee related to offsite advertising; and using our payments services to process payments, including foreign currency transactions. Etsy fees include the $0.20 listing fee for each item listed (for up to four months), the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, the listingwhere applicable, an additional transaction fee of $0.20 she pays12% or 15% related to offsite advertising, and fees for each item she lists (for up to four months) on Etsy.com, and Etsy Payments, our payment processing service. On July 16, 2018, we increased our seller transaction fee from 3.5% to 5%, and now apply it to the cost of shipping in addition to the cost of the item.product.
Services revenue.Services revenue is derived from optional services offered to Etsy sellers, which include Promoted Listings, Etsy Shipping Labels, Pattern, and Etsy Plus.
Revenue from Promoted Listings, our on-site advertising service, consistscomprised of cost-per-clickthe fees an Etsya seller pays us for our optional other services. Services primarily include on-site advertising services, which allows sellers to pay for prominent placement of hertheir listings in search results in our marketplace.
Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays us when she purchasesresults; and shipping labels, directly through our platform, net of the cost we incurwhich allows sellers in purchasing those shipping labels. We are able to provide our sellers shipping labels from the United States, Postal Service, FedEx, Canada, Post, Royal Mail,United Kingdom, and DAI Post atAustralia to purchase discounted pricing due to the volume of purchases through our platform.
Revenue from Pattern consists of monthly subscription fees an Etsy seller pays to use our custom website services.
Revenue from Etsy Plus consists of monthly subscription fees an Etsy seller pays for enhanced tools and credits for use on our platform.
Other revenue. Other revenue includes the fees we receive from commercial partnerships.shipping labels.
Our revenue recognition policies are discussed under “Critical“Note 1—Basis of Presentation and Summary of Significant Accounting Policies and Significant Judgments and Estimates.”Policies” in the Notes to Consolidated Financial Statements.
Cost of Revenue
Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees, and credit card chargebacks to support Etsy Paymentspayments revenue, and costs of refunds made to Etsy buyers that we are not able to collect from Etsy sellers. Cost of revenue also includes expenses associated with the operation and maintenanceusage of our platform and our data centers,cloud infrastructure, including employee-related costs,expenses, hosting and bandwidth costs, and depreciation and amortization. Our cost of revenue as a percentage of revenue may change over time as our revenue mix changes; for example, to the extent that Etsy Paymentspayments revenue increases as a percentage of revenue, there may be a dampening effect on our gross margin, as Etsy Payments is aour payments services are lower margin productproducts compared to our other offerings.
Operating Expenses
Operating expenses consist of marketing, product development, and general and administrative expenses, and asset impairment charges. Direct and indirect employee-relatedexpenses. Employee compensation-related expenses are the most significant component of the product development and general and administrative expense categories. We include stock-based compensation expense in the applicable operating expense category based on the respective equity award recipient’s function. We include restructuring and other exit costs (income) related to the Actions in the applicable operating expense category of the impacted function.
Marketing: Marketing expenses largelyprimarily consist of direct marketing and indirect employee-related expenses, to support our marketing initiatives. Direct marketingwhich largely includes digital marketing brand marketing and television seller lifecyclead and growth activities, public relations, communications, and marketing partnerships.digital video expenses. Digital marketing, also referred to as performance marketing, primarily consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing, social channels, and affiliate programs, and display advertising which are focused on buyer acquisition and retargeting. To a lesser extent, direct marketing expenses also include brand marketing.marketing, public relations and communications, marketing partnerships, and customer relationship management. Marketing expenses also include employee compensation-related expenses to support our marketing initiatives.
Product development: Product development expenses consist primarily of employee-relatedemployee compensation-related expenses for our engineering, product management, product design, and product research activities. Additional expenses include consulting costs related to the development, quality assurance, and testing of new technology and enhancement of our existing technology.
General and administrative.administrative: General and administrative expenses consist primarily of employee-relatedemployee compensation-related expenses for our general corporate functions. General and administrative expenses also include costs associated with the use of facilities and equipment, including depreciation and amortization and office overhead, bad debt expense, and certain professional services expenses.
Asset impairment charges: Asset impairment charges consist primarily of non-cash charges related to our decisions to discontinue certain product offerings and the impairment of the related capitalized web development and internal-use software costs.
Other (Expense) Income, net
Other (expense) income,Expense, net
Other expense, net consists of loss on extinguishment of debt, interest expense, interest and other income, and foreign exchange (loss) gain. Loss on extinguishment of debt relates to the partial repurchase of our 2018 Notes in 2020. Interest expense consists primarily of non-cash interest and amortization of debt issuance costs related to our Convertible Senior2018 Notes, due 2023,2019 Notes, and 2020 Notes. As part of the adoption of ASU 2016-02—Leases in the first quarter of 2019, interest expense includes interest associated with our Brooklyn headquarters lease, and, to a lesser extent, interest on our hosting and computer equipment leases, both accounted for as finance leases. Prior to 2019, interest expense included interest associated with the build-to-suit accounting treatment of our Brooklyn headquarters lease, and, to a lesser extent, interest on our hosting and computer equipment leases, accounted for as capital lease obligations. Interest and other income is primarily comprised of interest and dividend income from our investment accounts.
(Provision) Benefit for Income Taxes
Our effective tax rate and the (provision) benefit for income taxes is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, taxable income and loss in each jurisdiction, changes in our stock price, audit-related developments, acquisitions, changes in our 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 magnitude of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when pre-tax income is lower.
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 statutes of limitations. To the extent that the results differ from our original or adjusted estimates, the effect will be recorded in (provision) benefit for income taxes.
The (provision) benefit for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which we operate. 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 us. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on our tax provision and results of operations.
Results of Operations
The following tables show our results of operations for the periods presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| | (in thousands) |
| Revenue: | | | | | |
| Marketplace | $ | 1,303,126 | | | $ | 593,646 | | | $ | 444,765 | |
| Services | 422,499 | | | 224,733 | | | 158,928 | |
| | | | | |
| Total revenue | 1,725,625 | | | 818,379 | | | 603,693 | |
| Cost of revenue | 464,745 | | | 271,036 | | | 190,762 | |
| Gross profit | 1,260,880 | | | 547,343 | | | 412,931 | |
| Operating expenses: | | | | | |
| Marketing | 500,756 | | | 215,570 | | | 158,013 | |
| Product development | 180,080 | | | 121,878 | | | 97,249 | |
| General and administrative | 156,035 | | | 121,134 | | | 82,883 | |
| | | | | |
| Total operating expenses | 836,871 | | | 458,582 | | | 338,145 | |
| Income from operations | 424,009 | | | 88,761 | | | 74,786 | |
| Other expense, net | (58,300) | | | (8,115) | | | (19,708) | |
| Income before income taxes | 365,709 | | | 80,646 | | | 55,078 | |
| (Provision) benefit for income taxes | (16,463) | | | 15,248 | | | 22,413 | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenue: | | | | | |
| Marketplace | 75.5 | % | | 72.5 | % | | 73.7 | % |
| Services | 24.5 | | | 27.5 | | | 26.3 | |
| | | | | |
| Total revenue | 100.0 | | | 100.0 | | | 100.0 | |
| Cost of revenue | 26.9 | | | 33.1 | | | 31.6 | |
| Gross profit | 73.1 | | | 66.9 | | | 68.4 | |
| Operating expenses: | | | | | |
| Marketing | 29.0 | | | 26.3 | | | 26.2 | |
| Product development | 10.4 | | | 14.9 | | | 16.1 | |
| General and administrative | 9.0 | | | 14.8 | | | 13.7 | |
| | | | | |
| Total operating expenses | 48.5 | | | 56.0 | | | 56.0 | |
| Income from operations | 24.6 | | | 10.8 | | | 12.4 | |
| Other expense, net | (3.4) | | | (1.0) | | | (3.3) | |
| Income before income taxes | 21.2 | | | 9.9 | | | 9.1 | |
| (Provision) benefit for income taxes | (1.0) | | | 1.9 | | | 3.7 | |
| Net income | 20.2 | % | | 11.7 | % | | 12.8 | % |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
| | (in thousands) |
| Revenue: | | | | | |
| Marketplace | $ | 440,740 |
| | $ | 326,076 |
| | $ | 269,628 |
|
| Services | 158,928 |
| | 111,869 |
| | 89,433 |
|
| Other | 4,025 |
| | 3,286 |
| | 5,906 |
|
| Total revenue | 603,693 |
| | 441,231 |
| | 364,967 |
|
| Cost of revenue | 190,762 |
| | 150,986 |
| | 123,328 |
|
| Gross profit | 412,931 |
| | 290,245 |
| | 241,639 |
|
| Operating expenses: | | | | | |
| Marketing | 158,013 |
| | 109,085 |
| | 82,248 |
|
| Product development | 97,249 |
| | 74,616 |
| | 55,083 |
|
| General and administrative | 82,883 |
| | 91,486 |
| | 86,180 |
|
| Asset impairment charges | — |
| | 3,162 |
| | 551 |
|
| Total operating expenses | 338,145 |
| | 278,349 |
| | 224,062 |
|
| Income from operations | 74,786 |
| | 11,896 |
| | 17,577 |
|
| Other (expense) income, net | (19,708 | ) | | 20,369 |
| | (20,453 | ) |
| Income (loss) before income taxes | 55,078 |
| | 32,265 |
| | (2,876 | ) |
| Benefit (provision) for income taxes | 22,413 |
| | 49,535 |
| | (27,025 | ) |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) |
| | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Revenue: | | | | | |
| Marketplace | 73.0 | % | | 73.9 | % | | 73.9 | % |
| Services | 26.3 |
| | 25.4 |
| | 24.5 |
|
| Other | 0.7 |
| | 0.7 |
| | 1.6 |
|
| Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Cost of revenue | 31.6 |
| | 34.2 |
| | 33.8 |
|
| Gross profit | 68.4 |
| | 65.8 |
| | 66.2 |
|
| Operating expenses: | | | | | |
| Marketing | 26.2 |
| | 24.7 |
| | 22.5 |
|
| Product development | 16.1 |
| | 16.9 |
| | 15.1 |
|
| General and administrative | 13.7 |
| | 20.7 |
| | 23.6 |
|
| Asset impairment charges | — |
| | 0.7 |
| | 0.2 |
|
| Total operating expenses | 56.0 |
| | 63.1 |
| | 61.4 |
|
| Income from operations | 12.4 |
| | 2.7 |
| | 4.8 |
|
| Other (expense) income, net | (3.3 | ) | | 4.6 |
| | (5.6 | ) |
| Income (loss) before income taxes | 9.1 |
| | 7.3 |
| | (0.8 | ) |
| Benefit (provision) for income taxes | 3.7 |
| | 11.2 |
| | (7.4 | ) |
| Net income (loss) | 12.8 | % | | 18.5 | % | | (8.2 | )% |
Comparison of Years Ended December 31, 20182020 and 20172019
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | | |
| | | (in thousands, except percentages) |
| Revenue: | | | | | | | | | | | | | | |
| Marketplace | | $ | 1,303,126 | | | $ | 593,646 | | | $ | 709,480 | | | 119.5 | % | | $ | 444,765 | | | $ | 148,881 | | | 33.5 | % |
| Percentage of total revenue | | 75.5 | % | | 72.5 | % | | | | | | 73.7 | % | | | | |
| Services | | $ | 422,499 | | | $ | 224,733 | | | $ | 197,766 | | | 88.0 | % | | $ | 158,928 | | | $ | 65,805 | | | 41.4 | % |
| Percentage of total revenue | | 24.5 | % | | 27.5 | % | | | | | | 26.3 | % | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total revenue | | $ | 1,725,625 | | | $ | 818,379 | | | $ | 907,246 | | | 110.9 | % | | $ | 603,693 | | | $ | 214,686 | | | 35.6 | % |
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2018 | | 2017 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Revenue: | | | | | | | | |
| Marketplace | | $ | 440,740 |
| | $ | 326,076 |
| | $ | 114,664 |
| | 35.2 | % |
| Percentage of total revenue | | 73.0 | % | | 73.9 | % | | | | |
| Services | | $ | 158,928 |
| | $ | 111,869 |
| | $ | 47,059 |
| | 42.1 | % |
| Percentage of total revenue | | 26.3 | % | | 25.4 | % | | | | |
| Other | | $ | 4,025 |
| | $ | 3,286 |
| | $ | 739 |
| | 22.5 | % |
| Percentage of total revenue | | 0.7 | % | | 0.7 | % | | | | |
| Total revenue | | $ | 603,693 |
| | $ | 441,231 |
| | $ | 162,462 |
| | 36.8 | % |
GMSRevenue increased $678.1$907.2 million, or 20.8%110.9%, to $3.9$1.7 billion in the year ended December 31, 20182020 compared to the year ended December 31, 2017. On a currency-neutral basis (excluding the direct impact2019, of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2018 would have been 20.4%, or approximately 40 basis points lower than the reported 20.8% growth. Supporting this growth in GMS, active sellers increased 9.4% to 2.1 millionwhich 75.5% consisted of Marketplace revenue and active buyers increased 18.2% to 39.4 million at December 31, 2018 compared to December 31, 2017. In the year ended December 31, 2018, GMS from new buyers grew 16% year-over-year and represented approximately 18%24.5% consisted of overall GMS, a decrease compared to last year. In the year ended December 31, 2018, GMS from existing buyers grew 23% year-over-year and represented approximately 82% of overall GMS, an increase compared to last year. We anticipate continued visit growth and improved conversion in 2019. We believe conversion improvements will be driven primarily by product launches enhancing the buyer experience.Services revenue.
During the year ended December 31, 2018, mobile GMS increased as a percentagesecond quarter of total GMS2020, Etsy transitioned from its combined “Etsy Ads” on-site and offsite advertising to approximately 55%, up from approximately 51%two separate advertising offerings: Offsite Ads, with 12% or 15% transaction fees reported in Marketplace revenue, and Etsy Ads, the new name for the year ended December 31, 2017. We believe this increase was a result of increased mobile traffic, and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers. Mobile GMS growth during the year ended December 31, 2018 was approximately 30%on-site advertising product (formerly Promoted Listings), with mobile web and mobile app GMS each continuingadvertising fees reported in Services revenue.
Marketplace revenue increased $709.5 million, or 119.5%, to grow faster than desktop GMS during the year.
For the year ended December 31, 2018, international GMS increased as a percentage of total GMS to 35%, up from approximately 33% for the year ended December 31, 2017. International GMS was up approximately 28%$1.3 billion in the year ended December 31, 20182020 compared to the year ended December 31, 2017, driven by GMS between U.S. buyers and international sellers and by our fastest growing international trade route, international domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both2019. This growth was substantially all due to an increase in the same country. International domesticvolume of GMS grew approximately 36% in 2018 compared with 2017. On a currency-neutral basis international GMS growthon our marketplaces for the year ended December 31, 2018 would have been 27%. We expect international GMS to continue to grow faster than U.S. GMS, assuming that currency rates remain stable compared to average levels in December 2018, driven by our global product enhancements and marketing.
Revenue increased $162.5 million, or 36.8%, to $603.7 million in the year ended December 31, 2018 compared to the year ended December 31, 2017, of which 73.0% consisted of Marketplace revenue and 26.3% consisted of Services revenue.
Marketplace revenue increased $114.7 million, or 35.2%, to $440.7 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. This growth corresponded with a 20.8% increase in GMS2020 to a total of $3.9$10.3 billion, forand the year ended December 31, 2018.balance was due to pricing related to the introduction of our new Offsite Ads transaction fee in May 2020. A significant majority of the growth in volume of GMS was driven by the Etsy marketplace. The balance was due to our acquisition of Reverb in the third quarter of 2019, whose revenue consisted principally of Marketplace revenue increased at a faster rate than GMS primarily due torevenue.
Within the increase in volume of GMS, transaction revenue and Etsy Payments revenue for the year ended December 31, 2018 compared to the year ended December 31, 2017. Transactionincreased 103.9%, payments revenue increased 59.6% year-over-year, primarily driven by our 2018 pricing updates, which drove approximately 41% of the 59.6% increase. Etsy Payments120.1%, and listing fee revenue increased 24.4%, largely driven by overall GMS growth trends and increased seller adoption.grew 65.4% year-over-year. The share of Etsy.com GMS processed through our Etsy Payments platform was 86%92% for the year ended December 31, 2018,2020, up from 85%89% for the year ended December 31, 2017,2019, primarily due to the transition of sellers in eligible countries to the platform. During the second quarter of 2018, we reached the anniversary of the Etsy Payments adoption requirement, which has been a substantial driver of year-over-year Etsy Payments revenue growth, and therefore, we expect Etsy Payments to grow more closely in-line with year-over-year GMS growth in future quarters. Listing fee revenue grew 17.0%, driven by an increase in charged listings year-over-year corresponding with the increase in overall GMS growth.
Listing fee revenue increased at a slower rate than GMS primarily due to the issuance of free listings in our international markets, including France and Germany.
Services revenue increased $47.1$197.8 million, or 42.1%88.0%, to $158.9$422.5 million in the year ended December 31, 20182020 compared to the year ended December 31, 2017.2019. The growth in Services revenue was primarily driven by an increase of 83.5% in Promoted Listings, up 41.4%,on-site advertising revenue, which represented a significant majority of the overall Services revenue growth, and, to a lesser extent, Etsy Shipping Labels, up 39.9%.an increase in shipping label revenue of 147.7% from the prior year. The increase in Promoted Listingsadvertising revenue was primarily due to higher click volume and overall product enhancements, including expansionon Etsy Ads (formerly Promoted Listings). At December 31, 2020, 22% of Promoted Listing budgets and context specific ranking on Promoted Listings, which increased the relevance of promoted adsEtsy active sellers used Etsy advertising services, up from 17% in our search results.2019. The increase in Etsy Shipping Labelshipping label revenue was primarily driven by a combination of an increase in label volume, and anthe majority of which is driven by the increase in average margin per label. Additionally, Etsy Shipping Label revenue reflects a one-time adjustment to recognize prior period revenue which drove $2.8 million of the increase. At December 31, 2018, 15.1% of active sellers used Promoted Listings, and 24.7% of active sellers in the United States, Canada, United Kingdom, and Australia used Etsy Shipping Labels.GMS.
Cost of Revenue
| | | | | Year Ended
December 31, | | Change | | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | 2018 | | 2017 | | $ | | % | | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands except percentages) | | | (in thousands, except percentages) |
| Cost of revenue | | $ | 190,762 |
| | $ | 150,986 |
| | $ | 39,776 |
| | 26.3 | % | Cost of revenue | | $ | 464,745 | | | $ | 271,036 | | | $ | 193,709 | | | 71.5 | % | | $ | 190,762 | | | $ | 80,274 | | | 42.1 | % |
| Percentage of total revenue | | 31.6 | % | | 34.2 | % | | | | | Percentage of total revenue | | 26.9 | % | | 33.1 | % | | 31.6 | % | |
Cost of revenue increased $39.8$193.7 million, or 26.3%71.5%, to $190.8$464.7 million in the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, primarily driven by additionalincreased costs as a result of the increase in transactionsrelated to overall volume increases on our marketplaces, including payments fees and related revenue generated on the Etsy platform. The remaining increase was driven bycloud-related hosting and bandwidth costs incurredcosts. We gained leverage as a resultcost of revenue did not increase as fast as revenue. The increase in our migrationgross margin from 2019 to 2020 was primarily due to the cloud while also maintaining our current infrastructure, and,shift to a lesser extent, increasesOffsite Ads in employee-related and professional services expenses. Costthe second quarter of 2020, which drives revenue growth without an equal offset in cost of revenue decreased as a percentagethe expense is recorded in marketing.
Operating Expenses
There were a total of 8741,414 employees on December 31, 2018,2020, compared with 7441,240 on December 31, 2017.2019. We expect an increase in employee compensation-related expenses, including stock-based compensation, in 2021 primarily driven by headcount increases to support the growth in our business.
Marketing
| | | | | Year Ended
December 31, | | Change | | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | 2018 | | 2017 | | $ | | % | | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands except percentages) | | | (in thousands, except percentages) |
| Marketing | | $ | 158,013 |
| | $ | 109,085 |
| | $ | 48,928 |
| | 44.9 | % | Marketing | | $ | 500,756 | | | $ | 215,570 | | | $ | 285,186 | | | 132.3 | % | | $ | 158,013 | | | $ | 57,557 | | | 36.4 | % |
| Percentage of total revenue | | 26.2 | % | | 24.7 | % | | | | | Percentage of total revenue | | 29.0 | % | | 26.3 | % | | 26.2 | % | |
Marketing expenses increased $48.9$285.2 million, or 44.9%132.3%, to $158.0$500.8 million in the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, primarily as a result of increased spend onin digital marketing, related to buyer acquisition, and, to a lesser extent, increased direct marketing expenses associated with our television ad campaigns. These increases were offset by decreasesThe increase in employee-related expensesdigital marketing was largely due to a reductionincreased site traffic and the shift to our Offsite Ads offering beginning in average headcount and $3.0 millionthe second quarter of restructuring and other exit costs associated with the Actions included2020. Paid GMS was 20% of overall Etsy.com GMS in marketing expense for the year ended December 31, 2017 that did not recur2020, up from paid GMS of 15% in 2018. Excluding the impactyear ended December 31, 2019, which is a result of restructuringhigher return on ad spend due to favorable competitive dynamics and other exit costs, non-GAAP marketing expenses increased $52.0 million, or 49.0%. In 2019, we expectthe launch of Offsite Ads. Etsy began charging sellers an offsite advertising transaction fee on May 4, 2020; 9% of Etsy GMS was subject to increase our investmentan Offsite Ads transaction fee in marketing, including into channels such as television.
2020.
Product development
| | | | | Year Ended
December 31, | | Change | | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | 2018 | | 2017 | | $ | | % | | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands except percentages) | | | (in thousands, except percentages) |
| Product development | | $ | 97,249 |
| | $ | 74,616 |
| | $ | 22,633 |
| | 30.3 | % | Product development | | $ | 180,080 | | | $ | 121,878 | | | $ | 58,202 | | | 47.8 | % | | $ | 97,249 | | | $ | 24,629 | | | 25.3 | % |
| Percentage of total revenue | | 16.1 | % | | 16.9 | % | | | | | Percentage of total revenue | | 10.4 | % | | 14.9 | % | | 16.1 | % | |
Product development expenses increased $22.6$58.2 million, or 30.3%47.8%, to $97.2$180.1 million in the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, primarily as a result of an increase in employee-relatedincreased employee compensation-related expenses, including stock-based compensation, and professional services expenses for consultants working on our product and engineering teams. Themainly driven by an increase in employee-related expenses includes approximately $8.5 millionaverage headcount at Etsy and the acquisition of expense in connection with certain employee departures, including $7.0 million in expense resulting from the modification of stock options and RSUs.Reverb. Additionally, $3.2 million of restructuring and other exit costs associated with the Actions is included inwe gained leverage as product development expenses for the year ended December 31, 2017. Excluding the impact of restructuring and other exit costs, non-GAAP product development expenses increased $26.0 million, or 36.4%.did not increase as fast as revenue.
General and administrative
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | | |
| | | (in thousands, except percentages) | | | | | | |
| General and administrative | | $ | 156,035 | | | $ | 121,134 | | | $ | 34,901 | | | 28.8 | % | | $ | 82,883 | | | $ | 38,251 | | | 46.2 | % |
| Percentage of total revenue | | 9.0 | % | | 14.8 | % | | | | | | 13.7 | % | | | | |
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2018 | | 2017 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| General and administrative | | $ | 82,883 |
| | $ | 91,486 |
| | $ | (8,603 | ) | | (9.4 | )% |
| Percentage of total revenue | | 13.7 | % | | 20.7 | % | | | | |
General and administrative expenses decreased $8.6increased $34.9 million, or 9.4%28.8%, to $82.9$156.0 million in the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, primarily due to decreased employee-relatedincreased employee compensation-related expenses, including stock-based compensation, mainly the result of a reductiondriven by an increase in average headcount at Etsy and $7.0 millionthe acquisition of restructuringReverb. General and other exit costs associated withadministrative expenses increased to a lesser extent due to bad debt expense, which increased as a result of the Actions includedgrowth in our business, but at a slower rate than revenue, and digital service tax, which was new in 2020. Additionally, we gained leverage as general and administrative expenses for the year ended December 31, 2017 that did not recurincrease as fast as revenue. We expect an increase in 2018. Excluding the impact of restructuring and other exit costs, non-GAAP general and administrative expenses decreased $1.6 million, or 1.9%. Upon adoption of ASU 2016-02, Leases stock-based compensation expense in 2019, we expect to recognize additional depreciation and amortization expense compared to the year ended December 31, 20182021, related to continued growth in the accounting treatment for our Brooklyn headquarters lease.business and to long-term equity incentive awards, which will be granted in the first quarter of 2021 to Josh Silverman, Etsy’s President and Chief Executive Officer.
Other Expense, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | | | | | | | | | | | |
| | (in thousands, except percentages) | | | | | | |
| Other expense, net: | | | | | | | | | | | | | |
| Loss on extinguishment of debt | $ | (16,855) | | | $ | — | | | $ | (16,855) | | | NM | | $ | — | | | $ | — | | | — | % |
| Percentage of total revenue | (1.0) | % | | — | % | | | | | | — | % | | | | |
| Interest expense | $ | (42,025) | | | $ | (24,320) | | | $ | (17,705) | | | 72.8 | % | | $ | (22,178) | | | $ | (2,142) | | | 9.7 | % |
| Percentage of total revenue | (2.4) | % | | (3.0) | % | | | | | | (3.7) | % | | | | |
| Interest and other income | $ | 7,102 | | | $ | 13,199 | | | $ | (6,097) | | | (46.2) | % | | $ | 8,957 | | | $ | 4,242 | | | 47.4 | % |
| Percentage of total revenue | 0.4 | % | | 1.6 | % | | | | | | 1.5 | % | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Foreign exchange (loss) gain | $ | (6,522) | | | $ | 3,006 | | | $ | (9,528) | | | (317.0) | % | | $ | (6,487) | | | $ | 9,493 | | | (146.3) | % |
| Percentage of total revenue | (0.4) | % | | 0.4 | % | | | | | | (1.1) | % | | | | |
| Other expense, net | $ | (58,300) | | | $ | (8,115) | | | $ | (50,185) | | | 618.4 | % | | $ | (19,708) | | | $ | 11,593 | | | (58.8) | % |
| Percentage of total revenue | (3.4) | % | | (1.0) | % | | | | | | (3.3) | % | | | | |
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2018 | | 2017 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Asset impairment charges | | $ | — |
| | $ | 3,162 |
| | $ | (3,162 | ) | | (100.0 | )% |
| Percentage of total revenue | | — | % | | 0.7 | % | | | | |
There were no asset impairment charges in the year ended December 31, 2018. Asset impairment charges were $3.2Other expense, net was $58.3 million in the year ended December 31, 2017. In the fourth quarter of 2017, we made the decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing,2020, which resulted in the recognition of a $3.2increased $50.2 million impairment charge to write the related capitalized web development and internal-use software assets down to zero. This decision was based on our strategy to focus on the growth of the Etsy.com marketplace.
Other (Expense) Income, net
|
| | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands except percentages) |
| Other (expense) income, net: | | | | | | | |
| Interest expense | $ | (22,178 | ) | | $ | (11,130 | ) | | $ | (11,048 | ) | | 99.3 | % |
| Percentage of total revenue | (3.7 | )% | | (2.5 | )% | | | | |
| Interest and other income | $ | 8,957 |
| | $ | 2,394 |
| | $ | 6,563 |
| | 274.1 | % |
| Percentage of total revenue | 1.5 | % | | 0.5 | % | | | | |
| Foreign exchange (loss) gain | $ | (6,487 | ) | | $ | 29,105 |
| | $ | (35,592 | ) | | (122.3 | )% |
| Percentage of total revenue | (1.1 | )% | | 6.6 | % | | | | |
| Other (expense) income, net | $ | (19,708 | ) | | $ | 20,369 |
| | $ | (40,077 | ) | | (196.8 | )% |
| Percentage of total revenue | (3.3 | )% | | 4.6 | % | | | | |
Other expense, net was $19.7from $8.1 million in the year ended December 31, 2018, which increased $40.1 million from other income, net of $20.4 million in the year ended December 31, 2017.2019. The increase in expense was primarily due to an increase in non-cash interest expense and a non-cash loss on extinguishment of debt of $16.9 million related to the partial repurchase of the 2018 Notes. The increase in non-cash interest expense was primarily driven by our 2019 Notes, which were issued in September 2019 and had 12 month of interest expense in 2020, and to a lesser extent our 2020 Notes, which were issued in August 2020 and had approximately four months of interest expense in 2020. Additionally, there was an increase in foreign exchange loss primarily due to the change in U.S. Dollar todollar, Euro, Pound Sterling, and Canadian dollar exchange rates on our intercompany and other non-functionalnon-functional currency cash balances and higher interest expense, mainly non-cash interest related to our convertible debt issuedas well as a decrease in the first quarter of 2018, partially offset by increased interest and dividend income related to our investment accounts. Interest expense also includesaccounts and primarily driven by a decrease in interest rates in 2020 as compared to 2019. Following the adoption of ASU 2020-06 in the first quarter of 2021, we expect a decrease in non-cash interest expense associated with the build-to-suit lease accounting related to our corporate headquarters, which remained flat year-over-year. Uponthe Notes as there would not be any further amortization of the debt discount due to its derecognition. For more information on the adoption of ASU 2016-02, Leases 2020-06, see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” in 2019, we expectthe Notes to recognize decreased interest expense compared to the year ended December 31, 2018 related to the accounting treatment for our Brooklyn headquarters lease.Consolidated Financial Statements.
(Provision) Benefit for Income Taxes
| | | | | | | | | | | | | Year Ended
December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | | Year Ended
December 31, | | Change | | | 2020 | | 2019 | | $ | | % | | 2018 | | $ | | % |
| | | 2018 | | 2017 | | $ | | % | | | | | | | | | | | | | | |
| | | | | | | | | | | | (in thousands, except percentages) | |
| | | (in thousands except percentages) | |
| Benefit for income taxes | | $ | 22,413 |
| | $ | 49,535 |
| | $ | (27,122 | ) | | (54.8 | )% | |
| (Provision) benefit for income taxes | | (Provision) benefit for income taxes | | $ | (16,463) | | | $ | 15,248 | | | $ | (31,711) | | | (208.0) | % | | $ | 22,413 | | | $ | (7,165) | | | 32.0 | % |
| Percentage of total revenue | | 3.7 | % | | 11.2 | % | | | | | Percentage of total revenue | | (1.0) | % | | 1.9 | % | | 3.7 | % | |
Our income tax provision and benefit for the years ended December 31, 20182020 and 20172019 was $22.4$16.5 million and $49.5$15.2 million, respectively.
The primary drivers of our income tax provision for the year ended December 31, 2020 was tax expense of $63.6 million on income before income taxes, partially offset by tax benefits from employee stock-based compensation of $45.4 million.
The primary drivers of our income tax benefit for the year ended December 31, 20182019 were tax benefit related to valuation allowance of $28.7 million,benefits from employee stock-based compensation of $11.7$16.3 million, and oura benefit related to research and development tax credit of $4.1 million. These were$9.9 million, partially offset by tax expense related toof $11.5 million on income before income taxes of $11.3 million, state and local tax expense of $3.8 million, and the inclusion of additional taxes of $3.9 million due to certain provisions of the Tax Cuts and Jobs Act of 2017, as enacted by the U.S. Federal Government on December 22, 2017, (the “TCJA”).
The primary driver of our income tax benefit for the year ended December 31, 2017 was the impact on deferred taxes from the reduction in the U.S. federal corporate tax rate beginning in 2018. As a result of the TCJA, which reduced the corporate income tax rate from 35% to 21%, our deferred taxes and certain unrecognized tax benefits at December 31, 2017 have been revalued at the reduced 21% rate. The revaluation resulted in a benefit for income taxes of approximately $31.1 million for the year ended December 31, 2017.
The secondary driver of the income tax benefit for the year ended December 31, 2017 was the recognition of excess tax benefits from stock-based compensation as a result of the adoption of ASU 2016-09—Stock Compensation: Improvements to Employee Share-based Payment Accounting in the first quarter of 2017. As a result of this updated guidance, we recorded $12.8 million of excess tax benefits, rather than additional paid-in capital, for the year ended December 31, 2017.
For both periods, other drivers include the mix of income and losses in jurisdictions with a wide range of tax rates, the disallowance of the benefit of losses in certain foreign jurisdictions and the amount of non-deductible stock-based compensation expense.
taxes.
Comparison of Years Ended December 31, 2017and 2016
Revenue
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Revenue: | | | | | | | | |
| Marketplace | | $ | 326,076 |
| | $ | 269,628 |
| | $ | 56,448 |
| | 20.9 | % |
| Percentage of total revenue | | 73.9 | % | | 73.9 | % | | | | |
| Services | | $ | 111,869 |
| | $ | 89,433 |
| | $ | 22,436 |
| | 25.1 | % |
| Percentage of total revenue | | 25.4 | % | | 24.5 | % | | | | |
| Other | | $ | 3,286 |
| | $ | 5,906 |
| | $ | (2,620 | ) | | (44.4 | )% |
| Percentage of total revenue | | 0.7 | % | | 1.6 | % | | | | |
| Total revenue | | $ | 441,231 |
| | $ | 364,967 |
| | $ | 76,264 |
| | 20.9 | % |
GMS increased $411.6 million, or 14.5%, to $3.3 billion in the year ended December 31, 2017 compared to the year ended December 31, 2016. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2017 would have been 14.3%, or approximately 20 basis points lower than the reported 14.5% growth. Supporting this growth in GMS, active sellers increased 10.6% to 1.9 million and active buyers increased 16.8% to 33.4 million at December 31, 2017 compared to December 31, 2016. In the year ended December 31, 2017, GMS from new buyers increased 13% year-over-year and represented approximately 19% of overall GMS, a slight decrease compared to last year. In the year ended December 31, 2017, GMS from existing buyers increased 16% year-over-year and represented approximately 81% of overall GMS, a slight increase compared to last year.
During the year ended December 31, 2017, mobile GMS increased as a percentage of total GMS to approximately 51%, up from approximately 48% for the year ended December 31, 2016. We believe this increase was a result of increased mobile traffic, and, to a lesser extent, continued improvements in our mobile offerings for Etsy buyers. Mobile web continued to be the largest driver of mobile GMS growth. Mobile GMS growth during the year ended December 31, 2017 was approximately 22%, with mobile web and mobile app GMS each continuing to grow faster than desktop GMS during the year. Year-over-year, mobile conversion rates continued to grow faster than desktop conversion rates.
For the year ended December 31, 2017, international GMS increased as a percentage of total GMS to 33%, from 30% for the year ended December 31, 2016, largely driven by continued GMS growth between U.S. buyers and international sellers, and buyers and sellers outside of the U.S., both in the same country and cross-border. GMS growth between international buyers and sellers in the same country was the fastest growing category of international GMS, up approximately 45% year-over-year during the year ended December 31, 2017 compared to the year ended December 31, 2016. International GMS was up approximately 23% in the year ended December 31, 2017 compared to the year ended December 31, 2016, growing faster than overall GMS.
Revenue increased $76.3 million, or 20.9%, to $441.2 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, of which 73.9% consisted of Marketplace revenue and 25.4% consisted of Services revenue.
Marketplace revenue increased $56.4 million, or 20.9%, to $326.1 million in the year ended December 31, 2017 compared to the year ended December 31, 2016. This growth corresponded with a 14.5% increase in GMS to a total of $3.3 billion in the year ended December 31, 2017. Marketplace grew at a faster rate than GMS primarily due to the increase in Etsy Payments, up 31.6%, largely driven by overall GMS growth trends and increased seller adoption. The share of GMS processed through our Etsy Payments platform was 85%, for the year ended December 31, 2017, up from 78% in the year ended December 31, 2016, primarily due to the transition of nearly all sellers in eligible countries to the platform. Transaction fee revenue grew 14.1% and listing fee revenue grew 12.3%, driven by overall GMS trends. Listing fee revenue grew at a slower rate than GMS primarily due to the issuance of free listings for promotional activities focused on driving growth in our international markets in the second half of 2017, including listings granted for the transition of our ALM sellers to the Etsy marketplace.
Services revenue increased $22.4 million, or 25.1%, to $111.9 million in the year ended December 31, 2017 compared to the year ended December 31, 2016. The growth in Services revenue was primarily driven by an increase in revenue from Promoted Listings, up 25.0%, and, to a lesser extent, Etsy Shipping Labels, up 16.7%, and Pattern, up 84.8%. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements. The increase in Etsy Shipping Label
revenue reflects a combination of an increase in label volume and average margin per label. The increase in Pattern revenue was primarily due to the incremental monthly paid subscription periods in 2017, as the product launched in April 2016, with the first paid subscriptions beginning in May 2016. At December 31, 2017, 15.0% of active sellers used Promoted Listings, and 28.1% of active sellers in the United States and Canada used Etsy Shipping Labels.
Other revenue decreased $2.6 million, or 44.4%, to $3.3 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, mainly due to a decrease in revenue from accumulated unused gift card funds received from our third-party service provider, down 73.4%. In the year ended December 31, 2016, we recognized $1.7 million in revenue from accumulated unused gift cards, which represented the three-year cumulative value of gift cards that the third-party service provider has concluded are not likely to be redeemed. In 2017, unused gift card revenue was recognized monthly as earned and is not anticipated to be significant in future periods. In addition, processing fees from PayPal, a third-party payment processor, decreased 30.2% as a result of the transition of nearly all sellers in eligible countries to Etsy Payments in 2017.
Cost of Revenue
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Cost of revenue | | $ | 150,986 |
| | $ | 123,328 |
| | $ | 27,658 |
| | 22.4 | % |
| Percentage of total revenue | | 34.2 | % | | 33.8 | % | | | | |
Cost of revenue increased $27.7 million, or 22.4%, to $151.0 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily as a result of additional costs to support the increase in Etsy Payments revenue and, to a lesser extent, an increase in employee-related costs. Cost of revenue increased as a percentage of revenue primarily due to an increase in professional services expenses related to customer service support. Restructuring and other exit costs of $0.7 million associated with the Actions were included in cost of revenue for the year ended December 31, 2017.
Operating Expenses
There were a total of 744 employees on December 31, 2017, compared with 1,043 on December 31, 2016, reflecting headcount reductions associated with the Actions.
Marketing
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Marketing | | $ | 109,085 |
| | $ | 82,248 |
| | $ | 26,837 |
| | 32.6 | % |
| Percentage of total revenue | | 24.7 | % | | 22.5 | % | | | | |
Marketing expenses increased $26.8 million, or 32.6%, to $109.1 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily as a result of increased spend on digital marketing related to buyer acquisition, and an increase in employee-related expenses in our marketing team, including $3.0 million of restructuring and other exit costs associated with the Actions.
Product development
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Product development | | $ | 74,616 |
| | $ | 55,083 |
| | $ | 19,533 |
| | 35.5 | % |
| Percentage of total revenue | | 16.9 | % | | 15.1 | % | | | | |
Product development expenses increased $19.5 million, or 35.5%, to $74.6 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily as a result of an increase in employee-related expenses in our product and engineering teams, up $10.3 million, including $3.2 million of restructuring and other exit costs associated with the Actions, and $6.2 million of additional expenses resulting from the acquisition of Blackbird in September 2016.
General and administrative
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| General and administrative | | $ | 91,486 |
| | $ | 86,180 |
| | $ | 5,306 |
| | 6.2 | % |
| Percentage of total revenue | | 20.7 | % | | 23.6 | % | | | | |
General and administrative expenses increased $5.3 million, or 6.2%, to $91.5 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily driven by an increase in employee-related expenses, including $7.0 million of restructuring and other exit costs associated with the Actions. This increase was partially offset by decreases in professional services and office overhead expenses.
Asset impairment charges
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Asset impairment charges | | $ | 3,162 |
| | $ | 551 |
| | $ | 2,611 |
| | 473.9 | % |
| Percentage of total revenue | | 0.7 | % | | 0.2 | % | | | | |
Asset impairment charges increased $2.6 million, or 473.9%, to $3.2 million in the year ended December 31, 2017, compared to the year ended December 31, 2016. In the fourth quarter of 2017, we made the decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing, which resulted in the recognition of a $3.2 million impairment charge to write the related capitalized web development and internal-use software assets down to zero. This decision was based on our strategy to focus on the growth of the Etsy.com marketplace. This compares to $0.6 million in the year ended December 31, 2016, related to the impairment of nonrecoverable intangible assets acquired in the ALM and Jarvis Labs, Inc. acquisitions for customer relationships and trademarks.
Other Income (Expense), net
|
| | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change |
| | 2017 | | 2016 | | $ | | % |
| | | | | | | | |
| | (in thousands except percentages) |
| Other income (expense), net: | | | | | | | |
| Interest expense | $ | (11,130 | ) | | $ | (7,204 | ) | | $ | (3,926 | ) | | 54.5 | % |
| Percentage of total revenue | (2.5 | )% | | (2.0 | )% | | | | |
| Interest and other income | $ | 2,394 |
| | $ | 1,702 |
| | $ | 692 |
| | 40.7 | % |
| Percentage of total revenue | 0.5 | % | | 0.5 | % | | | | |
| Foreign exchange gain (loss) | $ | 29,105 |
| | $ | (14,951 | ) | | $ | 44,056 |
| | (294.7 | )% |
| Percentage of total revenue | 6.6 | % | | (4.1 | )% | | | | |
| Other income (expense), net | $ | 20,369 |
| | $ | (20,453 | ) | | $ | 40,822 |
| | (199.6 | )% |
| Percentage of total revenue | 4.6 | % | | (5.6 | )% | | | | |
Other income, net was $20.4 million in the year ended December 31, 2017, which increased $40.8 million from other expense, net of $20.5 million in the year ended December 31, 2016. The increase in income was primarily driven by the change in U.S. Dollar to Euro exchange rates on our intercompany and other non-functional currency balances, partially offset by an increase in interest expense, largely associated with the build-to-suit lease accounting related to our corporate headquarters. In the fourth quarter of 2017, we established a new legal entity based in Ireland with a U.S. dollar functional currency to help mitigate the currency rate risk on our intercompany debt.
Benefit (Provision) for Income Taxes
|
| | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Change |
| | | 2017 | | 2016 | | $ | | % |
| | | | | | | | | |
| | | (in thousands except percentages) |
| Benefit (provision) for income taxes | | $ | 49,535 |
| | $ | (27,025 | ) | | $ | 76,560 |
| | 283.3 | % |
| Percentage of total revenue | | 11.2 | % | | (7.4 | )% | | | | |
Our income tax benefit and provision for the years ended December 31, 2017 and 2016 was $49.5 million and $27.0 million, respectively.
The primary driver of the income tax benefit for the year ended December 31, 2017 was the impact on deferred taxes from the reduction in the U.S. federal corporate tax rate beginning in 2018. On December 22, 2017 the TCJA was signed into law, which, among other items, reduced the corporate income tax rate from 35% to 21%. As a result, our deferred taxes and certain unrecognized tax benefits at December 31, 2017 have been revalued at the reduced 21% rate. The revaluation resulted in a benefit for income taxes of approximately $31.1 million for the year ended December 31, 2017.
The secondary driver of the income tax benefit for the year ended December 31, 2017 was the recognition of excess tax benefits from stock-based compensation as a result of the adoption of ASU 2016-09—Stock Compensation: Improvements to Employee Share-based Payment Accounting in the first quarter of 2017. As a result of this updated guidance, we recorded $12.8 million of excess tax benefits, rather than additional paid-in capital, for the year ended December 31, 2017.
The primary driver of the income tax provision for the year ended December 31, 2016 was tax expense related to our updated corporate structure of $17.1 million.
For both periods, other drivers include the mix of income and losses in jurisdictions with a wide range of tax rates, the disallowance of the benefit of losses in certain foreign jurisdictions and the amount of non-deductible stock-based compensation expense.
Quarterly Results of Operations
The following tables show selected unaudited quarterly results of operations and other unaudited operational and non-GAAP financial data for the eight quarters ended December 31, 2018 and the percentage that each line item in the following results of operations data represents of revenue. The results of operations data for each of these quarters have been prepared on the same basis as the audited annual Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K and includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these periods. This data should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report. Our quarterly results of operations and operational and non-GAAP financial data will vary in the future. These quarterly operating results are not necessarily indicative of our operating results for any future quarter or year.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Dec. 31,
2018 (1) | Sept. 30,
2018 | June 30,
2018 | Mar. 31,
2018 | Dec. 31,
2017 | Sept. 30,
2017 | June 30,
2017 | Mar. 31,
2017 |
| | (in thousands except share and per share amounts) |
| Revenue: | | | | | | | | |
| Marketplace (2) | $ | 150,540 |
| $ | 110,927 |
| $ | 91,306 |
| $ | 87,967 |
| $ | 102,261 |
| $ | 77,808 |
| $ | 75,445 |
| $ | 70,562 |
|
| Services (2) | 48,622 |
| 38,194 |
| 39,507 |
| 32,605 |
| 34,309 |
| 27,976 |
| 25,440 |
| 24,144 |
|
| Other | 866 |
| 1,245 |
| 1,574 |
| 340 |
| (302 | ) | 596 |
| 807 |
| 2,185 |
|
| Total revenue | 200,028 |
| 150,366 |
| 132,387 |
| 120,912 |
| 136,268 |
| 106,380 |
| 101,692 |
| 96,891 |
|
| Cost of revenue (3)(4) | 57,111 |
| 46,947 |
| 45,409 |
| 41,295 |
| 44,220 |
| 36,383 |
| 35,724 |
| 34,659 |
|
| Gross profit | 142,917 |
| 103,419 |
| 86,978 |
| 79,617 |
| 92,048 |
| 69,997 |
| 65,968 |
| 62,232 |
|
| Operating expenses: | | | | | | | | |
| Marketing (3)(4) | 63,362 |
| 39,516 |
| 28,941 |
| 26,194 |
| 34,590 |
| 23,520 |
| 27,521 |
| 23,454 |
|
| Product development (3)(4) | 28,542 |
| 24,418 |
| 23,568 |
| 20,721 |
| 17,788 |
| 16,958 |
| 21,754 |
| 18,116 |
|
| General and administrative (3)(4) | 21,524 |
| 20,748 |
| 21,707 |
| 18,904 |
| 18,218 |
| 22,094 |
| 28,411 |
| 22,763 |
|
| Asset impairment charges | — |
| — |
| — |
| — |
| 3,162 |
| — |
| — |
| — |
|
| Total operating expenses | 113,428 |
| 84,682 |
| 74,216 |
| 65,819 |
| 73,758 |
| 62,572 |
| 77,686 |
| 64,333 |
|
| Income (loss) from operations | 29,489 |
| 18,737 |
| 12,762 |
| 13,798 |
| 18,290 |
| 7,425 |
| (11,718 | ) | (2,101 | ) |
| Other (expense) income, net | (6,613 | ) | (4,141 | ) | (8,137 | ) | (817 | ) | (24 | ) | 5,815 |
| 13,950 |
| 628 |
|
| Income (loss) before income taxes | 22,876 |
| 14,596 |
| 4,625 |
| 12,981 |
| 18,266 |
| 13,240 |
| 2,232 |
| (1,473 | ) |
| Benefit (provision) for income taxes (5) | 18,375 |
| 5,298 |
| (1,246 | ) | (14 | ) | 26,484 |
| 12,562 |
| 9,437 |
| 1,052 |
|
| Net income (loss) | $ | 41,251 |
| $ | 19,894 |
| $ | 3,379 |
| $ | 12,967 |
| $ | 44,750 |
| $ | 25,802 |
| $ | 11,669 |
| $ | (421 | ) |
| Net income (loss) per share attributable to common stockholders: |
| Basic | $ | 0.34 |
| $ | 0.17 |
| $ | 0.03 |
| $ | 0.11 |
| $ | 0.37 |
| $ | 0.22 |
| $ | 0.10 |
| $ | 0.00 |
|
| Diluted | $ | 0.32 |
| $ | 0.15 |
| $ | 0.03 |
| $ | 0.10 |
| $ | 0.36 |
| $ | 0.21 |
| $ | 0.10 |
| $ | 0.00 |
|
| Weighted average common shares outstanding: |
| Basic | 120,192,912 |
| 119,870,711 |
| 119,450,194 |
| 121,267,092 |
| 121,586,991 |
| 119,592,191 |
| 116,933,216 |
| 115,696,024 |
|
| Diluted | 129,012,508 |
| 129,086,137 |
| 125,551,759 |
| 125,772,315 |
| 124,818,322 |
| 123,224,559 |
| 120,723,938 |
| 115,696,024 |
|
| |
(1) | During the three months ended December 31, 2018, we recorded adjustments to correct errors in the years ended December 31, 2018 and 2017 that increased income before income taxes by $1.6 million in the current quarter and decreased net income by $1.8 million in the current quarter. The Company has concluded that the errors and their correction were not material to the Consolidated Financial Statements for any of the periods impacted nor are they material for results in the fourth quarter of 2018. |
| |
(2) | In connection with the adoption of ASU 2014-09—Revenue from Contracts with Customers (“ASC 606”) in the first quarter of 2018, we renamed our revenue categories Marketplace and Services revenue. In addition, we reclassified Etsy Payments from Services to Marketplace revenue as described in “Note 2—Revenue.” The following table provides our Marketplace and Services revenue under our previous and current presentation:
|
|
| | | | | | | | | | | | | | | |
| | Quarter-to-Date Period Ended |
| | Previous Presentation | | Updated Presentation |
| | Marketplace Revenue | | Services Revenue | | Marketplace Revenue | | Services Revenue |
| | | | | | | | |
| | (in thousands) |
| December 31, 2017 | $ | 54,251 |
| | $ | 82,319 |
| | $ | 102,261 |
| | $ | 34,309 |
|
| September 30, 2017 | 42,413 |
| | 63,371 |
| | 77,808 |
| | 27,976 |
|
| June 30, 2017 | 42,069 |
| | 58,816 |
| | 75,445 |
| | 25,440 |
|
| March 31, 2017 | 40,759 |
| | 53,947 |
| | 70,562 |
| | 24,144 |
|
| |
(3) | Includes total stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Dec. 31,
2018 | Sept. 30,
2018 | June 30,
2018 | Mar. 31,
2018 | Dec. 31,
2017 | Sept. 30,
2017 | June 30,
2017 | Mar. 31,
2017 |
| | (in thousands) |
| Cost of revenue | $ | 990 |
| $ | 894 |
| $ | 927 |
| $ | 546 |
| $ | 508 |
| $ | 469 |
| $ | 398 |
| $ | 364 |
|
| Marketing | 688 |
| 642 |
| 699 |
| 478 |
| 514 |
| 447 |
| 528 |
| 444 |
|
| Product development (a) | 9,873 |
| 4,697 |
| 4,025 |
| 2,639 |
| 2,021 |
| 2,180 |
| 2,053 |
| 2,020 |
|
| General and administrative | 2,693 |
| 2,683 |
| 2,966 |
| 2,791 |
| 2,948 |
| 4,425 |
| 5,183 |
| 2,057 |
|
| Total stock-based compensation expense | $ | 14,244 |
| $ | 8,916 |
| $ | 8,617 |
| $ | 6,454 |
| $ | 5,991 |
| $ | 7,521 |
| $ | 8,162 |
| $ | 4,885 |
|
| |
(a) | Product development includes $6.0 million and $1.0 million of expense resulting from the modification of stock options and RSUs in the three months ended December 31, 2018 and September 30, 2018, respectively, in connection with certain employee departures See “Note 16—Stock-based Compensation” in the Notes to Consolidated Financial Statements for additional information.
|
| |
(4) | Includes restructuring and other exit costs (income), as shown in the quarterly reconciliation of net income (loss) to Adjusted EBITDA below. For a summary of restructuring and other exit costs (income) see “Note 17—Restructuring and Other Exit Costs (Income)” in the Notes to Consolidated Financial Statements.
|
| |
(5) | In the year ended December 31, 2018, we recognized an income tax benefit associated with the release of a valuation allowance on certain deferred tax assets. The valuation allowance release resulted in a non-recurring benefit for income taxes of $23.4 million for the year ended December 31, 2018. In the quarter ended December 31, 2017, we recognized an income tax benefit associated with the enactment of the TCJA as defined above. As a result of the TCJA, our deferred taxes at December 31, 2017 have been revalued at the reduced 21% corporate income tax rate. The revaluation resulted in a non-recurring benefit for income taxes of approximately $31.1 million for the quarter ended December 31, 2017. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Dec. 31,
2018 | Sept. 30,
2018 | June 30,
2018 | Mar. 31,
2018 | Dec. 31,
2017 | Sept. 30,
2017 | June 30,
2017 | Mar. 31,
2017 |
| Revenue: | | | | | | | | |
| Marketplace | 75.3 | % | 73.8 | % | 69.0 | % | 72.8 | % | 75.0 | % | 73.1 | % | 74.2 | % | 72.8 | % |
| Services | 24.3 |
| 25.4 |
| 29.8 |
| 27.0 |
| 25.2 |
| 26.3 |
| 25.0 |
| 24.9 |
|
| Other | 0.4 |
| 0.8 |
| 1.2 |
| 0.3 |
| (0.2 | ) | 0.6 |
| 0.8 |
| 2.3 |
|
| Total revenue | 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
|
| Cost of revenue | 28.6 |
| 31.2 |
| 34.3 |
| 34.2 |
| 32.5 |
| 34.2 |
| 35.1 |
| 35.8 |
|
| Gross profit | 71.4 |
| 68.8 |
| 65.7 |
| 65.8 |
| 67.5 |
| 65.8 |
| 64.9 |
| 64.2 |
|
| Operating expenses: | | | | | | | | |
| Marketing | 31.7 |
| 26.3 |
| 21.9 |
| 21.7 |
| 25.4 |
| 22.1 |
| 27.1 |
| 24.2 |
|
| Product development | 14.3 |
| 16.2 |
| 17.8 |
| 17.1 |
| 13.1 |
| 15.9 |
| 21.4 |
| 18.7 |
|
| General and administrative | 10.8 |
| 13.8 |
| 16.4 |
| 15.6 |
| 13.4 |
| 20.8 |
| 27.9 |
| 23.5 |
|
| Asset impairment charges | — |
| — |
| — |
| — |
| 2.3 |
| — |
| — |
| — |
|
| Total operating expenses | 56.7 |
| 56.3 |
| 56.1 |
| 54.4 |
| 54.1 |
| 58.8 |
| 76.4 |
| 66.4 |
|
| Income (loss) from operations | 14.7 |
| 12.5 |
| 9.6 |
| 11.4 |
| 13.4 |
| 7.0 |
| (11.5 | ) | (2.2 | ) |
| Other (expense) income, net | (3.3 | ) | (2.8 | ) | (6.1 | ) | (0.7 | ) | — |
| 5.5 |
| 13.7 |
| 0.6 |
|
| Income (loss) before income taxes | 11.4 |
| 9.7 |
| 3.5 |
| 10.7 |
| 13.4 |
| 12.4 |
| 2.2 |
| (1.5 | ) |
| Benefit (provision) for income taxes | 9.2 |
| 3.5 |
| (0.9 | ) | — |
| 19.4 |
| 11.8 |
| 9.3 |
| 1.1 |
|
| Net income (loss) | 20.6 | % | 13.2 | % | 2.6 | % | 10.7 | % | 32.8 | % | 24.3 | % | 11.5 | % | (0.4 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Dec. 31,
2018 | Sept. 30,
2018 | June 30,
2018 | Mar. 31,
2018 | Dec. 31,
2017 | Sept. 30,
2017 | June 30,
2017 | Mar. 31,
2017 |
| | (in thousands except percentages) |
| Other financial and operations data (1): |
| GMS | $ | 1,246,472 |
| $ | 922,513 |
| $ | 901,685 |
| $ | 861,075 |
| $ | 1,019,452 |
| $ | 766,354 |
| $ | 748,762 |
| $ | 719,041 |
|
| GMS growth | 22.3 | % | 20.4 | % | 20.4 | % | 19.8 | % | 17.8 | % | 13.2 | % | 11.8 | % | 14.2 | % |
| Currency-neutral GMS growth | 23.1 | % | 20.8 | % | 19.3 | % | 17.6 | % | 16.5 | % | 12.6 | % | 12.6 | % | 15.2 | % |
| Adjusted EBITDA | $ | 51,359 |
| $ | 34,035 |
| $ | 27,695 |
| $ | 26,421 |
| $ | 34,822 |
| $ | 22,769 |
| $ | 12,696 |
| $ | 9,722 |
|
| Active sellers | 2,115 |
| 2,043 |
| 1,983 |
| 1,970 |
| 1,933 |
| 1,891 |
| 1,834 |
| 1,801 |
|
| Active buyers | 39,447 |
| 37,134 |
| 35,830 |
| 34,693 |
| 33,364 |
| 31,680 |
| 30,584 |
| 29,669 |
|
| Percent mobile GMS | 56 | % | 56 | % | 55 | % | 54 | % | 52 | % | 52 | % | 51 | % | 51 | % |
| Percent international GMS | 36 | % | 35 | % | 34 | % | 35 | % | 33 | % | 34 | % | 32 | % | 32 | % |
| |
(1) | See “Key Operating and Financial Metrics” for the definitions of the following terms: “active buyer,” “active seller,” “Adjusted EBITDA,” “GMS,” “international GMS,” and “mobile GMS.”
|
The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Dec. 31,
2018 | Sept. 30,
2018 | June 30,
2018 | Mar. 31,
2018 | Dec. 31,
2017 | Sept. 30,
2017 | June 30,
2017 | Mar. 31,
2017 |
| | (in thousands) |
| Net income (loss) | $ | 41,251 |
| $ | 19,894 |
| $ | 3,379 |
| $ | 12,967 |
| $ | 44,750 |
| $ | 25,802 |
| $ | 11,669 |
| $ | (421 | ) |
| Excluding: | | | | | | | | |
| Interest and other non-operating expense, net | 3,099 |
| 3,768 |
| 3,687 |
| 2,667 |
| 2,177 |
| 2,254 |
| 2,153 |
| 2,152 |
|
| (Benefit) provision for income taxes | (18,375 | ) | (5,298 | ) | 1,246 |
| 14 |
| (26,484 | ) | (12,562 | ) | (9,437 | ) | (1,052 | ) |
| Depreciation and amortization | 7,626 |
| 6,439 |
| 6,357 |
| 6,320 |
| 6,577 |
| 7,022 |
| 6,660 |
| 6,938 |
|
| Stock-based compensation expense(1) | 12,648 |
| 8,191 |
| 7,898 |
| 5,740 |
| 5,197 |
| 5,832 |
| 4,881 |
| 4,043 |
|
| Stock-based compensation expense—acquisitions | 1,596 |
| 725 |
| 719 |
| 714 |
| 725 |
| 724 |
| 1,613 |
| 842 |
|
| Foreign exchange loss (gain) | 3,514 |
| 373 |
| 4,450 |
| (1,850 | ) | (2,153 | ) | (8,069 | ) | (16,103 | ) | (2,780 | ) |
| Restructuring and other exit costs (income) | — |
| (57 | ) | (41 | ) | (151 | ) | 871 |
| 1,766 |
| 11,260 |
| — |
|
| Asset impairment charges (2) | — |
| — |
| — |
| — |
| 3,162 |
| — |
| — |
| — |
|
| Adjusted EBITDA | $ | 51,359 |
| $ | 34,035 |
| $ | 27,695 |
| $ | 26,421 |
| $ | 34,822 |
| $ | 22,769 |
| $ | 12,696 |
| $ | 9,722 |
|
| |
(1) | $0.1 million, $1.0 million, and $1.7 million of restructuring-related stock-based compensation expense has been excluded from the three months ended December 31, 2017, September 30, 2017, and June 30, 2017, respectively, and is included in the restructuring and other exit costs (income) line. |
(2) In the fourth quarter of 2017, we made the decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing, which resulted in the recognition of a $3.2 million impairment charge to write the related capitalized web development and internal-use software assets down to zero. This decision was based on our strategy to focus on the growth of the Etsy.com marketplace.
Seasonality
Etsy sellers experience increased sales and use more Services during the fourth-quarter holiday shopping season. This has resulted in increased GMS and revenue for us during the fourth quarter of each fiscal year, which can compare to lower GMS and revenue in the first quarter of the following fiscal year. For example, revenue in the first quarter of 20182020 decreased when compared with revenue in the fourth quarter of 2017.2019. We expect this seasonality to continue in future years. Our cost of revenue and marketing expenses also follow this trend, with the highest costs corresponding with the fourth quarter and lower costs in the first quarter of each fiscal year. As our growth rates moderate, the impact of these seasonality trends on our results of operations may become more pronounced.
Our quarterly revenue increased sequentially quarter-to-quarter for all periods presented above,within 2020, other than the first quarter of 2018,2020, generally corresponding to our GMS performance in the same periods. We cannot assure you that this pattern of sequential revenue and GMS growth will continue. We believe that it is generally more meaningful to compare year-over-year results than sequential quarter-over-quarter results.
Non-GAAP Financial Measures
Adjusted EBITDA
In this Annual Report on Form 10-K, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition-related expenses; non-ordinary course disputes; restructuring and other exit income; and loss on extinguishment of debt. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA because it is a key measure used by our management and Board of Directors to evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans, determine incentive compensation, and assess the health of our business. As our Adjusted EBITDA increases, we are able to invest more in our platform.
We believe that Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business as it removes the impact of certain non-cash items and certain variable charges.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense;
•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not consider the impact of stock-based compensation expense;
•Adjusted EBITDA does not consider the impact of foreign exchange loss (gain);
•Adjusted EBITDA does not reflect acquisition-related expenses;
•Adjusted EBITDA does not consider the impact of non-ordinary course disputes;
•Adjusted EBITDA does not consider the impact of restructuring and other exit income;
•Adjusted EBITDA does not consider the impact of the loss on extinguishment of debt; and
•other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results.
The following table reflects the reconciliation of net income to Adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | | | | |
| | | | | (in thousands) |
| Net income | | | | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Excluding: | | | | | | | | |
| Interest and other non-operating expense, net (1) | | | | 34,923 | | | 11,121 | | | 13,221 | |
| Provision (benefit) for income taxes | | | | 16,463 | | | (15,248) | | | (22,413) | |
| Depreciation and amortization (2) | | | | 58,189 | | | 48,031 | | | 26,742 | |
| Stock-based compensation expense | | | | 65,114 | | | 44,395 | | | 38,231 | |
| | | | | | | | |
| Foreign exchange loss (gain) (3) | | | | 6,522 | | | (3,006) | | | 6,487 | |
| Acquisition-related expenses (4) | | | | 1,804 | | | 3,917 | | | — | |
| Non-ordinary course disputes | | | | — | | | 1,164 | | | — | |
| Restructuring and other exit income | | | | — | | | — | | | (249) | |
| | | | | | | | |
| | | | | | | | |
| Loss on extinguishment of debt (5) | | | | 16,855 | | | — | | | — | |
| Adjusted EBITDA | | | | $ | 549,116 | | | $ | 186,268 | | | $ | 139,510 | |
(1) Included in interest and other non-operating expense, net is primarily non-cash interest expense, including amortization of debt issuance costs, related to our convertible debt offerings, which were entered into in March 2018, September 2019, and August 2020.
(2) Included in depreciation and amortization is depreciation expense related to our headquarters lease, which is accounted for as a finance lease. Additionally, the years ended December 31, 2020 and 2019 include amortization expense of acquired intangible assets and developed technology related to the acquisition of Reverb in the third quarter of 2019.
(3) See “Results of Operations—Other Expense, net” for more information on the fluctuation in foreign exchange loss (gain) in the years ended December 31, 2020 and 2019.
(4) Acquisition-related expenses are expenses related to our acquisition of Reverb. For further information, see “Note 5—Business Combinations” in the Notes to Consolidated Financial Statements.
(5) During the third quarter of 2020, we repurchased $301.1 million aggregate principal amount of its outstanding 2018 Notes. We recognized a non-cash loss on extinguishment of debt of $16.9 million as a result. For more information see “Note 13—Debt ” in the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Cash and cash equivalents, and short-term investments were $1.7 billion as of December 31, 2020. Additionally, we have $39.1 million in long-term investments that we can liquidate at short notice and with minimal penalties if needed. We also have the ability to draw down on our $200.0 million senior secured revolving credit facility. In the year ended December 31, 2020, we had positive operating cash flows of $679.0 million. We believe that this capital structure, as well as the nature and framework of our business will allow us to meet all debt covenants, sustain our business operations, and be able to react to changing macroeconomic conditions.
The following tables showtable shows our cash and cash equivalents, short-term investments, accounts receivablelong-term investments, and net working capital as of the dates indicated:
| | | | | As of December 31, | | | As of December 31, |
| | | 2018 | | 2017 | | | 2020 | | 2019 |
| | | | | | | | | |
| | | (in thousands) | | | (in thousands) |
| Cash and cash equivalents | | $ | 366,985 |
| | $ | 315,442 |
| Cash and cash equivalents | | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | | 257,302 |
| | 25,108 |
| Short-term investments | | 425,119 | | | 373,959 | |
| Accounts receivable, net | | 12,244 |
| | 33,677 |
| |
| | Long-term investments | | Long-term investments | | 39,094 | | | 89,343 | |
| Total cash and cash equivalents, and short- and long-term investments | | Total cash and cash equivalents, and short- and long-term investments | | $ | 1,708,312 | | | $ | 906,595 | |
| Net working capital | | 568,227 |
| | 336,787 |
| Net working capital | | $ | 1,440,117 | | | $ | 732,510 | |
As of December 31, 2018,2020, a majority of our cash and cash equivalents, a majority of which were primarily held in cash deposits and money market funds, were held in the United States for future investments, working capital funding, and general corporate purposes.
We fund our international operations from our funds held in the United States on an as-needed basis.
We invest in short-termshort- and long-term instruments, including fixed-income funds and U.S. Government and agency securities aligned with our investment strategy. These investments are intended to allow us to preserve our principal, maintain the ability to meet our liquidity needs, deliver positive yields across a balanced portfolio, and continue to provide us with direct fiduciary control. In accordance with our investment policy, all investments have maturities no longer than 3637 months, with the average maturity of these investments maintained at 12 months or less.
See “Contractual Obligations” below for a detailed description of our material cash commitments as of December 31, 2020. Additionally, we have the ability to repurchase up to $250 million of our common stock under our board approved stock repurchase program.
Sources of Liquidity
In March 2018,August 2020, we issued $345.0 million aggregate principal amount of 0% Convertible Seniorthe 2020 Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The initial conversion price of the 2020 Notes represented a premium of approximately 37.5%52.5% over the price of Etsy’sour common stock. The net proceeds from the sale of the 2020 Notes were $335.0$639.5 million after deducting the offering expenses. Based on the terms of the 2020 Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. The 2020 Notes will mature on September 1, 2027, unless earlier converted or repurchased. Based on the daily closing prices of our stock during the quarter ended December 31, 2020, holders of the 2020 Notes are not eligible to convert their 2020 Notes during the first quarter of 2021.
In September 2019, we issued the 2019 Notes pursuant to the Securities Act. The initial conversion price of the 2019 Notes represented a premium of approximately 47.5% over the price of Etsy's common stock. The net proceeds from the sale of the 2019 Notes were $639.5 million after deducting initial purchasers’ discount and offering expenses. AsBased on the terms of the 2019 Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. Based on the daily closing prices of our stock during the quarter ended December 31, 2018, we had not received any conversion notices, and, as such,2020, holders of the 2019 Notes are not currently redeemable for cash and are therefore classified as long-term debt. For more informationeligible to convert their 2019 Notes during the first quarter of 2021. The 2019 Notes will mature on the Notes, see “Note 13—Debt” in the Notes to Consolidated Financial Statements.October 1, 2026, unless earlier converted or repurchased.
We believe that our existing cash and cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in “Key Factors Affecting Our Performance” above and in our “Risk Factors” in this Annual Report on Form 10-K.
Subsequent Event
On February 25, 2019, we entered into a $200.0 million senior secured revolving credit facility pursuant to a Credit Agreement with several lenders (the “2019 Credit Agreement”). 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. See “NoteAt December 31, 2020, we did not have any borrowings under the 2019 Credit Agreement.
In March 2018, we issued the 2018 Notes pursuant to the Securities Act. The initial conversion price of the 2018 Notes represented a premium of approximately 37.5% over the price of Etsy’s common stock. The net proceeds from the sale of the 2018 Notes were $335.0 million after deducting initial purchasers’ discount and offering expenses. Based on the terms of the 2018 Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. The 2018 Notes will mature on March 1, 2023, unless earlier converted or repurchased. During the third quarter of 2020, we paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 2018 Notes through privately negotiated transactions. Concurrently, we repurchased 1.3 million shares of Etsy’s common stock for $166.2 million. As of December 31, 2020, $43.9 million aggregate principal of the 2018 Notes remained outstanding. This transaction was accounted for as an extinguishment of debt, and we recognized a non-cash loss on extinguishment of $16.9 million. Based on the daily closing prices of our common stock during the quarter ended December 31, 2020, holders of the 2018 Notes are eligible to convert their 2018 Notes during the first quarter of 2021.
For more information on the 2020 Notes, 2019 Notes, 2019 Credit Agreement, and 2018 Notes, see “Note 13—Debt—Subsequent Event”Debt” in the Notes to Consolidated Financial StatementsStatements.
We believe that our existing cash and cash equivalents and short- and long-term investments, together with cash generated from operations, will be sufficient to meet our anticipated operating cash needs for additional information.
current macroeconomic conditions, our future capital requirements and the adequacy of available funds will depend on many factors, including the rate of our GMS and revenue growth, the amount and timing of our investments in marketing, product development, future acquisitions and investments, and our stock repurchase program, as well as those described in “Key Factors Affecting Our Performance” above and in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Historical Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | (in thousands) |
| Cash provided by (used in): | | | | | | |
| Operating activities | | $ | 678,956 | | | $ | 206,920 | | | $ | 198,925 | |
| Investing activities | | (11,379) | | | (488,373) | | | (285,393) | |
| Financing activities | | 119,282 | | | 359,607 | | | 144,006 | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| | | | | | | |
| | | (in thousands) |
| Cash provided by (used in): | | | | | | |
| Operating activities | | $ | 198,925 |
| | $ | 69,101 |
| | $ | 47,964 |
|
| Investing activities | | (285,393 | ) | | 61,836 |
| | (135,430 | ) |
| Financing activities | | 144,006 |
| | 6,555 |
| | (524 | ) |
See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Revisions” in the Notes to Consolidated Financial Statements for information on revisions to our Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016.
Net Cash Provided by Operating Activities
Our cash flows from operations are largely dependent on the amount of revenue generated on our platform, as well as associated cost of revenue and other operating expenses. Our primary source of cash from operating activities is cash collections from our customers. Net cash provided by operating activities in each period presented has been influenced by changes in accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities.working capital.
Net cash provided by operating activities was $198.9$679.0 million in the year ended December 31, 2018,2020, primarily driven by cash net income of $139.6$554.8 million as a result of increased revenue generated on our platform, and changes in our operating assets and liabilities that provided $59.3$124.2 million in cash, largelyprimarily driven by timing of collections of accounts receivable due to the launch of our redesigned payment account in the fourth quarter of 2018, which now automatically deducts our fees and applicable taxes from the seller’s funds earned through sales using Etsy Payments prior to settlement of those funds to the seller’s bank accountvolume and payment timing of payables.accrued expenses in the period.
Net cash provided by operating activities was $69.1$206.9 million in the year ended December 31, 2017,2019, primarily driven by cash net income of $68.8$196.9 million as a result of increased revenue generated on our platform, and changes in our operating assets and liabilities that provided $0.3$10.0 million in cash.cash, driven by the timing of payables offset by prepayments made in the period and collections of accounts receivable.
Net cash provided by operating activities was $48.0 millionCash Used in the year ended December 31, 2016, as a result of the cash net income of $58.4 million as a result of increased revenue generated on our platform, partially offset by changes in our operating assets and liabilities that used $10.5 million in cash.
Net Cash (Used in) Provided by Investing Activities
Our primary investing activities consist of cash paid for acquisitions, sales maturities, and purchases of short-termshort- and long-term marketable securities, cash paid to purchase intangible assets, and capital expenditures, including investments in capitalized website development and internal-use software and purchases of property and equipment to support our overall business growth.
Net cash used in investing activities was $285.4$11.4 million in the year ended December 31, 2018.2020. This was primarily attributable to $7.1 million in capital expenditures, including $5.7 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to the Etsy platform.
Net cash used in investing activities was $488.4 million in the year ended December 31, 2019. This was primarily attributable to $270.4 million in cash paid to acquire Reverb, net purchases of marketable securities of $229.3$200.7 million, $35.3 million in cash paid for the DaWanda intangible asset acquisition, and $20.6$15.3 million in capital expenditures, including $19.5$7.8 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to the Etsy platform and focused on growth investments, such as our migration to Google Cloud.
Net cash provided by investing activities was $61.8 million in the year ended December 31, 2017. This was primarily attributable to net sales of marketable securities of $75.0 million, offset by $13.2 million in capital expenditures, including $9.2 million for capitalized website development and internal-use software and $4.0 million for purchases of property and equipment.
Net cash used in investing activities was $135.4 million in the year ended December 31, 2016. This was primarily attributable to net purchases of marketable securities of $79.8 million, capital expenditures of $47.7 million, including $36.0 million for purchases of property and equipment, $11.7 million for capitalized website development and internal-use software, and $7.9 million in cash paid to acquire Blackbird.
Net Cash Provided by (Used in) Financing Activities
Our primary financing activities include proceeds from the issuance of the Notes, repurchaseconvertible notes, repurchases of common stock, under share repurchase programs,settlement of convertible senior notes, payments related to capped call transactions, (“Capped Call Transactions”) with the initial purchasers and/or their respective affiliates in connection with the Notes, shares withheld to satisfypayment of tax withholding obligations in connection with the vesting of employee RSUs,on vested equity awards, proceeds from exercise of stock options, payments of debt issuance costs, payments on our facility financing obligation related to the build-to-suit accounting treatment of our Brooklyn headquartersfinance lease and financing of capital leases for computer and hosting equipment.obligations.
Net cash provided by financing activities was $144.0$119.3 million in the year ended December 31, 2018.2020. This was primarily attributable to proceeds from the issuance of the 2020 Notes of $345.0$650.0 million and proceeds from the exercise of stock options of $18.3$25.3 million, partially offset by stock repurchases under shareof $268.7 million, partial repurchase programs of $134.6the 2018 Notes of $137.2 million, payments of $34.2$74.7 million for the 2020 Capped Call Transactions, stock repurchasesand payment of vested RSUs withheld to satisfy tax obligations on vested equity awards of $24.1 million, payments on our facility financing obligation of $10.2 million, related to our Brooklyn headquarters lease, and $10.0 million of debt issuance cost payments.$47.7 million.
Net cash provided by financing activities was $6.6$359.6 million in the year ended December 31, 2017.2019. This was primarily attributable to proceeds from the exerciseissuance of stock optionsthe 2019 Notes of $33.8$650.0 million and proceeds from other financing activities of $3.1 million, partially offset by repurchase of stock under the share repurchase program of $10.3 million, payments on capital lease obligations of $7.8 million, stock repurchases of vested RSUs withheld to satisfy tax obligations of $6.4 million, and payments on our facility financing obligation of $5.9 million, related to our Brooklyn headquarters lease.
Net cash used in financing activities was $0.5 million in the year ended December 31, 2016. This was primarily attributable to payments on capital lease obligations of $6.1 million, outflows from other financing activities of $3.1 million, stock repurchases of vested RSUs withheld to satisfy tax obligations of $1.3 million and a deferred payment related to the acquisition of ALM of $0.6 million, offset by proceeds from the exercise of stock options of $10.6$9.8 million, partially offset by stock repurchases of $177.0 million, payments of $76.2 million for the 2019 Capped Call Transactions, payment of tax obligations on vested equity awards of $32.5 million, payment of debt issuance costs of $11.9 million and payments on finance lease obligations of $10.8 million.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, in 2018, 2017,2020, 2019, or 2016.2018.
Contractual Obligations
The following table summarizes our future fixed contractual obligations as of December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1
Year | | 2–3
Years | | 4–5
Years | | More than
5 Years |
| | | | | | | | | | |
| | (in thousands) |
| Finance lease obligations, including imputed interest | | $ | 60,090 | | | $ | 10,661 | | | $ | 21,714 | | | $ | 21,435 | | | $ | 6,280 | |
| Operating lease obligations, including imputed interest | | 24,046 | | | 5,343 | | | 9,750 | | | 7,008 | | | 1,945 | |
| Debt obligations | | 1,343,915 | | | 2,635 | | | 41,280 | | | — | | | 1,300,000 | |
| Interest payments | | 10,579 | | | 1,641 | | | 3,250 | | | 3,250 | | | 2,438 | |
| Purchase obligations | | 44,934 | | | 7,551 | | | 37,383 | | | — | | | — | |
| Total contractual obligations | | $ | 1,483,564 | | | $ | 27,831 | | | $ | 113,377 | | | $ | 31,693 | | | $ | 1,310,663 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | Less than 1 Year | | 1–3 Years | | 3–5 Years | | More than 5 Years |
| | | | | | | | | | | |
| | | (in thousands) |
| Capital lease obligations | | $ | 5,979 |
| | $ | 3,884 |
| | $ | 2,095 |
| | $ | — |
| | $ | — |
|
| Operating lease obligations | | 32,017 |
| | 4,904 |
| | 8,968 |
| | 8,385 |
| | 9,760 |
|
| Long-term obligations | | 345,223 |
| | 132 |
| | 91 |
| | 345,000 |
| | — |
|
| Interest payments | | 648 |
| | 504 |
| | 144 |
| | — |
| | — |
|
| Facility financing obligations | | 78,161 |
| | 9,451 |
| | 19,876 |
| | 21,119 |
| | 27,715 |
|
| Purchase obligations | | 61,070 |
| | 10,696 |
| | 33,374 |
| | 17,000 |
| | — |
|
| Total contractual obligations | | $ | 523,098 |
| | $ | 29,571 |
| | $ | 64,548 |
| | $ | 391,504 |
| | $ | 37,475 |
|
CapitalFinance lease obligations consist of obligations under capitalfinance leases for computer and hosting equipment.equipment and the portion of our headquarters in Brooklyn, New York that is accounted for as a finance lease.
Operating lease obligations consist of obligations under non-cancelable operating leases for a portion of our headquarters in Brooklyn, New York and for our offices in San Francisco, Hudson (New York), London, Dublin, Toronto,Chicago, and New Delhi.Dublin.
Long-termDebt obligations consist of the issuance of Convertible Senior2020 Notes, in2019 Notes, and 2018 Notes which will mature on September 1, 2027, October 1, 2026, and March 1, 2023, respectively, unless earlier converted or repurchased and commitments we assumed in connection with our 2014 acquisition of ALM.repurchased.
Interest payments consist of interest due in connection with our capital leases.
Facility financing obligations consist of the portion of our obligations for our headquarters in Brooklyn, New York that is accounted for as a build-to-suit lease.2020 Notes and 2019 Notes.
Purchase obligations consist of commitments related to the migration of our data centers to the cloud the related ongoing service fees,computing and other support services. For those agreements with variable terms, we do not estimate what the total obligation may be beyond any minimum quantities and/or pricing.
In addition, we have uncertain tax positions of $18.8$23.7 million and non-income tax related contingency reserves of $0.9$8.0 million, which amounts are not reflected in the table as the ultimate resolution and timing are uncertain. These non-income tax contingency reserves include $4.5 million due to the acquisition of Reverb, which is wholly offset by an indemnification asset of $3.4 million and a deferred tax asset of $1.1 million.
Critical Accounting PoliciesEstimates and Significant Judgments and EstimatesPolicies
Our management’s discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements,consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these Consolidated Financial Statementsconsolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, determining the nature and timing of satisfaction of performance obligations and stand-alone selling price for use in allocating the subscription price; stock-based compensation,compensation; income taxes, including the assessmentevaluation of valuation allowances and the accounting for uncertain tax positions; website development costs and internal-use software, purchase price allocations for business combinations, valuation of the acquired intangibles purchased in a business combination, and valuation of goodwill and intangible assets,assets; leases, restructuring and other exit costs (income),including determining the incremental borrowing rate; and fair value of financial instrumentsconvertible senior notes are material in nature due to the subjectivity associated with them and have the greatest potential impact on our Consolidated Financial Statements.consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significantcritical accounting policies related to revenue recognition, stock-based compensation, income taxes, business combinations, goodwill, intangible assets, leases and fair value of financial instruments, see “Note“Note 1—Basis of Presentation and Summary of Significant Accounting Policies”Policies” in the Notes to Consolidated Financial Statements.
Revenue Recognition
Our revenue is diversified; generated from a mix of marketplace activities and other optional services to help Etsy sellers to generate more sales and scale their businesses. We recognize revenue as we transfer control of promised goods or services to Etsy sellers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We evaluate whether it is appropriate to recognize revenue on a gross or net basis based upon our evaluation of whether we obtain control of the specified goods or services by considering if we are primarily responsible for fulfillment of the promise, have inventory risk, and have latitude in establishing pricing and selecting suppliers, among other factors. Based on our evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. With the exception of Etsy Shipping Labels, our revenues are recognized on a gross basis. Sales and usage-based taxes are excluded from revenues.
Marketplace revenue: As members of the Etsy marketplace, Etsy sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. Etsy sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Variable fees include the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged and Etsy Payments fees for processing payments, including foreign currency payments. On July 16, 2018, we increased our seller transaction fee from 3.5% to 5%, and now apply it to the cost of shipping in addition to the cost of the item. Etsy Payments processing fees vary between 3% to 4.5% of an item’s total sale price, including shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional 2.5% to 5% transaction fee is applied.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee and Etsy Payments fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable while transaction fees and Etsy Payments fees are recorded net of refunds.
Services revenue: Services revenue is derived from optional services we offer to Etsy sellers, which include Promoted Listings, Etsy Shipping Labels, Pattern, and Etsy Plus. Each service below represents an individual obligation that we must perform when an Etsy seller chooses to use the service.
Revenue from Promoted Listings, our on-site advertising service, consists of cost-per-click fees an Etsy seller pays us for prominent placement of the seller’s listings in search results in our marketplace. Promoted Listings fees are based on an auction system, which utilizes the budget that each Etsy seller sets when using Promoted Listings to determine the cost-per-click fee. Promoted Listing fees are nonrefundable and are charged to a seller’s Etsy bill when the Promoted Listing is clicked; at which time revenue is recognized.
Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays us when she purchases shipping labels through our platform, net of the cost we incur in purchasing those shipping labels. We provide our sellers access to purchase shipping labels from the United States Postal Service, FedEx, Canada Post, Royal Mail and DAI Post at discounted pricing due to the volume of purchases through its platform. We recognize Etsy Shipping Label revenue when an Etsy seller purchases a shipping label. We recognize Etsy Shipping Label revenue on a net basis as we are an agent in this arrangement and do not take control of shipping labels prior to transferring the labels to the Etsy Seller. Etsy Shipping Label revenue is recorded net of refunds.
Revenue from Pattern consists of monthly subscription fees an Etsy seller pays to use our custom website services. We recognize revenue from Pattern ratably over the term of the subscription. The Pattern subscription fee is $15 per month and is nonrefundable.
Revenue from Etsy Plus consists of monthly subscription fees an Etsy seller pays for enhanced tools and credits for use on our platform. The Etsy Plus subscription fee is $10 per month and is nonrefundable. Each feature represents its own distinct performance obligation. We allocate subscription revenue based on the relative actual or estimated stand-alone selling price of the features included in the Etsy Plus offering. Enhanced tools include advanced shop customization options, targeted restock notifications, discounts on branded packaging and promotional materials, and free or discounted custom web addresses, all of which are recognized ratably over the 30-day subscription period. Additionally, the subscription includes $5 of Promoted Listing credits and 15 free listing credits per month. The allocated value of Promoted Listing credits is recognized when the Promoted Listing is clicked, or when the 30-day subscription period expires. The allocated value of listing credits is deferred until the option is used, and once used, allocated over the four-month listing period. Any unused listing credits are recognized when the 30-day subscription period expires.
Other revenue: Other revenue typically includes revenue generated from commercial partnerships, which are recognized as the customer in each contract consumes the benefit of the service we provide in each arrangement.
Stock-Based Compensation
We account for our stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) Topic 718—Compensation—Stock Compensation (“ASC 718”). Stock options and RSUsrestricted stock units (“RSUs”) are awarded to employees and members of our Board of Directors and are measured at fair value at each grant date. For both options and RSUs, vesting is typically over a four-year period and is contingent upon continued employment on each vesting date. In general, options granted to newly-hired employees prior to July 2018 vest 25% after the first year of service and ratably each month over the remaining 36-month period. In general, RSUs granted to newly-hired employees prior to July 2018 vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant, and then vest ratably each quarter over the remaining 12-quarter period. In general, for current employees who received an additional grant prior to March 2018, options vest ratably each month over a 48-month period. In general, for current employees who received an additional grant prior to March 2018, RSUs vest ratably each quarter over a 16-quarter period following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant.
Beginning in July 2018, in general, for newly-hired employees, both options and RSUs vest 25% after the first year of service and ratably each six-month period over a four-year period following the vesting commencement date, which is the first day of the month closest to the date of grant. Beginning in March 2018, in general, for current employees who receive an additional grant, both options and RSUs vest ratably each six-month period over a four-year period following the vesting commencement date.
Stock-based compensation cost for stock options is measured on the grant date, based on the estimated fair value of the award using a Black-Scholes pricing model and recognized as an expense over the employee’s or director’s requisite service period on a straight-line basis. The fair value of RSUs is determined based on the closing price of our common stock on Nasdaq on the grant date. In the first quarter of 2017, we made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance in ASU 2016-09—Compensation—Stock Compensation: Scope of Modification Accounting. In reporting periods prior to 2017, we
estimated forfeitures at the time of grant and revised in subsequent periods as necessary if actual forfeitures differed from estimates. We expect to continue to grant stock options and RSUs in the future, and, to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
Key Assumptions
Our Black-Scholes option-pricing model requires the input of subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock risk-free interest rates,and the expected term of the option, and the expected dividend yield of our common stock.option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and differentthese assumptions are used,either increase or decrease, our stock-based compensation expense could be materially differentdiffer in the future.
Fair Value of Our Common Stock: Prior to our initial public offering in April 2015, our Board of Directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards were approved. The factors included: contemporaneous third-party valuations of our common stock; the prices, rights, preferences, and privileges of our preferred stock relative to those of our common stock; the prices of preferred stock sold by us to third-party investors in arms-length transactions; the prices of common stock sold to third-party investors by us and in secondary transactions or repurchased by us in arms-length transactions; the lack of marketability of our common stock; our operating and financial results; current business conditions and projections; and the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given then prevailing market conditions. Since our initial public offering, we have used the market closing price for our common stock as reported on the Nasdaq to determine the fair value of our common stock.
•Expected Volatility: As we do not have a sufficient trading history for our common stock, the expected stock price volatility for our common stock is estimated by taking the average historical price volatility for Etsy and certain industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers, which we have selected, consist of several public companies in the industry similar in size, stage of life cycle, and financial leverage. We intendexpect to continue to consistently apply this processbegin using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be usedbeginning in the calculation.
second quarter of 2021, as we believe we will then have a sufficient amount of historical information.Risk-free Interest Rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
•Expected Term: The expected term represents the period that our stock-based awards are expected to be outstanding. We base our expected term for awards issued to employees or members of our Board of Directors on the simplified method, which represents the average period from vesting to the expiration of the stock option.
Expected Dividend Yield: We have never declared or paid any cash dividendsexpect to common stockholders and do not presently planbegin using our historical share option exercise experience to pay cash dividendsestimate the expected term of our stock option grants beginning in the foreseeable future. Consequently, we use an expected dividend yieldsecond quarter of zero.
2021.In determiningFor these assumptions, the weighted-average used in the Black-Scholes option-pricing model in order to determine the fair value of stock options granted the following weighted-average assumptions were used in the Black-Scholes option-pricing model for awards granted in the periods indicated:indicated were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, |
| | | 2020 | | 2019 | | 2018 |
| Expected volatility | | 38.9% - 41.7% | | 39.1% - 39.5% | | 38.6% - 47.8% |
| | | | | | |
| Expected term (in years) | | 5.5 - 6.2 | | 5.5 - 6.2 | | 5.5 - 6.3 |
| | | | | | |
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Expected volatility | | 38.6% - 47.8% | | 41.7% - 44.2% | | 38.6% - 44.6% |
| Risk-free interest rate | | 2.6% - 2.9% | | 1.9% - 2.2% | | 1.1% - 2.1% |
| Expected term (in years) | | 5.5 - 6.3 | | 5.5 - 6.3 | | 5.5 - 6.3 |
| Dividend rate | | —% | | —% | | —% |
Income Taxes
We account for the income tax (provision) benefit based on income (loss) before income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to settle. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We assess the need for a valuation allowance on a quarterly basis to reduce deferred tax assets to the amounts we expect to be realized.
On December 22, 2017 the TCJA was signed into law. The TCJA requires us to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Taxed Income ("GILTI") as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of our deferred taxes (the “deferred method”). We recorded tax expense related to GILTI in our effective tax rate for 2018, and have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI using the period cost method.
We account for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement. The tax positions 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 statutes of limitations. While we believe our tax positions are fully supportable, they may be challenged by various tax authorities. If actual results were to be materially different than estimated, it could result in a material impact on our consolidated financial statements in future periods.
Business Combinations, Intangible Assets, and Goodwill
Etsy acquired Reverb on August 15, 2019 in a business combination. Determining the fair value of the assets acquired and liabilities assumed required management to use significant judgment and estimates, including estimates of future revenue and adjusted earnings before interest and taxes and discount rates. Our estimates of fair value were based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results were to be materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.
The goodwill recorded represented the excess of the aggregate fair value of the consideration transferred for the business combination over the fair value of the assets acquired, net of liabilities assumed. It is subject to an annual impairment test, and if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we are required to perform a quantitative assessment for impairment.
As of the annual impairment testing date in 2019, we determined that the estimated fair value of the Reverb reporting unit was not substantially in excess of its carrying value, due to the proximity of the acquisition date. Accordingly, we prepared a
quantitative assessment, in which determining the fair value requires management to use significant judgment and estimates, including estimates of future revenue and adjusted earnings before interest and taxes and the discount rate. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ materially from estimates. If actual results were to be materially lower than estimated, it could result in a material impact on our consolidated financial statements in future periods.
As of the annual impairment testing date in 2020, we concluded that it is not more likely than not that the fair value of the Reverb reporting unit is less than its carrying amount and therefore determined that no quantitative analysis was required. If actual results were to be materially lower than estimated it could result in a material impact on our consolidated financial statements in future periods.
We did not recognize any goodwill impairment during the three years ended December 31, 2020, 2019, and 2018.
Leases
Leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use (“ROU”) assets, lease obligations and, if applicable, long-term lease obligations. Lease obligations and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Fair Value of Convertible Senior Notes
In accounting for the issuance of the Notes and the extinguishment of the 2018 Notes, discussed in “Liquidity and Capital Resources—Sources of Liquidity,” we used estimates and assumptions to calculate the carrying amounts of the liability and equity components by measuring the fair value of similar securities. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, we discounted the contractual cash flows of each of the Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock, was determined by deducting the fair value of the liability component from the par value of each of the Notes. See “Note 13—Debt” in the Notes to Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
For information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements, please see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both within the United States and internationally and we are exposed to market risks in the ordinary course of our business, including the effects of foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Foreign Currency Exchange Risk
We operate global marketplaces. Our revenues are denominated in the currencies in which the seller is paid, and our operating expenses are denominated in the currencies of the countries in which our operations are located. Etsy processes seller charges in our sellers’ ledger currencies. We have asset and liability balances denominated in currencies other than the functional currency of the subsidiaries in which they are recorded. As a result of transacting business in multiple foreign currencies, primarily the Euro and Pound Sterling, we are subject to the risk of fluctuations in foreign currency exchange rates.
For the purpose of analyzing foreign currency exchange risk, we considered the historical trends in foreign currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% could be experienced in the near term. An adverse 10% foreign currency exchange rate would have resulted in a decrease to revenue of $47.6 million or approximately 2.8% of total revenue for the year ended December 31, 2020. Additionally, a 10% adverse change in foreign currency exchange rates would result in a currency exchange loss of $11.9 million based on balance sheet balances as of December 31, 2020. This compares to a revenue decrease of $21.0 million or approximately 2.6% of total revenue for the year ended December 31, 2019 and currency exchange loss of $11.5 million based on the same analysis performed on balance sheet balances as of December 31, 2019.
Item 8. Financial Statements and Supplementary Data.
The supplementary financial information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Etsy, Inc.
Index to the Consolidated Financial Statements
| | | | | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| Consolidated Statements of Comprehensive Income | |
| Consolidated Statements of Changes in Stockholders’ Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Etsy, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Etsy, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Controls Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Note Transactions
As described in Notes 1 and 13 to the consolidated financial statements, in August 2020, the Company issued $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”). In accounting for the issuance of the 2020 Notes, management separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the 2020 Notes at an estimated interest rate for a comparable non-convertible note. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2020 Notes. Additionally, during the third quarter of 2020, the Company paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 0% Convertible Senior Notes due 2023 (the “2018 Notes”) through privately negotiated transactions. This transaction was accounted for as an extinguishment of debt, and the Company recognized a non-cash loss on extinguishment of $16.9 million. This loss was calculated by comparing the carrying value of the debt component with the fair value of a similar liability that does not have an associated convertible feature immediately prior to extinguishment as well as writing off any remaining unamortized deferred debt issuance costs at the time of extinguishment. To estimate the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the Notes at an estimated interest rate for a comparable non-convertible note.
The principal considerations for our determination that performing procedures relating to the convertible note transactions is a critical audit matter are (i) the significant judgment by management in determining the fair value of the liability portion of the 2018 and 2020 Notes, (ii) the significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to the estimated interest rates of comparable non-convertible notes used in determining the fair value of similar notes that do not have an associated conversion feature, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s financing process, including controls over management’s selection of the estimated interest rates of comparable non-convertible notes. These procedures also included, among others (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent implied interest rate range for a similar liability without a convertible feature and (ii) comparing the independent range to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent range involved estimating a synthetic credit rating range for the Company as they are not currently rated and creating a range of interest rates based on debt currently held by companies within a similar industry and credit rating range.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 2021
We have served as the Company’s auditor since 2012.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Accounts receivable, net | 22,605 | | | 15,386 | |
| Prepaid and other current assets | 56,152 | | | 38,614 | |
| | | |
| | | |
| Funds receivable and seller accounts | 146,806 | | | 49,786 | |
| Total current assets | 1,894,781 | | | 921,038 | |
| Restricted cash | 5,341 | | | 5,341 | |
| Property and equipment, net | 112,495 | | | 144,864 | |
| Goodwill | 140,810 | | | 138,731 | |
| Intangible assets, net | 187,449 | | | 199,236 | |
| Deferred tax assets | 115 | | | 14,257 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Other assets | 24,404 | | | 29,542 | |
| Total assets | $ | 2,404,489 | | | $ | 1,542,352 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 40,883 | | | $ | 26,324 | |
| Accrued expenses | 232,352 | | | 88,345 | |
| Finance lease obligations—current | 8,537 | | | 8,275 | |
| Funds payable and amounts due to sellers | 146,806 | | | 49,786 | |
| Deferred revenue | 11,264 | | | 7,617 | |
| Other current liabilities | 14,822 | | | 8,181 | |
| Total current liabilities | 454,664 | | | 188,528 | |
| Finance lease obligations—net of current portion | 44,979 | | | 53,611 | |
| | | |
| Deferred tax liabilities | 58,481 | | | 64,497 | |
| | | |
| Long-term debt, net | 1,062,299 | | | 785,126 | |
| Other liabilities | 41,642 | | | 43,956 | |
| Total liabilities | 1,662,065 | | | 1,135,718 | |
| Commitments and contingencies (Note 14) | 0 | | 0 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2020 and 2019; 125,835,931 and 118,342,772 shares issued and outstanding as of December 31, 2020 and 2019, respectively) | 126 | | | 119 | |
| Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2020 and 2019) | 0 | | | 0 | |
| Additional paid-in capital | 883,166 | | | 642,628 | |
| Accumulated deficit | (146,819) | | | (227,414) | |
| Accumulated other comprehensive income (loss) | 5,951 | | | (8,699) | |
| Total stockholders’ equity | 742,424 | | | 406,634 | |
| Total liabilities and stockholders’ equity | $ | 2,404,489 | | | $ | 1,542,352 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenue | $ | 1,725,625 | | | $ | 818,379 | | | $ | 603,693 | |
| Cost of revenue | 464,745 | | | 271,036 | | | 190,762 | |
| Gross profit | 1,260,880 | | | 547,343 | | | 412,931 | |
| Operating expenses: | | | | | |
| Marketing | 500,756 | | | 215,570 | | | 158,013 | |
| Product development | 180,080 | | | 121,878 | | | 97,249 | |
| General and administrative | 156,035 | | | 121,134 | | | 82,883 | |
| | | | | |
| Total operating expenses | 836,871 | | | 458,582 | | | 338,145 | |
| Income from operations | 424,009 | | | 88,761 | | | 74,786 | |
| Other expense: | | | | | |
| Loss on extinguishment of debt | (16,855) | | | 0 | | | 0 | |
| Interest expense | (42,025) | | | (24,320) | | | (22,178) | |
| Interest and other income | 7,102 | | | 13,199 | | | 8,957 | |
| | | | | |
| Foreign exchange (loss) gain | (6,522) | | | 3,006 | | | (6,487) | |
| Total other expense | (58,300) | | | (8,115) | | | (19,708) | |
| Income before income taxes | 365,709 | | | 80,646 | | | 55,078 | |
| (Provision) benefit for income taxes | (16,463) | | | 15,248 | | | 22,413 | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Net income per share attributable to common stockholders: | | | | | |
| Basic | $ | 2.88 | | | $ | 0.80 | | | $ | 0.64 | |
| Diluted | $ | 2.69 | | | $ | 0.76 | | | $ | 0.61 | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 121,251,588 | | | 119,665,248 | | | 120,146,076 | |
| Diluted | 136,414,592 | | | 125,720,073 | | | 127,084,785 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Other comprehensive income (loss): | | | | | |
| Cumulative translation adjustment | 14,468 | | | (1,078) | | | (1,399) | |
| Unrealized gains (losses) on marketable securities, net of tax expense of $73, $65, and $0, respectively | 182 | | | 192 | | | (35) | |
| Total other comprehensive income (loss) | 14,650 | | | (886) | | | (1,434) | |
| Comprehensive income | $ | 363,896 | | | $ | 95,008 | | | $ | 76,057 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
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| | | | | | | | | | | | | | | | | Common Stock | | | | Additional
Paid-in
Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total |
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| Balance as of December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 121,769,238 | | | $ | 122 | | | | | | | $ | 499,441 | | | $ | (96,290) | | | $ | (6,379) | | | $ | 396,894 | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 40,483 | | | — | | | — | | | 40,483 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,588,779 | | | 1 | | | | | | | 18,252 | | | — | | | — | | | 18,253 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 53,323 | | | — | | | — | | | 53,323 | |
| Purchase of capped call, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (25,400) | | | — | | | — | | | (25,400) | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 860,102 | | | 1 | | | | | | | (24,066) | | | — | | | — | | | (24,065) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,446,417) | | | (4) | | | | | | | — | | | (134,643) | | | — | | | (134,647) | |
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| Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (1,434) | | | (1,434) | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 77,491 | | | — | | | 77,491 | |
| 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 45,697 | | | — | | | — | | | 45,697 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 840,835 | | | 1 | | | | | | | 9,790 | | | — | | | — | | | 9,791 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 115,980 | | | — | | | — | | | 115,980 | |
| Purchase of capped call, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (58,324) | | | — | | | — | | | (58,324) | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 832,642 | | | 1 | | | | | | | (32,548) | | | — | | | — | | | (32,547) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,102,407) | | | (3) | | | | | | | — | | | (176,982) | | | — | | | (176,985) | |
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| Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (886) | | | (886) | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 95,894 | | | — | | | 95,894 | |
| Balance as of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 118,342,772 | | | 119 | | | | | | | 642,628 | | | (227,414) | | | (8,699) | | | 406,634 | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 66,350 | | | — | | | — | | | 66,350 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,834,773 | | | 1 | | | | | | | 25,318 | | | — | | | — | | | 25,319 | |
| 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 taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,271,723 | | | 7 | | | | | | | 151,304 | | | — | | | — | | | 151,311 | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 825,200 | | | 1 | | | | | | | (47,717) | | | — | | | — | | | (47,716) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,438,537) | | | (2) | | | | | | | — | | | (268,651) | | | — | | | (268,653) | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | 14,650 | | | 14,650 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 349,246 | | | — | | | 349,246 | |
| Balance as of December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 125,835,931 | | | $ | 126 | | | | | | | $ | 883,166 | | | $ | (146,819) | | | $ | 5,951 | | | $ | 742,424 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Stock-based compensation expense | 65,114 | | | 44,395 | | | 38,231 | |
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| Depreciation and amortization expense | 58,189 | | | 48,031 | | | 26,742 | |
| Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Foreign exchange loss (gain) | 7,349 | | | (5,708) | | | 5,997 | |
| Amortization of debt issuance costs | 2,751 | | | 2,006 | | | 1,191 | |
| Non-cash interest expense | 36,086 | | | 19,108 | | | 10,968 | |
| Interest expense (income) on marketable securities | 2,729 | | | (4,182) | | | (2,887) | |
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| (Gain) loss on disposal of assets | (795) | | | 1,667 | | | 136 | |
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| Deferred provision (benefit) for income taxes | 2,202 | | | (15,248) | | | (22,414) | |
| Loss on extinguishment of debt | 16,855 | | | 0 | | | 0 | |
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| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (22,540) | | | (12,656) | | | 17,215 | |
| Funds receivable and seller accounts | (90,141) | | | (23,177) | | | 23,436 | |
| Prepaid expenses and other current assets | (16,963) | | | (14,156) | | | (4,785) | |
| Other assets | 4,816 | | | 4,045 | | | 43 | |
| Accounts payable | 14,550 | | | (953) | | | 13,364 | |
| Accrued and other current liabilities | 146,634 | | | 37,410 | | | 23,079 | |
| Funds payable and amounts due to sellers | 90,141 | | | 23,177 | | | (23,436) | |
| Deferred revenue | 3,312 | | | 191 | | | 1,331 | |
| Other liabilities | (5,612) | | | (3,887) | | | 9,099 | |
| Net cash provided by operating activities | 678,956 | | | 206,920 | | | 198,925 | |
| Cash flows from investing activities | | | | | |
| Acquisition, net of cash acquired | 0 | | | (270,409) | | | 0 | |
| Cash paid for asset acquisition and intangible assets | (880) | | | (1,963) | | | (35,494) | |
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| Purchases of property and equipment | (1,445) | | | (7,528) | | | (1,019) | |
| Development of internal-use software | (5,665) | | | (7,750) | | | (19,537) | |
| Purchases of marketable securities | (499,237) | | | (661,821) | | | (514,286) | |
| Sales and maturities of marketable securities | 495,848 | | | 461,098 | | | 284,943 | |
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| Net cash used in investing activities | (11,379) | | | (488,373) | | | (285,393) | |
| Cash flows from financing activities | | | | | |
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| Payment of tax obligations on vested equity awards | (47,716) | | | (32,547) | | | (24,065) | |
| Repurchase of stock | (268,653) | | | (176,985) | | | (134,647) | |
| Proceeds from exercise of stock options | 25,319 | | | 9,791 | | | 18,253 | |
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| Proceeds from issuance of convertible senior notes | 650,000 | | | 650,000 | | | 345,000 | |
| Payment of debt issuance costs | (10,531) | | | (11,904) | | | (9,962) | |
| Purchase of capped calls | (74,685) | | | (76,180) | | | (34,224) | |
| Settlement of convertible senior notes | (137,168) | | | 0 | | | 0 | |
| Payments on finance lease obligations | (9,211) | | | (10,833) | | | (6,057) | |
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| Payments on facility financing obligation | 0 | | | 0 | | | (10,164) | |
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| Other financing, net | (8,073) | | | 8,265 | | | (128) | |
| Net cash provided by financing activities | 119,282 | | | 359,607 | | | 144,006 | |
| Effect of exchange rate changes on cash | 13,947 | | | (1,846) | | | (5,995) | |
| Net increase in cash, cash equivalents, and restricted cash | 800,806 | | | 76,308 | | | 51,543 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 448,634 | | | 372,326 | | | 320,783 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 3,405 | | | $ | 3,206 | | | $ | 10,002 | |
| Cash paid for income taxes | $ | 8,535 | | | $ | 2,084 | | | $ | 966 | |
| Supplemental non-cash disclosures: | | | | | |
| Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 2,852 | | | $ | 2,450 | | | $ | 3,463 | |
| | | | | |
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| Right-of-use assets obtained in exchange for new lease liabilities | $ | 3,183 | | | $ | 849 | | | $ | 2,122 | |
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During the year ended December 31, 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 13—Debt” in the Notes to Consolidated Financial Statements for more information.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown above:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance: | | | | | |
| Cash and cash equivalents | $ | 443,293 | | | $ | 366,985 | | | $ | 315,442 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 448,634 | | | $ | 372,326 | | | $ | 320,783 | |
| | | | | |
| Ending balance: | | | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | | | $ | 366,985 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
The accompanying notes are an integral part of these consolidated financial statements.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
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. On August 15, 2019, Etsy acquired all of the issued and outstanding capital stock of Reverb Holdings, Inc. (“Reverb”). The financial results of Reverb have been included in Etsy’s consolidated financial statements from the date of acquisition. See “Note 5—Business Combinations.”
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments 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: stock-based compensation; income taxes, including the 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; leases, including determining the incremental borrowing rate; and fair value of convertible senior notes. As of December 31, 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.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), which the Company adopted on January 1, 2018 using the full retrospective method of transition.
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help sellers generate more sales and scale their businesses. Revenues are recognized as the Company transfers control of promised goods or services to sellers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk, and has the latitude in establishing pricing and selecting suppliers, among other factors. Based on its evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. With the exception of shipping labels, the Company’s revenues are recognized on a gross basis. Sales and usage-based taxes are excluded from revenues.
Etsy Marketplace revenue: As members of the Etsy marketplace, Etsy sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. Etsy sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Variable fees include the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and where applicable, an additional transaction fee of 12% or 15% related to offsite advertising, and Etsy Payments fees for processing payments, including foreign currency payments. On July 16, 2018, the Company increased the seller transaction fee from 3.5% to 5% of each completed transaction, and now applies it to the cost of shipping in addition to the cost of the item. In May 2020, Etsy started charging sellers on its marketplace platform for Offsite Ads, whereby sellers will 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 Etsy on third-party internet platforms. The corresponding expense is recorded in marketing. Etsy Payments processing fees vary between 3.0% and 4.5% of an item’s total sale price, including
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional transaction fee is applied.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable while transaction fees, Offsite Ads transaction fees, and Etsy Payments processing fees are recorded net of refunds.
Reverb Marketplace revenue: The Reverb seller transaction fee is a variable fee, which is 5% of each completed transaction, including both the cost of the item and the shipping. In August 2020, Reverb increased its seller transaction fee from 3.5% to 5%. There are no Reverb listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments. Payments processing fees vary between 2.5% and 2.7% of an item’s total sale price, including shipping and any applicable sales tax, plus a flat fee per order, depending on the currency in which a listing is denominated. International transactions incur a 1% additional cross-border fee.
Etsy Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which primarily include on-site advertising services (formerly Promoted Listings) and Etsy Shipping Labels. Each service below represents an individual obligation that the Company must perform when an Etsy seller chooses to use the service.
•During the second quarter of 2020, Etsy transitioned from a combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: Offsite Ads, with 12% or 15% transaction fees reported in Marketplace revenue, and Etsy Ads, the new name for the Company’s on-site product (formerly Promoted Listings), with advertising fees reported in Services revenue. 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. The previous combined “Etsy Ads” offering was available from the third quarter of 2019 to the beginning of the second quarter of 2020. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into 1 unified ad platform, where Etsy sellers could set a budget, which allowed Etsy to allocate that budget between channels, targeting optimal return on seller spend. Revenue from this unified ad platform consisted of cost-per-click fees, which were nonrefundable and were charged to a seller’s Etsy bill when the ad was clicked. This unified ad platform was replaced by the new on-site Etsy Ads product. The revenue that the Company recognized related to the unified ad platform was recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue. Prior to the unified ad platform, revenue from Promoted Listings consisted of cost-per-click fees an Etsy seller paid the Company for prominent placement of her listings in search results in the Company’s marketplace. Promoted Listing fees were nonrefundable and were charged to a seller’s Etsy bill when the Promoted Listing was clicked, at which time revenue was recognized.
•Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays the Company when she purchases shipping labels through its platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. The Company recognizes Etsy Shipping Labels revenue when an Etsy seller purchases a shipping label. The Company recognizes Etsy Shipping Labels revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Etsy seller. Etsy Shipping Label revenue is recorded net of refunds.
Reverb Services revenue: Reverb has its own on-site advertising service called Bump advertising. Reverb sellers have the ability to determine their own ad rate as a percentage of their item’s final sale price. Revenue from Bump advertising is recognized at the time the item is sold. Reverb also provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. Revenue from shipping labels consists of fees a Reverb seller pays when they purchase shipping labels directly through the Reverb platform, net of the cost the shipping company charges Reverb. Reverb recognizes shipping label revenue when a Reverb seller purchases a shipping label. Reverb recognizes shipping label revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Reverb seller. Shipping label revenue is recorded net of refunds.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Contract balances: The Company records deferred revenues when cash payments are received or due in advance of the completion of the listing period, which represents the value of the Company’s unsatisfied performance obligations. Deferred listing revenue is recognized ratably over the remainder of the four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The amount of revenue recognized in the year ended December 31, 2020 that was included in the deferred balance at January 1, 2020 was $7.6 million.
Cost of Revenue
Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees, and credit card chargebacks to support payments revenue, and costs of refunds made to buyers that the Company is not able to collect from sellers. Cost of revenue also includes expenses associated with the operation and maintenance of the Company’s platform, including employee-related costs, hosting and bandwidth costs, and depreciation and amortization. With the shift to the combined “Etsy Ads” offering from the third quarter of 2019 to the beginning of the second quarter of 2020, amounts spent on Google Shopping, which were previously recorded on a net basis in Services revenue, were recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue.
Marketing
Marketing expenses primarily consist of direct marketing expenses, which largely includes digital marketing and television ad and digital video expenses. Digital marketing, also referred to as performance marketing, primarily consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing, social channels, and affiliate programs, which are focused on buyer acquisition and retargeting. Marketing expenses also include employee-related expenses to support the Company’s marketing initiatives. Advertising expenses are recognized as incurred, with the exception of certain production expenses related to television and display advertising which are deferred until the first time an advertisement airs or is published. If such advertising is not expected to occur, costs are expensed immediately. Advertising expenses related to direct marketing, included in marketing expenses on the Consolidated Statements of Operations, were $442.2 million, $175.2 million, and $129.1 million in the years ended December 31, 2020, 2019, and 2018, respectively.
Product Development
Product development expenses consist primarily of employee-related expenses for engineering, product management, product design, and product research activities, net of costs capitalized to website development and internal-use software. Additional expenses include consulting costs related to the development, quality assurance, and testing of new technology and enhancement of our existing technology.
Stock-Based Compensation
The Company accounts for our stock-based compensation awards in accordance with ASC Topic 718—Compensation—Stock Compensation (“ASC 718”). Stock options and restricted stock units (“RSUs”) are awarded to employees and members of the Company’s Board of Directors and are measured at fair value at each grant date. The Company calculates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model and the expense is recognized over the requisite service period. The Company uses the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from market comparisons of Etsy and certain publicly traded companies. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on the grant date. The requisite service period for stock options and RSUs is generally four years from the date of grant. The Company recognizes forfeitures as they occur.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Foreign Currency
The Company has determined that the functional currency for each of its foreign operations is the currency of the primary cash flow of the operations, which is generally the local currency in which the operation is located. All assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Revenue and expenses are translated using average exchange rates during the period. Foreign currency translation adjustments are reflected in stockholders’ equity as a component of other comprehensive income (loss). Transaction gains and losses including intercompany balances denominated in a currency other than the functional currency of the entity involved are included in foreign exchange gain (loss) within other income (expense) in the Consolidated Statement of Operations.
Income Taxes
The income tax benefit is based on income before income taxes and is accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to settle. The Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company regularly reviews the recoverability of its deferred tax assets by considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance against deferred tax assets that are deemed not more likely than not to be realizable.
On December 22, 2017 the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law. The TCJA requires the Company to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Taxed Income (“GILTI”) as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has recorded tax expense related to GILTI in its effective tax rate beginning in 2018, and has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred using the period cost method.
The Company accounts for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement.
The Company recognizes interest and penalties, if any, associated with income tax matters as part of the income tax provision and includeincludes accrued interest and penalties with the related income tax liability in ourthe Consolidated Balance Sheet.Sheets.
Net Income Per Share
Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted net income per share is computed by dividing net income adjusted on an if-converted basis for the period by the weighted-average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based compensation awards and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating net income per share of common stock attributable to common stockholders when their effect is dilutive.
The calculation of diluted net income per share excludes all anti-dilutive common shares.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Segment Data
The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer. The Company has determined it has 2 operating segments, Etsy and Reverb, which qualify for aggregation as 1 reportable segment, for purposes of allocating resources and evaluating financial performance.
Cash and Cash Equivalents, and Short- and Long-term Investments
The Company considers all investments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash restricted by third parties is not considered cash and cash equivalents. Short-term investments, consisting of certificates of deposit, commercial paper, corporate bonds, and U.S. Government and agency securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Long-term investments, consisting of certificates of deposit, corporate bonds, and U.S. Government and agency securities with original maturities of greater than twelve months but less than 37 months when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax expenses or benefits.
The following table provides cash and cash equivalents, and short- and long-term investments within the Consolidated Balance Sheets as of the dates indicated (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Total cash and cash equivalents, and short- and long-term investments | $ | 1,708,312 | | | $ | 906,595 | |
Restricted Cash
The Company classifies any cash balances that are legally restricted as to withdrawal or usage as restricted cash on the Consolidated Balance Sheets. In connection with the Company’s noncancellable Brooklyn lease agreement, which expires in 2026, the Company established a $5.3 million collateral account, which is reflected in the restricted cash balance as of December 31, 2020 and 2019.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short- and long-term investments, and funds receivable and seller accounts. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, to the extent eligible, such amounts may exceed federally insured limits. The Company believes that minimal credit risk exists with respect to these investments due to the credit ratings of the financial institutions that hold its short- and long-term investments. In addition, funds receivable settle relatively quickly, and the Company’s historical experience of losses has not been significant.
Fair Value of Financial Instruments
Management believes that the fair value of financial instruments, consisting of cash and cash equivalents, short- and long-term investments, accounts receivable, funds receivable and seller accounts, accounts payable, and funds payable and seller accounts approximates carrying value due to the immediate or short-term maturity associated with these instruments.
In accounting for the issuance of the 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), and 0% Convertible Senior Notes due 2023 (the “2018 Notes”and together with the
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Etsy, Inc.
Notes to Consolidated Financial Statements
2020 Notes and the 2019 Notes, the “Notes”), and the extinguishment of the 2018 Notes, discussed in “Note 13—Debt,” management used estimates and assumptions to calculate the carrying amounts of the liability and equity components by measuring the fair value of similar securities. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, the Company discounted the contractual cash flows of each of the Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s stock, was determined by deducting the fair value of the liability component from the par value of each of the Notes. Subsequent to their issuance, the Notes are not measured at fair value in the Consolidated Balance Sheets, but the Company estimates the fair value of the liability component of the Notes through inputs that are observable in the market or that could be derived from observable market data, corroborated with quoted market prices of similar instruments. See Note 8—Fair Value Measurements for more information on the fair value of the liability component of the Notes.
Accounts Receivable and Provision for Expected Credit Losses
The Company’s trade accounts receivable are recorded at amounts billed to sellers and are presented on the Consolidated Balance Sheets net of the provision for expected credit losses. The provision is determined 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. Receivables are written off once they are deemed uncollectible. Estimates of uncollectible accounts receivable are recorded to general and administrative expense.
Etsy payment terms: As of November 13, 2018, for Etsy sellers using Etsy Payments, all charges, including listing fees, transactions fees, Etsy Payments fees, advertising services fees, and Etsy Shipping Labels fees, are deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account. Etsy sellers receive a statement electronically on the first day of each month outlining the previous month’s charges and any remaining amount due after the Company’s fees are deducted from the seller’s shop payment account. Etsy sellers who do not use Etsy Payments receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment is due by the 15th of every month.
Prior to November 13, 2018, Etsy sellers would receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment was due by the 15th of every month. Prior to November 13, 2018 only Etsy Payments fees were deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account.
Reverb payment terms: For most transactions, Reverb buyers use a credit card to pay for the service, when the order is placed. For these transactions, the Company collects the total amount due on the order, retains its fees due from the Reverb seller, and remits the net proceeds to the Reverb seller.
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):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Balance as of the beginning of period | $ | 5,033 | | | $ | 4,720 | | | $ | 2,687 | |
| | | | | |
| Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Amounts written off, net of recoveries | (10,309) | | | (10,650) | | | (2,091) | |
| Balance as of the end of period | $ | 9,757 | | | $ | 5,033 | | | $ | 4,720 | |
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Etsy, Inc.
Notes to Consolidated Financial Statements
Funds Receivable and Seller Accounts and Funds Payable and Amounts due to Sellers
The Company records funds receivable and seller accounts and funds payable and amounts due to sellers as current assets and liabilities, respectively, on the Consolidated Balance Sheets. Funds receivable and seller accounts represent amounts received or expected to be received from buyers via third-party credit card processors, which flow through a bank account for payment to sellers. This cash and related receivable represent the total amount due to sellers, and as such a liability for the same amount is recorded to funds payable and amounts due to sellers.
Property and Equipment
Property and equipment, consisting principally of capitalized website development and internal-use software, building, leasehold improvements, and computer equipment, are recorded at cost. Depreciation and amortization begin at the time the asset is placed into service and is recognized using the straight-line method in amounts sufficient to relate the cost of depreciable and amortizable assets to the Consolidated Statements of Operations over their estimated useful lives. Repairs and maintenance are charged to the Consolidated Statements of Operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the balance sheet and the resulting gain or loss is reflected in the Consolidated Statements of Operations.
When events or changes in circumstances require, the Company assesses the likelihood of recovering the cost of tangible long-lived assets based on its expectations of future profitability, undiscounted cash flows, and management’s plans with respect to operations to determine if the asset is impaired and subject to write-off. Measurement of any impairment loss is based on the excess of the carrying value of the asset over the fair value.
Website DevelopmentFair Value of Financial Instruments
Management believes that the fair value of financial instruments, consisting of cash and Internal-use Software Costscash equivalents, short- and long-term investments, accounts receivable, funds receivable and seller accounts, accounts payable, and funds payable and seller accounts approximates carrying value due to the immediate or short-term maturity associated with these instruments.
Costs incurred to develop our website and softwareIn accounting for internal-use are capitalized and amortized over the estimated useful lifeissuance of the software, generally three0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), and 0% Convertible Senior Notes due 2023 (the “2018 Notes”and together with the
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Etsy, Inc.
Notes to five years. In accordance with authoritativeConsolidated Financial Statements
2020 Notes and the 2019 Notes, the “Notes”), and the extinguishment of the 2018 Notes, discussed in “Note 13—Debt,” management used estimates and assumptions to calculate the carrying amounts of the liability and equity components by measuring the fair value of similar securities. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, the Company discounted the contractual cash flows of each of the Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, andas a derivative as it is probable that the project will be completed and the software will be used as intended. We also capitalize costs related to upgrades and enhancements when it is probable the expenditures will result in additional functionality or will extend the useful life of existing functionality. Costs relatedindexed to the designCompany’s stock, was determined by deducting the fair value of the liability component from the par value of each of the Notes. Subsequent to their issuance, the Notes are not measured at fair value in the Consolidated Balance Sheets, but the Company estimates the fair value of the liability component of the Notes through inputs that are observable in the market or maintenancethat could be derived from observable market data, corroborated with quoted market prices of website developmentsimilar instruments. See Note 8—Fair Value Measurements for more information on the fair value of the liability component of the Notes.
Accounts Receivable and internal-use softwareProvision for Expected Credit Losses
The Company’s trade accounts receivable are expensedrecorded at amounts billed to sellers and are presented on the Consolidated Balance Sheets net of the provision for expected credit losses. The provision is determined 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. Receivables are written off once they are deemed uncollectible. Estimates of uncollectible accounts receivable are recorded to general and administrative expense.
Etsy payment terms: As of November 13, 2018, for Etsy sellers using Etsy Payments, all charges, including listing fees, transactions fees, Etsy Payments fees, advertising services fees, and Etsy Shipping Labels fees, are deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account. Etsy sellers receive a statement electronically on the first day of each month outlining the previous month’s charges and any remaining amount due after the Company’s fees are deducted from the seller’s shop payment account. Etsy sellers who do not use Etsy Payments receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment is due by the 15th of every month.
Prior to November 13, 2018, Etsy sellers would receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment was due by the 15th of every month. Prior to November 13, 2018 only Etsy Payments fees were deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account.
Reverb payment terms: For most transactions, Reverb buyers use a credit card to pay for the service, when the order is placed. For these transactions, the Company collects the total amount due on the order, retains its fees due from the Reverb seller, and remits the net proceeds to the Reverb seller.
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):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Balance as of the beginning of period | $ | 5,033 | | | $ | 4,720 | | | $ | 2,687 | |
| | | | | |
| Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Amounts written off, net of recoveries | (10,309) | | | (10,650) | | | (2,091) | |
| Balance as of the end of period | $ | 9,757 | | | $ | 5,033 | | | $ | 4,720 | |
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Etsy, Inc.
Notes to Consolidated Financial Statements
Funds Receivable and Seller Accounts and Funds Payable and Amounts due to Sellers
The Company records funds receivable and seller accounts and funds payable and amounts due to sellers as incurred. We periodically review thesecurrent assets and liabilities, respectively, on the Consolidated Balance Sheets. Funds receivable and seller accounts represent amounts received or expected to be received from buyers via third-party credit card processors, which flow through a bank account for payment to sellers. This cash and related receivable represent the total amount due to sellers, and as such a liability for the same amount is recorded to funds payable and amounts due to sellers.
Property and Equipment
Property and equipment, consisting principally of capitalized website development and internal-use software, costs to determine whetherbuilding, leasehold improvements, and computer equipment, are recorded at cost. Depreciation and amortization begin at the projects will be completed, placed in service, removed from service, or replaced by other internally-developed or third-party software. If an asset is not expected to provide any future use,time the asset is retiredplaced into service and any unamortizedis recognized using the straight-line method in amounts sufficient to relate the cost of depreciable and amortizable assets to the Consolidated Statements of Operations over their estimated useful lives. Repairs and maintenance are charged to the Consolidated Statements of Operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the balance sheet and the resulting gain or loss is expensed.reflected in the Consolidated Statements of Operations.
If an asset will continue to be used, but the net book value is not expected to be fully recoverable, the asset is impaired to its fair value. When events or changes in circumstances require, we assessthe Company assesses the likelihood of recovering the cost of website development and internal-use software coststangible long-lived assets based on its expectations of future profitability, undiscounted cash flows, and ourmanagement’s plans with respect to operations to determine if the asset is impaired and subject to write-off. Measurement of any impairment loss is based on the excess of the carrying value of the asset over the fair value.
Asset Acquisitions
We have completed asset acquisitions and may complete additional asset acquisitions in the future. In an asset acquisition, we initially determine whether we acquired a single or group of assets. Acquired assets are recognized based on the purchase price, which is presumed to equal the fair value of the net assets acquired and amortized in the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. When circumstances indicate that the carrying value of these assets may not be recoverable, we review our identifiable amortizable intangible assets for impairment. We accrue for contingent consideration when payout becomes probable and is reasonably estimable.
Business Combinations, Intangible Assets and Goodwill
We have completed a number of acquisitions of other businesses in the past and may acquire additional businesses or technologies in the future. In an acquisition, we first review if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, in which case the set is not considered a business and is accounted for as an asset acquisition.
The results of businesses acquired in a business combination are included in our Consolidated Financial Statements from the date of acquisition. We allocate the purchase price, which is the sum of the consideration provided and may consist of cash, equity, or a combination of the two, in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies.
When we issue stock-based or cash awards to an acquired company’s stockholders, we evaluate whether the awards are contingent consideration or compensation for post-combination services. The evaluation includes, among other things, whether
the vesting of the awards is contingent on the continued employment of the acquired company’s stockholder beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-combination services and recognized as expense over the requisite service period.
We initially recognize intangible assets at fair value, and we amortize them on a straight-line basis over their estimated useful lives. When circumstances indicate that the carrying value of these assets may not be recoverable, we review our identifiable amortizable intangible assets for impairment.
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. We have determined that we have a single reporting unit and we perform our annual goodwill impairment test during the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired.
We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if we conclude otherwise, we are then required to perform a quantitative assessment for impairment.
The quantitative assessment involves comparing the estimated fair value of the reporting unit with its respective book value, including goodwill. If we determine that the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, we determine that the book value of the reporting unit exceeds the fair value, we would recognize an impairment loss in an amount equal to the excess, not to exceed the total amount of goodwill allocated to that reporting unit.
Leases
We lease office space and certain computer equipment in multiple locations under non-cancelable lease agreements. The leases are reviewed for classification as operating, capital, or build-to-suit leases. For operating leases, rent is recognized on a straight-line basis over the lease period. For capital leases, we record the leased asset with a corresponding liability. Payments are recorded as reductions to the liability with an appropriate interest charge recorded based on the then-outstanding remaining liability. Upon adoption of ASU 2016-02—Leases, we will recognize additional operating liabilities and corresponding right-of-use assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
We consider the nature of the renovations and our involvement during the construction period of newly-leased office space to determine if we are considered, for accounting purposes only, to be the owner of the construction project during the construction period. If we determine that we are the owner of the construction project, we are required to capitalize the fair value of the building as well as the construction costs incurred on our Consolidated Balance Sheet along with a corresponding financing liability (“build-to-suit accounting”). Upon occupancy for build-to-suit leases, we assess whether the circumstances qualify for sales recognition under the sale-leaseback accounting guidance. If the lease meets the sale-leaseback criteria, we will remove the asset and related financial obligation from the balance sheet and treat the building lease as an operating lease. If upon completion of construction, the project does not meet the sale-leaseback criteria, the leased property will be treated as a capital lease for financial reporting purposes.
In May 2016, we took possession of our corporate headquarters in Brooklyn, New York upon substantial completion of the construction phase of the build-out. Upon completion of the project, we performed a sale-leaseback analysis pursuant to Accounting Standards Codification (“ASC”) 840—Leases, to determine the appropriateness of removing the previously capitalized assets from the Consolidated Balance Sheets. We concluded that components of “continuing involvement” were evident as a result of this review, precluding the derecognition of the related assets from the Consolidated Balance Sheets. In conjunction with the initiation of the lease in May 2014, we also recorded a facility financing obligation equal to the fair market value of the assets received from the landlord. We do not report rent expense for the lease. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest expense, and the associated asset capitalized throughout the construction project is depreciated over its estimated useful life. Upon adoption of ASU 2016-02—Leases, we will derecognize the facility financing obligation and any gains or losses associated with this change in accounting will be recognized through a cumulative-effect adjustment to accumulated deficit as of January 1, 2019. Additionally, a new right-of-use asset and lease liability will be recognized on the Consolidated Balance Sheet for the associated lease. See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” for additional information on the impact of ASU 2016-02—Leases.
Restructuring and Other Exit Costs (Income)
Under certain circumstances, such as the Actions described in “Non-GAAP Financial Measures,” we establish restructuring accruals for estimated employee severance and other exit costs. These accruals require the use of estimates, and though we believe the estimates and assumptions are reasonable, they may differ materially from actual costs. We include restructuring and other exit costs (income) in the applicable operating expense category of the impacted function in the Consolidated Statements of Operations. See “Note 17—Restructuring and Other Exit Costs (Income)” in the Notes to Consolidated Financial Statements for additional information.
Fair ValueBasis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Controls Over Financial InstrumentsReporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Note Transactions
As described in Notes 1 and 13 to the consolidated financial statements, in August 2020, the Company issued $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”). In accounting for the issuance of the 2020 Notes, discussed in “Liquiditymanagement separated the 2020 Notes into liability and Capital Resources—Sources of Liquidity,” we used estimates and assumptions to calculate theequity components. The carrying amountsamount of the liability and equity componentscomponent was calculated by measuring the fair value of a similar securities.liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the 2020 Notes at an estimated interest rate for a comparable non-convertible note. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2020 Notes. Additionally, during the third quarter of 2020, the Company paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 0% Convertible Senior Notes due 2023 (the “2018 Notes”) through privately negotiated transactions. This transaction was accounted for as an extinguishment of debt, and the Company recognized a non-cash loss on extinguishment of $16.9 million. This loss was calculated by comparing the carrying value of the debt component with the fair value of a similar liability that does not have an associated convertible feature immediately prior to extinguishment as well as writing off any remaining unamortized deferred debt issuance costs at the time of extinguishment. To estimate the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the Notes at an estimated interest rate for a comparable non-convertible note.
The principal considerations for our determination that performing procedures relating to the convertible note transactions is a critical audit matter are (i) the significant judgment by management in determining the fair value of the liability portion of the 2018 and 2020 Notes, (ii) the significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to the estimated interest rates of comparable non-convertible notes used in determining the fair value of similar notes that do not have an associated conversion feature, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s financing process, including controls over management’s selection of the estimated interest rates of comparable non-convertible notes. These procedures also included, among others (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent implied interest rate range for a similar liability without a convertible feature and (ii) comparing the independent range to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent range involved estimating a synthetic credit rating range for the Company as they are not currently rated and creating a range of interest rates based on debt currently held by companies within a similar industry and credit rating range.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 2021
We have served as the Company’s auditor since 2012.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Accounts receivable, net | 22,605 | | | 15,386 | |
| Prepaid and other current assets | 56,152 | | | 38,614 | |
| | | |
| | | |
| Funds receivable and seller accounts | 146,806 | | | 49,786 | |
| Total current assets | 1,894,781 | | | 921,038 | |
| Restricted cash | 5,341 | | | 5,341 | |
| Property and equipment, net | 112,495 | | | 144,864 | |
| Goodwill | 140,810 | | | 138,731 | |
| Intangible assets, net | 187,449 | | | 199,236 | |
| Deferred tax assets | 115 | | | 14,257 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Other assets | 24,404 | | | 29,542 | |
| Total assets | $ | 2,404,489 | | | $ | 1,542,352 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 40,883 | | | $ | 26,324 | |
| Accrued expenses | 232,352 | | | 88,345 | |
| Finance lease obligations—current | 8,537 | | | 8,275 | |
| Funds payable and amounts due to sellers | 146,806 | | | 49,786 | |
| Deferred revenue | 11,264 | | | 7,617 | |
| Other current liabilities | 14,822 | | | 8,181 | |
| Total current liabilities | 454,664 | | | 188,528 | |
| Finance lease obligations—net of current portion | 44,979 | | | 53,611 | |
| | | |
| Deferred tax liabilities | 58,481 | | | 64,497 | |
| | | |
| Long-term debt, net | 1,062,299 | | | 785,126 | |
| Other liabilities | 41,642 | | | 43,956 | |
| Total liabilities | 1,662,065 | | | 1,135,718 | |
| Commitments and contingencies (Note 14) | 0 | | 0 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2020 and 2019; 125,835,931 and 118,342,772 shares issued and outstanding as of December 31, 2020 and 2019, respectively) | 126 | | | 119 | |
| Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2020 and 2019) | 0 | | | 0 | |
| Additional paid-in capital | 883,166 | | | 642,628 | |
| Accumulated deficit | (146,819) | | | (227,414) | |
| Accumulated other comprehensive income (loss) | 5,951 | | | (8,699) | |
| Total stockholders’ equity | 742,424 | | | 406,634 | |
| Total liabilities and stockholders’ equity | $ | 2,404,489 | | | $ | 1,542,352 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenue | $ | 1,725,625 | | | $ | 818,379 | | | $ | 603,693 | |
| Cost of revenue | 464,745 | | | 271,036 | | | 190,762 | |
| Gross profit | 1,260,880 | | | 547,343 | | | 412,931 | |
| Operating expenses: | | | | | |
| Marketing | 500,756 | | | 215,570 | | | 158,013 | |
| Product development | 180,080 | | | 121,878 | | | 97,249 | |
| General and administrative | 156,035 | | | 121,134 | | | 82,883 | |
| | | | | |
| Total operating expenses | 836,871 | | | 458,582 | | | 338,145 | |
| Income from operations | 424,009 | | | 88,761 | | | 74,786 | |
| Other expense: | | | | | |
| Loss on extinguishment of debt | (16,855) | | | 0 | | | 0 | |
| Interest expense | (42,025) | | | (24,320) | | | (22,178) | |
| Interest and other income | 7,102 | | | 13,199 | | | 8,957 | |
| | | | | |
| Foreign exchange (loss) gain | (6,522) | | | 3,006 | | | (6,487) | |
| Total other expense | (58,300) | | | (8,115) | | | (19,708) | |
| Income before income taxes | 365,709 | | | 80,646 | | | 55,078 | |
| (Provision) benefit for income taxes | (16,463) | | | 15,248 | | | 22,413 | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Net income per share attributable to common stockholders: | | | | | |
| Basic | $ | 2.88 | | | $ | 0.80 | | | $ | 0.64 | |
| Diluted | $ | 2.69 | | | $ | 0.76 | | | $ | 0.61 | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 121,251,588 | | | 119,665,248 | | | 120,146,076 | |
| Diluted | 136,414,592 | | | 125,720,073 | | | 127,084,785 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Other comprehensive income (loss): | | | | | |
| Cumulative translation adjustment | 14,468 | | | (1,078) | | | (1,399) | |
| Unrealized gains (losses) on marketable securities, net of tax expense of $73, $65, and $0, respectively | 182 | | | 192 | | | (35) | |
| Total other comprehensive income (loss) | 14,650 | | | (886) | | | (1,434) | |
| Comprehensive income | $ | 363,896 | | | $ | 95,008 | | | $ | 76,057 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
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| | | | | | | | | | | | | | | | | Common Stock | | | | Additional
Paid-in
Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total |
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| Balance as of December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 121,769,238 | | | $ | 122 | | | | | | | $ | 499,441 | | | $ | (96,290) | | | $ | (6,379) | | | $ | 396,894 | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 40,483 | | | — | | | — | | | 40,483 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,588,779 | | | 1 | | | | | | | 18,252 | | | — | | | — | | | 18,253 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 53,323 | | | — | | | — | | | 53,323 | |
| Purchase of capped call, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (25,400) | | | — | | | — | | | (25,400) | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 860,102 | | | 1 | | | | | | | (24,066) | | | — | | | — | | | (24,065) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,446,417) | | | (4) | | | | | | | — | | | (134,643) | | | — | | | (134,647) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (1,434) | | | (1,434) | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 77,491 | | | — | | | 77,491 | |
| 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 45,697 | | | — | | | — | | | 45,697 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 840,835 | | | 1 | | | | | | | 9,790 | | | — | | | — | | | 9,791 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 115,980 | | | — | | | — | | | 115,980 | |
| Purchase of capped call, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (58,324) | | | — | | | — | | | (58,324) | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 832,642 | | | 1 | | | | | | | (32,548) | | | — | | | — | | | (32,547) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,102,407) | | | (3) | | | | | | | — | | | (176,982) | | | — | | | (176,985) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (886) | | | (886) | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 95,894 | | | — | | | 95,894 | |
| Balance as of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 118,342,772 | | | 119 | | | | | | | 642,628 | | | (227,414) | | | (8,699) | | | 406,634 | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 66,350 | | | — | | | — | | | 66,350 | |
| Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,834,773 | | | 1 | | | | | | | 25,318 | | | — | | | — | | | 25,319 | |
| 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 taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,271,723 | | | 7 | | | | | | | 151,304 | | | — | | | — | | | 151,311 | |
| Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 825,200 | | | 1 | | | | | | | (47,717) | | | — | | | — | | | (47,716) | |
| Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,438,537) | | | (2) | | | | | | | — | | | (268,651) | | | — | | | (268,653) | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | 14,650 | | | 14,650 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | 349,246 | | | — | | | 349,246 | |
| Balance as of December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 125,835,931 | | | $ | 126 | | | | | | | $ | 883,166 | | | $ | (146,819) | | | $ | 5,951 | | | $ | 742,424 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Stock-based compensation expense | 65,114 | | | 44,395 | | | 38,231 | |
| | | | | |
| Depreciation and amortization expense | 58,189 | | | 48,031 | | | 26,742 | |
| Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Foreign exchange loss (gain) | 7,349 | | | (5,708) | | | 5,997 | |
| Amortization of debt issuance costs | 2,751 | | | 2,006 | | | 1,191 | |
| Non-cash interest expense | 36,086 | | | 19,108 | | | 10,968 | |
| Interest expense (income) on marketable securities | 2,729 | | | (4,182) | | | (2,887) | |
| | | | | |
| (Gain) loss on disposal of assets | (795) | | | 1,667 | | | 136 | |
| | | | | |
| Deferred provision (benefit) for income taxes | 2,202 | | | (15,248) | | | (22,414) | |
| Loss on extinguishment of debt | 16,855 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (22,540) | | | (12,656) | | | 17,215 | |
| Funds receivable and seller accounts | (90,141) | | | (23,177) | | | 23,436 | |
| Prepaid expenses and other current assets | (16,963) | | | (14,156) | | | (4,785) | |
| Other assets | 4,816 | | | 4,045 | | | 43 | |
| Accounts payable | 14,550 | | | (953) | | | 13,364 | |
| Accrued and other current liabilities | 146,634 | | | 37,410 | | | 23,079 | |
| Funds payable and amounts due to sellers | 90,141 | | | 23,177 | | | (23,436) | |
| Deferred revenue | 3,312 | | | 191 | | | 1,331 | |
| Other liabilities | (5,612) | | | (3,887) | | | 9,099 | |
| Net cash provided by operating activities | 678,956 | | | 206,920 | | | 198,925 | |
| Cash flows from investing activities | | | | | |
| Acquisition, net of cash acquired | 0 | | | (270,409) | | | 0 | |
| Cash paid for asset acquisition and intangible assets | (880) | | | (1,963) | | | (35,494) | |
| | | | | |
| Purchases of property and equipment | (1,445) | | | (7,528) | | | (1,019) | |
| Development of internal-use software | (5,665) | | | (7,750) | | | (19,537) | |
| Purchases of marketable securities | (499,237) | | | (661,821) | | | (514,286) | |
| Sales and maturities of marketable securities | 495,848 | | | 461,098 | | | 284,943 | |
| | | | | |
| Net cash used in investing activities | (11,379) | | | (488,373) | | | (285,393) | |
| Cash flows from financing activities | | | | | |
| | | | | |
| | | | | |
| Payment of tax obligations on vested equity awards | (47,716) | | | (32,547) | | | (24,065) | |
| Repurchase of stock | (268,653) | | | (176,985) | | | (134,647) | |
| Proceeds from exercise of stock options | 25,319 | | | 9,791 | | | 18,253 | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from issuance of convertible senior notes | 650,000 | | | 650,000 | | | 345,000 | |
| Payment of debt issuance costs | (10,531) | | | (11,904) | | | (9,962) | |
| Purchase of capped calls | (74,685) | | | (76,180) | | | (34,224) | |
| Settlement of convertible senior notes | (137,168) | | | 0 | | | 0 | |
| Payments on finance lease obligations | (9,211) | | | (10,833) | | | (6,057) | |
| | | | | |
| Payments on facility financing obligation | 0 | | | 0 | | | (10,164) | |
| | | | | |
| Other financing, net | (8,073) | | | 8,265 | | | (128) | |
| Net cash provided by financing activities | 119,282 | | | 359,607 | | | 144,006 | |
| Effect of exchange rate changes on cash | 13,947 | | | (1,846) | | | (5,995) | |
| Net increase in cash, cash equivalents, and restricted cash | 800,806 | | | 76,308 | | | 51,543 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 448,634 | | | 372,326 | | | 320,783 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 3,405 | | | $ | 3,206 | | | $ | 10,002 | |
| Cash paid for income taxes | $ | 8,535 | | | $ | 2,084 | | | $ | 966 | |
| Supplemental non-cash disclosures: | | | | | |
| Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 2,852 | | | $ | 2,450 | | | $ | 3,463 | |
| | | | | |
| | | | | |
| Right-of-use assets obtained in exchange for new lease liabilities | $ | 3,183 | | | $ | 849 | | | $ | 2,122 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
During the year ended December 31, 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“Note 13—Debt”Debt” in the Notes to Consolidated Financial Statements for additionalmore information.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown above: Recent Accounting Pronouncements | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance: | | | | | |
| Cash and cash equivalents | $ | 443,293 | | | $ | 366,985 | | | $ | 315,442 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 448,634 | | | $ | 372,326 | | | $ | 320,783 | |
| | | | | |
| Ending balance: | | | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | | | $ | 366,985 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
For information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements, please see “
The accompanying notes are an integral part of these consolidated financial statements.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 1—Basis of Presentation and Summary of Significant Accounting Policies”
Description of Business
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 the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both within the United States and internationally and we are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Interest Rate Sensitivity
As of December 31, 2018 and December 31, 2017, the majority of our cash and cash equivalents and short-term investments were held in cash deposits, money market funds, fixed-income funds and U.S. Government and agency securities. The fair value of our cash, cash equivalents and short-term investments would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. The majority of our current interest expense is attributable to our facility financing obligation related to our build-to-suit lease and debt discount related to our Notes and is not impacted by external factors on interest rates. A 10% increase or decrease in our current interest rate would not have a significant impact on our interest expense.
Currency Risk
We are a global marketplace. Our revenues are denominated in the currencies of our seller’s ledger currencies, and our operating expenses are denominated in the currenciesconsolidation. On August 15, 2019, Etsy acquired all of the countries in which our operations are located. In addition, in the fourth quarterissued and outstanding capital stock of 2018, we launched a redesigned payment account and began processing seller charges in our seller’s ledger currencies. Prior to this launch, only Etsy Payments revenues were processed in our seller’s ledger currencies. As a resultReverb Holdings, Inc. (“Reverb”). The financial results of transacting business in multiple foreign currencies, primarily the Euro and Pound Sterling, we are subject to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar.
In the year ended December 31, 2018, approximately 17% of GMS was from goods that were not listed in U.S. dollars and, therefore, subject to currency exchange fluctuations. On a currency-neutral basis, GMS growth for the year ended December 31, 2018 wouldReverb have been 20.4%, or approximately 40 basis points lower than the reported 20.8% growth. On a currency-neutral basis, GMS growth for the three months ended December 31, 2018 would have been 23.1% compared with the reported 22.3% growth.
In the year ended December 31, 2017, approximately 15% of GMS was from goods that were not listed in U.S. dollars and, therefore, subject to currency exchange fluctuations. On a currency-neutral basis, GMS growth for the year ended December 31, 2017 would have been 14.3%, or approximately 20 basis points lower than the reported 14.5% growth.
On January 1, 2015, we implemented a revised corporate structure to more closely align our structure with our global operations and future expansion plans outside of the United States, which resulted in a U.S. dollar-denominated intercompany debt on a Euro-denominated ledger that was subject to continued currency exchange rate risk through the middle of the fourth quarter of 2017. In the fourth quarter of 2017, we established a new legal entity based in Ireland with a U.S. dollar functional currency to help mitigate the currency rate risk on our intercompany debt.
For the purpose of analyzing foreign currency exchange risk, we considered the historical trends in foreign currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% could be experience in the near term. An adverse 10% foreign currency exchange rate would have resulted in a decrease to revenue of $7.5 million or approximately 1.2% of total revenue and a currency exchange loss of $17.0 million for the year ended December 31, 2018. This compares to a revenue decrease of $3.7 million or 0.8% of total revenue and currency exchange loss of $22.5 million based on the same analysis performed for the year ended December 31, 2017.
Item 8. Financial Statements and Supplementary Data.
The supplementary financial information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Etsy, Inc.
Index to the Consolidated Financial Statements
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| |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 2018 and 2017 | |
Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016 | |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017, and 2016 | |
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017, and 2016 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016 | |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Etsy, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanyingEtsy’s consolidated balance sheets of Etsy, Inc. and its subsidiaries(the “Company”) as of December 31, 2018 and 2017,and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects,from the date of acquisition. See “Note 5—Business Combinations.”
Use of Estimates
The preparation of consolidated financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018statements in conformity with accounting principles generally accepted in the United States of America. AlsoAmerica (“GAAP”) requires us to make estimates and judgments 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: stock-based compensation; income taxes, including the 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; leases, including determining the incremental borrowing rate; and fair value of convertible senior notes. As of December 31, 2020, the effects of the ongoing COVID-19 pandemic on our opinion,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.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), which the Company maintained,adopted on January 1, 2018 using the full retrospective method of transition.
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help sellers generate more sales and scale their businesses. Revenues are recognized as the Company transfers control of promised goods or services to sellers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk, and has the latitude in establishing pricing and selecting suppliers, among other factors. Based on its evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. With the exception of shipping labels, the Company’s revenues are recognized on a gross basis. Sales and usage-based taxes are excluded from revenues.
Etsy Marketplace revenue: As members of the Etsy marketplace, Etsy sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. Etsy sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Variable fees include the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and where applicable, an additional transaction fee of 12% or 15% related to offsite advertising, and Etsy Payments fees for processing payments, including foreign currency payments. On July 16, 2018, the Company increased the seller transaction fee from 3.5% to 5% of each completed transaction, and now applies it to the cost of shipping in addition to the cost of the item. In May 2020, Etsy started charging sellers on its marketplace platform for Offsite Ads, whereby sellers will 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 Etsy on third-party internet platforms. The corresponding expense is recorded in marketing. Etsy Payments processing fees vary between 3.0% and 4.5% of an item’s total sale price, including
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Etsy, Inc.
Notes to Consolidated Financial Statements
shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional transaction fee is applied.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable while transaction fees, Offsite Ads transaction fees, and Etsy Payments processing fees are recorded net of refunds.
Reverb Marketplace revenue: The Reverb seller transaction fee is a variable fee, which is 5% of each completed transaction, including both the cost of the item and the shipping. In August 2020, Reverb increased its seller transaction fee from 3.5% to 5%. There are no Reverb listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments. Payments processing fees vary between 2.5% and 2.7% of an item’s total sale price, including shipping and any applicable sales tax, plus a flat fee per order, depending on the currency in which a listing is denominated. International transactions incur a 1% additional cross-border fee.
Etsy Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which primarily include on-site advertising services (formerly Promoted Listings) and Etsy Shipping Labels. Each service below represents an individual obligation that the Company must perform when an Etsy seller chooses to use the service.
•During the second quarter of 2020, Etsy transitioned from a combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: Offsite Ads, with 12% or 15% transaction fees reported in Marketplace revenue, and Etsy Ads, the new name for the Company’s on-site product (formerly Promoted Listings), with advertising fees reported in Services revenue. 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. The previous combined “Etsy Ads” offering was available from the third quarter of 2019 to the beginning of the second quarter of 2020. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into 1 unified ad platform, where Etsy sellers could set a budget, which allowed Etsy to allocate that budget between channels, targeting optimal return on seller spend. Revenue from this unified ad platform consisted of cost-per-click fees, which were nonrefundable and were charged to a seller’s Etsy bill when the ad was clicked. This unified ad platform was replaced by the new on-site Etsy Ads product. The revenue that the Company recognized related to the unified ad platform was recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue. Prior to the unified ad platform, revenue from Promoted Listings consisted of cost-per-click fees an Etsy seller paid the Company for prominent placement of her listings in search results in the Company’s marketplace. Promoted Listing fees were nonrefundable and were charged to a seller’s Etsy bill when the Promoted Listing was clicked, at which time revenue was recognized.
•Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays the Company when she purchases shipping labels through its platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. The Company recognizes Etsy Shipping Labels revenue when an Etsy seller purchases a shipping label. The Company recognizes Etsy Shipping Labels revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Etsy seller. Etsy Shipping Label revenue is recorded net of refunds.
Reverb Services revenue: Reverb has its own on-site advertising service called Bump advertising. Reverb sellers have the ability to determine their own ad rate as a percentage of their item’s final sale price. Revenue from Bump advertising is recognized at the time the item is sold. Reverb also provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. Revenue from shipping labels consists of fees a Reverb seller pays when they purchase shipping labels directly through the Reverb platform, net of the cost the shipping company charges Reverb. Reverb recognizes shipping label revenue when a Reverb seller purchases a shipping label. Reverb recognizes shipping label revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Reverb seller. Shipping label revenue is recorded net of refunds.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Contract balances: The Company records deferred revenues when cash payments are received or due in advance of the completion of the listing period, which represents the value of the Company’s unsatisfied performance obligations. Deferred listing revenue is recognized ratably over the remainder of the four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The amount of revenue recognized in the year ended December 31, 2020 that was included in the deferred balance at January 1, 2020 was $7.6 million.
Cost of Revenue
Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees, and credit card chargebacks to support payments revenue, and costs of refunds made to buyers that the Company is not able to collect from sellers. Cost of revenue also includes expenses associated with the operation and maintenance of the Company’s platform, including employee-related costs, hosting and bandwidth costs, and depreciation and amortization. With the shift to the combined “Etsy Ads” offering from the third quarter of 2019 to the beginning of the second quarter of 2020, amounts spent on Google Shopping, which were previously recorded on a net basis in Services revenue, were recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue.
Marketing
Marketing expenses primarily consist of direct marketing expenses, which largely includes digital marketing and television ad and digital video expenses. Digital marketing, also referred to as performance marketing, primarily consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing, social channels, and affiliate programs, which are focused on buyer acquisition and retargeting. Marketing expenses also include employee-related expenses to support the Company’s marketing initiatives. Advertising expenses are recognized as incurred, with the exception of certain production expenses related to television and display advertising which are deferred until the first time an advertisement airs or is published. If such advertising is not expected to occur, costs are expensed immediately. Advertising expenses related to direct marketing, included in marketing expenses on the Consolidated Statements of Operations, were $442.2 million, $175.2 million, and $129.1 million in the years ended December 31, 2020, 2019, and 2018, respectively.
Product Development
Product development expenses consist primarily of employee-related expenses for engineering, product management, product design, and product research activities, net of costs capitalized to website development and internal-use software. Additional expenses include consulting costs related to the development, quality assurance, and testing of new technology and enhancement of our existing technology.
Stock-Based Compensation
The Company accounts for our stock-based compensation awards in accordance with ASC Topic 718—Compensation—Stock Compensation (“ASC 718”). Stock options and restricted stock units (“RSUs”) are awarded to employees and members of the Company’s Board of Directors and are measured at fair value at each grant date. The Company calculates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model and the expense is recognized over the requisite service period. The Company uses the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from market comparisons of Etsy and certain publicly traded companies. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on the grant date. The requisite service period for stock options and RSUs is generally four years from the date of grant. The Company recognizes forfeitures as they occur.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Foreign Currency
The Company has determined that the functional currency for each of its foreign operations is the currency of the primary cash flow of the operations, which is generally the local currency in which the operation is located. All assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Revenue and expenses are translated using average exchange rates during the period. Foreign currency translation adjustments are reflected in stockholders’ equity as a component of other comprehensive income (loss). Transaction gains and losses including intercompany balances denominated in a currency other than the functional currency of the entity involved are included in foreign exchange gain (loss) within other income (expense) in the Consolidated Statement of Operations.
Income Taxes
The income tax benefit is based on income before income taxes and is accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to settle. The Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company regularly reviews the recoverability of its deferred tax assets by considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance against deferred tax assets that are deemed not more likely than not to be realizable.
On December 22, 2017 the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law. The TCJA requires the Company to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Taxed Income (“GILTI”) as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has recorded tax expense related to GILTI in its effective tax rate beginning in 2018, and has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred using the period cost method.
The Company accounts for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement.
The Company recognizes interest and penalties, if any, associated with income tax matters as part of the income tax provision and includes accrued interest and penalties with the related income tax liability in the Consolidated Balance Sheets.
Net Income Per Share
Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted net income per share is computed by dividing net income adjusted on an if-converted basis for the period by the weighted-average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based compensation awards and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating net income per share of common stock attributable to common stockholders when their effect is dilutive.
The calculation of diluted net income per share excludes all material respects, effective internal control overanti-dilutive common shares.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Segment Data
The Company identifies operating segments as components of an entity for which discrete financial reportinginformation is available and is regularly reviewed by the chief operating decision maker in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer. The Company has determined it has 2 operating segments, Etsy and Reverb, which qualify for aggregation as 1 reportable segment, for purposes of allocating resources and evaluating financial performance.
Cash and Cash Equivalents, and Short- and Long-term Investments
The Company considers all investments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash restricted by third parties is not considered cash and cash equivalents. Short-term investments, consisting of certificates of deposit, commercial paper, corporate bonds, and U.S. Government and agency securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Long-term investments, consisting of certificates of deposit, corporate bonds, and U.S. Government and agency securities with original maturities of greater than twelve months but less than 37 months when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax expenses or benefits.
The following table provides cash and cash equivalents, and short- and long-term investments within the Consolidated Balance Sheets as of the dates indicated (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Total cash and cash equivalents, and short- and long-term investments | $ | 1,708,312 | | | $ | 906,595 | |
Restricted Cash
The Company classifies any cash balances that are legally restricted as to withdrawal or usage as restricted cash on the Consolidated Balance Sheets. In connection with the Company’s noncancellable Brooklyn lease agreement, which expires in 2026, the Company established a $5.3 million collateral account, which is reflected in the restricted cash balance as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued2020 and 2019.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short- and long-term investments, and funds receivable and seller accounts. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, to the COSO.extent eligible, such amounts may exceed federally insured limits. The Company believes that minimal credit risk exists with respect to these investments due to the credit ratings of the financial institutions that hold its short- and long-term investments. In addition, funds receivable settle relatively quickly, and the Company’s historical experience of losses has not been significant.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal ControlControls Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Note Transactions
As described in Notes 1 and 13 to the consolidated financial statements, in August 2020, the Company issued $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”). In accounting for the issuance of the 2020 Notes, management separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the 2020 Notes at an estimated interest rate for a comparable non-convertible note. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2020 Notes. Additionally, during the third quarter of 2020, the Company paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 0% Convertible Senior Notes due 2023 (the “2018 Notes”) through privately negotiated transactions. This transaction was accounted for as an extinguishment of debt, and the Company recognized a non-cash loss on extinguishment of $16.9 million. This loss was calculated by comparing the carrying value of the debt component with the fair value of a similar liability that does not have an associated convertible feature immediately prior to extinguishment as well as writing off any remaining unamortized deferred debt issuance costs at the time of extinguishment. To estimate the fair value of a similar liability that does not have an associated convertible feature, management discounted the contractual cash flows of the Notes at an estimated interest rate for a comparable non-convertible note.
The principal considerations for our determination that performing procedures relating to the convertible note transactions is a critical audit matter are (i) the significant judgment by management in determining the fair value of the liability portion of the 2018 and 2020 Notes, (ii) the significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions related to the estimated interest rates of comparable non-convertible notes used in determining the fair value of similar notes that do not have an associated conversion feature, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s financing process, including controls over management’s selection of the estimated interest rates of comparable non-convertible notes. These procedures also included, among others (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent implied interest rate range for a similar liability without a convertible feature and (ii) comparing the independent range to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent range involved estimating a synthetic credit rating range for the Company as they are not currently rated and creating a range of interest rates based on debt currently held by companies within a similar industry and credit rating range.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 28, 201925, 2021
We have served as the Company’s auditor since 2012.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Accounts receivable, net | 22,605 | | | 15,386 | |
| Prepaid and other current assets | 56,152 | | | 38,614 | |
| | | |
| | | |
| Funds receivable and seller accounts | 146,806 | | | 49,786 | |
| Total current assets | 1,894,781 | | | 921,038 | |
| Restricted cash | 5,341 | | | 5,341 | |
| Property and equipment, net | 112,495 | | | 144,864 | |
| Goodwill | 140,810 | | | 138,731 | |
| Intangible assets, net | 187,449 | | | 199,236 | |
| Deferred tax assets | 115 | | | 14,257 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Other assets | 24,404 | | | 29,542 | |
| Total assets | $ | 2,404,489 | | | $ | 1,542,352 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 40,883 | | | $ | 26,324 | |
| Accrued expenses | 232,352 | | | 88,345 | |
| Finance lease obligations—current | 8,537 | | | 8,275 | |
| Funds payable and amounts due to sellers | 146,806 | | | 49,786 | |
| Deferred revenue | 11,264 | | | 7,617 | |
| Other current liabilities | 14,822 | | | 8,181 | |
| Total current liabilities | 454,664 | | | 188,528 | |
| Finance lease obligations—net of current portion | 44,979 | | | 53,611 | |
| | | |
| Deferred tax liabilities | 58,481 | | | 64,497 | |
| | | |
| Long-term debt, net | 1,062,299 | | | 785,126 | |
| Other liabilities | 41,642 | | | 43,956 | |
| Total liabilities | 1,662,065 | | | 1,135,718 | |
| Commitments and contingencies (Note 14) | 0 | | 0 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2020 and 2019; 125,835,931 and 118,342,772 shares issued and outstanding as of December 31, 2020 and 2019, respectively) | 126 | | | 119 | |
| Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2020 and 2019) | 0 | | | 0 | |
| Additional paid-in capital | 883,166 | | | 642,628 | |
| Accumulated deficit | (146,819) | | | (227,414) | |
| Accumulated other comprehensive income (loss) | 5,951 | | | (8,699) | |
| Total stockholders’ equity | 742,424 | | | 406,634 | |
| Total liabilities and stockholders’ equity | $ | 2,404,489 | | | $ | 1,542,352 | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 366,985 |
| | $ | 315,442 |
|
| Short-term investments | 257,302 |
| | 25,108 |
|
| Accounts receivable, net | 12,244 |
| | 33,677 |
|
| Prepaid and other current assets | 22,686 |
| | 20,379 |
|
| Funds receivable and seller accounts | 21,072 |
| | 44,658 |
|
| Total current assets | 680,289 |
| | 439,264 |
|
| Restricted cash | 5,341 |
| | 5,341 |
|
| Property and equipment, net | 120,179 |
| | 117,617 |
|
| Goodwill | 37,482 |
| | 38,541 |
|
| Intangible assets, net | 34,589 |
| | 4,100 |
|
| Deferred tax assets | 23,464 |
| | 159 |
|
| Other assets | 507 |
| | 561 |
|
| Total assets | $ | 901,851 |
| | $ | 605,583 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 26,545 |
| | $ | 13,622 |
|
| Accrued expenses | 49,158 |
| | 28,743 |
|
| Capital lease obligations—current | 3,884 |
| | 5,798 |
|
| Funds payable and amounts due to sellers | 21,072 |
| | 44,658 |
|
| Deferred revenue | 7,478 |
| | 6,262 |
|
| Other current liabilities | 3,925 |
| | 3,394 |
|
| Total current liabilities | 112,062 |
| | 102,477 |
|
| Capital lease obligations—net of current portion | 2,095 |
| | 4,115 |
|
| Deferred tax liabilities | 30,455 |
| | 23,786 |
|
| Facility financing obligation | 59,991 |
| | 60,049 |
|
| Long-term debt, net | 276,486 |
| | — |
|
| Other liabilities | 19,864 |
| | 18,262 |
|
| Total liabilities | 500,953 |
| | 208,689 |
|
| Commitments and contingencies (Note 14) |
|
| |
|
|
| Stockholders’ equity: | | | |
| Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2018 and 2017; 119,771,702 and 121,769,238 shares issued and outstanding as of December 31, 2018 and 2017, respectively) | 120 |
| | 122 |
|
| Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2018 and 2017) | — |
| | — |
|
| Additional paid-in capital | 562,033 |
| | 499,441 |
|
| Accumulated deficit | (153,442 | ) | | (96,290 | ) |
| Accumulated other comprehensive loss | (7,813 | ) | | (6,379 | ) |
| Total stockholders’ equity | 400,898 |
| | 396,894 |
|
| Total liabilities and stockholders’ equity | $ | 901,851 |
| | $ | 605,583 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements
consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Revenue | $ | 603,693 |
| | $ | 441,231 |
| | $ | 364,967 |
| Revenue | $ | 1,725,625 | | | $ | 818,379 | | | $ | 603,693 | |
| Cost of revenue | 190,762 |
| | 150,986 |
| | 123,328 |
| Cost of revenue | 464,745 | | | 271,036 | | | 190,762 | |
| Gross profit | 412,931 |
| | 290,245 |
| | 241,639 |
| Gross profit | 1,260,880 | | | 547,343 | | | 412,931 | |
| Operating expenses: | | | | | | Operating expenses: | |
| Marketing | 158,013 |
| | 109,085 |
| | 82,248 |
| Marketing | 500,756 | | | 215,570 | | | 158,013 | |
| Product development | 97,249 |
| | 74,616 |
| | 55,083 |
| Product development | 180,080 | | | 121,878 | | | 97,249 | |
| General and administrative | 82,883 |
| | 91,486 |
| | 86,180 |
| General and administrative | 156,035 | | | 121,134 | | | 82,883 | |
| Asset impairment charges | — |
| | 3,162 |
| | 551 |
| |
| | Total operating expenses | 338,145 |
| | 278,349 |
| | 224,062 |
| Total operating expenses | 836,871 | | | 458,582 | | | 338,145 | |
| Income from operations | 74,786 |
| | 11,896 |
| | 17,577 |
| Income from operations | 424,009 | | | 88,761 | | | 74,786 | |
| Other (expense) income: | | | | | | |
| Other expense: | | Other expense: | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | (16,855) | | | 0 | | | 0 | |
| Interest expense | (22,178 | ) | | (11,130 | ) | | (7,204 | ) | Interest expense | (42,025) | | | (24,320) | | | (22,178) | |
| Interest and other income | 8,957 |
| | 2,394 |
| | 1,702 |
| Interest and other income | 7,102 | | | 13,199 | | | 8,957 | |
| | Foreign exchange (loss) gain | (6,487 | ) | | 29,105 |
| | (14,951 | ) | Foreign exchange (loss) gain | (6,522) | | | 3,006 | | | (6,487) | |
| Total other (expense) income | (19,708 | ) | | 20,369 |
| | (20,453 | ) | |
| Income (loss) before income taxes | 55,078 |
| | 32,265 |
| | (2,876 | ) | |
| Benefit (provision) for income taxes | 22,413 |
| | 49,535 |
| | (27,025 | ) | |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | |
| Net income (loss) per share attributable to common stockholders: | | | | | | |
| Total other expense | | Total other expense | (58,300) | | | (8,115) | | | (19,708) | |
| Income before income taxes | | Income before income taxes | 365,709 | | | 80,646 | | | 55,078 | |
| (Provision) benefit for income taxes | | (Provision) benefit for income taxes | (16,463) | | | 15,248 | | | 22,413 | |
| Net income | | Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Net income per share attributable to common stockholders: | | Net income per share attributable to common stockholders: | | | | | |
| Basic | $ | 0.64 |
| | $ | 0.69 |
| | $ | (0.26 | ) | Basic | $ | 2.88 | | | $ | 0.80 | | | $ | 0.64 | |
| Diluted | $ | 0.61 |
| | $ | 0.68 |
| | $ | (0.26 | ) | Diluted | $ | 2.69 | | | $ | 0.76 | | | $ | 0.61 | |
| Weighted average common shares outstanding: | | | | | | Weighted average common shares outstanding: | | | | | |
| Basic | 120,146,076 |
| | 118,538,687 |
| | 113,562,738 |
| Basic | 121,251,588 | | | 119,665,248 | | | 120,146,076 | |
| Diluted | 127,084,785 |
| | 122,267,673 |
| | 113,562,738 |
| Diluted | 136,414,592 | | | 125,720,073 | | | 127,084,785 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Other comprehensive income (loss): | | | | | |
| Cumulative translation adjustment | 14,468 | | | (1,078) | | | (1,399) | |
| Unrealized gains (losses) on marketable securities, net of tax expense of $73, $65, and $0, respectively | 182 | | | 192 | | | (35) | |
| Total other comprehensive income (loss) | 14,650 | | | (886) | | | (1,434) | |
| Comprehensive income | $ | 363,896 | | | $ | 95,008 | | | $ | 76,057 | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) |
| Other comprehensive (loss) income: | | | | | |
| Cumulative translation adjustment | (1,399 | ) | | (24,898 | ) | | 7,675 |
|
| Unrealized (losses) gains on marketable securities, net of tax of $0, $15, and $5, respectively | (35 | ) | | 47 |
| | (8 | ) |
| Total other comprehensive (loss) income | (1,434 | ) | | (24,851 | ) | | 7,667 |
|
| Comprehensive income (loss) | $ | 76,057 |
| | $ | 56,949 |
| | $ | (22,234 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements
consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts) | | | | | | | | | | | | | | | | Common Stock | | | Additional
Paid-in
Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total | | Common Stock | | Additional
Paid-in
Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total |
| | | | Shares | | Amount | |
| | Shares | | Amount | |
| Balance as of December 31, 2015 | 112,563,354 |
| | $ | 113 |
| | $ | 406,020 |
| | $ | (86,440 | ) | | $ | 10,805 |
| | $ | 330,498 |
| |
| Stock-based compensation | — |
| | — |
| | 13,960 |
| | — |
| | — |
| | 13,960 |
| |
| Exercise of vested options | 2,535,620 |
| | 3 |
| | 10,565 |
| | — |
| | — |
| | 10,568 |
| |
| Vesting of restricted stock units, net of shares withheld | 144,651 |
| | — |
| | (1,258 | ) | | — |
| | — |
| | (1,258 | ) | |
| Exercise of warrants, net of shares withheld | 80,011 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Retirement of restricted shares | (36,346 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| |
| Issuance of common stock at acquisition date | 685,749 |
| | — |
| | 6,966 |
| | — |
| | — |
| | 6,966 |
| |
| Stock-based compensation—acquisitions | — |
| | — |
| | 1,080 |
| | — |
| | — |
| | 1,080 |
| |
| Conversion of liability-classified restricted shares upon vesting | — |
| | — |
| | 1,942 |
| | — |
| | — |
| | 1,942 |
| |
| Excess tax benefit from the exercise of options | — |
| | — |
| | 3,235 |
| | — |
| | — |
| | 3,235 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 7,667 |
| | 7,667 |
| |
| Net loss | — |
| | — |
| | — |
| | (29,901 | ) | | — |
| | (29,901 | ) | |
| Balance as of December 31, 2016 | 115,973,039 |
| | 116 |
| | 442,510 |
| | (116,341 | ) | | 18,472 |
| | 344,757 |
| |
| Stock-based compensation | — |
| | — |
| | 23,462 |
| | — |
| | — |
| | 23,462 |
| |
| Exercise of vested options | 5,760,263 |
| | 6 |
| | 33,832 |
| | — |
| | — |
| | 33,838 |
| |
| Vesting of restricted stock units, net of shares withheld | 622,167 |
| | 1 |
| | (6,418 | ) | | — |
| | — |
| | (6,417 | ) | |
| Stock repurchase | (586,231 | ) | | (1 | ) | | — |
| | (10,300 | ) | | — |
| | (10,301 | ) | |
| Stock-based compensation—acquisitions | — |
| | — |
| | 3,132 |
| | — |
| | — |
| | 3,132 |
| |
| Conversion of liability-classified restricted shares upon vesting | — |
| | — |
| | 2,838 |
| | — |
| | — |
| | 2,838 |
| |
| Cumulative effect adjustment | — |
| | — |
| | 85 |
| | (51,449 | ) | | — |
| | (51,364 | ) | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (24,851 | ) | | (24,851 | ) | |
| Net income | — |
| | — |
| | — |
| | 81,800 |
| | — |
| | 81,800 |
| |
| | Balance as of December 31, 2017 | 121,769,238 |
| | 122 |
| | 499,441 |
| | (96,290 | ) | | (6,379 | ) | | 396,894 |
| Balance as of December 31, 2017 | | 121,769,238 | | | $ | 122 | | | | $ | 499,441 | | | $ | (96,290) | | | $ | (6,379) | | | $ | 396,894 | |
| Stock-based compensation | — |
| | — |
| | 36,729 |
| |
|
| |
|
| | 36,729 |
| Stock-based compensation | | — | | | — | | | | 40,483 | | | — | | | — | | | 40,483 | |
| Exercise of vested options | 1,588,779 |
| | 1 |
| | 18,252 |
| | — |
| | — |
| | 18,253 |
| Exercise of vested options | | 1,588,779 | | | 1 | | | | 18,252 | | | — | | | — | | | 18,253 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | — |
| | — |
| | 53,323 |
| | — |
| | — |
| | 53,323 |
| Issuance of convertible senior notes, net of issuance costs and taxes | | — | | | — | | | | 53,323 | | | — | | | — | | | 53,323 | |
| Purchase of capped call, net of taxes | — |
| | — |
| | (25,400 | ) | | — |
| | — |
| | (25,400 | ) | Purchase of capped call, net of taxes | | — | | | — | | | | (25,400) | | | — | | | — | | | (25,400) | |
| Vesting of restricted stock units, net of shares withheld | 860,102 |
| | 1 |
| | (24,066 | ) | | — |
| | — |
| | (24,065 | ) | Vesting of restricted stock units, net of shares withheld | | 860,102 | | | 1 | | | | (24,066) | | | — | | | — | | | (24,065) | |
| Stock repurchase | (4,446,417 | ) | | (4 | ) | | — |
| | (134,643 | ) | | — |
| | (134,647 | ) | Stock repurchase | | (4,446,417) | | | (4) | | | | — | | | (134,643) | | | — | | | (134,647) | |
| Stock-based compensation—acquisitions | — |
| | — |
| | 3,754 |
| | — |
| | — |
| | 3,754 |
| |
| | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1,434 | ) | | (1,434 | ) | Other comprehensive loss | | — | | | — | | | | — | | | — | | | (1,434) | | | (1,434) | |
| Net income | — |
| | — |
| | — |
| | 77,491 |
| | — |
| | 77,491 |
| Net income | | — | | | — | | | | — | | | 77,491 | | | — | | | 77,491 | |
| Balance as of December 31, 2018 | 119,771,702 |
| | $ | 120 |
| | $ | 562,033 |
| | $ | (153,442 | ) | | $ | (7,813 | ) | | $ | 400,898 |
| 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 | | Cumulative effect adjustment related to the adoption of the leasing standard | | — | | | — | | | | — | | | 7,116 | | | — | | | 7,116 | |
| Stock-based compensation | | Stock-based compensation | | — | | | — | | | | 45,697 | | | — | | | — | | | 45,697 | |
| Exercise of vested options | | Exercise of vested options | | 840,835 | | | 1 | | | | 9,790 | | | — | | | — | | | 9,791 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | Issuance of convertible senior notes, net of issuance costs and taxes | | — | | | — | | | | 115,980 | | | — | | | — | | | 115,980 | |
| Purchase of capped call, net of taxes | | Purchase of capped call, net of taxes | | — | | | — | | | | (58,324) | | | — | | | — | | | (58,324) | |
| Vesting of restricted stock units, net of shares withheld | | Vesting of restricted stock units, net of shares withheld | | 832,642 | | | 1 | | | | (32,548) | | | — | | | — | | | (32,547) | |
| Stock repurchase | | Stock repurchase | | (3,102,407) | | | (3) | | | | — | | | (176,982) | | | — | | | (176,985) | |
| | Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | | — | | | — | | | (886) | | | (886) | |
| Net income | | Net income | | — | | | — | | | | — | | | 95,894 | | | — | | | 95,894 | |
| Balance as of December 31, 2019 | | Balance as of December 31, 2019 | | 118,342,772 | | | 119 | | | | 642,628 | | | (227,414) | | | (8,699) | | | 406,634 | |
| Stock-based compensation | | Stock-based compensation | | — | | | — | | | | 66,350 | | | — | | | — | | | 66,350 | |
| Exercise of vested options | | Exercise of vested options | | 1,834,773 | | | 1 | | | | 25,318 | | | — | | | — | | | 25,319 | |
| Issuance of convertible senior notes, net of issuance costs and taxes | | Issuance of convertible senior notes, net of issuance costs and taxes | | — | | | — | | | | 102,131 | | | — | | | — | | | 102,131 | |
| Purchase of capped calls, net of taxes | | Purchase of capped calls, net of taxes | | — | | | — | | | | (56,848) | | | — | | | — | | | (56,848) | |
| Settlement of convertible senior notes, net of taxes | | Settlement of convertible senior notes, net of taxes | | 7,271,723 | | | 7 | | | | 151,304 | | | — | | | — | | | 151,311 | |
| Vesting of restricted stock units, net of shares withheld | | Vesting of restricted stock units, net of shares withheld | | 825,200 | | | 1 | | | | (47,717) | | | — | | | — | | | (47,716) | |
| Stock repurchase | | Stock repurchase | | (2,438,537) | | | (2) | | | | — | | | (268,651) | | | — | | | (268,653) | |
| Other comprehensive income | | Other comprehensive income | | — | | | — | | | | — | | | — | | | 14,650 | | | 14,650 | |
| Net income | | Net income | | — | | | — | | | | — | | | 349,246 | | | — | | | 349,246 | |
| Balance as of December 31, 2020 | | Balance as of December 31, 2020 | | 125,835,931 | | | $ | 126 | | | | $ | 883,166 | | | $ | (146,819) | | | $ | 5,951 | | | $ | 742,424 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
consolidated financial statements.
Consolidated Statements of Cash Flows
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | | Cash flows from operating activities | | | | | |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Net income | | Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Stock-based compensation expense | 34,477 |
| | 22,655 |
| | 13,168 |
| Stock-based compensation expense | 65,114 | | | 44,395 | | | 38,231 | |
| Stock-based compensation expense—acquisitions | 3,754 |
| | 3,904 |
| | 2,733 |
| |
| | Depreciation and amortization expense | 26,742 |
| | 27,197 |
| | 22,525 |
| Depreciation and amortization expense | 58,189 | | | 48,031 | | | 26,742 | |
| Bad debt expense | 4,124 |
| | 2,497 |
| | 1,770 |
| |
| Provision for expected credit losses | | Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Foreign exchange loss (gain) | 5,997 |
| | (27,424 | ) | | 12,921 |
| Foreign exchange loss (gain) | 7,349 | | | (5,708) | | | 5,997 | |
| Amortization of debt issuance costs | 1,191 |
| | 463 |
| | 184 |
| Amortization of debt issuance costs | 2,751 | | | 2,006 | | | 1,191 | |
| Non-cash interest expense | 10,968 |
| | 3,117 |
| | 5,337 |
| Non-cash interest expense | 36,086 | | | 19,108 | | | 10,968 | |
| Interest on marketable securities | (2,887 | ) | | 426 |
| | 914 |
| |
| Loss on disposal of assets | 136 |
| | 520 |
| | 1,143 |
| |
| Asset impairment charges | — |
| | 3,162 |
| | 551 |
| |
| Deferred income taxes | (22,414 | ) | | (49,535 | ) | | 9,969 |
| |
| Amortization of deferred tax charge | — |
| | — |
| | 17,132 |
| |
| Interest expense (income) on marketable securities | | Interest expense (income) on marketable securities | 2,729 | | | (4,182) | | | (2,887) | |
| | (Gain) loss on disposal of assets | | (Gain) loss on disposal of assets | (795) | | | 1,667 | | | 136 | |
| | Deferred provision (benefit) for income taxes | | Deferred provision (benefit) for income taxes | 2,202 | | | (15,248) | | | (22,414) | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | 16,855 | | | 0 | | | 0 | |
| | Changes in operating assets and liabilities, net of acquisitions: | | | | | | Changes in operating assets and liabilities, net of acquisitions: | |
| Accounts receivable | 17,215 |
| | (8,826 | ) | | (8,192 | ) | Accounts receivable | (22,540) | | | (12,656) | | | 17,215 | |
| Funds receivable and seller accounts | 23,436 |
| | (13,477 | ) | | (10,910 | ) | Funds receivable and seller accounts | (90,141) | | | (23,177) | | | 23,436 | |
| Prepaid expenses and other current assets | (4,785 | ) | | 3,024 |
| | (1,384 | ) | Prepaid expenses and other current assets | (16,963) | | | (14,156) | | | (4,785) | |
| Other assets | 43 |
| | (28 | ) | | 438 |
| Other assets | 4,816 | | | 4,045 | | | 43 | |
| Accounts payable | 13,364 |
| | 2,837 |
| | (3,585 | ) | Accounts payable | 14,550 | | | (953) | | | 13,364 | |
| Accrued and other current liabilities | 23,079 |
| | (2,659 | ) | | 795 |
| Accrued and other current liabilities | 146,634 | | | 37,410 | | | 23,079 | |
| Funds payable and amounts due to sellers | (23,436 | ) | | 13,477 |
| | 10,910 |
| Funds payable and amounts due to sellers | 90,141 | | | 23,177 | | | (23,436) | |
| Deferred revenue | 1,331 |
| | 434 |
| | 964 |
| Deferred revenue | 3,312 | | | 191 | | | 1,331 | |
| Other liabilities | 9,099 |
| | 5,537 |
| | 482 |
| Other liabilities | (5,612) | | | (3,887) | | | 9,099 | |
| Net cash provided by operating activities | 198,925 |
| | 69,101 |
| | 47,964 |
| Net cash provided by operating activities | 678,956 | | | 206,920 | | | 198,925 | |
| Cash flows from investing activities | | | | | | Cash flows from investing activities | | | | | |
| Acquisition, net of cash acquired | | Acquisition, net of cash acquired | 0 | | | (270,409) | | | 0 | |
| Cash paid for asset acquisition and intangible assets | (35,494 | ) | | — |
| | — |
| Cash paid for asset acquisition and intangible assets | (880) | | | (1,963) | | | (35,494) | |
| Acquisition of businesses, net of cash acquired | — |
| | — |
| | (7,880 | ) | |
| | Purchases of property and equipment | (1,019 | ) | | (3,948 | ) | | (35,981 | ) | Purchases of property and equipment | (1,445) | | | (7,528) | | | (1,019) | |
| Development of internal-use software | (19,537 | ) | | (9,208 | ) | | (11,769 | ) | Development of internal-use software | (5,665) | | | (7,750) | | | (19,537) | |
| Purchases of marketable securities | (514,286 | ) | | (62,348 | ) | | (160,504 | ) | Purchases of marketable securities | (499,237) | | | (661,821) | | | (514,286) | |
| Sales of marketable securities | 284,943 |
| | 137,340 |
| | 80,704 |
| |
| Net cash (used in) provided by investing activities | (285,393 | ) | | 61,836 |
| | (135,430 | ) | |
| Sales and maturities of marketable securities | | Sales and maturities of marketable securities | 495,848 | | | 461,098 | | | 284,943 | |
| | Net cash used in investing activities | | Net cash used in investing activities | (11,379) | | | (488,373) | | | (285,393) | |
| Cash flows from financing activities | | | | | | Cash flows from financing activities | | | | | |
| | Payment of tax obligations on vested equity awards | (24,065 | ) | | (6,417 | ) | | (1,258 | ) | Payment of tax obligations on vested equity awards | (47,716) | | | (32,547) | | | (24,065) | |
| Repurchase of stock | (134,647 | ) | | (10,301 | ) | | — |
| Repurchase of stock | (268,653) | | | (176,985) | | | (134,647) | |
| Proceeds from exercise of stock options | 18,253 |
| | 33,838 |
| | 10,568 |
| Proceeds from exercise of stock options | 25,319 | | | 9,791 | | | 18,253 | |
| | Proceeds from issuance of convertible senior notes | 345,000 |
| | — |
| | — |
| Proceeds from issuance of convertible senior notes | 650,000 | | | 650,000 | | | 345,000 | |
| Payment of debt issuance costs | (9,962 | ) | | — |
| | — |
| Payment of debt issuance costs | (10,531) | | | (11,904) | | | (9,962) | |
| Purchase of capped call | (34,224 | ) | | — |
| | — |
| |
| Payments on capital lease obligations | (6,057 | ) | | (7,798 | ) | | (6,086 | ) | |
| Deferred payments on acquisition of business | — |
| | — |
| | (649 | ) | |
| Purchase of capped calls | | Purchase of capped calls | (74,685) | | | (76,180) | | | (34,224) | |
| Settlement of convertible senior notes | | Settlement of convertible senior notes | (137,168) | | | 0 | | | 0 | |
| Payments on finance lease obligations | | Payments on finance lease obligations | (9,211) | | | (10,833) | | | (6,057) | |
| | Payments on facility financing obligation | (10,164 | ) | | (5,883 | ) | | — |
| Payments on facility financing obligation | 0 | | | 0 | | | (10,164) | |
| | Other financing, net | (128 | ) | | 3,116 |
| | (3,099 | ) | Other financing, net | (8,073) | | | 8,265 | | | (128) | |
| Net cash provided by (used in) financing activities | 144,006 |
| | 6,555 |
| | (524 | ) | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 119,282 | | | 359,607 | | | 144,006 | |
| Effect of exchange rate changes on cash | (5,995 | ) | | (3,642 | ) | | (1,662 | ) | Effect of exchange rate changes on cash | 13,947 | | | (1,846) | | | (5,995) | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 51,543 |
| | 133,850 |
| | (89,652 | ) | |
| Net increase in cash, cash equivalents, and restricted cash | | Net increase in cash, cash equivalents, and restricted cash | 800,806 | | | 76,308 | | | 51,543 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 320,783 |
| | 186,933 |
| | 276,585 |
| Cash, cash equivalents, and restricted cash at beginning of period | 448,634 | | | 372,326 | | | 320,783 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 372,326 |
| | $ | 320,783 |
| | $ | 186,933 |
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 3,405 | | | $ | 3,206 | | | $ | 10,002 | |
| Cash paid for income taxes | $ | 8,535 | | | $ | 2,084 | | | $ | 966 | |
| Supplemental non-cash disclosures: | | | | | |
| Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 2,852 | | | $ | 2,450 | | | $ | 3,463 | |
| | | | | |
| | | | | |
| Right-of-use assets obtained in exchange for new lease liabilities | $ | 3,183 | | | $ | 849 | | | $ | 2,122 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 10,002 |
| | $ | 7,555 |
| | $ | 2,000 |
|
| Cash paid for income taxes | $ | 966 |
| | $ | 1,003 |
| | $ | 10,559 |
|
| Supplemental non-cash disclosures: | | | | | |
| Equipment acquired under capital lease obligations | $ | 2,122 |
| | $ | 5,586 |
| | $ | 5,030 |
|
| Stock-based compensation capitalized in development of capitalized software | $ | 2,252 |
| | $ | 807 |
| | $ | 792 |
|
| Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses | $ | 1,211 |
| | $ | 956 |
| | $ | 2,239 |
|
| Fair value of common stock issued in acquisition | $ | — |
| | $ | — |
| | $ | 6,966 |
|
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown above:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 |
| Beginning balance: | | | | | |
| Cash and cash equivalents | $ | 443,293 | | | $ | 366,985 | | | $ | 315,442 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 448,634 | | | $ | 372,326 | | | $ | 320,783 | |
| | | | | |
| Ending balance: | | | | | |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | | | $ | 366,985 | |
| Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
| Total cash and cash equivalents, and restricted cash | $ | 1,249,440 | | | $ | 448,634 | | | $ | 372,326 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
consolidated financial statements.
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”) was incorporated in Delaware in February 2006. Etsyoperates 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 listing fees, Etsy Payments fees, Promoted Listing fees, Etsy Shipping Label sales, Patternpayments processing fees, and Etsy Plus subscription fees.on-site advertising and shipping label services.
Basis of Consolidation
The Consolidated Financial Statementsconsolidated financial statements include the accounts of Etsy and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain items in On August 15, 2019, Etsy acquired all of the prior years’ Consolidated Financial Statementsissued and outstanding capital stock of Reverb Holdings, Inc. (“Reverb”). The financial results of Reverb have been reclassified to conform to the current year presentation reflected in the Consolidated Financial Statements. Specifically, the Company reclassified $0.2 million previously included in other assets to deferred tax assets onEtsy’s consolidated financial statements from the Consolidated Balance Sheet for the year ended December 31, 2017 to conform to the current year presentation.
Additionally, the Company reclassified $146.6 million and $111.4 million previously included in Services revenue to Marketplace revenue (see “Note 2—Revenue”) for the years ended December 31, 2017 and 2016, respectively, to conform to the current year presentation in connection with the adoptiondate of Accounting Standards Codification (“ASC”) 606—Revenue from Contracts with Customers.
The Company also reclassified $5.3 million on the Consolidated Statement of Cash Flows in the years ended December 31, 2017 and 2016 to include restricted cash in the beginning and ending cash, cash equivalents, and restricted cash balances to conform to the current year presentation upon adoption of Accounting Standards Update (“ASU”) 2016-18—Statement of Cash Flows: Restricted Cash.
The Company also reclassified $1.6 million and $7.8 million previously included in changes in prepaid expenses and other current assets, accrued and other current liabilities, and other liabilities to deferred income taxes on the Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, respectively, to conform to the current year presentation.
Revisions
The Company revised the Consolidated Statement of Cash Flows for the years ended December 31, 2017 and 2016 to correct the presentation of the effect of exchange rate changes on cash. This revision resulted in an increase (decrease) of $1.7 million in cash flows from operating activities, $3.1 million in cash flows from financing activities, and $(4.8) million in effect of exchange rate changes on cash in the year ended December 31, 2017 and an increase (decrease) of $(2.0) million in cash flows from operating activities, $(3.1) million in cash flows from financing activities, and $5.1 million in effect of exchange rate changes on cash in the year ended December 31, 2016.
Additionally, the 2018 quarterly periods will also be revised in connection with our future 2019 unaudited interim condensed Consolidated Financial Statement filings in Quarterly Reports on Form 10-Q. The Company will revise the Consolidated Statements of Cash Flows for the year-to-date periods ended September 30, 2018, June 30, 2018 and March 31, 2018 to correct the presentation of the effect of exchange rate changes on cash. This revision will result in an increase (decrease) of $(0.3) million in cash flows from operating activities, $4.0 million in cash flows from financing activities, and $(3.7) million in effect of exchange rate changes on cash in the nine months ended September 30, 2018, an increase (decrease) of $0.3 million in cash flows from operating activities, $1.0 million in cash flows from financing activities, and $(1.3) million in effect of exchange rate changes on cash in the six months ended June 30, 2018, and an increase (decrease) of $(0.3) million in cash flows from operating activities, $(2.7) million in cash flows from financing activities, and $3.0 million in effect of exchange rate changes on cash in the three months ended March 31, 2018.
Etsy, Inc.
Notes to Consolidated Financial Statements
These revisions do not impact the Consolidated Statements of Operations, the Consolidated Statements of Comprehensive Income (Loss), or the Consolidated Balance Sheets. The Company has concluded that the effect of this revision is not material to any of our previously issued financial statements.
Correction of Errors
During the year ended December 31, 2018, the Company recorded adjustments to correct errors in the years ended December 31, 2018, 2017 and 2016 that increased income before income taxes by $1.5 million in the current year and decreased net income by $1.3 million in the current year. The Company has concluded that the errors and their correction were not material to the Consolidated Financial Statements for any of the periods impacted nor are they material for the 2018 results.acquisition. See “Note 5—Business Combinations.”
Use of Estimates
The preparation of the Company’s Consolidated Financial Statementsconsolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires managementus to make estimates and judgments that affect the amounts reported amounts of assets and liabilitiesdisclosed in the consolidated financial statements and disclosure of contingent assets, liabilitiesaccompanying notes. Actual results could differ from these estimates and equity at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period.assumptions. The accounting estimates that require management’s most difficult and subjective judgments include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations and stand-alone selling price for use in allocating the subscription price;stock-based compensation; income taxes, including the assessmentevaluation of valuation allowances and the accounting for uncertain tax positions; website development costs and internal-use software; purchase price allocations for business combinations;combinations, valuation of the acquired intangibles purchased in a business combination, and valuation of goodwill and intangible assets; leases; stock-based compensation; restructuring and other exit costs (income);leases, including determining the incremental borrowing rate; and fair value of convertible senior notes. As of December 31, 2020, the effects of the ongoing COVID-19 pandemic on our business, results of operations, and financial instruments. The Company evaluates itscondition continue to evolve. As a result, many of our estimates and judgments on an ongoing basisassumptions required increased judgment and revises them when necessary. Actual resultscarry a higher degree of variability and volatility. As additional information becomes available, our estimates may differ from the original or revised estimates.change materially in future periods.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), which the Company adopted on January 1, 2018 using the full retrospective method of transition.
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services to help Etsy sellers to generate more sales and scale their businesses. Revenues are recognized as the Company transfers control of promised goods or services to Etsy sellers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified goods or services by considering if it is primarily responsible for fulfillment of the promise, has inventory risk, and has the latitude in establishing pricing and selecting suppliers, among other factors. Based on its evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. With the exception of Etsy Shipping Labels,shipping labels, the Company’s revenues are recognized on a gross basis. Sales and usage-based taxes are excluded from revenues.
Etsy Marketplace revenue: As members of the Etsy marketplace, Etsy sellers receive the benefit of marketplace activities, including listing items for sale, completing sales transactions, and payments processing, which represents a single stand-ready performance obligation. Etsy sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com for a period of four months or, if earlier, until a sale occurs. Variable fees include the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and where applicable, an additional transaction fee of 12% or 15% related to offsite advertising, and Etsy Payments fees for processing payments, including foreign currency payments. On July 16, 2018, the Company increased the seller transaction fee from 3.5% to 5% of each completed transaction, and now applies it to the cost of shipping in addition to the cost of the item. In May 2020, Etsy started charging sellers on its marketplace platform for Offsite Ads, whereby sellers will 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 Etsy on third-party internet platforms. The corresponding expense is recorded in marketing. Etsy Payments processing fees vary between 3–3.0% and 4.5% of an item’s total sale price, including
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
shipping, plus a flat fee per order, depending on the country in which a seller’s bank account is located. When a foreign currency payment is processed, an additional 2.5–5% transaction fee is applied.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable while transaction fees, Offsite Ads transaction fees, and Etsy Payments processing fees are recorded net of refunds.
Reverb Marketplace revenue: The Reverb seller transaction fee is a variable fee, which is 5% of each completed transaction, including both the cost of the item and the shipping. In August 2020, Reverb increased its seller transaction fee from 3.5% to 5%. There are no Reverb listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments. Payments processing fees vary between 2.5% and 2.7% of an item’s total sale price, including shipping and any applicable sales tax, plus a flat fee per order, depending on the currency in which a listing is denominated. International transactions incur a 1% additional cross-border fee.
Etsy Inc.
Notes to Consolidated Financial Statements
Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which primarily include on-site advertising services (formerly Promoted Listings,Listings) and Etsy Shipping Labels, Pattern, and Etsy Plus.Labels. Each service below represents an individual obligation that the Company must perform when an Etsy seller chooses to use the service.
Revenue•During the second quarter of 2020, Etsy transitioned from Promoted Listings,a combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: Offsite Ads, with 12% or 15% transaction fees reported in Marketplace revenue, and Etsy Ads, the new name for the Company’s on-site product (formerly Promoted Listings), with advertising service,fees reported in Services revenue. 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. The previous combined “Etsy Ads” offering was available from the third quarter of 2019 to the beginning of the second quarter of 2020. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into 1 unified ad platform, where Etsy sellers could set a budget, which allowed Etsy to allocate that budget between channels, targeting optimal return on seller spend. Revenue from this unified ad platform consisted of cost-per-click fees, which were nonrefundable and were charged to a seller’s Etsy bill when the ad was clicked. This unified ad platform was replaced by the new on-site Etsy Ads product. The revenue that the Company recognized related to the unified ad platform was recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue. Prior to the unified ad platform, revenue from Promoted Listings consisted of cost-per-click fees an Etsy seller paid the Company for prominent placement of her listings in search results in the Company’s marketplace. Promoted Listings fees are based on an auction system, which utilizes the budget that each Etsy seller sets when using Promoted Listings to determine the cost-per-click fee. Promoted Listing fees arewere nonrefundable and arewere charged to a seller’s Etsy bill when the Promoted Listing is clicked;was clicked, at which time revenue iswas recognized.
•Revenue from Etsy Shipping Labels consists of fees an Etsy seller pays the Company when she purchases shipping labels through its platform, net of the cost the Company incurs in purchasing those shipping labels. The Company provides its sellers access to purchase shipping labels from the United States Postal Service, FedEx, Canada Post, Royal Mail, and DAI Post at discounted pricing due to the volume of purchases through its platform. The Company recognizes Etsy Shipping LabelLabels revenue when an Etsy seller purchases a shipping label. The Company recognizes Etsy Shipping LabelLabels revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Etsy Seller.seller. Etsy Shipping Label revenue is recorded net of refunds.
Reverb Services revenue: Reverb has its own on-site advertising service called Bump advertising. Reverb sellers have the ability to determine their own ad rate as a percentage of their item’s final sale price. Revenue from PatternBump advertising is recognized at the time the item is sold. Reverb also provides its sellers access to purchase shipping labels at discounted pricing due to the volume of purchases through its platform. Revenue from shipping labels consists of monthly subscription fees an Etsya Reverb seller pays when they purchase shipping labels directly through the Reverb platform, net of the cost the shipping company charges Reverb. Reverb recognizes shipping label revenue when a Reverb seller purchases a shipping label. Reverb recognizes shipping label revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to usetransferring the labels to the Reverb seller. Shipping label revenue is recorded net of refunds.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Contract balances: The Company records deferred revenues when cash payments are received or due in advance of the completion of the listing period, which represents the value of the Company’s custom website services. The Company recognizesunsatisfied performance obligations. Deferred listing revenue from Pattern ratably over the term of the subscription. The Pattern subscription fee is $15 per month and is nonrefundable.
Revenue from Etsy Plus consists of monthly subscription fees an Etsy seller pays for enhanced tools and credits for use on the Company’s platform. The Etsy Plus subscription fee is $10 per month and is nonrefundable. Each feature represents its own distinct performance obligation. The Company allocates subscription revenue based on the relative actual or estimated stand-alone selling price of the features included in the Etsy Plus offering. Enhanced tools include advanced shop customization options, targeted restock notifications, discounts on branded packaging and promotional materials, and free or discounted custom web addresses, all of which are recognized ratably over the 30-day subscription period. Additionally, the subscription includes $5remainder of Promoted Listing credits and 15 free listing credits per month. The allocated value of Promoted Listing credits is recognized when the Promoted Listing is clicked, or when the 30-day subscription period expires. The allocated value of listing credits is deferred until the option is used, and once used, allocated over the four-month listing period. Any unusedperiod, unless the item is sold or the seller re-lists it, at which time any remaining listing credits arefee is recognized. The amount of revenue recognized whenin the 30-day subscription period expires.
Other revenue: Other revenue typically includes revenue generated from commercial partnerships, which are recognized asyear ended December 31, 2020 that was included in the customer in each contract consumes the benefit of the service Etsy provides in each arrangement.
deferred balance at January 1, 2020 was $7.6 million.
Cost of Revenue
Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees, and credit card chargebacks to support Etsy Paymentspayments revenue, and costs of refunds made to Etsy buyers that the Company is not able to collect from Etsy sellers. Cost of revenue also includes expenses associated with the operation and maintenance of the Company’s platform, and its data centers, including employee-related costs, hosting and bandwidth costs, and depreciation and amortization. With the shift to the combined “Etsy Ads” offering from the third quarter of 2019 to the beginning of the second quarter of 2020, amounts spent on Google Shopping, which were previously recorded on a net basis in Services revenue, were recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue.
Marketing
Marketing expenses largelyprimarily consist of direct marketing and indirect employee-related expenses, to support our marketing initiatives. Direct marketingwhich largely includes digital marketing brand marketing and television seller lifecyclead and growth activities, public relations, communications, and marketing partnerships.digital video expenses. Digital marketing, also referred to as performance marketing, primarily consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing, social channels, and affiliate programs, and display advertising which are focused on buyer acquisition and brand marketing.retargeting. Marketing expenses also include employee-related expenses to support the Company’s marketing initiatives. Advertising expenses are recognized as incurred, with the exception of certain production expenses related to television and display advertising which are deferred until the first time an advertisement airs or is published. If such advertising is not expected to occur, costs are expensed immediately. Advertising expenses related to direct marketing, included in marketing expenses on the Consolidated Statements of Operations, were $129.1$442.2 million, $78.4$175.2 million, and $55.5$129.1 million in the years ended December 31, 2020, 2019, and 2018, 2017, and 2016, respectively.
Etsy, Inc.
Notes to Consolidated Financial Statements
Product Development
Product development expenses consist primarily of employee-related expenses for engineering, product management, product design, and product research activities.activities, net of costs capitalized to website development and internal-use software. Additional expenses include consulting costs related to the development, quality assurance, and testing of new technology and enhancement of our existing technology.
Stock-Based Compensation
The Company accounts for itsour stock-based compensation awards in accordance with ASC Topic 718—Compensation—Stock Compensation (“ASC 718”). Stock options and restricted stock units (“RSUs”) are awarded to employees and members of the Company’s Board of Directors and are measured at fair value at each grant date. The Company calculates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model and the expense is recognized over the requisite service period. Prior to the IPO, theThe Company utilized equity valuations based on comparable publicly-traded companies, discounted free cash flows, an analysis of the Company’s enterprise value, and other factors deemed relevant in estimating the fair value of its common stock. Subsequent to the IPO, the Company has useduses the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from market comparisons of Etsy and certain publicly traded companies, and other factors.companies. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on the grant date. The requisite service period for stock options and RSUs is generally four years from the date of grant.
In the first quarter of 2017, the The Company made an accounting policy election to recognizerecognizes forfeitures as they occur upon adoptionoccur.
Table of guidance in ASU 2016-09��Compensation—Stock Compensation: Scope of Modification Accounting. In reporting periods priorContents
Etsy, Inc.
Notes to 2017, the Company estimated forfeitures at the time of grant and revised in subsequent periods as necessary if actual forfeitures differed from estimates.
The Company accounted for stock-based compensation arrangements related to the A Little Market (“ALM”) acquisition in restricted shares, subject to a put option that allows the holder of the shares to put the shares back to the Company for cash, as liability-classified stock awards. These awards were re-measured at fair value each reporting period, with changes in fair value being charged to the Consolidated Statement of Operations. Compensation expense was recognized using a graded vesting methodology for each separately vesting tranche as though the award were, in substance, multiple awards. Unless the put option was exercised, the restricted shares were to be reclassified from a liability to an equity classified award upon the termination of the put option at the vesting of each separate tranche. In 2017, all outstanding restricted shares subject to a put option became fully vested and the Company is no longer required to remeasure these awards at fair value going forward.Financial Statements
Foreign Currency
The Company has determined that the functional currency for each of its foreign operations is the currency of the primary cash flow of the operations, which is generally the local currency in which the operation is located. All assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Revenue and expenses are translated using average exchange rates during the period. Foreign currency translation adjustments are reflected in stockholders’ equity as a component of other comprehensive income (loss). Transaction gains and losses including intercompany balances denominated in a currency other than the functional currency of the entity involved are included in foreign exchange gain (loss) within other income (expense) in the Consolidated Statement of Operations.
Income Taxes
The income tax (provision) benefit is based on income (loss) before income taxes and is accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to settle. The Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Management assessesThe Company regularly reviews the need forrecoverability of its deferred tax assets by considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance on a quarterly basis to reduceagainst deferred tax assets to the amounts expectedthat are deemed not more likely than not to be realized.
Etsy, Inc.
Notes to Consolidated Financial Statements
realizable.
On December 22, 2017 the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law. The TCJA requires the Company to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low Taxed Income ("GILTI"(“GILTI”) as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has recorded tax expense related to GILTI in its effective tax rate forbeginning in 2018, and has elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred using the period cost method.
The Company accounts for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement.
The Company recognizes interest and penalties, if any, associated with income tax matters as part of the income tax provision and includes accrued interest and penalties with the related income tax liability in the Consolidated Balance Sheet.
Excess Tax Benefits from Exercise of Stock Options
As of the first quarter of 2017, the Company adopted ASU 2016-09—Stock Compensation: Improvements to Employee Share-based Payment Accounting, for share-based payment transactions that require a reporting entity to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement. Prior to this adoption, including the year ended December 31, 2016, the Company used the “with and without” approach in determining the order in which tax attributes were utilized. As a result, the Company recognized a tax benefit from stock-based awards (“windfall”) in additional paid-in capital only if an incremental tax benefit was realized after all other tax attributes available to the Company had been utilized. When tax deductions from stock-based awards were less than the cumulative book compensation expense, the tax effect of the resulting difference (“shortfall”) was charged first to additional paid-in capital, to the extent of the Company’s pool of windfall tax benefits, with any remainder recognized in income tax expense.Sheets.
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per share is computed by dividing net income (loss)adjusted on an if-converted basis for the period by the weighted-average number of shares of common stock and potentially dilutive common stock outstanding during the period. Net income inPotentially dilutive shares, which are based on the diluted net income per share calculation is adjusted for income or loss from fair value adjustments on instruments accounted for as liabilities, but which may be settled in shares. The dilutive effectweighted-average shares of common stock underlying outstanding options and stock-based compensation awards is reflected in diluted net income (loss) per share by application of the treasury stock method. Since the Company expects to settle in cash the principal outstanding under the 0% Convertible Senior Notes due 2023 the Company issued in March 2018 (the “Notes,” see “Note 13—Debt”), it usesand convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating the potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock attributable to common stockholders when the average market price of the Company’s common stock for a given period exceeds the conversion price of $36.27 per share.
their effect is dilutive.
The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. For periods in which the Company has reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Etsy, Inc.
Notes to Consolidated Financial Statements
Segment Data
The Company identifies operating segments as components of an entity for which discrete financial information is available and is regularly reviewed by the chief operating decision maker or decision-making group, in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to be its chief executive officer. The Company has determined it operates in onehas 2 operating segmentsegments, Etsy and oneReverb, which qualify for aggregation as 1 reportable segment, as its chief operating decision maker reviews financial information presented on only a consolidated basis for purposes of allocating resources and evaluating financial performance.
Cash and Cash Equivalents, and Short-termShort- and Long-term Investments
The Company considers all investments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash restricted by third parties is not considered cash and cash equivalents. Short-term investments, consisting primarily of certificates of deposit, commercial paper, corporate bonds, and U.S. Government and agency securities and corporate bonds with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Long-term investments, consisting of certificates of deposit, corporate bonds, and U.S. Government and agency securities with original maturities of greater than twelve months but less than 37 months when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax provisionsexpenses or benefits.
The following table provides cash and cash equivalents, and short-termshort- and long-term investments within the Consolidated Balance Sheets as of the dates indicated (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Cash and cash equivalents | $ | 1,244,099 | | | $ | 443,293 | |
| Short-term investments | 425,119 | | | 373,959 | |
| Long-term investments | 39,094 | | | 89,343 | |
| Total cash and cash equivalents, and short- and long-term investments | $ | 1,708,312 | | | $ | 906,595 | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Cash and cash equivalents | $ | 366,985 |
| | $ | 315,442 |
|
| Short-term investments | 257,302 |
| | 25,108 |
|
| Total cash, cash equivalents, and short-term investments | $ | 624,287 |
| | $ | 340,550 |
|
The Company classifies any cash balances that are legally restricted as to withdrawal or usage as restricted cash on the Consolidated Balance Sheets. In connection with the Company’s noncancellable Brooklyn lease agreement, which expires in 2026, the Company established a $5.3 million collateral account, which is reflected in the restricted cash balance as of December 31, 2020 and 2019.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-termshort- and long-term investments, and funds receivable and seller accounts. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, to the extent eligible, such amounts may exceed federally insured limits. The Company believes that minimal credit risk exists with respect to these investments due to the credit ratings of the financial institutions that hold its short- and long-term investments. In addition, funds receivable are generated primarily with credit cardsettle relatively quickly, and payment processing companies which management believes arethe Company’s historical experience of high credit quality.losses has not been significant.
Fair Value of Financial Instruments
Management believes that the fair value of financial instruments, consisting of cash and cash equivalents, short-termshort- and long-term investments, accounts receivable, funds receivable and seller accounts, accounts payable, and funds payable and seller accounts approximates carrying value due to the immediate or short-term maturity associated with these instruments.
In accounting for the issuance of the 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”), and 0% Convertible Senior Notes due 2023 (the “2018 Notes”and together with the
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Etsy, Inc.
Notes to Consolidated Financial Statements
2020 Notes and the 2019 Notes, the “Notes”), and the extinguishment of the 2018 Notes, discussed in “Note“Note 13—Debt,,” management used estimates and assumptions to calculate the carrying amounts of the liability and equity components by measuring the fair value of similar securities. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, the Company discounted the contractual cash flows of each of the Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s stock, was determined by deducting the fair value of the liability component from the par value of each of the Notes. Subsequent to their issuance, the Notes are not measured at fair value in the Consolidated Balance Sheets, but the Company estimates the fair value of the liability component of the Notes through inputs that are observable in the market or that could be derived from observable market data, corroborated with quoted market prices of similar instruments. See Note 8—Fair Value Measurements for more information on the fair value of the liability component of the Notes.
Accounts Receivable and AllowanceProvision for Doubtful AccountsExpected Credit Losses
The Company’s trade accounts receivable are recorded at amounts billed to Etsy sellers and are presented on the Consolidated Balance SheetSheets net of the allowanceprovision for doubtful accounts.expected credit losses. The allowanceprovision is determined by a number of factors, including age of the receivable, current economic conditions, historical losses, and management’s assessment of the financial condition of Etsy sellers. Receivables are written off once they are deemed uncollectible, which may arise when Etsy sellers file for bankruptcy or are otherwise deemed unable to repay the amounts owed to the Company.uncollectible. Estimates of uncollectible accounts receivable are recorded to general and administrative expense. See “Note 2—Revenue”
Etsy payment terms: As of November 13, 2018, for additional information on payment terms relatedEtsy sellers using Etsy Payments, all charges, including listing fees, transactions fees, Etsy Payments fees, advertising services fees, and Etsy Shipping Labels fees, are deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account. Etsy sellers receive a statement electronically on the first day of each month outlining the previous month’s charges and any remaining amount due after the Company’s fees are deducted from the seller’s shop payment account. Etsy sellers who do not use Etsy Payments receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment is due by the 15th of every month.
Prior to November 13, 2018, Etsy sellers would receive a statement electronically on the first day of each month for the previous month’s charges in U.S. dollars, including all listing fees, transactions fees, advertising services fees, and Etsy Shipping Labels fees. Payment was due by the 15th of every month. Prior to November 13, 2018 only Etsy Payments fees were deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account.
Reverb payment terms: For most transactions, Reverb buyers use a credit card to pay for the service, when the order is placed. For these transactions, the Company collects the total amount due on the order, retains its fees due from the Reverb seller, and remits the net proceeds to the Reverb seller.
The following table provides a rollforward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable balances.to present the net amount expected to be collected (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Balance as of the beginning of period | $ | 5,033 | | | $ | 4,720 | | | $ | 2,687 | |
| | | | | |
| Provision for expected credit losses | 15,033 | | | 10,963 | | | 4,124 | |
| Amounts written off, net of recoveries | (10,309) | | | (10,650) | | | (2,091) | |
| Balance as of the end of period | $ | 9,757 | | | $ | 5,033 | | | $ | 4,720 | |
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the allowance activity during the periods indicated (in thousands):
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Balance as of the beginning of period | $ | 2,687 |
| | $ | 1,999 |
| | $ | 2,071 |
|
| Bad debt expense | 4,124 |
| | 2,497 |
| | 1,770 |
|
| Write-offs, net of recoveries and other adjustments | (2,091 | ) | | (1,809 | ) | | (1,842 | ) |
| Balance as of the end of period | $ | 4,720 |
| | $ | 2,687 |
| | $ | 1,999 |
|
Funds Receivable and Seller Accounts and Funds Payable and Amounts due to Sellers
The Company records funds receivable and seller accounts and funds payable and amounts due to sellers as current assets and liabilities, respectively, on the Consolidated Balance Sheet.Sheets. Funds receivable and seller accounts represent amounts received or expected to be received from Etsy buyers via third-party credit card processors, which flow through an Etsya bank account for payment to Etsy sellers. This cash and related receivable represent the total amount due to sellers, and as such a liability for the same amount is recorded to funds payable and amounts due to Etsy sellers.
Property and Equipment
Property and equipment, consisting principally of building, capitalized website development and internal-use software, building, leasehold improvements, and computer equipment, are recorded at cost. The Company capitalizes construction in progress for build-to-suit lease agreements where we are the owner, for accounting purposes only, during the construction period. Depreciation and amortization begin at the time the asset is placed into service and areis recognized using the straight-line method in amounts sufficient to relate the cost of depreciable and amortizable assets to the Consolidated Statements of Operations over their estimated useful lives. Repairs and maintenance are charged to the Consolidated Statements of Operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are removed from the balance sheet and the resulting gain or loss is reflected in the Consolidated Statements of Operations.
When events or changes in circumstances require, the Company assesses the likelihood of recovering the cost of tangible long-lived assets based on its expectations of future profitability, undiscounted cash flows, and management’s plans with respect to operations to determine if the asset is impaired and subject to write-off. Measurement of any impairment loss is based on the excess of the carrying value of the asset over the fair value. See “Recently Issued Accounting Pronouncements” below for information on the impact of ASU 2016-02—Leases on property and equipment balances.
Website Development and Internal-use Software Costs
Costs incurred to develop the Company’s website and software for internal-use are capitalized and amortized over the estimated useful life of the software, generally three to five years. In accordance with authoritative accounting guidance, capitalization of costs to develop software begin when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. The Company also capitalizes costs related to upgrades and enhancements when it is probable the expenditures will result in additional functionality or will extend the useful life of existing functionality. Costs related to the design or maintenance of website development and internal-use software are expensed as incurred. The Company periodically reviews capitalized website development and internal-use software costs to determine whether the projects will be completed, placed in service, removed from service, or replaced by other internally-developed or third-party software. If an asset is not expected to provide any future use, the asset is retired and any unamortized cost is expensed.
If an asset will continue to be used, but the net book value is not expected to be fully recoverable, the asset is impaired to its fair value. When events or changes in circumstances require, the Company assesses the likelihood of recovering the cost of website development and internal-use software costs based on its expectations of future profitability, undiscounted cash flows, and our plans with respect to operations to determine if the asset is impaired and subject to write-off. Measurement of any impairment loss is based on the excess of the carrying value of the asset over the fair value. No impairment of capitalized website development and internal-use software assets was recorded during the years ended December 31, 2018 and 2016. The Company
Etsy, Inc.
Notes to Consolidated Financial Statements
recognized an asset impairment charge of $3.2 million related to capitalized web development and internal-use software assets in the year ended December 31, 2017 as a result of its decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing.
Capitalized website development and internal-use software costs are included in property and equipment within the Consolidated Balance Sheets.
Asset AcquisitionsBusiness Combinations
In accordance with the guidance for business combinations, the Company determines whether a transaction is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. The Company has completed asset acquisitions and may complete additional asset acquisitions inaccounts for business combinations using the future. Inacquisition method of accounting. If the assets acquired are not a business, we account for the transaction as an asset acquisition, the Company initially determines whether it acquired a single or group of assets. Acquired assets are recognized based onacquisition. Under both methods, the purchase price which is presumedallocated to equal the fair value of the net assets acquired and amortized inliabilities assumed using the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. When circumstances indicate that the carrying value of these assets may not be recoverable, the Company reviews its identifiable amortizable intangible assets for impairment. The Company accrues for contingent consideration when payout becomes probable and is reasonably estimable.
Business Combinations
The Company has completed a number of acquisitions of other businesses in the past and may acquire additional businesses or technologies in the future. In an acquisition, the Company first reviews if substantially allfair values determined by management as of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, in which case the set is not considered a business and is accounted for as an asset acquisition.
acquisition date. The results of businesses acquired in a business combination are included in the Company’s Consolidated Financial Statementsconsolidated financial statements from the date of acquisition. The Company allocates the purchase price, which is the sum of the consideration provided and may consist of cash, equity, or a combination of the two, in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows,adjusted earnings before interest and taxes and discount rates, and selectionrates. Our estimates of comparable companies.
When the Company issues stock-based or cash awards to an acquired company’s stockholders, the Company evaluates whether the awards are contingent consideration or compensation for post-combination services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s stockholder beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-combination services and recognized as expense over the requisite service period.
The Company initially recognizes intangible assets at fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and
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Etsy, Inc.
Notes to Consolidated Financial Statements
unpredictable and, amortizes them onas a straight-line basis over their estimated useful lives. When circumstances indicate thatresult, actual results may differ materially from estimates. Our estimates associated with the carrying value of these assetsaccounting for business combinations may not be recoverable, the Company reviews its identifiable amortizable intangible assets for impairment.
To date,change as additional information becomes available regarding the assets acquired and liabilities assumedassumed. Any change in the Company’s business combinations have primarily consisted of goodwillfacts and finite-lived intangible assets, consisting primarily of developed technologies, customer relationships, and trademarks. The estimated fair values and useful lives of identifiable intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flowscircumstances that existed as of the acquired business,acquisition date and impacts our preliminary estimates is recorded to goodwill if identified within the nature ofmeasurement period. Subsequent to the business acquired, and the specific characteristics of the identified intangible assets. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection withmeasurement period or our final determination of fair values,value of assets and liabilities, whichever is earlier, the Company may engage independent appraisal firms to assist with the valuation of intangible and certain tangible assets acquired and certain assumed obligations.adjustments will affect our earnings.
Acquisition-related transaction costsexpenses incurred by the Company in a business combination are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred.
Etsy, Inc.
Notes to Consolidated Financial Statements
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. Management has determined that theThe Company has a single reporting unit and performs its annual goodwill impairment test during the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired.
Events or changes in circumstances Management has determined that the Company has 2 operating segments, Etsy and Reverb, which could trigger an impairment review include significant changes in the mannerqualify for aggregation as 1 reportable segment, for purposes of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, significant underperformance relativeallocating resources and evaluating financial performance, and each operating segment is determined to historical or projected future results of operations,be a significant adverse change in the business climate, cost factors that have a negative effect on earnings and cash flows, an adverse action or assessment by a regulator, a sustained decrease in share price, unanticipated competition, or a loss of key personnel.reporting unit.
The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if the Company concludes otherwise, then it is required to perform a quantitative assessment for impairment.
The quantitative assessment involves comparing the estimated fair value of the reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.impaired. If, however, the book value of the reporting unit exceeds the fair value, an impairment loss is recognized in an amount equal to the excess, not to exceed the total amount of goodwill allocated to that reporting unit.
The Company completed a qualitative analysis during the fourth quarter of 2018. No impairment of goodwill was recorded during the three years ended December 31, 2018, 2017, and 2016.
Intangible Assets
IntangibleFinite intangible assets are amortized using the straight-line method over the estimated useful life of the asset. The estimated useful lives of acquired technology, customer relationships, and trademarks are generally three years and the estimated useful life of the referral agreement is ten years. When events or changes in circumstances require,indicate the carrying amount may not be recoverable, the Company assessesreviews the likelihood of recoveringassets for impairment. The Company measures recoverability by comparing the cost of intangible assets based on its expectations ofcarrying amounts to the future profitability, undiscounted cash flows and management’s plans with respectthat the assets or asset groups are expected to operations to determine ifgenerate. If the assetcarrying value of the assets are not recoverable, the impairment recognized is impaired and subject to write-off. Measurement of any impairment loss is based onmeasured as the excess ofamount by which the carrying value of the asset over theexceeds its fair value. No impairment of intangible assets was recorded during the two years ended December 31, 2018 and 2017. The Company recognized an asset impairment charge of $0.6 million in the year ended December 31, 2016, related to the impairment of nonrecoverable intangible assets acquired in the ALM and Jarvis Labs, Inc. acquisitions for customer relationships and trademarks.
Leases
The Company accounts for leases office spacein accordance with ASC Topic 842—Leases (“ASC 842”), which it adopted on January 1, 2019 using the modified retrospective transition approach.
The Company’s lease arrangements generally include real estate and certain computer equipment in multiple locations under non-cancelable lease agreements. The leases are reviewed for classification as operating, capital, or build-to-suit leases. For operating leases, rent is recognized on a straight-line basis overassets. At the lease period. For capital leases,inception of an arrangement, the Company recordsdetermines whether the leased asset witharrangement is or contains a corresponding liability. Payments are recorded as reductions to the liability with an appropriate interest charge recordedlease based on the then-outstanding remaining liability. Upon adoption of ASU 2016-02—Leases,unique facts and circumstances present. At lease commencement, the Company will recognize additionalevaluates whether the arrangement is a finance or operating lease, and accounts for it accordingly. Operating leases are included in other assets, other current liabilities, and other liabilities on the Company’s Consolidated Balance Sheets. Finance leases are included in property and equipment, net, finance lease obligations, current, and finance lease obligations, net of current portion on the Company’s Consolidated Balance Sheets.
Leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use (“ROU”) assets, lease obligations, and, if applicable, long-term lease obligations in the financial statement line items cited above. The Company has elected not to recognize leases with terms of one year or less on the consolidated balance sheet. Lease obligations and their corresponding right-of-useROU assets of the same amountare recorded based on the present value of lease payments over the remaining minimum rental payments under current leasing standards for existing operating leases.
The Company considersexpected lease term. As the nature of the renovations and the Company’s involvement during the construction period of newly-leased office space to determine if itinterest rate implicit in lease contracts is considered, for accounting purposes only, to be the owner of the construction project during the construction period. Iftypically not readily determinable, the Company determines that itutilizes the appropriate incremental borrowing rate, which is the owner ofrate incurred to borrow on a collateralized basis over a similar term an amount equal to the construction project, it is required to capitalize the fair value of the building as well as the construction costs incurred on its Consolidated Balance Sheet along with a corresponding financing liability (“build-to-suit accounting”). Upon occupancy for build-to-suit leases, the Company assesses
lease
Etsy, Inc.
Notes to Consolidated Financial Statements
whetherpayments in a similar economic environment. Certain adjustments to the circumstances qualifyROU asset may be required for sales recognition under the sale-leaseback accounting guidance. Ifitems such as initial direct costs paid or incentives received. The lease term may include options to extend or terminate the lease meets the sale-leaseback criteria,when it is reasonably certain that the Company will removeexercise that option.
The components of a lease should be split into three categories: lease components, including land, building, or other similar components; non-lease components, including common area maintenance, maintenance, consumables, or other similar components; and non-components, including property taxes, insurance, or other similar components. However, the assetCompany has elected to combine lease and related financial obligation from the balance sheet and treat the building lease as an operating lease. If upon completion of construction, the project does not meet the sale-leaseback criteria, the leased property will be treatednon-lease components as a capitalsingle component. The lease for financial reporting purposes.
In May 2016,expense is recognized over the Company took possession of its corporate headquarters in Brooklyn, New York upon substantial completion of the construction phase of the build-out. Upon completion of the project, the Company performedexpected term on a sale-leaseback analysis pursuant to Accounting Standards Codification (“ASC”) 840—Leases, to determine the appropriateness of removing the previously capitalized assets from the Consolidated Balance Sheets. The Company concluded that components of “continuing involvement” were evident as a result of this review, precluding the derecognition of the related assets from the Consolidated Balance Sheets. In conjunction with the initiation of the lease in May 2014, the Company also recorded a facility financing obligation equal to the fair market value of the assets received from the landlord. As of December 31, 2018, the facility financing obligation outstanding was $60.0 million. The Company does not report rent expense for the lease. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest expense, and the associated asset capitalized throughout the construction project is depreciated over its estimated useful life. Upon adoption of ASU 2016-02—Leases, the Company will derecognize the facility financing obligation and any gains or losses associated with this change in accounting will be recognized through a cumulative-effect adjustment to accumulated deficit as of January 1, 2019. Additionally, a new right-of-use asset and lease liability will be recognized on the Consolidated Balance Sheet for the associated lease. See “Recently Issued Accounting Pronouncements” below for additional information on the impact of ASU 2016-02—Leases.
straight-line basis.
Contingencies
The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable; however, it discloses the range of such reasonably possible losses.
Recently Issued Accounting Pronouncements
In February 2016,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. This ASU 2016-02—Leases,simplifies accounting for convertible instruments by removing 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. This ASU eliminates an entity’s ability to overcome the presumption of share settlement, and additional changes, modifications, clarifications,as a result, the issuers of convertible debt that may be settled in any combination of cash or interpretations related to this guidance thereafter,stock at the issuer’s option, must use the if-converted method in computing diluted net income per share, which require a reporting entity to recognize right-of-use assets and lease liabilities onis typically more dilutive than the balance sheet for operating leases to increase transparency and comparability.net share settlement (treasury stock-type). The new guidance is effective for annual and interim periods beginning after December 15, 2018,2021, and early adoption is permitted. 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 will early adopt this guidanceASU on a modified retrospective basis in the first quarter of 2021, effective as of January 1, 2019, utilizing transition guidance introduced in ASU 2018-11—Leases: Targeted Improvements and expects to elect the ‘package of practical expedients,’ which permits the Company not to reassess prior conclusions about lease identification, classification and initial direct costs.2021. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable.
The Company has not yet finalized the review, however, the Company is expecting that this standardASU will have a material effect on the Company’s Consolidated Financial Statements. Theconsolidated financial statements. Although the Company continues to evaluate the effect of the ASU on the Company’s consolidated financial statements, upon adoption the most significant effects would relate to the recognitionNotes, including derecognition of new right-of-use assets and lease liabilitiesthe unamortized debt discount, which is recorded as a direct deduction from the Notes, resulting in an increase in long-term debt, net of approximately $264 million; derecognition of the equity component, which represents the value of the conversion option on the Consolidated Balance Sheet for real estate operating leases;issuance date of the Notes outstanding, resulting in a reduction in additional paid-in capital of approximately $229 million, net of taxes; derecognition of existing assetsdeferred tax liabilities of approximately $63 million; reversal of the cumulative debt discount recognized as interest expense in the Company’s Consolidated Statements of Operations since the date of issuance of each of the Notes to the period ending December 31, 2020, resulting in a decrease of accumulated deficit of approximately $28 million, net of taxes; and liabilities for a sale-leaseback transaction (arising from a build-to-suit lease arrangement on our Brooklyn headquarters for which construction is complete andreduction in the Company is leasingCompany’s interest expense after the constructed asset) that currently doesadoption of the ASU as there would not qualify for sale accounting; and providing significant new disclosures about leasing activities. However,be any further amortization of the debt discount due to its derecognition. The Company does not expect adoptionany impact to have a material impact on its results of operationsthe Company’s liquidity or liquidity. The accounting for capital leases is expected to remain substantially unchanged. Upon adoption, the Company will:cash flows.
recognize additional operating liabilities and corresponding right-of-use assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases;
derecognize existing facility financing obligations and the related existing building asset for our corporate headquarters. Any gains or losses associated with this change in accounting will be recognized through a cumulative-effect adjustment to accumulated deficit as of January 1, 2019. Additionally, a new right-of-use asset and lease liability
Etsy, Inc.
Notes to Consolidated Financial Statements
will be recognized on the Consolidated Balance Sheet for the associated lease, which will be classified as a financing lease.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company will elect the short-term lease recognition exemption for all leases that qualify. Accordingly, we will not recognize right-of-use assets or lease liabilities for leases that qualify, including leases for existing short-term leases in effect at transition and will recognize those payments on the Consolidated Statements of Operations on a straight-line basis over the lease term. The Company will elect the practical expedient to not separate lease and non-lease components for all its leases.
In January 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses, and additional changes, modifications, clarifications or interpretations related to this guidance thereafter, which require a reporting entity to estimate credit losses on certain types of financial instruments, and present assets held at amortized cost and available-for-sale debt securities at the amount expected to be collected. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements.
In July 2018, FASB issued ASU 2018-09—Codification Improvements, which clarifies, corrects, and makes minor improvements across multiple topics in the codification. The transition and effective dates are based on the facts and circumstances of each amendment, with some amendments becoming effective upon issuance of the update, and others becoming effective for annual periods beginning after December 15, 2018. The amendments that were effective upon issuance of the update did not have an impact on the Company’s Consolidated Financial Statements. The Company is currently evaluating the impact of the adoption of the other amendments on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15—Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new guidance on its Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
In May 2014,December 2019, the FASB issued ASU 2014-092019-12—Revenue from ContractsIncome 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 Customersthe 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 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 replaces existing revenue recognition guidance. The new guidance was effective forrequire 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 annual and interim periods beginning after December 15, 2017. Among other things, the updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsexpected to be entitled in exchange for those goods or services. The Company adopted the requirements of the new guidance as of January 1, 2018, utilizing the full retrospective method of transition. In connection with the adoption, the company reclassified Etsy Payments revenue from Services revenue to Marketplace revenue in the Consolidated Statements of Operations. Aside from this presentation reclassification, adoption of the new guidance did not result in changes to the prior year or current year Consolidated Financial Statements. See“Revenue Recognition” above and Note 2—Revenue” for additional information regarding revenue recognition.
In November 2016, the FASB issued ASU 2016-18—Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new guidance is effective for the annual and interim periods beginning after December 15, 2017.collected. The Company adopted this standard in the first quarter of 2018 utilizing the fullJanuary 1, 2020 using a modified retrospective method of transition. As a resulttransition method. The adoption of this guidance, the Company reclassified $5.3 millionstandard did not have a material impact on the Consolidated StatementCompany’s consolidated financial statements on the date of Cash Flows inits adoption.
For the year ended December 31, 2018, 2017,2020, the Company’s assessment of the provision for expected credit losses considered market disruptions caused by COVID-19 and 2016estimates of expected and emerging credit and collectibility trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to include restrictedpredict causing variability and volatility that may have a significant impact on the Company’s provision for credit losses in future periods.
Accounts Receivable: For more information on the Company’s accounting policy on accounts receivable see “Accounts Receivable and Provision for Expected Credit Losses” above.
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. The Company evaluates fair values for each individual security in the beginning and ending cash, cash equivalents, and restricted cash balances.
investment portfolio. See “Note 9—Marketable Securities” for additional information on the Company’s marketable securities. As of December 31, 2020, the Company did not recognize any year-to-date credit loss related to available-for-sale debt securities.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance: | | | | | |
| Cash and cash equivalents | $ | 315,442 |
| | $ | 181,592 |
| | $ | 271,244 |
|
| Restricted cash | 5,341 |
| | 5,341 |
| | 5,341 |
|
| Total cash, cash equivalents, and restricted cash | $ | 320,783 |
| | $ | 186,933 |
| | $ | 276,585 |
|
| | | | | | |
| Ending balance: | | | | | |
| Cash and cash equivalents | $ | 366,985 |
| | $ | 315,442 |
| | $ | 181,592 |
|
| Restricted cash | 5,341 |
| | 5,341 |
| | 5,341 |
|
| Total cash, cash equivalents, and restricted cash | $ | 372,326 |
| | $ | 320,783 |
| | $ | 186,933 |
|
The balances included in restricted cash represent amounts held as collateral associated with the lease of the Company’s Brooklyn, New York headquarters. This standard had no other impact to the Consolidated Financial Statements.
In June 2018, the FASB issued ASU 2018-07—Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718—Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The new guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted this standard in the third quarter of 2018 noting that the adoption of the standard had no material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which adds, modifies, and removes various disclosure requirements for fair value measurements. The new guidance is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company adopted this standard in the third quarter of 2018 noting that the adoption of the standard had no impact on its fair value measurement disclosures.
Note 2—Revenue
The following table summarizes revenue disaggregated by type of serviceMarketplace revenue and optional Services revenue for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Marketplace revenue | $ | 1,303,126 | | | $ | 593,646 | | | $ | 444,765 | |
| Services revenue | 422,499 | | | 224,733 | | | 158,928 | |
| Revenue | $ | 1,725,625 | | | $ | 818,379 | | | $ | 603,693 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Marketplace revenue (1) | $ | 440,740 |
| | $ | 326,076 |
| | $ | 269,628 |
|
| Services revenue | 158,928 |
| | 111,869 |
| | 89,433 |
|
| Other revenue | 4,025 |
| | 3,286 |
| | 5,906 |
|
| Revenue | $ | 603,693 |
| | $ | 441,231 |
| | $ | 364,967 |
|
| |
(1) | Etsy Payments revenue for the years ended December 31, 2018, 2017, and 2016 has been reclassified and presented within Marketplace revenue. Comparative periods have been reclassified to conform to current period presentation. |
See “Note“Note 1—Basis of Presentation and Summary of Significant Accounting Policies —RevenuePolicies—Revenue Recognition” for additional information on recognition.
Etsy, Inc.
Notes to Consolidated Financial Statements
Payment terms
As of November 13, 2018, for Etsy sellers using Etsy Payments, all charges, including listing fees, transaction fees, Etsy Payments fees, Promoted Listings fees, Etsy Shipping Labels fees, Pattern fees, Etsy Plus fees, are deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account. Etsy sellers receive a statement electronically on the first day of each month outlining the previous month’s charges and any remaining amount due after the Company’s fees are deducted from the seller’s shop payment account. Etsy sellers that do not use Etsy Payments receive a statement electronically on the first day of each month for the previous month’s charges in U.S. Dollars, including all listing fees, transactions fees, Promoted Listing fees, Etsy Shipping Labels fees, Pattern fees, and Etsy Plus fees. Payment is due by the 15th of every month.
Prior to November 13, 2018, Etsy sellers would receive a statement electronically on the first day of each month for the previous month’s charges in U.S. Dollars, including all listing fees, transactions fees, Promoted Listing fees, Etsy Shipping Labels fees, Pattern fees, and Etsy Plus fees. Payment was due by the 15th of every month. Prior to November 13, 2018 only Etsy Payments fees were deducted from the funds credited to the seller’s shop payment account in the seller’s ledger currency prior to settlement of those funds to the seller’s bank account.
Contract balances
Deferred revenues
The Company records deferred revenues when cash payments are received or due in advance of the completion of the listing or subscription period, which represents the value of the Company’s unsatisfied performance obligations. Deferred listing revenue is recognized ratably over the remainder of the four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized.
Deferred Etsy Plus subscription revenues related to the enhanced features described in “Noterecognition. See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies —Revenue Recognition” are recognized ratably over the 30-day subscription period. CreditsPolicies—Accounts Receivable and Provision for Promoted Listings are recognized when used, or when the 30-day subscription period expires. CreditsExpected Credit Losses” for listing fees are recognized over the four-month listing period when used, and any unused credits are recognized when the 30-day subscription period expires. The amount of revenue recognized in the year ended December 31, 2018 that was included in the deferred balance at the beginning of the period was $6.3 million.
Significant judgments
Judgment is required to assess the nature of the services that the Company promises to its customers and the timing of satisfaction of those promised services.
For services that are refundable, the Company accounts for the right of return as a refund liability and reduction of revenue recognized in the amount of refunds that are expected to be issued.Refunds are estimated monthly, are based on historical refund patterns, and are updated at the end of each reporting period as additional information becomes available.on the Company’s payment terms.
Note 3—Income Taxes
The following are the domestic and foreign components of the Company’s income (loss) before income taxes (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| United States | $ | 206,481 | | | $ | 14,544 | | | $ | 36,157 | |
| International | 159,228 | | | 66,102 | | | 18,921 | |
| Income before income taxes | $ | 365,709 | | | $ | 80,646 | | | $ | 55,078 | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Domestic | $ | 36,157 |
| | $ | (16,583 | ) | | $ | 25,910 |
|
| Foreign | 18,921 |
| | 48,848 |
| | (28,786 | ) |
| Income (loss) before income taxes | $ | 55,078 |
| | $ | 32,265 |
| | $ | (2,876 | ) |
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Current: | | | | | |
| U.S. Federal | $ | 4,854 | | | $ | (3,967) | | | $ | 709 | |
| U.S. State | 3,953 | | | 1,053 | | | (578) | |
| International | 5,455 | | | 352 | | | 600 | |
| Total current | 14,262 | | | (2,562) | | | 731 | |
| Deferred: | | | | | |
| U.S. Federal | (7,684) | | | (19,734) | | | (3,343) | |
| U.S. State | (4,543) | | | (1,564) | | | 3,496 | |
| International | 14,428 | | | 8,612 | | | (23,297) | |
| Total deferred | 2,201 | | | (12,686) | | | (23,144) | |
| Total income tax provision (benefit) | $ | 16,463 | | | $ | (15,248) | | | $ | (22,413) | |
For the years ended December 31, 2020, 2019 and 2018, the Company recorded an income tax provision (benefit) of $16.5 million, $(15.2) million, and $(22.4) million or an effective tax rate of 4.5%, (18.9)%, and (40.7)%, respectively.
Etsy, Inc.
Notes to Consolidated Financial Statements
The income tax (benefit) provision is comprised of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Federal | $ | 709 |
| | $ | (6,397 | ) | | $ | 22,084 |
|
| State | (578 | ) | | 79 |
| | 2,623 |
|
| Foreign | 600 |
| | 476 |
| | 580 |
|
| Total current | 731 |
| | (5,842 | ) | | 25,287 |
|
| Deferred: | | | | | |
| Federal | (3,343 | ) | | (34,948 | ) | | 2,008 |
|
| State | 3,496 |
| | (8,778 | ) | | (247 | ) |
| Foreign | (23,297 | ) | | 33 |
| | (23 | ) |
| Total deferred | (23,144 | ) | | (43,693 | ) | | 1,738 |
|
| Total income tax (benefit) provision | $ | (22,413 | ) | | $ | (49,535 | ) | | $ | 27,025 |
|
Beginning in the first quarter of 2017, the Company adopted ASU 2016-09—Stock Compensation: Improvements to Employee Share-based Payment Accounting, and subsequently recorded excess tax deductions on share-based compensation as income tax benefit in its income statement. The current tax expense listed above does not reflect income tax benefits of $3.2 million for the year ended December 31, 2016 related to excess tax deductions on share-based compensation because these benefits were recorded directly to additional paid-in capital. Please refer to “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Excess Tax Benefits from Exercise of Stock Options” for additional detail regarding the adoption of this accounting standard and its impact on the Consolidated Financial Statements.
A reconciliation of the income tax provision (benefit) provision at the U.S. federal statutory income tax rate of 21% in 2018 and 35% in 2017 and 2016 to the Company’s total income tax provision (benefit) provision is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Income tax provision at the federal statutory rate | $ | 76,799 | | | $ | 16,936 | | | $ | 11,566 | |
| State and local income taxes net of federal benefit | 7,693 | | | 973 | | | 3,839 | |
| Foreign income tax rate differential | (13,193) | | | (5,454) | | | (298) | |
| Stock-based compensation | (45,391) | | | (16,281) | | | (11,717) | |
| Research and development credit | (15,156) | | | (9,864) | | | (4,115) | |
| U.S. tax reform (1) | 3,923 | | | (4,197) | | | 3,897 | |
| Non-deductible expenses | 1,719 | | | 1,784 | | | (329) | |
| Change in valuation allowance (2) | 0 | | | 0 | | | (28,733) | |
| Return to provision adjustment | (107) | | | 500 | | | 3,293 | |
| Other | 176 | | | 355 | | | 184 | |
| Total income tax provision (benefit) | $ | 16,463 | | | $ | (15,248) | | | $ | (22,413) | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Income tax provision (benefit) at federal statutory rate | $ | 11,566 |
| | $ | 11,308 |
| | $ | (1,007 | ) |
| State and local taxes net of federal benefit | 3,839 |
| | (691 | ) | | 1,545 |
|
| Foreign income tax rate differential | (298 | ) | | (11,878 | ) | | 5,849 |
|
| Stock-based compensation | (11,717 | ) | | (12,584 | ) | | 1,412 |
|
| Non-deductible items | (329 | ) | | 168 |
| | 267 |
|
| Uncertain tax positions | 382 |
| | 789 |
| | 4,033 |
|
| Return to provision adjustment | 3,293 |
| | 167 |
| | (498 | ) |
| Non-deductible acquisition costs | — |
| | — |
| | 199 |
|
| Change in valuation allowance | (28,733 | ) | | (4,673 | ) | | 4,911 |
|
| Research and development credit | (4,115 | ) | | (1,098 | ) | | (2,170 | ) |
| Deferred charge on restructuring | — |
| | — |
| | 12,168 |
|
| U.S. tax reform | 3,897 |
| | (31,063 | ) | | — |
|
| Other | (198 | ) | | 20 |
| | 316 |
|
| Total income tax (benefit) provision | $ | (22,413 | ) | | $ | (49,535 | ) | | $ | 27,025 |
|
(1) On December 22, 2017, the U.S. government enacted the TCJA, as described above, which includes significant changes to the taxation of business entities. These changes include, among others, (1)(a) a permanent reduction to the corporate income tax rate, (2)(b) Global Intangible Low-Taxed Income (“GILTI”), a partial limitation on the deductibility of business interest expense (“163(j) Interest Limitation”), and (3) a shift of the U.S. taxation of multinational corporations from anew tax on worldwide income, and (c) Foreign Derived Intangible Income (“FDII”) a deduction provided with respect to a quasiterritorial system (along with certain rules designed to prevent erosion of the U.S. income tax base).
Etsy, Inc.
Notes to Consolidated Financial Statements
foreign earned income. Effective January 1, 2018, the Company isbecame subject to several provisions of the TCJA including computations under GILTI and Foreign Derived Intangible Income (“FDII”). TheFDII.
For all years presented, the Company does not currently meet the revenue thresholdhas accounted for the Base Erosion and Anti-Abuse Tax (“BEAT”). Forimpact of the GILTI and FDII computations,new TCJA provisions, as well as any adjustments with respect to the Company recordedre-measurement of its deferred taxes if applicable, as part of its income tax expensebenefit using the currentcurrently available regulations and technical guidance on the interpretations of the TCJA. As required by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we have finalized our accounting analysis based on the guidance and regulations available as of December 31, 2018. We have recorded the impacts of the TCJA in our effective tax rate and haveThe Company has elected to treat taxes due on future U.S. inclusions in taxable income relatedaccount for GILTI as a period cost. The Company is not currently subject to GILTI using the period cost method.Base Erosion and Anti-Abuse Tax (“BEAT”) or Section 163(j) Interest Limitation. The Company will continue to monitor the forthcoming regulations and additional guidance of the GILTI, FDII, and BEAT provisions under the TCJA, which are complex and subject to continuing regulatory interpretation by the IRS.Internal Revenue Service (“IRS”).
A secondary driver of the income tax provision for(2) For the year ended December 31, 2018, and December 31, 2017 was the recognitionCompany released the valuation allowance recorded against deferred tax assets in certain foreign jurisdictions as it had achieved three years of excess tax benefits from stock-based compensation as a resultcumulative pre-tax income.
Table of the adoption of ASU 2016-09—Stock Compensation: ImprovementsContents
Etsy, Inc.
Notes to Employee Share-based Payment Accounting in the first quarter of 2017. As a result of this updated guidance, we recorded $12.0 million and 12.8 million of excess tax benefits, rather than additional paid-in capital, for the years ended December 31, 2018 and 2017.Consolidated Financial Statements
The primary driver of the income tax benefit for the year ended December 31, 2017 was the impact on deferred taxes from the reduction in the U.S. federal corporate tax rate beginning in 2018. On December 22, 2017, the TCJA was signed into law, which, among other items, reduced the corporate income tax rate from 35% to 21%. As a result, our deferred taxes and certain unrecognized tax benefits at December 31, 2017 have been revalued at the reduced 21% rate. The revaluation resulted in a benefit for income taxes of approximately $31.1 million for the year ended December 31, 2017.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):
| | | | | | | | | | | |
| | As of December 31, |
| | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 3,087 | | | $ | 19,599 | |
| Research and development credit carryforwards | 10,925 | | | 13,133 | |
| Lease liability | 17,259 | | | 18,666 | |
| Stock-based compensation expense | 9,616 | | | 7,642 | |
| Excess tax basis in intangible assets | 1,223 | | | 3,572 | |
| Accrued bonus | 8,592 | | | 4,065 | |
| Other deferred tax assets | 4,645 | | | 3,944 | |
| Total deferred tax assets | 55,347 | | | 70,621 | |
| Less: valuation allowance | 1,398 | | | 883 | |
| Total net deferred tax asset | 53,949 | | | 69,738 | |
| | | |
| Deferred tax liabilities: | | | |
| Excess book basis in intangible assets | (37,155) | | | (39,500) | |
| Restructuring liability | (23,985) | | | (29,635) | |
| Convertible debt | (30,632) | | | (22,839) | |
| Right-of-use asset | (16,092) | | | (17,596) | |
| Depreciation | (4,210) | | | (10,328) | |
| Other deferred tax liabilities | (241) | | | (80) | |
| Total deferred tax liabilities | (112,315) | | | (119,978) | |
| Net deferred tax liabilities | $ | (58,366) | | | $ | (50,240) | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 13,347 |
| | $ | 24,625 |
|
| Amortization of acquired intangibles | 12,109 |
| | 15,631 |
|
| Research and development credit carryforwards | 7,567 |
| | 3,597 |
|
| Stock-based compensation expense | 6,623 |
| | 3,776 |
|
| Accrued VAT liability | 43 |
| | 42 |
|
| Alternative minimum tax credit | 274 |
| | 274 |
|
| Allowance for doubtful accounts | 545 |
| | 384 |
|
| Deferred rent | 529 |
| | 573 |
|
| Accrued vacation | 744 |
| | 623 |
|
| Unrealized loss on foreign currency | — |
| | 527 |
|
| Other, net | 1,301 |
| | 300 |
|
| Total deferred tax assets | 43,082 |
| | 50,352 |
|
| Less valuation allowance | 1,673 |
| | 32,455 |
|
| Total net deferred tax asset | 41,409 |
| | 17,897 |
|
| Deferred tax liabilities: | | | |
| Depreciation | (6,933 | ) | | (6,850 | ) |
| Global corporate restructuring liability | (33,730 | ) | | (33,783 | ) |
| Convertible debt | (7,283 | ) | | — |
|
| Unrealized gain on foreign currency | (92 | ) | | — |
|
| Other liabilities | (362 | ) | | (891 | ) |
| Total deferred tax liabilities | (48,400 | ) | | (41,524 | ) |
| Net deferred tax liabilities | $ | (6,991 | ) | | $ | (23,627 | ) |
Etsy, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2020, the Company had the following operating loss and tax credit carryforwards available to offset taxable income in future years:
The 2017 deferred tax balances have been revised to correct the Company’s disclosures related to the adoption | | | | | | | | | | | |
| December 31, 2020 | | Expiration Period |
| U.S. Federal net operating loss carryforwards | $ | 6,103 | | | 2039-Unlimited |
| U.S. Federal credit carryforwards | 8,264 | | | 2036-2040 |
| U.S. State net operating loss carryforwards | 22,717 | | | 2027-2040 |
| U.S. State credit carryforwards | 3,494 | | | 2021-2040 |
| Non-U.S. net operating loss carryforwards | 376 | | | Unlimited |
Utilization of ASU 2016-16—Income Taxes: Intra-entity Transfers of Assets other than Inventory. The revision increases both the deferred tax assets and valuation allowance by $21.4 million resulting in no change to the net deferredoperating losses (“NOLs”) is dependent on generating sufficient taxable income from our operations in each of the respective jurisdictions to which the NOLs relate, while taking into account tax asset.filing methodologies and limitations and/or restrictions on our ability to use them. The Company’s U.S. federal NOLs were acquired as part of the acquisition of Reverb and are subject to limitations as promulgated under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 of the Code limits the amount of NOLs that the Company has concluded that this disclosure omission was not materialcan use on an annual basis to offset consolidated U.S. taxable income. The NOLs are also subject to review by relevant tax authorities in the 2017 Consolidated Financial Statements.
The Company anticipates utilizing federal and state income tax NOL carryforwards as a result of its 2018 activity.jurisdictions to which they relate. The NOL deferred tax asset balance additionally includes losses in certain foreign jurisdictions that are currently subject to a valuation allowance.
As of December 31, 2018 and 2017, the Company had $7.6 million and $3.6 million, respectively, of federal research and development tax credit carryforwards which will begin to expire in 2035 if unused.
The Company assesses the likelihood of its ability to realize the benefit of its deferred tax assets in each jurisdiction by evaluating all relevant positive and negative evidence at each reporting date. To the extent the Company determines that some or all of its deferred tax assets are not more likely than not to be realized, it establishes a valuation allowance.
For the year ended December 31, 2018, in part because in the current year, the Company achieved three years of cumulative pre-tax income in certain of its foreign jurisdictions, and management determined that sufficient positive evidence existsexisted as of December 31, 2018 to conclude that is isit was more likely than not that deferred tax assets of $23.4 million will be utilized in those jurisdictions. Additionally, the Company determined that the existence of a three-year cumulative loss incurred in certain other foreign jurisdictions, inclusive of 2018, constituted sufficiently strong negative evidence to warrant the maintenance of a valuation allowance. As a result, a valuation allowance of $1.7 million as of December 31, 2018 has been recorded against certain of the Company’s deferred tax assets. The amount of the deferred tax assets considered realizable is $41.4 million.
The following table summarizes the valuation allowance activity for the periods indicated (in thousands). It has been revised to reflect the Company’s adoption of ASU 2016-16—Income Taxes: Intra-entity Transfers of Assets other than Inventory:
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Balance as of the beginning of period | $ | 32,455 |
| | $ | 13,839 |
| | $ | 9,540 |
| Balance as of the beginning of period | $ | 883 | | | $ | 1,673 | | | $ | 32,455 | |
| Additions charged to expense | — |
| | 16,743 |
| | 4,886 |
| Additions charged to expense | 506 | | | 504 | | | 0 | |
| Deletions credited to expense | (28,733 | ) | | — |
| | — |
| Deletions credited to expense | (101) | | | (4) | | | (28,733) | |
| Currency translation | (2,049 | ) | | 1,873 |
| | (587 | ) | |
| Currency translation and other balance sheet activity | | Currency translation and other balance sheet activity | 110 | | | (1,290) | | | (2,049) | |
| Balance as of the end of period | $ | 1,673 |
| | $ | 32,455 |
| | $ | 13,839 |
| Balance as of the end of period | $ | 1,398 | | | $ | 883 | | | $ | 1,673 | |
The Company has not recorded deferred income taxes and withholding taxes with respect
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Etsy, Inc.
Notes to undistributed earnings from its non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. The amount of undistributed earnings of non-U.S. subsidiaries at December 31, 2018, as well as the related deferred incomeConsolidated Financial Statements
Unrecognized tax if any, is not material.benefits
The following table summarizes the unrecognized tax benefit activity for the periods indicated (in thousands):
| | | | As of December 31, | | As of December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Balance as of the beginning of period | $ | 17,013 |
| | $ | 23,574 |
| | $ | 22,229 |
| Balance as of the beginning of period | $ | 19,933 | | | $ | 18,819 | | | $ | 17,013 | |
| Additions based on tax positions related to the current year | 921 |
| | 732 |
| | 1,071 |
| Additions based on tax positions related to the current year | 2,507 | | | 1,847 | | | 921 | |
| Additions for tax positions of prior years | 946 |
| | 118 |
| | 274 |
| Additions for tax positions of prior years | 1,576 | | | 3,620 | | | 946 | |
| Reductions for tax provisions of prior years | (61 | ) | | (7,411 | ) | | — |
| Reductions for tax provisions of prior years | (278) | | | (2,423) | | | (61) | |
| Lapse of statute of limitation | | Lapse of statute of limitation | 0 | | | (184) | | | 0 | |
| Additions recorded through goodwill as part of business combination | | Additions recorded through goodwill as part of business combination | 0 | | | 1,334 | | | 0 | |
| Settlements | | Settlements | 0 | | | (3,080) | | | 0 | |
| Balance as of the end of period | $ | 18,819 |
| | $ | 17,013 |
| | $ | 23,574 |
| Balance as of the end of period | $ | 23,738 | | | $ | 19,933 | | | $ | 18,819 | |
The amount of unrecognized tax benefits included on the Consolidated Balance Sheets as of December 31, 2020, 2019, and 2018 2017, and 2016 are $18.8$23.7 million, $17.0$19.9 million, and $23.6$18.8 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $18.8$23.7 million at December 31, 2018.2020.
Etsy, Inc.
Notesunrecognized tax benefits relating to Consolidated Financial Statements
We recognize interestthe Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or penalties related tothe expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain and a reasonable estimate of the range of gross unrecognized tax positions in income tax expense. In 2018, $0.3 million was included in tax expense for interest and penalties. The amount ofbenefits, excluding interest and penalties, accrued as of December 31, 2018 and 2017 was approximately $0.5 million and $0.2 million, respectively.
In January 2015,that could potentially be reduced during the Company implemented an updated global corporate structure to more closely align with its global operations and future expansion plans outside of the United States. The new structure changed how the Company uses its intellectual property and implemented certain intercompany arrangements. The Company believes this may eventually result in a reduction in its overall effective tax rate and other operational efficiencies. The revised structure resulted in the setup of a deferred tax liability in the amount of $66.0 million on the taxable gain created in the transaction. Concurrently, the Company recorded an asset of $66.0 million for the deferred tax charge representing the future income tax on the gain, which would have been amortized into income tax expense through 2019. During the first quarter of 2017, the Company adopted ASU 2016-16—Income Taxes: Intra-entity Transfers of Assets other than Inventory, resulting in a cumulative adjustment to retained earnings for the unamortized balance of the deferred tax charge at December 31, 2016.next 12 months cannot be made.
The Company is subject to taxation in the United States, New York, and various other states and foreign jurisdictions. As of December 31, 2018,2020, tax year 2014 and later remain open to examination. The Company is under examination, or may be subject to examination, by the IRS for calendar year 2014 and thereafter. These examinations may result in proposed adjustments to the Company’s income tax liability or tax attributes with respect to years under examination as well as subsequent periods.
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.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Note 4—Net Income (Loss) Per Share
For the 2020 Notes, the Company used the treasury stock method for the year ended December 31, 2020 when calculating earnings per share, since the Company expects to settle the outstanding principal in cash. For the 2019 Notes, the Company used the if-converted method for the year ended December 31, 2020 and used the treasury stock method for the year ended December 31, 2019 when calculating earnings per share. For the 2018 Notes, the Company used the if-converted method for the years ended December 31, 2020 and 2019 and used the treasury stock method for the year ended December 31, 2018 when calculating earnings per share.
The 2020 Notes were anti-dilutive for the year ended December 31, 2020. The 2019 Notes were dilutive for the year ended December 31, 2020. During the year ended December 31, 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 13—Debt” for more information.
The following table presents the calculation of basic and diluted net income (loss) per share for periods presented (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | |
| Net income | $ | 349,246 | | | $ | 95,894 | | | $ | 77,491 | |
| Net income allocated to participating securities under the two-class method | 0 | | | 0 | | | (37) | |
| Net income attributable to common stockholders—basic | 349,246 | | | 95,894 | | | 77,454 | |
| Add back interest expense, net of tax attributable to assumed conversion of convertible senior notes | 17,880 | | | 0 | | | 0 | |
| Dilutive effect of net income allocated to participating securities under the two-class method | 0 | | | 0 | | | 37 | |
| | | | | |
| Net income attributable to common stockholders—diluted | $ | 367,126 | | | $ | 95,894 | | | $ | 77,491 | |
| | | | | |
| | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding—basic (1) | 121,251,588 | | | 119,665,248 | | | 120,146,076 | |
| Dilutive effect of assumed conversion of options to purchase common stock | 4,492,550 | | | 4,516,413 | | | 4,238,622 | |
| Dilutive effect of assumed conversion of restricted stock units | 2,046,981 | | | 1,521,719 | | | 1,721,658 | |
| Dilutive effect of assumed conversion of convertible senior notes | 8,623,473 | | | 0 | | | 900,580 | |
| Diluted effective of assumed conversion of restricted stock from acquisition | 0 | | | 16,693 | | | 77,849 | |
| Weighted average common shares outstanding—diluted | 136,414,592 | | | 125,720,073 | | | 127,084,785 | |
| | | | | |
| Net income per share attributable to common stockholders—basic | $ | 2.88 | | | $ | 0.80 | | | $ | 0.64 | |
| Net income per share attributable to common stockholders—diluted | $ | 2.69 | | | $ | 0.76 | | | $ | 0.61 | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Numerator: | | | | | |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) |
| Net income (loss) allocated to participating securities under the two-class method | (37 | ) | | (80 | ) | | — |
|
| Net income (loss) applicable to common stockholders—basic | 77,454 |
| | 81,720 |
| | (29,901 | ) |
| Dilutive effect of net income allocated to participating securities under the two-class method | 37 |
| | 80 |
| | — |
|
| Change in fair value of liability classified restricted stock | — |
| | 771 |
| | — |
|
| Net income (loss) applicable to common stockholders—diluted | $ | 77,491 |
| | $ | 82,571 |
| | $ | (29,901 | ) |
| | | | | | |
| | | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding—basic (1) | 120,146,076 |
| | 118,538,687 |
| | 113,562,738 |
|
| Dilutive effect of assumed conversion of options to purchase common stock | 4,238,622 |
| | 2,498,448 |
| | — |
|
| Dilutive effect of assumed conversion of restricted stock units | 1,721,658 |
| | 1,177,799 |
| | — |
|
| Dilutive effect of assumed conversion of convertible debt | 900,580 |
| | — |
| | — |
|
| Diluted effective of assumed conversion of restricted stock from acquisition | 77,849 |
| | 52,739 |
| | — |
|
| Weighted average common shares outstanding—diluted | 127,084,785 |
| | 122,267,673 |
| | 113,562,738 |
|
| | | | | |
| Net income (loss) per share applicable to common stockholders—basic | $ | 0.64 |
| | $ | 0.69 |
| | $ | (0.26 | ) |
| Net income (loss) per share applicable to common stockholders—diluted | $ | 0.61 |
| | $ | 0.68 |
| | $ | (0.26 | ) |
| |
(1) | (1)57,482 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the year ended December 31, 2018. |
Etsy, Inc.
Notes to Consolidated Financial Statements
unvested stock are considered participating securities and are excluded from basic shares outstanding for the year ended December 31, 2018.
The following potential common shares were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Stock options | 3,711 | | | 317,401 | | | 475,238 | |
| Restricted stock units | 71 | | | 706,234 | | | 136,998 | |
| | | | | |
| Convertible senior notes | 8,625,771 | | | 9,511,993 | | | 0 | |
| Total anti-dilutive securities | 8,629,553 | | | 10,535,628 | | | 612,236 | |
|
| | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Stock options | 475,238 |
| | 4,902,664 |
| | 10,041,403 |
|
| Restricted stock units | 136,998 |
| | 435,358 |
| | 2,043,544 |
|
| Warrants | — |
| | — |
| | 33,447 |
|
| Total anti-dilutive securities | 612,236 |
| | 5,338,022 |
| | 12,118,394 |
|
Note 5—Business Combinations
On September 19, 2016, the Company acquired all of the outstanding common stock of Blackbird Technologies Inc (“Blackbird”), a machine learning company, for $32.5 million. The Company completed this acquisition to improve the quality and relevance of search on Etsy.com. Total consideration for the acquisition was approximately $15.0 million, consisting of $8.1 million in cash and 513,304 shares of the Company’s common stock with a fair value of $6.9 million on the acquisition date. Additionally, the Company issued 184,230 shares of restricted stock and restricted stock units (“RSUs”) on the acquisition date with a fair value of $2.5 million which are tied to continuous service with the Company as an employee and are being accounted for as post-combination stock-based compensation expense over up to a three-year vesting period. The Company agreed to pay up to an additional $8.8 million in cash and issue an aggregate of up to 460,575 shares of RSUs post-close with a fair value of $6.2 million, both of which are also tied to continuous service with the Company as an employee and are being accounted for as post-combination stock-based and other compensation expense over up to a three-year vesting period. A portion of the consideration and post-combination compensation is subject to indemnification provisions.
The below table summarizes the components of the Blackbird purchase price and allocation of the purchase price at fair value (in thousands):
|
| | | |
| Cash paid | $ | 8,050 |
|
| Common shares | 6,966 |
|
| Total purchase consideration | $ | 15,016 |
|
| Net working capital | $ | 81 |
|
| Developed technology | 7,200 |
|
| Customer relationships | 1,250 |
|
| Goodwill | 8,660 |
|
| Deferred tax liability | (2,175 | ) |
| Net assets acquired | $ | 15,016 |
|
Included in working capital is approximately $0.2 million of cash acquired.
The amounts allocated to developed technology and customer relationships (the acquired intangible assets) total $8.5 million. The acquired identifiable intangible assets are being amortized on a straight-line basis approximating the pattern in which the assets are utilized. Acquired technology intangible assets will amortize over three years and acquired customer relationships were amortized over six months from the acquisition date. The fair value assigned to developed technology was determined primarily by using the cost approach, which estimates the cost to reproduce the asset, adjusted for loss due to functional and economic obsolescence. The fair value of the Company’s customer relationships was determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. Goodwill recorded in connection with the Blackbird acquisition is primarily attributed to the value of the acquired workforce and their future contribution to Etsy. None of the resulting goodwill is deductible for tax purposes.
The Company incurred approximately $0.6 million in acquisition-related costs in the Blackbird acquisition in the year ended December 31, 2016, included in general and administrative expenses. This acquisition contributed $2.4 million to the Company’s consolidated net loss in the year ended December 31, 2016.
Etsy, Inc.
Notes to Consolidated Financial Statements
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 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.
Revenue and net loss of Reverb from August 15, 2019 (the date of acquisition) through December 31, 2019 were $19.1 million and $9.9 million, respectively. Acquisition-related expenses are expensed as incurred and were recorded in general and administrative expenses. They were $1.8 million for the year ended December 31, 2020, and they primarily related to non-recurring employee-related costs associated with the acquisition. Acquisition-related expenses were $3.9 million for the year ended December 31, 2019, and they primarily related to advisory, legal, valuation and other professional fees.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Unaudited Supplemental Pro Forma Information
The following unaudited pro forma financialsummary presents consolidated information presents the combined operating results of the Company and Blackbird as if the acquisitionbusiness combination had occurred on January 1, 2015. 2018 (in thousands):
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2019 | | 2018 |
| Revenue | | | | | $ | 847,154 | | | $ | 639,743 | |
| Net income | | | | | 88,595 | | | 53,587 | |
The unaudited pro forma financial information includes the accounting effects ofadjustments that are directly attributable to the business combination includingand are factually supportable. The pro forma adjustments to theinclude incremental amortization of intangible and developed technology assets, stock-basedbased on final values of each asset and other compensationacquisition-related expenses and professional fees associated withare tax-effected. For the acquisition. The unauditedyear ended December 31, 2019, the pro forma financial information doesexcludes $6.1 million of non-recurring acquisition-related expenses. For the year ended December 31, 2018, the pro forma financial information includes $2.0 million of non-recurring acquisition-related expenses. These pro forma results are illustrative only and not necessarily reflectindicative of the actual results of operations that would have been achieved nor is it necessarilyare they indicative of our future consolidated results.results of operations.
The unaudited pro forma financial information is presented in the table below for the year ended December 31, 2016 (in thousands except per share amounts):
|
| | | |
| | Year Ended December 31, |
| | 2016 |
| Revenue | $ | 365,786 |
|
| Net loss | (35,401 | ) |
| Basic and diluted net loss per share | (0.31 | ) |
Note 6—Goodwill and Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill for the periods indicated (in thousands):
| | | | Year Ended
December 31, | | Year Ended
December 31, |
| | 2018 | | 2017 | | 2020 | | 2019 |
| Balance as of the beginning of the period | $ | 38,541 |
| | $ | 35,657 |
| Balance as of the beginning of the period | $ | 138,731 | | | $ | 37,482 | |
| Business combination | | Business combination | 0 | | | 101,703 | |
| Foreign currency translation adjustments | (1,059 | ) | | 2,884 |
| Foreign currency translation adjustments | 2,079 | | | (454) | |
| Balance as of the end of the period | $ | 37,482 |
| | $ | 38,541 |
| Balance as of the end of the period | $ | 140,810 | | | $ | 138,731 | |
The Company completed a qualitative analysis for the Etsy and Reverb reporting units during the fourth quarter of 2020. Based on the qualitative analyses performed, we determined that it was not more likely than not that goodwill was impaired and therefore determined that a quantitative analysis was not required. The Company did not0t recognize any goodwill impairments during the years ended December 31, 2018, 2017,2020, 2019, and 2016.
2018.
At December 31, 20182020 and 2017,2019, the gross book value and accumulated amortization of intangible assets were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 31, 2019 |
| | Gross book
value | | Accumulated
amortization | | | | Net book
value | | Gross book
value | | Accumulated
amortization | | | | Net book
value |
| Customer relationships | $ | 93,500 | | | $ | (8,571) | | | | | $ | 84,929 | | | $ | 93,500 | | | $ | (2,338) | | | | | $ | 91,162 | |
| Trademark | 79,400 | | | (7,278) | | | | | 72,122 | | | 79,400 | | | (1,985) | | | | | 77,415 | |
| Referral agreement | 39,042 | | | (9,784) | | | | | 29,258 | | | 35,715 | | | (5,361) | | | | | 30,354 | |
| Technology | 0 | | | 0 | | | | | 0 | | | 7,200 | | | (7,200) | | | | | 0 | |
| Patent licenses | 1,212 | | | (72) | | | | | 1,140 | | | 332 | | | (27) | | | | | 305 | |
| Intangible assets, net | $ | 213,154 | | | $ | (25,705) | | | | | $ | 187,449 | | | $ | 216,147 | | | $ | (16,911) | | | | | $ | 199,236 | |
The Company acquired intangible assets valued at $172.9 million in the Reverb acquisition on August 15, 2019. As part of the acquisition, the Company recorded acquired intangible assets for customer relationships and trademark. These are both amortized on a straight-line basis over a period of 15 years. See “Note 5—Business Combinations” for additional information on the acquisition of Reverb.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 | | As of December 31, 2017 |
| | Gross book
value | | Accumulated
amortization | | Net book
value | | Gross book
value | | Accumulated
amortization | | Net book
value |
| Technology | $ | 7,200 |
| | $ | (5,500 | ) | | $ | 1,700 |
| | $ | 7,200 |
| | $ | (3,100 | ) | | $ | 4,100 |
|
| Referral agreement | 34,595 |
| | (1,874 | ) | | 32,721 |
| | — |
| | — |
| | — |
|
| Patent licenses | 172 |
| | (4 | ) | | 168 |
| | — |
| | — |
| | — |
|
| Intangible assets, net | $ | 41,967 |
| | $ | (7,378 | ) | | $ | 34,589 |
| | $ | 7,200 |
| | $ | (3,100 | ) | | $ | 4,100 |
|
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Etsy, Inc.
Notes to Consolidated Financial Statements
On June 15, 2018, the Company entered into a referral agreement with DaWanda GmbH (“DaWanda”), a privately held Germany-based marketplace for gifts and handmade items. As part of this agreement, DaWanda agreed to encourage its community of buyers and sellers to migrate to the Etsy platform. DaWanda wound down its operations and shut down its site on August 30, 2018. Etsy did not acquire any of DaWanda’s assets, liabilities, or employees as part of this agreement. The Company accounted for the agreement as an asset acquisition and the referral agreement intangible asset will beis amortized on a straight-line basis over a period of 10 years.
The Company acquiredAmortization expense of intangible assets valued at $8.5 million in the Blackbird acquisition on September 19, 2016.
Amortization expense for the years ended December 31, 2020, 2019, and 2018 2017, and 2016 was $4.3$15.2 million, $3.4$9.6 million, and $3.3$4.3 million, respectively.
The Company did not0t recognize any intangible asset impairment losses in the years ended December 31, 20182020, 2019, and 2017. The Company recognized a $0.6 million intangible asset impairment loss during the year ended December 31, 2016, included in
Etsy, Inc.
Notes to Consolidated Financial Statements
asset impairment charges. During the fourth quarter of 2016, the Company determined that there were indicators present that the carrying amount of intangible assets acquired in the ALM and Jarvis Labs, Inc. (“Grand St.”) acquisitions may not be recoverable. The Company prepared an undiscounted cash flow analysis and determined that intangible assets for customer relationships and trademarks acquired in the ALM and Grand St. acquisitions were not recoverable. The Company used the income approach to determine the fair value of intangible assets and concluded that these assets were fully impaired.2018.
Based on amounts recorded at December 31, 2018,2020, the Company estimates intangible assetfuture amortization expense in each of the years ending December 31intangible assets as follows (in thousands):
| | | | | |
| 2021 | $ | 15,593 | |
| 2022 | 15,593 | |
| 2023 | 15,593 | |
| 2024 | 15,593 | |
| 2025 | 15,593 | |
| Thereafter | 109,484 | |
| Total amortization expense | $ | 187,449 | |
|
| | | |
| 2019 | $ | 5,178 |
|
| 2020 | 3,477 |
|
| 2021 | 3,477 |
|
| 2022 | 3,477 |
|
| 2023 | 3,477 |
|
| Thereafter | 15,503 |
|
| Total amortization expense | $ | 34,589 |
|
Note 7—Segment and Geographic Information
The Company has determined it operateshas 2 operating segments, Etsy and Reverb, which qualify for aggregation as one operating and1 reportable segment, for purposes of allocating resources and evaluating financial performance.
Revenue by country is based on the billing address of the seller. The following table summarizes revenue income (loss) before income taxes and net income (loss) by geographic area (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| United States | $ | 1,150,725 | | | $ | 550,257 | | | $ | 422,523 | |
| United Kingdom | 195,827 | | | 72,471 | | | 51,385 | |
| Other international | 379,073 | | | 195,651 | | | 129,785 | |
| Revenue | $ | 1,725,625 | | | $ | 818,379 | | | $ | 603,693 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| United States | $ | 425,841 |
| | $ | 317,755 |
| | $ | 276,537 |
|
| International | 177,852 |
| | 123,476 |
| | 88,430 |
|
| Revenue | $ | 603,693 |
| | $ | 441,231 |
| | $ | 364,967 |
|
| | | | | | |
| United States (1) | $ | 10,778 |
| | $ | (43,014 | ) | | $ | 9,123 |
|
| International (2) | 44,300 |
| | 75,279 |
| | (11,999 | ) |
| Income (loss) before income taxes | $ | 55,078 |
| | $ | 32,265 |
| | $ | (2,876 | ) |
| | | | | | |
| United States (3) | $ | 10,493 |
| | $ | 7,029 |
| | $ | (17,345 | ) |
| International (2) | 66,998 |
| | 74,771 |
| | (12,556 | ) |
| Net income (loss) | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) |
| |
(1) | The United States loss before income taxes in the year ended December 31, 2017 was primarily driven by a foreign exchange loss, interest associated with the build-to-suit lease accounting related to our corporate headquarters, restructuring and other exit costs, and asset impairment charges. See “Note 17—Restructuring and Other Exit Costs (Income)” and “Note 6—Goodwill and Intangible Assets” for additional information on restructuring and other exit costs and asset impairment charges.
|
| |
(2) | The international loss before income taxes and net loss in the year ended December 31, 2016 was primarily driven by a foreign exchange loss related to the U.S. Dollar to Euro exchange rate fluctuations on the Company's intercompany and other non-functional currency balances. |
| |
(3) | The United States net loss in the year ended December 31, 2016 was primarily driven by an income tax provision recorded in the period, mainly attributable to tax expense related to the updated corporate structure. See “Note 3—Income Taxes” for additional information.
|
NoWith the exception of the United Kingdom, no individual international country’s revenue exceeded 10% of total revenue. All significant tangible long-lived assets are located in the United States.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 8—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 SheetSheets 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 liabilitiesfinancial instruments where values are derived from techniques in which one or more significant inputs are unobservable.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of the dates indicated (in thousands):
| | | | As of December 31, 2018 | | As of December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Asset | | | | | | | | Asset | | | | | | | |
| Cash equivalents: | | | | | | | | Cash equivalents: | |
| Certificate of deposit | | Certificate of deposit | $ | 0 | | | $ | 6,000 | | | $ | 0 | | | $ | 6,000 | |
| Commercial paper | $ | — |
| | $ | 7,775 |
| | $ | — |
| | $ | 7,775 |
| Commercial paper | 0 | | | 10,498 | | | 0 | | | 10,498 | |
| | Money market funds | 244,856 |
| | — |
| | — |
| | 244,856 |
| Money market funds | 881,465 | | | 0 | | | 0 | | | 881,465 | |
| | 244,856 |
| | 7,775 |
| | — |
| | 252,631 |
| |
| | | 881,465 | | | 16,498 | | | 0 | | | 897,963 | |
| Short-term investments: | | | | | | | | Short-term investments: | | | | | | | |
| Certificate of deposit | | Certificate of deposit | 0 | | | 6,751 | | | 0 | | | 6,751 | |
| Commercial paper | — |
| | 147,860 |
| | — |
| | 147,860 |
| Commercial paper | 0 | | | 4,000 | | | 0 | | | 4,000 | |
| Corporate bonds | — |
| | 46,801 |
| | — |
| | 46,801 |
| Corporate bonds | 0 | | | 38,279 | | | 0 | | | 38,279 | |
| | U.S. Government and agency securities | 62,641 |
| | — |
| | — |
| | 62,641 |
| U.S. Government and agency securities | 376,089 | | | 0 | | | 0 | | | 376,089 | |
| | 62,641 |
| | 194,661 |
| | — |
| | 257,302 |
| | 376,089 | | | 49,030 | | | 0 | | | 425,119 | |
| Funds receivable and seller accounts: | | | | | | | | Funds receivable and seller accounts: | | | | | | | |
| Money market funds | 9,229 |
| | — |
| | — |
| | 9,229 |
| Money market funds | 39,178 | | | 0 | | | 0 | | | 39,178 | |
| | 9,229 |
| | — |
| | — |
| | 9,229 |
| | 39,178 | | | 0 | | | 0 | | | 39,178 | |
| Long-term investments: | | Long-term investments: | | | | | | | |
| | $ | 316,726 |
| | $ | 202,436 |
| | $ | — |
| | $ | 519,162 |
| |
| | Corporate bonds | | Corporate bonds | 0 | | | 4,457 | | | 0 | | | 4,457 | |
| | U.S. Government and agency securities | | U.S. Government and agency securities | 34,637 | | | 0 | | | 0 | | | 34,637 | |
| | | 34,637 | | | 4,457 | | | 0 | | | 39,094 | |
| | | | $ | 1,331,369 | | | $ | 69,985 | | | $ | 0 | | | $ | 1,401,354 | |
|
Etsy, Inc.
Notes to Consolidated Financial Statements
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Asset | | | | | | | | Asset | | | | | | | |
| Cash equivalents: | | | | | | | | Cash equivalents: | |
| Certificate of deposit | | Certificate of deposit | $ | 0 | | | $ | 2,959 | | | $ | 0 | | | $ | 2,959 | |
| Commercial paper | $ | — |
| | $ | 11,290 |
| | $ | — |
| | $ | 11,290 |
| Commercial paper | 0 | | | 5,794 | | | 0 | | | 5,794 | |
| | Money market funds | 204,867 |
| | — |
| | — |
| | 204,867 |
| Money market funds | 228,859 | | | 0 | | | 0 | | | 228,859 | |
| U.S. Government and agency securities | 24,989 |
| | — |
| | — |
| | 24,989 |
| |
| | | 229,856 |
| | 11,290 |
| | — |
| | 241,146 |
| | 228,859 | | | 8,753 | | | 0 | | | 237,612 | |
| Short-term investments: | | | | | | | | Short-term investments: | | | | | | | |
| Certificate of deposit | | Certificate of deposit | 0 | | | 26,132 | | | 0 | | | 26,132 | |
| Commercial paper | — |
| | 2,998 |
| | — |
| | 2,998 |
| Commercial paper | 0 | | | 29,320 | | | 0 | | | 29,320 | |
| Corporate bonds | — |
| | 12,748 |
| | — |
| | 12,748 |
| Corporate bonds | 0 | | | 114,202 | | | 0 | | | 114,202 | |
| | U.S. Government and agency securities | 9,362 |
| | — |
| | — |
| | 9,362 |
| U.S. Government and agency securities | 204,305 | | | 0 | | | 0 | | | 204,305 | |
| | 9,362 |
| | 15,746 |
| | — |
| | 25,108 |
| | 204,305 | | | 169,654 | | | 0 | | | 373,959 | |
| Funds receivable and seller accounts: | | | | | | | | Funds receivable and seller accounts: | | | | | | | |
| Money market funds | 14,144 |
| | — |
| | — |
| | 14,144 |
| Money market funds | 18,168 | | | 0 | | | 0 | | | 18,168 | |
| | 14,144 |
| | — |
| | — |
| | 14,144 |
| | 18,168 | | | 0 | | | 0 | | | 18,168 | |
| Long-term investments: | | Long-term investments: | | | | | | | |
| Certificate of deposit | | Certificate of deposit | 0 | | | 4,729 | | | 0 | | | 4,729 | |
| | $ | 253,362 |
| | $ | 27,036 |
| | $ | — |
| | $ | 280,398 |
| |
| Corporate bonds | | Corporate bonds | 0 | | | 38,563 | | | 0 | | | 38,563 | |
| | U.S. Government and agency securities | | U.S. Government and agency securities | 46,051 | | | 0 | | | 0 | | | 46,051 | |
| | | 46,051 | | | 43,292 | | | 0 | | | 89,343 | |
| | | $ | 497,383 | | | $ | 221,699 | | | $ | 0 | | | $ | 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 certificates of deposit, commercial paper, and corporate bonds, which are valued based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
The Company did not have any Level 3 instruments historically included post-combination compensation classified as a liability in connection with the acquisition of ALM. December 31, 2020 and December 31, 2019.
The post-combination compensation was classified as a liability due to its affiliation with a related put option, which expired upon vesting of the underlying considerationCompany evaluates fair value for each individual security in the second quarter of 2017, and its fair value was previously determined based on the fair value of the Company’s common stock at the period-end reporting date, with adjustments included in general and administrative expenses.investment portfolio.
See “Note“Note 9—Marketable Securities”Securities” for additional information on the Company’s marketable securities measured at fair value.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
Disclosure of Fair Values
OurThe Company’s financial instruments that are not remeasured at fair value in the Consolidated Balance Sheets include the Notes, (see “Notesee “Note 13—DebtDebt.”). The Company estimates the fair value of the liability component of the Notes through consideration ofinputs that are observable in the market or that could be derived from observable market data, corroborated with quoted market prices of similar instruments, classified as Level 2 as described above. The following table presents the estimated fair value and the carrying value of the liability component of the Notes as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | | As of December 31, 2019 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| 2020 Notes | $ | 511,733 | | | $ | 536,126 | | | $ | 0 | | | $ | 0 | |
| 2019 Notes | 514,035 | | | 566,399 | | | 493,409 | | | 522,243 | |
| 2018 Notes (1) | 39,166 | | | 42,157 | | | 291,717 | | | 310,322 | |
| $ | 1,064,934 | | | $ | 1,144,682 | | | $ | 785,126 | | | $ | 832,565 | |
(1)The decrease in fair value of the 2018 Notes was $279.1 million asis substantially due to the partial repurchase of December 31, 2018.the 2018 Notes in August 2020 (see “Note 13—Debt”).
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.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 9—Marketable Securities
Short-termShort- 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 |
| December 31, 2020 | | | | | | | |
| Cash equivalents: | | | | | | | |
| Certificate of deposit | $ | 6,000 | | | $ | 0 | | | $ | 0 | | | $ | 6,000 | |
| Commercial paper | 10,498 | | | 0 | | | 0 | | | 10,498 | |
| | | | | | | |
| 16,498 | | | 0 | | | 0 | | | 16,498 | |
| Short-term investments: | | | | | | | |
| Certificate of deposit | 6,746 | | | 0 | | | 5 | | | 6,751 | |
| Commercial paper | 3,996 | | | 0 | | | 4 | | | 4,000 | |
| Corporate bonds | 38,172 | | | 0 | | | 107 | | | 38,279 | |
| U.S. Government and agency securities | 375,814 | | | (3) | | | 278 | | | 376,089 | |
| 424,728 | | | (3) | | | 394 | | | 425,119 | |
| Long-term investments: | | | | | | | |
| | | | | | | |
| Corporate bonds | 4,460 | | | (7) | | | 4 | | | 4,457 | |
| U.S. Government and agency securities | 34,557 | | | 0 | | | 80 | | | 34,637 | |
| 39,017 | | | (7) | | | 84 | | | 39,094 | |
| $ | 480,243 | | | $ | (10) | | | $ | 478 | | | $ | 480,711 | |
| December 31, 2019 | | | | | | | |
| Cash equivalents: | | | | | | | |
| Certificate of deposit | $ | 2,958 | | | $ | 0 | | | $ | 1 | | | $ | 2,959 | |
| Commercial paper | 5,794 | | | 0 | | | 0 | | | 5,794 | |
| | | | | | | |
| 8,752 | | | 0 | | | 1 | | | 8,753 | |
| Short-term investments: | | | | | | | |
| Certificate of deposit | 26,129 | | | (3) | | | 6 | | | 26,132 | |
| Commercial paper | 29,319 | | | (1) | | | 2 | | | 29,320 | |
| 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 | | | 0 | | | 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 | |
|
| | | | | | | | | | | | | | | |
| | Cost | | Gross
Unrealized
Holding Loss | | Gross
Unrealized
Holding Gain | | Fair Value |
| December 31, 2018 | | | | | | | |
| Cash equivalents: | | | | | | | |
| Commercial paper | $ | 7,775 |
| | $ | — |
| | $ | — |
| | $ | 7,775 |
|
| | 7,775 |
| | — |
| | — |
| | 7,775 |
|
| Short-term investments: | | | | | | | |
| Commercial paper | 147,860 |
| | — |
| | — |
| | 147,860 |
|
| Corporate bonds | 46,836 |
| | (35 | ) | | — |
| | 46,801 |
|
| U.S. Government and agency securities | 62,638 |
| | (9 | ) | | 12 |
| | 62,641 |
|
| | 257,334 |
| | (44 | ) | | 12 |
| | 257,302 |
|
| | $ | 265,109 |
| | $ | (44 | ) | | $ | 12 |
| | $ | 265,077 |
|
| December 31, 2017 | | | | | | | |
| Cash equivalents: | | | | | | | |
| Commercial paper | $ | 11,290 |
| | $ | — |
| | $ | — |
| | $ | 11,290 |
|
| U.S. Government and agency securities | 24,990 |
| | (1 | ) | | — |
| | 24,989 |
|
| | 36,280 |
|
| (1 | ) |
| — |
|
| 36,279 |
|
| Short-term investments: | | | | | | | |
| Commercial paper | 2,998 |
| | — |
| | — |
| | 2,998 |
|
| Corporate bonds | 12,754 |
| | (6 | ) | | — |
| | 12,748 |
|
| U.S. Government and agency securities | 9,352 |
| | (1 | ) | | 11 |
| | 9,362 |
|
| | 25,104 |
| | (7 | ) | | 11 |
| | 25,108 |
|
| | $ | 61,384 |
| | $ | (8 | ) | | $ | 11 |
| | $ | 61,387 |
|
The Company’sAll investments in marketable securities consist primarilyan unrealized loss position have been in an unrealized loss position for less than 12 months as of investments debt securities, including fixed-income funds and U.S. Government and agency securities. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability, and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. The Company evaluates fair values for each individual security in the investment portfolio.
December 31, 2020. See “Note“Note 8—Fair Value Measurements”Measurements” for additional information on the Company’s marketable securities measured at fair value.
Note 10—Warrants
As of December 31, 2018, 2017, and 2016, the Company did not have any outstanding warrants.
In May 2016, the Company issued 80,011 shares of common stock upon the net exercise of warrants to purchase 97,931 shares of common stock with a weighted-average exercise price of $1.62 per share and a weighted-average fair market value of common stock at the date of exercise of $8.88. The warrant holders exercised this warrant in a cashless transaction and 17,920 shares were forfeited to the Company as payment of the exercise price.
The Company did not record any unrealized gains or losses from the remeasurement of the warrants to fair value in the years ended December 31, 2018, 2017, and 2016.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 11—10—Property and Equipment
Property and equipment consisted of the following as of the dates indicated (in thousands):
| | | | | | As of
December 31, | | | | As of December 31, |
| | Estimated useful lives | | 2018 | | 2017 | | Estimated useful lives | | 2020 | | 2019 |
| Computer equipment | 3 years | | $ | 36,670 |
| | $ | 35,587 |
| Computer equipment | 3 years | | $ | 32,686 | | | $ | 35,190 | |
| Furniture and equipment | 2 - 4 years | | 6,574 |
| | 6,194 |
| Furniture and equipment | 2 - 4 years | | 7,468 | | | 7,999 | |
| Software | 1 - 3 years | | — |
| | 908 |
| |
| | Leasehold improvements | Shorter of life of asset or lease term | | 10,731 |
| | 10,929 |
| Leasehold improvements | Shorter of life of asset or lease term | | 50,765 | | | 48,688 | |
| Construction in progress | Not applicable | | 551 |
| | — |
| Construction in progress | Not applicable | | 633 | | | 206 | |
| Building | 25 years | | 81,892 |
| | 81,892 |
| Building | 10 years | | 66,650 | | | 66,650 | |
| Website development and internal-use software | Shorter of life of asset or contract term | | 69,201 |
| | 48,333 |
| Website development and internal-use software | 3 - 5 years | | 113,064 | | | 106,215 | |
| | | 205,619 |
| | 183,843 |
| | 271,266 | | | 264,948 | |
| | | | | | |
| Less: Accumulated depreciation and amortization | | 85,440 |
| | 66,226 |
| Less: Accumulated depreciation and amortization | | 158,771 | | | 120,084 | |
| | | $ | 120,179 |
| | $ | 117,617 |
| | $ | 112,495 | | | $ | 144,864 | |
Depreciation and amortization expense on property and equipment was $22.4$43.0 million, $23.8$38.4 million, and $19.2$22.4 million for the years ended December 31, 2020, 2019, and 2018, 2017, and 2016, respectively, which includes amortization expense for equipment acquired under capital leases of $5.9 million, $7.7 million, and $6.3 million for the years ended December 31, 2018, 2017, and 2016, respectively. The gross balance of leased equipment as of December 31, 2018 and 2017 was $29.7 million and $27.7 million, respectively. The related accumulated amortization of equipment under capital leases was $24.4 million and $18.6 million at December 31, 2018 and 2017, respectively.
The following table summarizes capitalized website development and internal-use software activities during the periods indicated (in thousands):
|
| | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 |
| Balance as of the beginning of the period | $ | 48,333 |
| | $ | 43,294 |
|
| Additions to website development, excluding stock-based compensation | 19,816 |
| | 10,028 |
|
| Additions to website development—stock-based compensation | 2,252 |
| | 807 |
|
| Less: Retirements | 1,200 |
| | 625 |
|
| Less: Impairments | — |
| | 5,171 |
|
| | 69,201 |
| | 48,333 |
|
| Less: | | | |
| Accumulated amortization balance as of the beginning of the period | 29,991 |
| | 24,155 |
|
| Amortization Expense | 9,519 |
| | 8,209 |
|
| Less: Retirements | 1,092 |
| | 364 |
|
| Less: Impairments | — |
| | 2,009 |
|
| Accumulated amortization balance as of the end of the period | 38,418 |
| | 29,991 |
|
| | $ | 30,783 |
| | $ | 18,342 |
|
For the years ended December 31, 2018, 2017,2020, 2019, and 2016,2018, the Company recorded amortization expense relating to capitalized website development and internal-use software of $22.6 million, $18.7 million, and $9.5 million, $8.2respectively.
On August 15, 2019, the Company acquired Reverb in a business combination, including the developed technology which was recognized at fair value for $30.3 million. As of December 31, 2020 and December 31, 2019, the accumulated amortization of the acquired developed technology classified in property and equipment, net was $13.9 million and $6.3$3.8 million, respectively. The lossdeveloped technology is amortized on write-offa straight-line basis over a period of 3 years. Amortization expense from the developed technology of Reverb was $10.1 million and $3.8 million for capitalized website development and internal-use software assets that were retired during the years ended December 31, 2018, 2017,2020 and 2016December 31, 2019, respectively, and was $0.1 million, $0.3 million,recorded in cost of revenue.
Note 11—Leases
For the years ended December 31, 2020 and $0.9 million, respectively.2019, the elements of lease expense were as follows (in thousands):
The Company recognized a $3.2 million impairment loss related to capitalized website development | | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 |
| Operating lease cost | $ | 5,847 | | | $ | 5,405 | |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | 10,190 | | | 13,124 | |
| Interest on lease liabilities | 2,576 | | | 3,205 | |
| Total finance lease cost | 12,766 | | | 16,329 | |
| Other lease cost, net (1) | 1,322 | | | 1,149 | |
| Total lease cost | $ | 19,935 | | | $ | 22,883 | |
(1)Other lease cost, net includes short-term sublease income, short-term lease costs, and internal-use software duringvariable lease costs.
Total rent expense on operating leases for the year ended December 31, 2017, included in asset impairment charges. During2018 was $3.8 million. Total depreciation and interest expense on capital leases for the fourth quarter of 2017, the Company made the decision to discontinue certain product offerings, including Etsy Studioyear ended December 31, 2018, was $5.9 million and Etsy Manufacturing, which was$1.0 million, respectively.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheet (in thousands):
an indicator that | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Operating leases: | | | |
| Other assets | $ | 19,563 | | | $ | 24,362 | |
| Other current liabilities | $ | 4,516 | | | $ | 4,134 | |
| Other liabilities | 17,202 | | | 22,322 | |
| Total operating lease liabilities | $ | 21,718 | | | $ | 26,456 | |
| | | |
| Finance leases: | | | |
| | | |
| | | |
| Property and equipment, net | $ | 50,261 | | | $ | 59,696 | |
| Finance lease obligations—current | $ | 8,537 | | | $ | 8,275 | |
| Finance lease obligations—net of current portion | 44,979 | | | 53,611 | |
| Total finance lease liabilities | $ | 53,516 | | | $ | 61,886 | |
The following table summarizes the carrying amountweighted average remaining lease term and weighted average discount rate as of certain capitalized website developmentDecember 31, 2020 and internal-use software assets may not be recoverable. The Company prepared an undiscounted2019:
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Weighted average remaining lease term: | | | |
| Operating leases | 4.85 years | | 5.94 years |
| Finance leases | 5.47 years | | 6.37 years |
| Weighted average discount rate: | | | |
| Operating leases | 4.26 | % | | 4.26 | % |
| Finance leases | 4.26 | % | | 4.31 | % |
Supplemental cash flow analysis and determined that the values for these assets exceeded the expected future cash flows and impaired the remaining book values based on a negative present valueinformation related to leases was as follows (in thousands):
| | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows used in operating leases | $ | (5,519) | | | $ | (4,889) | |
| Operating cash flows used in finance leases | (2,551) | | | (3,181) | |
| Finance cash flows used in finance leases | (9,211) | | | (10,833) | |
Future minimum lease payments under non-cancelable leases as of projected undiscounted cash flows.December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2021 | $ | 5,343 | | | $ | 10,661 | |
| 2022 | 5,323 | | | 10,975 | |
| 2023 | 4,427 | | | 10,739 | |
| 2024 | 3,687 | | | 10,678 | |
| 2025 | 3,321 | | | 10,757 | |
| Thereafter | 1,945 | | | 6,280 | |
| Total future minimum lease payments | 24,046 | | | 60,090 | |
| Less imputed interest | 2,328 | | | 6,574 | |
| Total | $ | 21,718 | | | $ | 53,516 | |
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Etsy, Inc.
Notes to Consolidated Financial Statements
Note 12—Accrued Expenses
Accrued expenses consisted of the following as of the dates indicated (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Pass-through marketplace tax collection obligation | $ | 109,662 | | | $ | 39,250 | |
| Vendor accruals | 73,437 | | | 25,760 | |
| Employee compensation-related liabilities | 43,879 | | | 23,335 | |
| Other | 5,374 | | | 0 | |
| | | |
| | | |
| | | |
| Total accrued expenses | $ | 232,352 | | | $ | 88,345 | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Vendor accruals | $ | 17,817 |
| | $ | 14,576 |
|
| Accrued bonus | 12,906 |
| | 4,364 |
|
| Sales and use tax payable | 12,232 |
| | 3,682 |
|
| Accrued vacation | 3,787 |
| | 3,136 |
|
| Payroll-related liabilities | 2,406 |
| | 2,920 |
|
| Other | 10 |
| | 65 |
|
| Total accrued expenses | $ | 49,158 |
| | $ | 28,743 |
|
Note 13—Debt
2020 Convertible Debt
In March 2018,August 2020, the Company issued $345.0$650.0 million aggregate principal amount of 0% Convertible Seniorthe 2020 Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the 2020 Notes were approximately $639.5 million after deducting the offering expenses and before the purchase of the 2020 Capped Call Transactions and the partial repurchase of the 2018 Notes, each as described below.
The 2020 Notes are convertible into shares of the Company’s common stock based upon an initial conversion rate of 5.0007 shares of the Company’s common stock per $1,000 principal amount of 2020 Notes (equivalent to an initial conversion price of approximately $199.97 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock.
The 2020 Notes will mature on September 1, 2027, unless earlier converted or repurchased. Prior to the close of business on the business day immediately preceding May 1, 2027, holders may convert all or a portion of their 2020 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2020 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On and after May 1, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2020 Notes at any time, regardless of the foregoing circumstances.
In accounting for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, the Company discounted the contractual cash flows of the 2020 Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s own stock, was determined by deducting the fair value of the liability component from the par value of the 2020 Notes. The difference between the principal amount of the 2020 Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the 2020 Notes of $136.4 million is included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and are amortized to interest expense using
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Etsy, Inc.
Notes to Consolidated Financial Statements
the effective interest method over the term of the 2020 Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be repurchased. Holders of 2020 Notes who convert their 2020 Notes in connection with a notice of a redemption or a make-whole fundamental change may be entitled to a premium in the form of an increase in the conversion rate of the 2020 Notes. As of December 31, 2020, none of the conditions permitting the holders of the 2020 Notes to early convert have been met.
During any calendar quarter preceding May 1, 2027 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2020 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 2020 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended December 31, 2020, holders of the 2020 Notes are not eligible to convert their 2020 Notes during the first quarter of 2021. Based on the terms of the 2020 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 2020 Notes in cash and, therefore, the 2020 Notes are classified as long-term debt as of December 31, 2020.
The 2020 Notes are general unsecured obligations of the Company. The 2020 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 2020 Notes; rank equal in right of payment with all of the Company’s liabilities that are not so subordinated, including the Company’s 2018 Notes and 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.
2020 Capped Call Transactions
The Company used $74.7 million of the net proceeds from the 2020 Notes to enter into privately negotiated capped call instruments (“2020 Capped Call Transactions”) with certain financial institutions. The 2020 Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2020 Notes upon conversion of the 2020 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the 2020 Capped Call Transactions with such reduction and/or offset subject to a cap. The 2020 Capped Call Transactions have an initial cap price of $327.83 per share of the Company’s common stock, which represents a premium of 150% over the last reported sale price of the Company’s common stock on August 19, 2020, and is subject to certain adjustments under the terms of the 2020 Capped Call Transactions. Collectively, the 2020 Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2020 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2020 Notes.
The 2020 Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock. The premiums paid for the 2020 Capped Call Transactions have been included as a net reduction to additional paid-in capital within stockholders’ equity.
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 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 2019 Notes are convertible based upon an initial conversion rate of 11.4040 shares of the Company’s common stock per $1,000 principal amount of 2019 Notes (equivalent to an initial conversion price of approximately $87.69 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock.
The 2019 Notes will mature on October 1, 2026, unless earlier converted or repurchased. Prior to the close of business on the business day immediately preceding June 1, 2026, holders may convert all or a portion of their 2019 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019
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Etsy, Inc.
Notes to Consolidated Financial Statements
(and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2019 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events. On and after June 1, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2019 Notes at any time, regardless of the foregoing circumstances.
In accounting for the issuance of the 2019 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s own stock, was determined by deducting the fair value of the liability component from the par value of the 2019 Notes. The difference between the principal amount of the 2019 Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the 2019 Notes of approximately $154.0 million is included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and are amortized to interest expense using the effective interest method over the term of the 2019 Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be repurchased. Holders of 2019 Notes who convert their 2019 Notes in connection with a notice of a redemption or a make-whole fundamental change may be entitled to a premium in the form of an increase in the conversion rate of the 2019 Notes.
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 December 31, 2020, holders of the 2019 Notes are eligible to convert their 2019 Notes during the first quarter of 2021. 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 December 31, 2020.
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 and 2020 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.
2019 Capped Call Transactions
The Company used $76.2 million of the net proceeds from the 2019 Notes offering to enter into separate capped call instruments (“2019 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates. The 2019 Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2019 Notes upon conversion of the 2019 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the 2019 Capped Call Transactions with such reduction and/or offset subject to a cap. The 2019 Capped Call Transactions have an initial cap price of $148.63 per share of the Company’s common stock, which represents a premium of 150% over the last reported sale price of the Company’s common stock on September 18, 2019, and is subject to certain adjustments under the terms of the 2019 Capped Call
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Etsy, Inc.
Notes to Consolidated Financial Statements
Transactions. Collectively, the 2019 Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2019 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2019 Notes.
The 2019 Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock. The premiums paid for the 2019 Capped Call Transactions have been included as a net reduction to additional paid-in capital within stockholders’ equity.
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 2018 Notes are convertible based upon an initial conversion rate of 27.5691 shares of the Company’s common stock per $1,000 principal amount of 2018 Notes (equivalent to an initial conversion price of approximately $36.27 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock. The Company will settle any conversions of the Notes in cash, shares of the Company’s common stock, or a combination thereof, with the form of consideration determined at the Company’s election.
The 2018 Notes will mature on March 1, 2023, unless earlier converted or repurchased. Prior to the close of business on the business day immediately preceding November 1, 2022, holders may convert all or a portion of their 2018 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2018 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; and (3) with respect to any or all of the Notes called for redemption by the Company prior to the close of business on the business day immediately preceding November 1, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day prior to the redemption date, even if the Notes are not otherwise convertible at such time; (4) upon the occurrence of specified corporate events. On and after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased. Holders of Notes who convert their Notes in connection with a notice of a redemption or a make-whole fundamental change may be entitled to a
Etsy, Inc.
Notes to Consolidated Financial Statements
premium in the form of an increase in the conversion rate of the Notes. During the fourth quarter of 2018, the closing price of the Company’s common stock exceeded 130% of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of the Notes may convert their Notes during the first quarter of 2019. As of December 31, 2018, the Company had not received any conversion notices, and, as such, the Notes are not currently redeemable for cash and are therefore classified as long-term debt. As of December 31, 2018, the if-converted value of the Notes was approximately $107.5 million higher than the aggregate principal amount, or $452.5 million, offset in entirety by the capped call transactions described below.
The Notes are general unsecured obligations of the Company. The Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment with all of our liabilities that are not so subordinated; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.
In accounting for the issuance of the 2018 Notes, the Company separated the 2018 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s own stock, was determined by deducting the fair value of the liability component from the par value of the 2018 Notes. The difference between the principal amount of the 2018 Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance SheetSheets and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the 2018 Notes ofissuance was approximately $72.8 million isand was included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification.Sheets. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance SheetSheets and are amortized to interest expense using the effective interest method over the term of the 2018 Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.
Non-cash interest expense relatedIf a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2018 Notes for cash at a price equal to 100% of the yearprincipal amount of the 2018 Notes to be repurchased. Holders of 2018 Notes who convert their 2018 Notes in connection with a notice of a redemption or a make-whole fundamental change may be entitled to a premium in the form of an increase in the conversion rate of the 2018 Notes.
During the third quarter of 2020, the Company paid $137.2 million in cash and issued approximately 7.3 million shares of Etsy’s common stock to repurchase $301.1 million aggregate principal amount of its outstanding 2018 Notes through privately negotiated transactions. Concurrently, the Company repurchased 1.3 million shares of Etsy’s common stock for $166.2 million, in order to effectively complete the partial repurchase of 2018 Notes principal value in cash, and the conversion premium in
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Etsy, Inc.
Notes to Consolidated Financial Statements
shares. The equity component associated with the conversion premium on the 2018 Notes was a net increase to additional paid-in capital of $143.2 million and is included in the Consolidated Balance Sheets. As of December 31, 2020, $43.9 million aggregate principal of the 2018 Notes remained outstanding, of which the equity component is approximately $9.3 million, which is included in the additional paid-in capital in the Consolidated Balance Sheets, and is not remeasured as long as it continues to meet the conditions for equity classification.
This transaction was accounted for as an extinguishment of debt, and the Company recognized a non-cash loss on extinguishment of $16.9 million. This loss was calculated by comparing the carrying value of the debt component with the fair value of a similar liability that does not have an associated convertible feature immediately prior to extinguishment as well as writing off any remaining unamortized deferred debt issuance costs at the time of extinguishment. To estimate the fair value of a similar liability that does not have an associated convertible feature, the Company discounted the contractual cash flows of the Notes at an estimated interest rate for a comparable nonconvertible note.
Contemporaneously with the partial repurchase of the 2018 Notes in the third quarter of 2020, the Company also agreed with its counterparties to the 2018 Capped Call Transactions that they would remain outstanding with a maturity of March 2023. This was mutually agreed to between Etsy and its counterparties and there was no exchange of any consideration for such agreement.
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 December 31, 2020, holders of the 2018 was $12.2 million. Total unamortizedNotes are eligible to convert their 2018 Notes during the first quarter of 2021. 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. As of December 31, 2020, the Company had received 2,635 conversion notices and had provided settlement notices indicating that the $1,000 principal amount associated with each would be settled in cash and the premium would be settled in shares. As a result, $2.6 million of principal associated with the 2018 Notes, representative of the portion of the notes to be settled in cash, have been reclassified from long-term debt issuance costs were $6.7 million as of December 31, 2018.
2020, and are included within Other current liabilities on the Consolidated Balance Sheets. The estimated fair valuecompany cannot be required to settle the remaining 2018 Notes in cash and, therefore, the remaining $36.6 million of the2018 Notes was $279.1 millionoutstanding are classified as long-term debt as of December 31, 2018. 2020.
The estimated fair value2018 Notes are general unsecured obligations of the Company. The 2018 Notes was determined through considerationrank senior in right of quoted market prices for similar instruments. The fair valuepayment to all of the Company’s future indebtedness that is classified as Level 2, as definedexpressly subordinated in “Note 8—Fair Value Measurements.”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 and 2020 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.
2018 Capped Call Transactions
The Company used $34.2 million of the net proceeds from the 2018 Notes offering to enter into separate capped call transactionsinstruments (“2018 Capped Call Transactions”) with the initial purchasers and/or their respective affiliates. The 2018 Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2018 Notes upon conversion of the 2018 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the 2018 Capped Call Transactions with such reduction and/or offset subject to a cap. The 2018 Capped Call Transactions have an initial cap price of $52.76 per share of the Company’s common stock, which represents a premium of 100% over the last reported sale price of the Company’s common stock on March 8, 2018, and is subject to certain adjustments under the terms of the 2018 Capped Call Transactions. Collectively, the 2018 Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2018 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2018 Notes.
The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock. The premiums paid for the 2018 Capped Call Transactions have been included as a net reduction to additional paid-in capital within stockholders’ equity.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table presents the outstanding principal amount and carrying value of the Notes as of the dates indicated (in thousands):
Credit Agreement | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
| Principal | $ | 650,000 | | | $ | 650,000 | | | $ | 43,915 | | | $ | 1,343,915 | |
| Unamortized debt discount | 130,308 | | | 129,224 | | | 4,286 | | | 263,818 | |
| Unamortized debt issuance costs | 7,959 | | | 6,741 | | | 463 | | | 15,163 | |
| Net carrying value | $ | 511,733 | | | $ | 514,035 | | | $ | 39,166 | | | $ | 1,064,934 | |
| | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2019 |
| | | 2019 Notes | | 2018 Notes | | Total |
| Principal | | | $ | 650,000 | | | $ | 345,000 | | | $ | 995,000 | |
| Unamortized debt discount | | | 148,822 | | | 48,091 | | | 196,913 | |
| Unamortized debt issuance costs | | | 7,769 | | | 5,192 | | | 12,961 | |
| Net carrying value | | | $ | 493,409 | | | $ | 291,717 | | | $ | 785,126 | |
The Company terminatedeffective interest rate for the senior secured revolving credit facility pursuant to a Revolving Credit2020 Notes, 2019 Notes, and Guaranty Agreement with several lenders (the “2014 Credit Agreement”) effective as of November 21, 2017. As of2018 Notes at the date of termination, there were no borrowings outstanding underissuance was 3.50%, 4.00%, and 4.75%, respectively. Interest expense, including amortization of debt issuance costs, related to the 2014Notes for the periods presented below was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended
December 31, |
| 2020 | | 2019 | | 2018 |
| 2020 Notes | $ | 6,741 | | | $ | 0 | | | $ | 0 | |
| 2019 Notes | 21,441 | | | 5,631 | | | 0 | |
| 2018 Notes | 10,987 | | | 15,231 | | | 12,152 | |
| $ | 39,169 | | | $ | 20,862 | | | $ | 12,152 | |
As of December 31, 2020, the if-converted value of the Notes was (lower than) or exceeded its principal amount by the following (in thousands):
| | | | | | | |
| As of December 31, 2020 | | |
| 2020 Notes | $ | (71,712) | | | |
| 2019 Notes | 668,776 | | | |
| 2018 Notes | 171,480 | | | |
The estimated fair value of the liability component of the Notes was determined through inputs that are observable in the market or that could be derived from observable market data, corroborated with quoted market prices of similar instruments, classified as Level 2. See “Note 8—Fair Value Measurements” for more information regarding the fair value of the Notes.
2019 Credit Agreement and we incurred no additional fees as a result of early termination. In May 2014, the Company entered into a $35.0 million Credit Agreement. In March 2015, the Company amended the 2014 Credit Agreement to increase the credit facility to $50.0 million. In December 2015, the Company amended the 2014 Credit Agreement to clarify certain provisions relating to permitted investments and to make other immaterial updates. The amended 2014 Credit Agreement included a letter of credit sublimit of $10.0 million and a swingline loan sublimit of $15.0 million. The 2014 Credit Agreement, as amended, would have expired in May 2019.
Subsequent Event
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
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
preceding four fiscal quarter period. The Company is also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee, ranging from 0.20% to 0.35% depending on the Company’s senior secured net leverage ratio, and fees associated with letters of credit. The 2019 Credit Agreement also permits the Company, in certain circumstances, to request an increase in the facility by an amount of up to $100.0 million at the same maturity, pricing and other terms and to request an extension of the maturity date for the facility. In connection with the 2019 Credit Agreement, the Company also paid the lenders certain upfront fees.
The 2019 Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries and customary affirmative and negative covenants applicable to the Company and its restricted subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, certain fundamental changes (including mergers), investments, dispositions, restricted payments (including dividends and stock repurchases), prepayments of junior debt, and transactions with affiliates. These restrictions do not prohibit a subsidiary of the Company from making pro rata payments to the Company or any other person that owns an equity interest in such subsidiary. The 2019 Credit Agreement contains financial covenants, that require the Company and its subsidiaries to maintain (i) a secured net leverage ratio not to exceed 3.00 to 1.00, subject to an increase, at the option of the Company, to 3.50 to 1.00 for a specified period of time in the event of certain material acquisitions, tested as of the last day of each fiscal quarter and (ii) an interest coverage ratio (defined as the ratio of EBITDA to cash interest expense) of not less than 2.50 to 1.00, tested for each fiscal quarter.
The 2019 Credit Agreement includes customary events of default, including, but not limited to, nonpayment of principal or interest, breaches of representations and warranties, failure to perform or observe covenants, cross-defaults with certain other indebtedness, final judgments or orders, certain change of control events, and certain bankruptcy-related events or proceedings. Upon the occurrence of an event of default (subject to notice and grace periods), obligations under the 2019 Credit Agreement could be accelerated.
Subject to certain exceptions, to the extent the Company has any material domestic subsidiaries, the obligations under the 2019 Credit Agreement would be required to be guaranteed by such material domestic subsidiaries. The obligations under the 2019 Credit Agreement are secured by all or substantially all of the assets of the Company and any such subsidiary guarantors.
The Company capitalized $1.4 million of debt issuance costs in connection with the 2019 Credit Agreement. Total unamortized debt issuance costs related to the 2019 Credit Agreement were $0.9 million and $1.1 million as of December 31, 2020 and December 31, 2019, respectively. Interest expense related to debt issuance costs on the 2019 Credit Agreement for the periods presented below was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| 2019 Credit Agreement | $ | 279 | | | $ | 252 | | | $ | 0 | |
At February 28, 2018,December 31, 2020 and December 31, 2019, the Company did not0t have any borrowings under the 2019 Credit Agreement.
Agreement and was in compliance with all financial covenants.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 14—Commitments and Contingencies
Lease Commitments
Capital Leases
The Company entered into a credit agreement with Dell Financial Services, LLC. (“DFS”) on February 17, 2016, which provided the Company with a credit line of up to $6.0 million for hosting equipment leases (the “DFS Line”), which was increased to $9.0 million during 2017. This credit line expired in December 2018. The DFS Line allowed the Company to lease hosting equipment from DFS. The leases have a 36-month term, zero interest and are payable in equal monthly installments with a buy-out option of $1 at the end of the lease term. As of December 31, 2018, the Company has lease obligations of approximately $2.9 million related to leased hosting equipment using the previously active DFS Line.
The Company entered into a credit agreement with ePlus Group, Inc. (“ePlus”) on January 3, 2014, which provided the Company with a credit line of up to $8.0 million for computer equipment leases (the “ePlus Line”), which was increased to $18.0 million during 2015. The ePlus Line allows the Company to order equipment from any approved vendor. ePlus purchases the equipment on behalf of the Company and leases it back to the Company. The leases have a 36-month term, interest rate of 3.71-6.93% and are payable in equal monthly installments with a fair market value or a $1 buy-out option at the end of the lease term depending on the equipment. As of December 31, 2018, the Company has lease obligations of approximately $3.1 million related to leased computer equipment using the ePlus Line.
For the years ended December 31, 2018, 2017, and 2016, the accompanying Consolidated Statement of Operations includes charges of approximately $1.0 million, $1.6 million, and $1.6 million for interest expense, respectively, related to the equipment leased using the DFS and ePlus Lines.
Operating Leases
The Company did not enter into any material operating leases or extensions in 2018, 2017, or 2016. Rent expense for the Company’s operating leases is recognized over the term of each respective lease on a straight-line basis. In addition, the Company leases other office facilities under shorter terms and cancelable leases.
Total rent expense for the years ended December 31, 2018, 2017, and 2016 was $3.8 million, $4.1 million, and $6.0 million, respectively.
Build-to-Suit Lease
In May 2014, the Company entered into a 10-year lease agreement for approximately 199,000 rentable square feet of office space in Brooklyn, New York for the Company’s headquarters, which commenced in 2015. Of the total office space, approximately 172,000 rentable square feet is being accounted for as a build-to-suit lease and approximately 27,000 rentable square feet located in an adjacent building is being accounted for as an operating lease. In connection with the lease agreement, the Company established a $5.3 million collateral account, reflected in the restricted cash balance on the Consolidated Balance Sheet.
Purchase Obligations
The Company has $61.1$44.9 million of non-cancelable contractual commitments as of December 31, 2018,2020, primarily related to the initiative to migrate its data centers to the cloud computing, as well as other support services. These commitments are primarily due within fourtwo years.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table represents the Company’s commitments under its current capital, operating and build-to-suit lease agreements and purchase obligations as of December 31, 20182020 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Capital Lease
Obligations | | Operating
Leases | | Build-to-Suit
Lease | | Purchase Obligations |
| Periods ending | | | | | | | |
| 2019 | $ | 4,392 |
| | $ | 4,904 |
| | $ | 9,451 |
| | $ | 10,696 |
|
| 2020 | 1,754 |
| | 4,783 |
| | 9,522 |
| | 17,374 |
|
| 2021 | 481 |
| | 4,185 |
| | 10,354 |
| | 16,000 |
|
| 2022 | — |
| | 4,180 |
| | 10,520 |
| | 17,000 |
|
| 2023 | — |
| | 4,205 |
| | 10,599 |
| | — |
|
| Thereafter | — |
| | 9,760 |
| | 27,715 |
| | — |
|
| Total minimum payments required | $ | 6,627 |
| | $ | 32,017 |
| | $ | 78,161 |
| | $ | 61,070 |
|
| Amounts representing interest | 648 |
| | | | | | |
| Present value of net minimum payments | 5,979 |
| | | | | | |
| Current maturities | 3,884 |
| | | | | | |
| Long-term payment obligations | $ | 2,095 |
| | | | | | |
Long-Term Debt
In March 2018, the Company issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes will mature on March 1, 2023, unless earlier converted or repurchased, and there are no contractual payments required until maturity. For more information on the Notes, see “Note 13—Debt.” | | | | | | | | | | |
| | | | | | Purchase Obligations |
| Periods ending | | | | | | |
| 2021 | | | | | | $ | 7,551 | |
| 2022 | | | | | | 36,330 | |
| 2023 | | | | | | 1,053 | |
| | | | | | |
| | | | | | |
| Thereafter | | | | | | 0 | |
| Total purchase obligations | | | | | | $ | 44,934 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Non-Income Tax Contingencies
The Company had reserves of $0.9$8.0 million and $0.4$7.2 million at December 31, 20182020 and 2017,2019, respectively, for certain non-income tax obligations, representing management’s best estimate of its potential liability. The reserves as of December 31, 2020 and 2019 includes $4.5 million and $4.8 million, respectively, due to the acquisition of Reverb, which is wholly offset by an indemnification asset of $3.4 million and $3.7 million and a deferred tax asset of $1.1 million and $1.1 million, respectively. The Company could also be subject to examination in various jurisdictions related to income tax and non-income tax matters. The resolution of these types of matters, if in excess of the recorded reserve, could have an adverse impact on the Company’s business.consolidated financial statements.
Legal Proceedings
Cervantes and Weiss Cases
On July 21, 2015, a purported securities class action complaint (Cervantes v. Dickerson, et.al., Case No. CIV 534768) was filed in the Superior Court of State of California, County of San Mateo against the Company, certain officers, directors, and underwriters. The complaint asserted violations of Sections 11 and 15 of the Securities Act. The complaint alleged misrepresentations in the Company’s Registration Statement on Form S-1 and Prospectus with respect to, among other things, merchandise for sale on the Company’s website that may be counterfeit or constitute trademark or copyright infringement. The complaint sought certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. On December 7, 2015, the Company and the underwriter defendants moved to stay the Cervantes action on the grounds of forum non conveniens.
On November 5, 2015, another purported securities class action complaint (Weiss v. Etsy et al., No. CIV 536123) was filed in the Superior Court of State of California, County of San Mateo. The Weiss complaint named as defendants the Company and the same officers, directors, and underwriters named in the Cervantes complaint, and also asserts violations of Sections 11 and 15 of the Securities Act based on allegedly false or misleading statements or omissions with respect to, among other things, merchandise for sale on the Company’s website that may be counterfeit or constitute trademark or copyright infringement. On December 24, 2015, the court consolidated the Cervantes and Weiss actions. On February 3, 2016, the court granted the Company’s motion to stay the consolidated actions. On September 19, 2018, the court granted plaintiffs’ request to dismiss the consolidated Cervantes and Weiss actions with prejudice.
Etsy, Inc.
Notes to Consolidated Financial Statements
In addition, fromFrom time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation regardless of their success, could have an adverse effect on the Company’s Consolidated Resultsresults of Operationsoperations, cash flows, or Cash Flowsbusiness and financial condition in the period the claims or litigation are resolved. Although the results of litigation and claims cannot be predicted with certainty, wethe Company currently believebelieves that the final outcome of these ordinary course matters will not have a material adverse effect on our business.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Note 15—Stockholders’ Equity
At December 31, 20182020 and 2017,2019, the authorized capital stock of the Company included 1,400,000,000 shares of common stock. At December 31, 20182020 and 20172019 there were 25,000,000 shares of preferred stock authorized.
Common Stock
At December 31, 20182020 and 20172019 there were 119,771,702125,835,931 and 121,769,238118,342,772 shares of common stock issued and outstanding, respectively. Holders of common stock are entitled to one1 vote per share. Holders of common stock are not entitled to receive dividends unless declared by the Board of Directors. NoNaN dividends have been declared through December 31, 2018.2020. The common stock has a $0.001 par value.
Convertible Preferred Stock
Upon the closing of the IPO on April 21, 2015, all outstanding shares of convertible preferred stock were converted into 53,448,243 shares of common stock. As of December 31, 2018, 2017,2020, 2019, and 2016,2018, there was no0 convertible preferred stock outstanding.
Common Stock IssuancesShare Repurchases
In the year ended December 31, 2016, the Company issued a total of 685,749 shares of common stock in connection with the acquisition of Blackbird, of which 513,304 shares with an aggregate fair value of $6.9 million on the applicable acquisition date is included in the purchase price and 172,445 shares with an aggregate fair value of $2.3 million on the applicable acquisition date is tied to continued employment with the Company and is being accounted for as post-combination compensation expense.
Share Repurchase Program
On November 1, 2018,2020, the Board of Directors approved a stock repurchase program that enables the Company to repurchase up to $200$250 million of its common stock. No stock repurchases were made under this program in 2020. 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.
In August 2020, the Board of Directors approved a stock repurchase of $166.2 million, or 1.3 million shares of the Company’s common stock, concurrently with the repurchase of $301.1 million aggregate principal amount of the outstanding 2018 Notes, see “Note 13—Debt.” This repurchase was separate from the stock repurchase plan approved by the Board of Directors in November 2018.
In September 2019, the Board of Directors approved a concurrent stock repurchase with the pricing of the 2019 Notes, pursuant to which the Company repurchased $124.5 million, or 2.1 million shares of its common stock. This authorization was only applicable concurrent with the issuance of the 2019 Notes and, therefore, there were 0 further purchases authorized under this approval.
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 was completed in the fourth quarter of 2020.
In November 2017, the Board of Directors approved a stock repurchase program that enabled the Company to repurchase up to $100 million of its common stock. The program was completed in the second quarter of 2018.
Under the stock repurchase program,programs, 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 maycould 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the Company’s cumulative share repurchase activity of the programs noted above, excluding shares withheld to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units, excluding the 1.3 million shares repurchased in August 2020 and the 2.1 million shares repurchased in September 2019 (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares Repurchased | | Average Price Paid per Share (1) | | Value of Shares Repurchased (1) | | Remaining Amount Authorized |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance as of December 31, 2017 | 586,231 | | | $ | 17.57 | | | $ | 10,301 | | | $ | 89,699 | |
| Repurchases of common stock for the three months ended: | | | | | | | |
| March 31, 2018 | 2,807,393 | | | 24.43 | | | 68,586 | | | (68,586) | |
| June 30, 2018 | 722,941 | | | 29.15 | | | 21,113 | | | (21,113) | |
| September 30, 2018 | 0 | | | 0 | | | 0 | | | 0 | |
| New Authorization on November 1, 2018 of $200 million | — | | | — | | | — | | | 200,000 | |
| Repurchases of common stock for the three months ended: | | | | | | | |
| December 31, 2018 | 916,083 | | | 49.11 | | | 45,000 | | | (45,000) | |
| Balance as of December 31, 2018 | 5,032,648 | | | 28.80 | | | 145,000 | | | 155,000 | |
| Repurchases of common stock for the three months ended: | | | | | | | |
| March 31, 2019 | 532,412 | | | 51.64 | | | 27,500 | | | (27,500) | |
| June 30, 2019 | 0 | | | 0 | | | 0 | | | 0 | |
| September 30, 2019 | 50,721 | | | 55.16 | | | 2,798 | | | (2,798) | |
| December 31, 2019 | 425,078 | | | 52.21 | | | 22,202 | | | (22,202) | |
| Balance as of December 31, 2019 | 6,040,859 | | | 32.68 | | | 197,500 | | | 102,500 | |
| Repurchases of common stock for the three months ended: | | | | | | | |
| March 31, 2020 | 543,106 | | | 46.02 | | | 25,000 | | | (25,000) | |
| June 30, 2020 | 0 | | | 0 | | | 0 | | | 0 | |
| September 30, 2020 | 0 | | | 0 | | | 0 | | | 0 | |
| December 31, 2020 | 618,841 | | | 125.22 | | | 77,500 | | | (77,500) | |
| New Authorization on December 15, 2020 of $250 million | — | | | — | | | — | | | 250,000 | |
| Balance as of December 31, 2020 | 7,202,806 | | | $ | 41.64 | | | $ | 300,000 | | | $ | 250,000 | |
|
| | | | | | | | | | | | | | |
| | Shares Repurchased | | Average Price Paid per Share (1) | | Value of Shares Repurchased | | Remaining Amount Authorized |
| New Authorization on November 17, 2017 of $100 million | — |
| | $ | — |
| | $ | — |
| | $ | 100,000 |
|
| Repurchases of common stock for the three months ended: | | | | | | | |
| December 31, 2017 | 586,231 |
| | 17.57 |
| | 10,301 |
| | (10,301 | ) |
| Balance as of December 31, 2017 | 586,231 |
| | $ | 17.57 |
| | $ | 10,301 |
| | $ | 89,699 |
|
| Repurchases of common stock for the three months ended: | | | | | | | |
| March 31, 2018 | 2,807,393 |
| | 24.43 |
| | 68,586 |
| | (68,586 | ) |
| June 30, 2018 | 722,941 |
| | 29.15 |
| | 21,113 |
| | (21,113 | ) |
| September 30, 2018 | — |
| | — |
| | — |
| | — |
|
| New Authorization on November 1, 2018 of $200 million | — |
| | — |
| | — |
| | 200,000 |
|
| Repurchases of common stock for the three months ended: | | | | | | | |
| December 31, 2018 | 916,083 |
| | 49.11 |
| | 45,000 |
| | (45,000 | ) |
| Balance as of December 31, 2018 | 5,032,648 |
| | $ | 28.80 |
| | $ | 145,000 |
| | $ | 155,000 |
|
(1)Average price paid per share excludes broker commissions. Value of shares repurchased includes broker commissions.
All repurchases were made using cash resources.resources and all repurchased shares of common stock have been retired.
Note 16—Stock-based Compensation
The Company’s 2015 Equity Incentive Plan (the “2015 Plan”) was adopted by its Board of Directors and approved by stockholders in March 2015. The 2015 Plan became effective immediately upon adoption although no awards were made under it until the effective date of the IPO. The 2015 Plan replaced the 2006 Stock Plan, and no further grants were made under the 2006 Stock Plan as of the effective date of the IPO.
Under the 2006 Stock Plan, incentive and nonqualified stock options or rights to purchase common stock were granted to eligible participants. Options were generally granted for a term of 10 years and generally vested 25% after the first year of service and ratably each month over the remaining 36-month period contingent on continued employment with the Company on each vesting date.
The 2015 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), and performance cash awards to employees, directors, and consultants. Beginning in 2016, the number of shares available for issuance under the 2015 Plan may be increased annually by an amount equal to the lesser of 7,050,000 shares of common stock, 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as determined by the Company’s Boardboard of Directors.directors. The Board of Directors approved an increase of 2,395,434, 6,088,461,6,291,797, 5,917,139, and 5,798,6512,395,434 shares available for issuance under the 2015 Plan as of January 2, 2019,4, 2021, January 2, 2018,2020, and January 3, 2017,2, 2019, respectively. Any awards issued under the 2015 Plan that are forfeited
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Etsy, Inc.
Notes to Consolidated Financial Statements
by the participant will become available for future grant under the 2015 Plan. The number of shares of the Company’s common stock initially reserved for issuance under the 2015 Plan equaled the sum of 14,100,000 shares plus up to 12,653,075 shares reserved for issuance or subject to outstanding awards under the 2006 Stock Plan. At December 31, 2018, 29,436,3742020, 37,748,947 shares were authorized under the 2015 Plan and 18,645,78324,820,928 shares were available for future grant.
In the first quarter of 2017, the Company made an accounting policy election to recognize forfeitures as they occur upon adoption of guidance in ASU 2016-09—Stock Compensation: Improvements to Employee Share-based Payment Accounting. In reporting periods prior to 2017, the Company estimated forfeitures at the time of grant and revised in subsequent periods as necessary if actual forfeitures differed from estimates.
In the year ended December 31, 2018,2020, the Company granted nonqualified stock options and RSUs to eligible participants. Options were generally granted for a term of 10 years. For both options and RSUs, vesting is typically over a four-year period
Etsy, Inc.
Notes to Consolidated Financial Statements
and is contingent upon continued employment with the Company on each vesting date. In general, options granted to newly-hired employees prior to July 2018 vest 25% after the first year of service and ratably each month over the remaining 36-month period. In general, RSUs granted to newly-hired employees prior to July 2018 vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant, and then vest ratably each quarter over the remaining 12-quarter period. In general, for current employees who received an additional grant prior to March 2018, options vest ratably each month over a 48-month period. In general, for current employees who received an additional grant prior to March 2018, RSUs vest ratably each quarter over a 16-quarter period following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant. The Company recognizes forfeitures as they occur.
Beginning in July 2018, in general, for newly-hired employees, both options and RSUs vest 25% after the first year of service and ratably each six-month period over a four-year period following the vesting commencement date, which is the first day of the month closest tofollowing the date of grant. Beginning in March 2018, in general, for current employees who receive an additional grant, both options and RSUs vest ratably each six-month period over a four-year period following the vesting commencement date.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the inputs below. Prior to the IPO, the Company utilized equity valuations based on comparable publicly-traded companies, discounted free cash flows, an analysis of the Company’s enterprise value, and other factors deemed relevant in estimating the fair value of its common stock. Subsequent to the IPO, the Company has used the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant for time periods that approximate the expected life of the option awards. Expected volatilities are based on implied volatilities from Etsy and market comparisons of certain publicly traded companies and other factors.companies. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The requisite service period is generally four years from the date of grant. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on(rounded to the grant date.nearest hundredth) for the 30 trading days immediately prior to and including the date of grant. The requisite service period for stock options and RSUs is generally four years from the date of grant.
The fair value of options granted in each year using the Black-Scholes pricing model has been based on the following assumptions:
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Volatility | 38.9% - 41.7% | | 39.1% - 39.5% | | 38.6% - 47.8% |
| Risk-free interest rate | 0.3% - 1.7% | | 1.6% - 2.5% | | 2.6% - 2.9% |
| Expected term (in years) | 5.5 - 6.2 | | 5.5 - 6.2 | | 5.5 - 6.3 |
| Dividend rate | 0% | | 0% | | 0% |
|
| | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Volatility | 38.6% - 47.8% | | 41.7% - 44.2% | | 38.6% - 44.6% |
| Risk-free interest rate | 2.6% - 2.9% | | 1.9% - 2.2% | | 1.1% - 2.1% |
| Expected term (in years) | 5.5 - 6.3 | | 5.5 - 6.3 | | 5.5 - 6.3 |
| Dividend rate | —% | | —% | | —% |
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the activity for the Company’s options (in thousands, except share and per share amounts):
| | | | | | | | | | | Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining Contract
Term (in years) | | Aggregate
Intrinsic Value |
| | Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining Contract
Term (in years) | | Aggregate
Intrinsic Value | |
| Outstanding at December 31, 2015 | 11,068,859 |
| | $ | 6.94 |
| | 7.01 | | $ | 31,932 |
| |
| Granted | 1,700,234 |
| | 9.35 |
| | | |
| Exercised | (2,535,620 | ) | | 4.17 |
| | | |
| Forfeited/Canceled | (893,906 | ) | | 9.51 |
| | | |
| Outstanding at December 31, 2016 | 9,339,567 |
| | 7.89 |
| | 6.64 | | 43,613 |
| |
| Granted | 5,887,183 |
| | 11.04 |
| | | |
| Exercised | (5,760,263 | ) | | 5.87 |
| | | |
| Forfeited/Canceled | (1,518,548 | ) | | 11.36 |
| | | |
| | Outstanding at December 31, 2017 | 7,947,939 |
| | 11.02 |
| | 7.93 | | 74,996 |
| Outstanding at December 31, 2017 | 7,947,939 | | | $ | 11.02 | | | 7.93 | | $ | 74,996 | |
| Granted | 797,201 |
| | 29.87 |
| | | Granted | 797,201 | | | 29.87 | | |
| Exercised | (1,588,779 | ) | | 11.49 |
| | | Exercised | (1,588,779) | | | 11.49 | | |
| Forfeited/Canceled | (265,367 | ) | | 15.68 |
| | | Forfeited/Canceled | (265,367) | | | 15.68 | | |
| Outstanding at December 31, 2018 | 6,890,994 |
| | 12.91 |
| | 7.94 | | 239,177 |
| Outstanding at December 31, 2018 | 6,890,994 | | | 12.91 | | | 7.94 | | 239,177 | |
| Total exercisable at December 31, 2018 | 3,032,251 |
| | 10.94 |
| | 7.28 | | 111,071 |
| |
| Granted | | Granted | 462,563 | | | 64.29 | | |
| Exercised | | Exercised | (840,835) | | | 11.64 | | |
| Forfeited/Canceled | | Forfeited/Canceled | (217,803) | | | 30.11 | | |
| Outstanding at December 31, 2019 | | Outstanding at December 31, 2019 | 6,294,919 | | | 16.26 | | | 7.24 | | 185,900 | |
| Granted | | Granted | 654,296 | | | 46.38 | | |
| Exercised | | Exercised | (1,834,773) | | | 13.80 | | |
| Forfeited/Canceled | | Forfeited/Canceled | (14,490) | | | 32.15 | | |
| Outstanding at December 31, 2020 | | Outstanding at December 31, 2020 | 5,099,952 | | | 20.97 | | | 6.81 | | 800,453 | |
| Total exercisable at December 31, 2020 | | Total exercisable at December 31, 2020 | 3,548,994 | | | 14.21 | | | 6.32 | | 580,969 | |
|
The following table summarizes the weighted-average grant date fair value of options granted, intrinsic value of options exercised and fair value of awards vested in periods indicated (in thousands, except per share amounts):
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Weighted average grant date fair value of options granted | $ | 13.33 |
| | $ | 4.85 |
| | $ | 4.03 |
| Weighted average grant date fair value of options granted | $ | 18.18 | | | $ | 26.75 | | | $ | 13.33 | |
| Intrinsic value of options exercised | 34,268 |
| | 52,693 |
| | 19,130 |
| Intrinsic value of options exercised | 151,785 | | | 42,758 | | | 34,268 | |
| Fair value of awards vested | 32,717 |
| | 19,826 |
| | 9,533 |
| Fair value of awards vested | 60,622 | | | 41,997 | | | 32,717 | |
The total unrecognized compensation expense for the Company’s options at December 31, 20182020 was $22.9$20.1 million, which will be recognized over a weighted-average period of 2.592.44 years.
The following table summarizes the activity for the Company’s unvested RSUs:
| | | | | | | Shares | | Weighted-Average
Fair Value |
| | Shares | | Weighted-Average
Fair Value | |
| Unvested at December 31, 2015 | 395,846 |
| | $ | 13.70 |
| |
| Granted | 3,200,297 |
| | 10.29 |
| |
| Vested | (255,868 | ) | | 10.64 |
| |
| Forfeited/Canceled | (205,094 | ) | | 10.15 |
| |
| Unvested at December 31, 2016 | 3,135,181 |
| | 10.70 |
| |
| Granted | 2,360,315 |
| | 12.17 |
| |
| Vested | (1,072,321 | ) | | 10.44 |
| |
| Forfeited/Canceled | (1,348,928 | ) | | 10.56 |
| |
| | Unvested at December 31, 2017 | 3,074,247 |
| | 11.98 |
| Unvested at December 31, 2017 | 3,074,247 | | | $ | 11.98 | |
| Granted | 2,448,169 |
| | 28.22 |
| Granted | 2,448,169 | | | 28.22 | |
| Vested | (1,496,906 | ) | | 13.80 |
| Vested | (1,496,906) | | | 13.80 | |
| Forfeited/Canceled | (545,142 | ) | | 18.47 |
| Forfeited/Canceled | (545,142) | | | 18.47 | |
| Unvested at December 31, 2018 | 3,480,368 |
| | 22.87 |
| Unvested at December 31, 2018 | 3,480,368 | | | 22.87 | |
| Granted | | Granted | 1,464,785 | | | 61.92 | |
| Vested | | Vested | (1,392,295) | | | 22.67 | |
| Forfeited/Canceled | | Forfeited/Canceled | (592,445) | | | 31.25 | |
| Unvested at December 31, 2019 | | Unvested at December 31, 2019 | 2,960,413 | | | 40.61 | |
| Granted | | Granted | 1,712,587 | | | 54.19 |
| Vested | | Vested | (1,369,271) | | | 35.36 |
| Forfeited/Canceled | | Forfeited/Canceled | (217,742) | | | 43.27 |
| Unvested at December 31, 2020 | | Unvested at December 31, 2020 | 3,085,987 | | | 50.28 |
The total unrecognized compensation for RSUs at December 31, 20182020 was $70.5$137.3 million, which will be recognized over a weighted-average period of 3.032.85 years.
Etsy, Inc.
Notes to Consolidated Financial Statements
Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2020 | | 2019 | | 2018 |
| Cost of revenue | $ | 7,731 | | | $ | 5,787 | | | $ | 3,357 | |
| Marketing | 5,184 | | | 3,774 | | | 2,507 | |
| Product development | 33,030 | | | 21,085 | | | 21,234 | |
| General and administrative | 19,169 | | | 13,749 | | | 11,133 | |
| Total stock-based compensation expense | $ | 65,114 | | | $ | 44,395 | | | $ | 38,231 | |
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Cost of revenue | $ | 3,357 |
| | $ | 1,739 |
| | $ | 1,057 |
|
| Marketing | 2,507 |
| | 1,933 |
| | 971 |
|
| Product development | 21,234 |
| | 8,274 |
| | 5,079 |
|
| General and administrative | 11,133 |
| | 14,613 |
| | 8,794 |
|
| Total stock-based compensation expense | $ | 38,231 |
| | $ | 26,559 |
| | $ | 15,901 |
|
The total stock-based compensation expense in the years ended December 31, 2018, 2017, and 2016 includes $3.8 million, $3.9 million, and $2.7 million, in acquisition-related stock-based compensation expense, respectively.
During the year ended December 31, 2018, the Company incurred non-cash stock-based compensation expense of $7.0 million resulting from the modification of stock options and RSUs to accelerate vesting of certain stock-based compensation in connection with the departure of two2 employees. See “Note 17—Restructuring and Other Exit Costs (Income)” for information on stock modifications incurred in 2017 related to restructuring.
Note 17—Restructuring and Other Exit Costs (Income)
On April 30, 2017,January 15, 2021, the Board of Directors approved a plan to increase efficiency and streamline the Company’s cost structure through headcount reductions and a reduction in internal program expenses (the “May Actions”). On June 16, 2017, the Board of Directors approved additional initiatives designed to improve focus on key strategic growth opportunities (together with the May Actions, the “Actions”). The Actions included total headcount reductions of 245 positions or 23%an extension of the total workforce asemployment agreement between Etsy and Josh Silverman, Etsy’s President and Chief Executive Officer. The employment agreement provides for the grant of December 31, 2016, closing ALM, a marketplace in France, and closingspecial performance based equity award on or consolidating certain international offices.
In connection with the Actions, the Company incurred $13.9 million of restructuring and other exit costsaround March 15, 2021, which will be in the year ended December 31, 2017, comprisedform of employee severance, stock compensation modifications,performance share units with a target value of $25 million. Vesting of the award will be based on achievement of certain performance goals and other exit costs, largely made up of cash expenditures. The Company generated $0.2 million of income in the year ended December 31, 2018 due to changes in estimated severance costs.
continued service, and will occur based on service through April 1, 2024 and April 1, 2025, respectively.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table displays restructuring and other exit costs (income) recorded related to the Actions and a rollforward of the charges to the accrued expenses balance as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Severance Charge | | Stock-Based Compensation | | Other Exit Costs | | Total |
| Balance, December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total restructuring and other exit costs | 8,972 |
| | 1,668 |
| | 620 |
| | 11,260 |
|
| Costs charged against equity/assets | — |
| | (1,668 | ) | | — |
| | (1,668 | ) |
| Cash payments | (2,110 | ) | | — |
| | (278 | ) | | (2,388 | ) |
| Balance, June 30, 2017 | 6,862 |
| | — |
| | 342 |
| | 7,204 |
|
| Total restructuring and other exit costs | 871 |
| | 965 |
| | (70 | ) | | 1,766 |
|
| Costs charged against equity/assets | — |
| | (965 | ) | | — |
| | (965 | ) |
| Cash payments | (4,385 | ) | | — |
| | (180 | ) | | (4,565 | ) |
| Balance, September 30, 2017 | 3,348 |
| | — |
| | 92 |
| | 3,440 |
|
| Total restructuring and other exit costs | 361 |
| | 68 |
| | 442 |
| | 871 |
|
| Costs charged against equity/assets | — |
| | (68 | ) | | (286 | ) | | (354 | ) |
| Cash payments | (2,401 | ) | | — |
| | (214 | ) | | (2,615 | ) |
| Balance, December 31, 2017 | 1,308 |
| | — |
| | 34 |
| | 1,342 |
|
| Total restructuring and other exit costs (income) | (156 | ) | | — |
| | 5 |
| | (151 | ) |
| Cash payments | (793 | ) | | — |
| | — |
| | (793 | ) |
| Balance, March 31, 2018 | 359 |
| | — |
| | 39 |
| | 398 |
|
| Total restructuring and other exit costs (income) | (43 | ) | | — |
| | 2 |
| | (41 | ) |
| Cash payments | (271 | ) | | — |
| | (16 | ) | | (287 | ) |
| Balance, June 30, 2018 | 45 |
| | — |
| | 25 |
| | 70 |
|
| Total restructuring and other exit costs (income) | (45 | ) | | — |
| | (12 | ) | | (57 | ) |
| Cash payments | — |
| | — |
| | (13 | ) | | (13 | ) |
| Balance, September 30, 2018 | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2018 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total restructuring and other exit costs (income) included in the Consolidated Statements of Operations are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2018 | | 2017 | | 2016 |
| Cost of revenue | $ | (19 | ) | | $ | 738 |
| | $ | — |
|
| Marketing | (82 | ) | | 2,950 |
| | — |
|
| Product development | (110 | ) | | 3,232 |
| | — |
|
| General and administrative | (38 | ) | | 6,977 |
| | — |
|
| Total restructuring and other exit costs (income) | $ | (249 | ) | | $ | 13,897 |
| | $ | — |
|
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018.2020. “Disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 20182020 at the reasonable assurance level.
Management’s Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management has concluded that its internal control over financial reporting was effective as of December 31, 2018 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report with respect to the effectiveness of our internal control over financial reporting as of December 31, 2018, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified during the fourth quarter ended December, 31, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
Management’s Report on Internal Controls Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management has concluded that its internal control over financial reporting was effective as of December 31, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report with respect to the effectiveness of our internal control over financial reporting as of December 31, 2020, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified during the fourth quarter ended December, 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders (“Proxy Statement”) to be filed with the SEC within 120 days of the fiscal year ended December 31, 2018.2020.
Our Board of Directors has adopted a Code of Conduct applicable to all officers, directors, and employees, which is available on our website (investors.etsy.com) under “Governance—Governance Documents.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments and waivers of our Code of Conduct by posting information on the website address specified above.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to our Proxy Statement.
PART IV.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1) Financial Statements.
Our Consolidated Financial Statementsconsolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8
of this Annual Report on Form 10-K.
(2) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statementsconsolidated financial statements and Notes.accompanying notes.
(3) Exhibits.
Exhibit Index
|
| | | | | | | | | | | |
Exhibit Number | | | Incorporated by Reference | | Filed Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | 8-K | | 001-36911 | | 3.1 | | 4/21/2015 | | |
| | | 8-K | | 001-36911 | | 3.2 | | 4/21/2015 | | |
| | | S-1/A | | 333-202497 | | 10.1 | | 3/31/2015 | | |
| | | S-1 | | 333-202497 | | 10.2.1 | | 3/4/2015 | | |
| | | S-1/A | | 333-202497 | | 10.3 | | 4/14/2015 | | |
| | | | | | | | | | | X |
| | | S-1/A | | 333-202497 | | 10.4 | | 3/31/2015 | | |
| | | S-1 | | 333-202497 | | 10.6 | | 3/4/2015 | | |
| | | 10-K | | 001-36911 | | 10.15 | | 2/28/2017 | | |
| | | 10-Q | | 001-36911
| | 10.1 | | 11/7/2018 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 8/7/2017 | | |
| | | 8-K | | 001-36911 | | 10.1 | | 4/3/2017 | | |
| | | 10-Q | | 001-36911 | | 10.2.2 | | 8/7/2017 | | |
| | | 10-K | | 001-36911 | | 10.11 | | 3/1/2018 | | |
| | | 10-K | | 001-36911 | | 10.12 | | 3/1/2018 | | |
| | | | | | | | | | | X |
| | | S-1 | | 333-202497 | | 10.14 | | 3/4/2015 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 8/4/2016 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit
Number | | | Incorporated by Reference | | Filed
Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | 8-K | | 001-36911 | | 2.01 | | 7/22/2019 | | |
| | | 8-K | | 001-36911 | | 3.1 | | 4/21/2015 | | |
| | | 8-K | | 001-36911 | | 3.2 | | 4/21/2015 | | |
| | | 8-K | | 001-36911 | | 4.1 | | 3/14/2018 | | |
| | | 8-K | | 001-36911 | | 4.2 | | 3/14/2018 | | |
| | | 8-K | | 001-36911 | | 4.1 | | 9/23/2019 | | |
| | | 8-K | | 001-36911 | | 4.2 | | 9/23/2019 | | |
| | | 8-K | | 001-36911 | | 99.2 | | 9/23/2019 | | |
| | | 8-K | | 001-36911 | | 4.1 | | 8/24/2020 | | |
| | | 8-K | | 001-36911 | | 4.2 | | 8/24/2020 | | |
| | | 8-K | | 001-36911 | | 99.1 | | 8/24/2020 | | |
| | | 10-K | | 001-36911 | | 4.6 | | 2/27/2020 | | |
| | | S-1/A | | 333-202497 | | 10.1 | | 3/31/2015 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit
Number | | | Incorporated by Reference | | Filed
Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | S-1 | | 333-202497 | | 10.2.1 | | 3/4/2015 | | |
| | | S-1/A | | 333-202497 | | 10.3 | | 4/14/2015 | | |
| | | 10-K | | 001-36911 | | 10.3.1 | | 2/28/2019 | | |
| | | S-1/A | | 333-202497 | | 10.4 | | 3/31/2015 | | |
| | | S-1 | | 333-202497 | | 10.6 | | 3/4/2015 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 8/7/2017 | | |
| | | 8-K | | 001-36911 | | 10.1 | | 1/15/2021 | | |
| | | 8-K | | 001-36911 | | 10.1 | | 4/3/2017 | | |
| | | 10-Q | | 001-36911 | | 10.2.2 | | 8/7/2017 | | |
| | | 10-K | | 001-36911 | | 10.11 | | 3/1/2018 | | |
| | | 10-K | | 001-36911 | | 10.12 | | 3/1/2018 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 5/7/2020 | | |
| | | 10-K | | 001-36911 | | 10.11 | | 2/28/2019 | | |
| | | S-1 | | 333-202497 | | 10.14 | | 3/4/2015 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 8/4/2016 | | |
| | | 10-K | | 001-36911 | | 10.19.3 | | 3/1/2018 | | |
| | | 10-K | | 001-36911 | | 10.12.1 | | 2/27/2020 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 5/9/2019 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 10/31/2019 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 10/29/2020 | | |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
|
| | | | | | | | | | | |
| | | 10-K | | 001-36911 | | 10.19.3 | | 3/1/2018 | | |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| 101.INS | XBRL Instance Document | | | | | | | | | | X |
| 101.SCH | XBRL Taxonomy Schema Linkbase Document | | | | | | | | | | X |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | | | | | | | | | | X |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | | | | | | | | | | X |
| 101.LAB | XBRL Taxonomy Labels Linkbase Document | | | | | | | | | | X |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document’ | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
*Exhibit
Number | Indicates a management contract or compensatory plan. | | Incorporated by Reference | | Filed
Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
† | These certifications are not deemed to be filed with the SEC | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| 101.INS | XBRL Instance Document | | | | | | | | | | X |
| 101.SCH | XBRL Taxonomy Schema Linkbase Document | | | | | | | | | | X |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | | | | | | | | | | X |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | | | | | | | | | | X |
| 101.LAB | XBRL Taxonomy Labels Linkbase Document | | | | | | | | | | X |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document’ | | | | | | | | | | X |
| 104 | The cover page of the Company’s Annual Report on Form 10-K for the year ended Dec. 31, 2020, formatted in inline XBRL.** | | | | | | | | | | |
* Indicates a management contract or compensatory plan. † These certifications are not deemed to be filed with the SEC and are not to be incorporated by reference into any filing of Etsy, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
** The cover page interactive data file is embedded within the inline XBRL document and included in Exhibit 101.
Item 16. Form 10-K Summary
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| ETSY, INC. |
Date: February 28, 201925, 2021 | /s/ Rachel GlaserMerilee Buckley |
| Rachel Glaser
Merilee Buckley
Chief FinancialAccounting Officer |
| (Principal Financial and Accounting Officer) |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Josh Silverman and Rachel Glaser, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | |
| Signature | Title | Date |
/s/ Josh Silverman Josh Silverman | President, Chief Executive Officer, and Director (Principal Executive Officer) | February 28, 201925, 2021 |
/s/ Rachel Glaser Rachel Glaser | Chief Financial Officer (Principal Financial andOfficer) | February 25, 2021 |
/s/ Merilee Buckley Merilee Buckley | Chief Accounting Officer (Principal Accounting Officer) | February 28, 201925, 2021 |
/s/ Fred Wilson Fred Wilson | Chair | February 28, 201925, 2021 |
/s/ Gary Briggs Gary Briggs | Director | February 28, 201925, 2021 |
/s/ M. Michele Burns M. Michele Burns | Director | February 28, 201925, 2021 |
/s/ Edith Cooper Edith Cooper | Director | February 28, 201925, 2021 |
/s/ Jonathan D. Klein Jonathan D. Klein | Director | February 28, 201925, 2021 |
/s/ Melissa Reiff Melissa Reiff | Director | February 28, 201925, 2021 |
/s/ Margaret M. Smyth Margaret M. Smyth | Director | February 28, 201925, 2021 |
