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 us 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 our brands from misuse by third parties.
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. In addition, in both the United States and abroad, laws and regulations relating to the liability of online marketplaces for activities of their sellers and other third parties are being tested by a number of proceedings.
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 and consumer protection, and the privacy of consumer information;protection; 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
Item 1A. Risk FactorRisk Factorss.
Investing in our securities 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.Report. 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 securities 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-lookingForward-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 experienced rapid growth in our business, in the number of buyers and sellers, and purchase frequency during 2020. Our revenue growth may not be sustainable. While our growth continued in 2021, our rate of growth decelerated as compared to the rapid growth we experienced in 2020 which was driven at least in part by the pandemic-related shift to online purchasing. 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 as we 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 has made and may continue to make us a more attractive target to bad actors and fraudsters targeting our marketplaces and our communities, civil litigants, and those seeking to enforce often questionable intellectual property rights. Our increased visibility has led and may continue to lead to attempts to misrepresent or mischaracterize us or our marketplaces, such as on social media, or via individual or coordinated campaigns. We may not be successful in defending against these types of claims which, if successful, could damage our brands 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. In addition, the recent increased scrutiny and regulation of marketplace platforms, even though focused on other large platforms, has and may continue to create burdens on both Etsy and its communities of buyers and sellers. This may lead to increased risks that shift more quickly than our policies, enforcement mechanisms, and systems can react.
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 continue to decelerate for a number of reasons, including the abatement of the COVID-19 pandemic and other factors described elsewhere in these Risk Factors. For further information about the rate of revenue and GMS growth, see Part II, Item 7, “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 unprecedented ongoing COVID-19 pandemic has impacted our GMS and results of operations, and the pandemic may continue to impact our GMS or our results of operations in numerous volatile and unpredictable ways.
Uncertainty caused by the ongoing COVID-19 pandemic has impacted and may to continue to impact the global economy, e-commerce at large, and global macroeconomic conditions that impact consumer spending. While COVID-19 vaccination efforts are ongoing, the timing, speed, acceptance, and efficacy of vaccinations along with the imposition of movement restrictions and closures vary from location to location, is evolving and, to varying degrees across locations, still remains unpredictable. In addition, the COVID-19 pandemic and related government and private sector responsive actions have affected the broader economies and financial markets and have at points adversely affected, and could again adversely affect, demand for products sold in our marketplaces. It is impossible to predict all the effects and the ultimate impact of the COVID-19 pandemic, as the situation continues to evolve. The COVID-19 pandemic has also disrupted the global supply chain, and various 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 or become more expensive, our GMS and revenue could be negatively impacted.
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 and re-openings, stimulus checks, and “stay at home” practices or mandates. However, we have seen demand for certain items, like handmade masks, diminish significantly with the rollout of vaccines, and as medical grade masks became more widely available. It is also difficult to predict how our business might be impacted by changing consumer spending patterns as the pandemic runs its course. 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. Other factors that could affect consumers’ willingness to make discretionary purchases include, among others: levels of employment, interest and core inflation rates, tax rates, housing costs, the availability of consumer credit, consumer confidence in future economic conditions, and any future stimulus checks. In the event of a prolonged economic downturn or acute recession, significant inflation, or increased supply chain shortages impacting our communities of sellers and the economy as a whole, consumer spending habits could be adversely affected, and we could experience lower than expected GMS, revenue, net income, and Adjusted EBITDA.
As a result of the ongoing COVID-19 pandemic, our employees remain almost fully remote, and a significant number will continue to work remotely as we transition to a hybrid work model. It is possible that these arrangements 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 were to occur, 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 and we transition to a hybrid work model, 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. Such disruptions may impact our operations, internet, or mobile networks, or the operations of one or more of our third-party service providers.
The uncertainty around the duration of business disruptions, and the lifting or imposition of travel restrictions in the United States and other areas of the world, and consumers’ responses to these developments may 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 initial phases of the pandemic. The full extent of the COVID-19 pandemic’s impact on our operations, key metrics, and financial performance depends on future developments that are uncertain and unpredictable, including the timing, acceptance, and efficacy of vaccinations and possible achievement of herd immunity in various locations, the timing of further relaxation, elimination, or imposition of movement and travel restrictions, 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, including as a result of uncertainty or changing spending patterns resulting from the COVID-19 pandemic, the impact or the waning of the impact of any government actions, the seasonality of market transactions, and our sellers’ use of services;
•our ability to convert marketplace visits into sales for our sellers;
•the amount and timing of our operating expenses;
•our success in attracting and retaining sellers and 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, such as our free shipping initiative and changes to our on-site and off-site ads products, including changes to our advertising products that we intend to launch in the second quarter of 2020;introduce;
•the success of our marketing efforts;
•the success of our integration of acquired businesses, such as Depop and Elo7, each of which we acquired in July 2021, and Reverb, which we acquired in 2019;
•our ability to integrate Depop and Elo7 and implement our “House of Brands” strategy;
•adverse economic and market conditions, such asincluding those related to the current COVID-19 pandemic, currency fluctuations, rapidly rising inflation, and adverse global events;
•disruptions or defects in our 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;platforms;
•the impact of competitive developments and our response to those developments;
•our ability to manage our business and future growth; and
•our ability to recruit and retain employees.
Fluctuations in our quarterly operating results, key metrics, and the price of our common 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 reopening of the offline economy and lessening or elimination of restrictions on 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 thequarter-to-quarter comparisons of our results of one quarteroperations 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 24, 2022, we provided guidance for the first quarter of 2022. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that are based on information known when they are issued, and, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies relating to 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 as SARS-CoV-2 variants spread, COVID-19 vaccines and therapies become widely available, and restrictions on movement are lifted or reinstated, future consumer spending patterns, and the associated economic uncertainty on our business. These assumptions are inherently difficult to predict, particularly in the long term. In addition, we completed the acquisition of Elo7 on July 2, 2021 and Depop on July 12, 2021. While all guidance is necessarily speculative in nature, guidance relating to the anticipated results of operations of a recently acquired business is inherently more speculative in nature than other guidance as management will, necessarily, be less familiar with the business, procedures, and operations of the recently acquired business. It can be expected that some or all of the assumptions regarding Depop and Elo7 underlying any guidance furnished by us will not materialize or will vary significantly from actual results. We generally 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 or the removal of restrictions on movement, which could adversely affect our business and future operating results. There are no comparable recent events that provide insights on the probable effects of the ongoing 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, lifting or imposition of restrictions on movement in various regions 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 ongoing 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 the COVID-19 pandemic, the efficacy of vaccines, the impacts of current or new variants of the SARS-CoV-2 virus, and the timing and impact of the easing or reimposition of restrictions on movement, we may continue to provide more limited quarterly guidance, as we did in 2020 and 2021. 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 communities 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 communities may curtail use of our platforms, 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, intentional or accidental actions or inactions by employees or others with authorized access to our networks, phishing attacks, denial-of-service attacks, ransomware, and other cyber incidents. Any of these occurrences could lead to interruptions or shutdowns of one or more of our platforms, 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. While we are investing in recovery systems, security and access controls, and assessments of our vendors’ security for us and our recently acquired subsidiaries, these systems and controls are not yet fully in place and, even when in place, have not always been in the past, and in the future may not be, sufficient to prevent or detect a cyber attack, system failure, or security breach.
In addition, we have experienced in the past, and may experience in the future, technology disruptions, cyber incidents, and security breaches, including intentional, inadvertent, or social engineering breaches occurring through our employees or employees of our third-party service providers. As in the past, 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. As in the past, 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.
We moved to a fully remote work environment due to the COVID-19 pandemic and are transitioning to a hybrid work environment where a portion of our workforce will remain fully remote. In addition, the industry is generally moving to online remote infrastructure for core work. As a result, 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 communities, 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, required notices 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 (and other entities in our supply chain). 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 (and other entities in our supply chain) 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, and which may impact our future access to, 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, as has occurred from time to time in the past, experience a cyber incident or attack such as a breach of their networks, our members’ data may be rendered unavailable, 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 continue to operate in a partial or fully remote work environment and may, as a result, be more vulnerable to cyber attacks. Consequently, a security incident at any of such service providers or others in our supply chain could result in the loss, compromise, or unauthorized access to or disclosure of sensitive or personal data of our buyers or sellers.
Our software is highly complex and may contain undetected errors.
The software underlying our platforms 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 frequently release software code to our platforms. For the Etsy marketplace platform 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 platforms, which can impact the user experience and functionality of our marketplaces. Additionally, due to the interconnected nature of the software underlying our platforms, 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 platforms 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 brands, guiding principles, and mission. Any errors or vulnerabilities discovered in our code after release could also result in damage to our reputation, loss of members of our communities, 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.com’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 would 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 if our strategy proves to be ineffective, our business,and financial performance and growthcondition could be adversely affected. Reverb, Depop, and Elo7 rely on Amazon Web Services for some business operations, and those marketplaces are thus subject to analogous risks.
Our ability to execute our strategy is dependent on a number of factors, including the abilityThe trustworthiness of our senior management team and key team leaders to execute the strategy, our ability to maintain our pace of product experiments coupled with the success of such initiatives and our ability to meet the changing needs of our sellers and buyers,marketplaces and the ability ofconnections within our employeescommunities are important to perform at a high level.our success. If we are unable to executeretain our strategy, ifexisting buyers and sellers and activate new ones, our strategy does not drive the growthfinancial performance could decline.
We are focused on ensuring that our marketplaces embody our mission and values, and that we anticipate,deliver trust and reliability throughout the buyer and seller experiences. Our reputation and brands 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 platforms, or our policies and guidelines, even if factually incorrect or based on isolated incidents;
•an inability to gain the public perceptiontrust of prospective buyers;
•disruptions or defects in our marketplaces, privacy or data security incidents, website outages, payment disruptions or other incidents that impact the reliability of our platforms;
•lack of awareness of our policies or confusion about how they are applied;
•changes to our policies that members of our communities perceive as inconsistent with their best interests or our mission, or that are not clearly articulated;
•inadequacies in our House Rules or 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 repeated widespread 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 communities; or
•a failure to operate our business in a way that is thatconsistent with our guiding principles and mission.
Creating trusted brands is one of the key elements of our strategy. In particular, we are not executingfocused 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 strategy,marketplaces. If our efforts are unsuccessful, or if our market opportunity is not as large ascustomer service platforms or our trust and safety program fail 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 brands, 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 communitycommunities of buyers and 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 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 us and purchase items in our marketplaces more frequently. We must also continue to encourage ourfrequently and sellers to list items for sale and use our services.services, our financial performance may be negatively impacted.
We believe that many new buyers and sellers find us by word of mouth and other non-paid referrals from existing buyers and sellers. If existing buyers do not find our platform appealing, whether because of a negative experience, lack of competitive shipping costs, inadequate customer service, lack of buyer-friendly features, declining interest in the nature of the goods offered by our sellers, or other factors, they may make fewer purchases and they may stop referring others to us. Likewise, if existing sellers are dissatisfied with their experience on our platform, they may stop listing items in our marketplaces and using our services and may stop referring others to us. Under any of these circumstances, we may have difficulty attracting new buyers and sellers without incurring additional expense.
Our GMS and revenue is concentrated in our most active buyers and sellers. The early part of the pandemic fueled an unprecedented increase in the growth of new buyers and reactivated lapsed buyers, although in recent quarters we have seen the growth rate decline on a year-over-year basis. We have also seen a higher than recent historic growth rate of new sellers. If we lose a significant number of those buyers, andor sellers, due to the abatement of pandemic restrictions, increased seller fees 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 recent 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,communities, our business, financial performance, and growth wouldcould 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.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 wouldcould be harmed. TrendsA shift in trends away from socially-conscious consumerism, and buying second-hand fashion, or unique or vintage rather than mass produced goods, which has historically been beneficial to our business, could also shift or slow which would make it more difficult to attract new buyers and sellers. In addition, ourOur growth would also be harmed if the shift from brick and mortar retail to e-commerce does not continue.continue, or reverses when the COVID-19 pandemic abates. We believe that many new buyers and sellers find us by word of mouth and other non-paid referrals from existing buyers and sellers. If existing buyers do not find our platforms 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 our sellers, or other factors, they may make fewer purchases and they may stop referring others to us. Likewise, if existing sellers are dissatisfied with their experience on our platforms, or feel they have more attractive alternatives, they may stop listing items in our marketplaces and using our services and may stop referring others to us. Under any of these circumstances, we may have difficulty attracting new buyers and sellers without incurring additional expense.
We 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 platforms. As a pure marketplace, our sellers manage their shops, most policies, products and product descriptions, shipping and returns. As a result, we may not have the ability to control important aspects of buyers’ experiences on our platforms. 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. Popular or trending sellers may experience an influx of orders that may be beyond their ability to fulfill in a timely manner. 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 ability to attract and retain our sellers and buyers or damage our reputation. We take action against sellers who we are aware 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 or avoiding negative publicity.
As our marketplaces grow, our controls over fraud and policy violations are important to maintaining user trust, but they may not be adequate and may not be sufficient to keep up with quickly-shifting techniques used by those attempting to undertake fraudulent activity on our platforms. While we regularly update our processes for handling complaints and detecting policy violations, these processes are by their nature imperfect in a dynamic, quickly growing marketplace, and include risk to us, our sellers, and our buyers from both under-enforcement and over-enforcement.
A perception that our levels of responsiveness and support for our sellers and buyers are inadequate could have similar results. In some situations, we may choose to reimburse our buyers 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 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 platforms. 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, customs delays, natural disasters, inclement weather, terrorism, public health crises, or political unrest. For example, a number of countries continue to experience delays in shipping due to the COVID-19 pandemic, and supply chain disruptions and shipping delays may become more widespread. If buyers have a negative purchase experience, whether due to delay or other reasons, our reputation could be damaged.
Our company has only recently become profitable,business depends on third party services and technology which we utilize to maintain and scale the technology underlying our platforms 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 platforms.
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 platforms 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 platforms. 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, governments of one or more countries have in the past and may continue to seek to censor content available on our platforms, attempt to apply their local requirements extra-territorially, or may even attempt to block access to our platforms. If we are restricted from operating in one or more countries, our ability to attract and retain sellers and buyers may be adversely affected and we may not maintainbe 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 current rate of revenue growth or profitability in the future.
WeCOVID-19 pandemic and other factors, our sellers have experienced rapid growthincreased delays in delivery of their goods. If these shipping delays continue or worsen, 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, in the numberfinancial 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.
The payment offerings provided on each of our marketplaces differ and, as such, are subject to varying degrees and types of risk. In particular, each payment offering has a different level of reliance on third parties to perform certain aspects of its services. 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 sellerssellers. If we fail to invest adequate resources into our payments platforms, 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 brands, which, in turn, could adversely affect our GMS and results of operations.
We rely upon third-party service providers to perform key components of our payments platforms, including payments processing and payments disbursing, compliance, currency exchange, identity verification, sanctions screening, tax collection, 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 brands 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 numbermajor card brands’ rules and
regulations, contractual indemnification obligations or other obligations contained in which we have sellersmerchant agreements and buyers,similar contracts, and we planmay lose our ability to continue to grow in the future. Our costs may increaseaccept payment cards as we continue to invest in the development of our platform, includingpayment for our services and technological enhancements,our sellers’ goods and increaseservices.
In addition, we and our marketing efforts, expand our operations, and hire additional employees. Further, the growth of our business places significant demandsthird-party service providers may experience service outages from time to time that negatively impact payments on our management teamplatforms. We have in the past experienced, and pressuremay in the future experience, such payments-related service outages and, if we are unable 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 in line with our current growth. If we do not manage our growth effectively, the increases in our operating expenses could outpace any increases in our revenue andpromptly remedy or provide an alternative payment solution, our business could be harmed. In addition, if our revenuethird-party providers increase the fees they charge us, our operating expenses, or those of our sellers, 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 third-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, we, along with our sellers, may declinebecome 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. In addition, should one of our subsidiaries become regulated as a financial services entity in any jurisdiction, we would be subject to additional regulation. 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, for example, 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 platforms, usage of our payments services, and our revenue growth rate may decelerate for a number of reasons, including the deceleration of our GMS growth rate 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.
marketplaces.
Our business could be adversely affected by economic downturns, inflation, natural disasters, public health crises such as the COVID-19 pandemic, political crises, geopolitical changes, or other unexpected events.macroeconomic conditions, which have in the past and may in the future negatively impact our business and financial performance.
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 platformplatforms 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 we have seen significant and rapid shifts in consumer purchasing behavior as this pandemic has evolved, particularly as it relates to items sought on Etsy. Other factors that could affect consumers’ willingness to make discretionary purchases include, among others: levels of employment, interest and core inflation rates, tax rates, housing costs, the availability of consumer credit, consumer confidence in future economic conditions, and any future stimulus checks. 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 sellers offering their goods in our marketplaces could decline and the number of goods listed in our marketplaces could decline. In addition, currency exchange rates may directly and indirectly impact our business. For example, continued uncertainty around the United Kingdom’s exit from the European Union, or E.U., commonly referred to as Brexit, may result in future exchange rate volatility, which may strengthen the U.S. dollar against foreign currencies. 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, 2019,2021, approximately 81%74% 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, supply chain disruptions, 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, political instability or crises, public health crises and significant news items in the United States or internationally that distract the public,if they occur, may impact buyer behaviordemand for discretionary goods, andimpact sellers’ ability to run their businesses on our marketplaces and ship their goods, which may increase seller defaults and delinquencies. These kinds of events may also impact consumer perceptions of well-being and security, which may adversely impact consumer discretionary spending. Ifour ability to execute on our strategy, any of which 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, business practices, including those related to the environment, and taxation of income, goods, and services) sometimes with attempts to apply these laws and regulatory standards extra-territorially;
•defending our marketplaces against international litigation, including in jurisdictions that may not offer judicial norms or protections similar to those found in the United States;
•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, supply chain delays, 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 and retain key employees is important to our success. Significant attrition or turnover could impact our ability to grow our business.
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 communitycommunities 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, including employees of recently acquired companies such as Depop and Elo7, and continuing to do so in a remote or hybrid work environment;
•continuing to find promotion opportunities forto retain key employees intofor leadership 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, San Francisco, Dublin, and Chicago, is challenging.challenging and may be challenging in London, São Paulo, and Mexico City as well, as competition for engineering talent continues to increase rapidly. 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.
Most of our employees are currently working on a fully remote or very nearly fully remote basis, even though we have started to reopen our offices. As we continue reopening our offices, we are planning to migrate towards a hybrid work model in which some of our employees will remain fully remote and others will return to our offices with a flexible schedule. If our needs are not aligned with our employees’ preferences, it may adversely affect our ability to recruit and retain employees. If we continue to operate with most of our employees located outside of our offices, such arrangements 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 or on reasonable terms, particularly in critical areas of operations such as engineering, we may not achieve our strategic goals and our business and operations could be harmed.
We may be unable to adequately protect our intellectual property.
Our intellectual property is an essential asset of our business. To establish and protect our intellectual property rights, we rely on a combination of copyright, trademark, and patent laws, as well as confidentiality procedures and contractual provisions. We also rely on trade secret protection for parts of our technology and intellectual property. The trustworthinessefforts 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, patent filings may not be adequate alone to protect our intellectual property, and may not be sufficiently broad to protect our proprietary technologies. 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 platforms.
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 when we do detect violations, we have in the past and may in the future need to engage in litigation, use of takedowns and similar procedures, 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 unenforceable. 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 ability to protect our intellectual property and defend against third party claims. If we are unable to cost-effectively protect our intellectual property rights, 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 services taxes, or online sales taxes. In 2021, the administration of President Joseph R. Biden, as well as several members
of Congress, through the fiscal budget reconciliation process, released proposed legislation that includes several significant modifications to key income tax provisions, as well as introduced new provisions, to the U.S. internal revenue code. The proposed legislation includes, among other things, an increase to U.S. tax on certain foreign earnings, an increase to the limitation of deductible interest expense, and an increase to the disallowance of a deduction for certain named executive officers’ compensation. Although it is uncertain if some or all of the identified provisions will be enacted, a change in U.S. tax law would likely materially and adversely impact our income tax liability, deferred tax asset or liability balances, 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 sellers on our platforms. In evolving areas such as platform products liability, recent court decisions such as McMillan v. Amazon in Texas, and Loomis v. Amazon and Bolger v. Amazon in California, suggest that different jurisdictions may take differing positions on the scope of e-commerce platform liability for seller products. In some circumstances, a platform might be held liable for violations of applicable legal regimes by sellers and their products, such as intellectual property laws, privacy and security laws, product regulation, or consumer protection laws. 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 platforms 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 platforms, changes to our marketplaces or business model, or other damage to our brands 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 sellers and buyers. As a result, we face competition from a wide range of online and offline competitors.
We compete for sellers with marketplaces, retailers, social media commerce, and companies that sell software and services to small businesses. For example, in addition to listing her goods for sale on the Etsy marketplace, a seller can list her goods with 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 TikTok. She may also sell wholesale directly to traditional retailers, including large national retailers, who discover her goods in our marketplaces or otherwise. We similarly compete for sellers on our other marketplaces, Depop, Reverb, and Elo7, which sellers may list their goods with online retailers such as Vinted, ThredUp, or Poshmark, in the case of Depop, Sweetwater, in the case of Reverb, or MercadoLibre, in the case of Elo7, among others, or sell through other venues, marketplaces, retailers, or commerce channels.
We also compete with companies that sell software and services to small businesses, enabling a seller to sell from her own website or otherwise run her business independently of our platforms, or enabling her to sell through multiple channels, such as BigCommerce, Wix, and Shopify.
We compete to attract, engage, and retain sellers based on many factors, including:
•the value and awareness of our brands;
•the effectiveness of our product and marketing investments;
•the effectiveness of our scaled member support and trust and safety practices and policies;
•the global scale of our marketplaces and the connections withinbreadth of our communityonline 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 mobile apps;
•the strength of our communities; and
•our mission.
In addition, we compete with retailers for the attention of buyers. A 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, 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 and habits evolve, 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 and awareness of our brands;
•the effectiveness of our marketing;
•the person-to-person commerce experience;
•customer service;
•our reputation for trustworthiness;
•the effectiveness of our mobile apps;
•the availability of timely, fair, and free shipping offered by sellers to buyers;
•ease of payment;
•localization and experiences targeted based on regional preferences, and
•the availability and reliability of our platforms.
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. 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 on-platform apps or e-commerce transactions. To the extent Etsy and our sellers may rely on these competitors’ services, such services may be integrated into site functionality, and these competitors may have access to substantial data about Etsy and its communities of buyers and sellers. As a result, they may have the ability to reduce our ability to service our users, reduce our ability to obtain analytics or information to optimize advertising 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 risk 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 importantsituated to comply. If legislation or regulatory inquiries, even if focused on other entities, requires us to expend significant resources in response or results in the imposition of new obligations, our success. business and results of operations could be 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 them,compete successfully, or if competing successfully requires us to expend significant resources in response to our competitors’ actions, our business and results of operations could be adversely affected.
Depop’s growth and profitability depends on its ability to attract new buyers and sellers, expand internationally and to compete effectively in new and existing markets.
Depop provides an online platform for resale of used and vintage apparel and accessories. To grow GMS and profitability, Depop must grow its active seller and buyer communities in the United States and the United Kingdom, expand into new geographies, and compete effectively in the increasingly competitive resale sector.
The markets for resale and secondhand items are highly competitive. In addition, Depop competes with vendors of new and secondhand items, including branded goods stores, local, national, and global department stores, traditional brick-and-mortar consignment and thrift stores, specialty retailers, direct-to-consumer retailers, discount chains, independent retail stores, the online offerings of traditional retail competitors, and resale sellers specializing in niche or narrow categories, as well as online marketplaces that may offer the same or similar goods and services that Depop offers. Competitors offering secondhand apparel include other online marketplaces, such as eBay, Vinted, ThredUp, Poshmark, and The RealReal. Other competitors include: large online and traditional retailers such as Amazon, H&M, Kohl’s, and Walmart; off-price retailers, such as Burlington Stores, Ross Stores, and The TJX Companies and low-cost fast-fashion retailers such as Shein. We believe Depop’s ability to compete depends on many factors, many of which are beyond its control, including:
•attracting and retaining active buyers and sellers and increasing the volume of secondhand items they buy and sell;
•sellers offering a broad selection of desirable and high-quality secondhand items on Depop’s marketplace;
•continuing appeal of secondhand fashion to Gen Z and other demographics;
•growing favorable brand recognition in new and existing markets;
•the speed and cost at which Depop sellers ship purchased items to buyers; and
•the ease with which Depop buyers and sellers can purchase, supply, and return secondhand items.
As resale markets continue to evolve and expand, we anticipate competition in this sector to increase. Moreover, consumer preferences may change, or growth in consumer demand for used items may decelerate or even decrease, and buyers may not purchase through Depop’s marketplace as frequently or spend as much with Depop sellers as they have historically. Relatedly, an inability to attract and retain buyers could harm our ability to attract and retain sellers, and buyers could suffer.
We are focused on ensuring that our marketplaces embody our values-based culture and that we deliver trust and reliability throughout the buyer experience. Our reputation depends upon our sellers, the quality ofwho may decide to resell their offerings and their adherence to our policies.
The trustworthiness of our marketplaces and the connections among the members of our community are the cornerstones of our business. Many things could undermine these cornerstones, such as:
complaintsitems through alternative platforms 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 marketplaces, such as the increased pace of product experimentation, privacy or data security breaches, 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 clearly articulated;
inadequacies in our terms of use;
frequent product launches or updates that could deteriorate member trust;
a failure to enforce our policies effectively, fairly and transparently, including, for example, by allowing the widespread listing of prohibited items in our marketplaces;
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.
Creating a trusted brand is one of the key elements of our strategy. In particular, we are focused on enhancing customer service for sellers and buyers. For example, in 2019, we continued to evolve our offerings with Zendesk to improve our customer experience on the Etsy marketplace. In addition, we plan to introduce new customer service features and tools to support a positive user experience on the Etsy marketplace. If our efforts to enhance customer service are unsuccessful or if our customer service platform fails to meet our needs, we may need to invest additional resources in customer service and our ability to maintain trustworthy marketplaces could be harmed.
If we are unable to maintain trustworthy marketplaces and encourage connections among members of our community, then our ability to attract and retain sellers and buyers could be impaired and our reputation and business could be adversely affected.marketplaces.
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 sellers and 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 platformplatforms 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, Etsy’s free shipping initiative and the planned changes to our advertising products expected to launch in the second quarter of 2020. Our sellers and 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,platforms, our sellers and 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 sellers and 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.
If the widely adopted mobile, social, search, and/or 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.
We are dependent on widely-adopted third party platforms to reach our customers, such as popular mobile, social, search, and advertising offerings. If we are not able to deliver a rewarding experience on these 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 business may be harmed. 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 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, such as when impacted or limited by a change imposed by a third party platform, 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.
Conversion rates differ between web, mobile web, and mobile app traffic. If visits to our platforms from sources with lower conversion rates (such as mobile web for the Etsy.com marketplace) were to increase as a percentage of overall visits, it could adversely impact our conversion rate and reduce GMS on our platforms which could adversely affect our business, financial performance, and growth.
The success of our marketplaces could also be harmed by factors outside our control, such 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 platforms, such as for our mobile apps or social network presence;
•unfavorable treatment received by our platforms, especially as compared to competing platforms, such as the placement of our mobile apps in a mobile app download store;
•increased costs to distribute or use our platforms via mobile 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, our understanding of the usage or our services, or that give preferential treatment to competitive 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 sellers and buyers encounter difficulty accessing or using our marketplaces through these widely adopted access providers, our business, financial performance, and growth may be adversely affected.
Expanding our operations 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.
We are focused on growing our business both inside and outside of the United States. Although we have a significant number of sellers and buyers outside of the United States, we are a U.S.-based company with less experience developing local markets internationally and may not execute our strategy successfully. Operating outside of the United States also requires significant management attention, including managing operations and people over diverse geographic areas with varying cultural norms and customs, and adapting our platforms and business operations to local markets.
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, certifications, representative requirements, and customs requirements 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, our international growth strategy may be adversely affected by the extent to which the COVID-19 pandemic outside the United States results in further quarantines, closures, delayed or terminated delivery services, and movement restriction.
Our success outside the United States also depends upon our ability to attract sellers and buyers from the same countries in order to enable the growth of local markets. An inability to develop our communities globally or to otherwise grow our business outside of the United States in a cost-effective manner 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. 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, 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.
Despite our execution efforts, the goods that sellers list on our Etsy and Reverb marketplaces 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 Etsy and Reverb 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 a strong U.S. dollar relative to other currencies and the fact that most of the goods listed on these platforms are denominated in U.S. dollars. Similarly, non-U.K. consumers may be less familiar with Depop, or find the listed items less appealing, than consumers in the United Kingdom, and non-Brazilian consumers may be less familiar with Elo7, or find the listed items less appealing, than consumers in Brazil.
Continued international expansion may also require significant financial investment. For example, Etsy has made investments to address growth opportunities in India, a dynamic market where we have limited operating experience, and acquired Elo7 which extends Etsy’s reach in Latin America. To facilitate continued international expansion, we plan to continue investing 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 additional 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.
Our recent acquisitions of Depop and Elo7 may create strains on our management, technology, and operational resources and may prove to be costlier and take longer to integrate than we anticipate, which may ultimately reduce or eliminate the benefits to Etsy of the acquisitions.
We expect that our acquisitions of Depop and Elo7 will continue to require significant attention and resources from our management team and workforce, including our technology, operations, accounting, and human resource units. Devoting resources to the integration of Depop and Elo7 means that these resources will be redeployed to varying degrees from their normal day-to-day activities supporting existing Etsy functions. This could impair our effectiveness and efficiency in serving existing Etsy sellers and buyers and may have an adverse impact on our financial condition or results of operations. For example,
to the extent our products and marketing teams are involved in supporting Depop and Elo7, they may be unable to devote sufficient time to product and marketing efforts relating to the Etsy and Reverb marketplaces which may materially impact our business, growth, or results of operations.
We incurred substantial transaction fees and costs in connection with our acquisitions of Depop and Elo7 and may experience difficulty in realizing the expected benefits of the acquisitions.
We incurred significant non-recurring expenses in connection with our acquisition of Depop and, to a lesser extent, our acquisition of Elo7, including legal, accounting, filing, financial advisory, and integration planning and other expenses. Additionally, while we intend to operate Depop and Elo7 as stand-alone marketplaces, we may continue to incur significant expenses as we invest to grow their respective businesses and implement public company compliance policies and procedures (including effective internal control over financial reporting and disclosure controls and procedures, as well as information privacy controls).
Also, the success of the Depop and Elo7 acquisitions will depend, in part, on our ability to apply Etsy’s technological, marketing, and operational expertise to help scale their growth in a profitable, efficient, and effective manner, including maintaining relationships with their respective sellers, buyers, and third party service providers. Because our business and the Depop and Elo7 businesses differ in certain respects, we may not be able to manage these businesses smoothly or successfully and may experience difficulty in realizing the expected benefits of the acquisitions.
Potential difficulties that may be encountered include the following:
•the loss of key employees;
•challenges in executing on Depop’s and Elo7’s business plans; and
•potential unknown liabilities, unforeseen expenses, and other complexities associated with integrating Depop and Elo7 into and managing our “House of Brands.”
In addition, we recorded approximately $1.1 billion and $157.2 million of goodwill from our acquisitions of Depop and Elo7, respectively. We review goodwill for impairment at least annually. Impairment may result from, among other things, deterioration in performance, adverse market conditions, including adverse market conditions arising from the COVID-19 pandemic, adverse changes in applicable laws or regulations, challenges applying Etsy’s technological, marketing, and operational expertise to help scale the Depop and Elo7 marketplaces in a profitable, efficient, and effective manner, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations and could have a material adverse effect on our financial position and results of operations.
If we are unable to successfully integrate Depop and Elo7 into our “House of Brands” strategy, we may be unable to realize the benefits we expect to achieve as a result of these acquisitions. As a result, our business, growth and/or results of operations could be adversely affected.
We may have limited redress with respect to claims under the Depop and Elo7 acquisition agreements.
The agreements pursuant to which we acquired Depop and Elo7 contain representations, warranties, and covenants that are customary for transactions of their nature, as well as limitations on the obligations and liabilities of the former equityholders of Depop and Elo7, as applicable, including in the case of the Depop acquisition, no recourse directly against Depop’s former shareholders for a breach of the business-related representations and warranties. In connection with the Depop acquisition, we have obtained customary representation and warranty insurance to insure against losses that may arise from breaches of certain representation and warranties included in the Depop acquisition agreement, which policy is itself subject to specified limitations and exclusions. Under the Elo7 agreement, an indemnity escrow was established. Our ability to make claims and recover against the escrow and the sellers may be contractually time-barred under the Elo7 merger agreement. Depending on the nature of the claim, our ability to make claims will expire between 18 month and six years from the date of the acquisition. There can be no assurance that, in the event of a claim made in connection with the Depop acquisition, the policy would cover the relevant losses, nor can there be any assurance that the proceeds that are recoverable under the policy (if any), in the case of the Depop acquisition, or the proceeds that are recoverable from the indemnity escrow, if available, in the case of the Elo7 acquisition, would be sufficient to compensate us for any losses incurred. Therefore, we may have no or limited recourse with respect to claims for breach of the representations, warranties, covenants, or other provisions contained in the Depop and Elo7 acquisition agreements which could adversely affect our financial condition and results of operations.
The due diligence undertaken by us in connection with the Depop and Elo7 acquisitions may not have revealed all relevant considerations or liabilities of Depop and/or Elo7, which could have an adverse effect on our financial condition or results of operations.
Although we conducted due diligence in connection with our acquisitions of Depop and Elo7, we cannot assure you that this due diligence revealed all relevant facts necessary to fully evaluate Depop and Elo7. Furthermore, the information provided during due diligence may have been incomplete, inadequate, or inaccurate. As part of each due diligence process and our evaluation of the relevant opportunity, we also made subjective judgments regarding the results of operations, financial condition, and prospects of Depop and Elo7. If the due diligence investigation failed to correctly or completely identify material issues and liabilities that may be present in Depop or Elo7, or if we considered certain risks to be commercially acceptable relative to the respective opportunity, we may incur substantial, unexpected, or greater than anticipated expense should such issues, liabilities, or risks materialize. In addition, we may be subject to significant, previously undisclosed liabilities of Depop and Elo7 that were not identified during due diligence and that could contribute to poor financial or operational performance and have an adverse effect on our financial condition and results of operations.
We may expand our business through additional 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 businesses in the past, including our recent acquisitions of Depop and Elo7 in July 2021, and may acquire additional businesses or technologies, or enter into strategic partnerships, in the future. We 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 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. Any future acquisitions or partnerships may result in unforeseen operational difficulties and expenditures associated with:
•integrating new businesses and technologies into our infrastructure;
•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;
•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, 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.
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 communities.
Our marketing efforts to help grow our business may not be effective.
Maintaining and promoting awareness of our marketplaces and services is important to our ability to attract and retain sellers and buyers. One of the key parts of our strategy 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 specialpurchase occasions.
We continue to iterate on and invest in our marketing strategies for each of our marketplaces, which 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 primaryperformance 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. email marketing. If we fail to scale and deliver an effective return on investment in any of these marketing efforts, it may harm our business. We also engage with celebrities and influencers as part of our marketing efforts, and our perceived affiliation with these individuals could cause us brand or reputational damage in the event they undertake actions inconsistent with our brands and values.
Additionally, we engageinvest significantly in brand advertising via channels such as television and digital video advertising. If we do not produce effective content or purchase effective air time and placement for that content, it could fail to deliver a return on our investment, and damage our brands 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, brands, and values, which could result in failure to deliver a return on our investment, media or regulatory scrutiny, and damage to our brands 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, and mayalter analytics or search engine optimization data available to us or make other changes to the way results are displayed, which can negatively affect the placement of links to our marketplaces and therefore, reduce the number of visits toor otherwise negatively impact our marketplaces. 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-partiesthird 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 GMS. Therevenue. Etsy-provided controls for users to limit third party advertising features, the growing use of online ad-blocking software, including onand technological changes to browsers and mobile devices, may alsooperating systems impact the successeffectiveness of, or our visibility and insights into, our marketing efforts becauseefforts. As a result, we may reach a smaller audience and fail to bring more buyers, or fail to increase frequency of visits to our platform.platforms. In addition, ongoing privacylegal and regulatory changes in the data privacy sphere, such as the EUE.U. General Data Protection Regulation (“GDPR”) and, the California Consumer Privacy Act of 2018 (“CCPA”), the California Privacy Rights Act of 2020 (“CPRA”), and additional laws being passed or considered in U.S. States and countries throughout the world may impact the scope and effectiveness of marketing and advertising services generally, including those used on our platform.
platforms.
We also obtain a significant number of visits through email.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 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.
IfSome 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 mobile solutions availableefficiency of our marketing efforts and our access to data about use of our platforms. 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 brands, 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 seller, a buyer, or a third party and are implementing and enforcing similar policies at Depop and Elo7 as we integrate them into our marketplace policy program. Additionally, we prohibit a range of items on our marketplaces, including (but not effective,limited to): drugs, alcohol, tobacco, weapons, endangered animal products, hazardous materials, recalled items or those that create an unreasonable risk of harm, 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 uphold the safety and integrity of our marketplaces, engender trust in the use of our services, and encourage positive connections among members of our communities. 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, inconsistent, or conflicting regional consensus or regulatory standards in different jurisdictions, or it could be perceived to be arbitrary, unclear, or inconsistent. Similarly, the tools and processes in place with respect to Etsy’s recently acquired marketplaces, Elo7 and Depop, are not as sophisticated or mature as those used by Etsy. Shortcomings and errors in our ability to enforce our policies across our marketplaces could decline.
Purchases made on mobile devices by consumers, includinglead to negative public perception, distrust from our buyers, have increased significantlymembers, or lack of confidence in recent years. The smaller screen size and reduced functionality associated with some mobile devices may make the use of our platform more difficultservices, and could negatively impact the reputation of our brands. In particular, certain enforcement decisions, even those we deem necessary for the health and safety of our marketplaces, may be received negatively by stakeholders or less appealing. Our sellers are also increasingly using mobile devicesthe public, such as:
•we may choose to operate their businesseslimit or prohibit the sale of items in our marketplaces based on our platform. Ifpolicies, even though we are not ablecould benefit financially from the sale of those items;
•from time to deliver a rewarding experience on mobile devices,time, we may revise our sellers’ ability to manage and scale their businessespolicies in ways that we believe will enhance trust in our platforms, even though the changes may be harmed and, consequently, our business may suffer. Further, although we strive to provide engaging mobile experiences for both sellers and buyers who visit our mobile websites using a browser on their mobile device, we depend on our sellers and buyers using our mobile apps for the optimal mobile experience. Mobile web conversion rate is lower than our desktop and Buy on Etsy app conversion rates. Therefore, if mobile web visits continue to grow as a percentage of overall visits, it could be a headwind to future conversion rate gains and result in less GMS 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.
The success of our mobile apps could also be harmed by factors outside our control, such as:
actions taken by providers of mobile operating systems or mobile app download stores;
unfavorable treatment received by our mobile apps, especially as compared to competing apps,perceived unfavorably, such as updates to the placement ofway we define handmade.
We are subject to risks related to our mobile apps in a mobile app download store;environmental, social, and governance activities and disclosures.
increased costs to distribute or use our mobile apps; or
changes in mobile operating systems, such as iOS and Android,We have developed an Impact strategy that degrade the functionality of our mobile website or mobile apps or that give preferential treatment to competitive products.
If sellers and 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, our business, financial performance, and growth may be adversely affected.
Expanding our community 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 we are focusedfocuses on growing sustainably by aligning our mission and business outsidestrategy to help create economic impact through entrepreneurship. We have also announced a number of the United States.Although we havegoals and initiatives and elected to publicly report on a significant number of sellersenvironmental and buyers outside of the United States,social metrics that we aremonitor (our “ESG metrics”) and include them in this Annual Report. As a U.S.-based companyresult, our business may face heightened scrutiny for these activities. See Part I, Item 1, “Business—ESG Reporting: Our Impact Goals, Strategy & 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 less experience developing local markets outside the United Statesa financial statement audit and such review process may not identify errors and may not execute our strategy successfully. Operating outsideprotect us from potential liability under the securities laws. In addition, for some of the United States also requires significant management attention, including managing operationsmetrics we report, the methodology of computation and/or the scope of our value chain assessed continues to evolve from year to year. As a result, period over a broad geographic area with varying cultural norms and customs, and adapting our platform to local markets.
Despite our execution efforts, the goods that sellers list on our sitesperiod comparisons may not appealbe meaningful.
The implementation of our goals and initiatives may require considerable investments, and our goals, with all of their contingencies, dependencies, and in certain cases, reliance on third-party verification and/or performance, are complex and ambitious, and we cannot guarantee that we will achieve them. If we do not demonstrate progress against our Impact strategy or if our Impact strategy is not perceived to non-U.S. consumersbe adequate, our reputation could be harmed. We could also damage our reputation and the value of our brands if we fail to act responsibly in the same way as they doareas in which we report and demonstrate that our commitment to consumersour Impact strategy enhances our overall financial performance.
Additionally, there can be no assurance that our current programs, reporting frameworks, and principles will be in the United States. In addition, non-U.S. buyers are not as familiarcompliance with the Etsyany new environmental and Reverb brands as buyerssocial laws and regulations that may be promulgated 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 strong U.S. dollar relative to other currencieselsewhere, and the fact that mostcosts 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 bychanging 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 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.
Our success outside the United States depends upon our ability to attract sellers and 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 our community globally or to otherwise grow our business outside of the United States on a cost-effective basis 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. 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. Some of our competitors may also be ablecurrent practices to developcomply with any new legal and grow internationally more quickly than we will.
Continued expansion outside of the United States may also require significant financial investment. For example,regulatory requirements 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 also made initial investments to explore growth opportunities in India, a dynamic market where we have limited operating experience. 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 Stateselsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more costlyrobust 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 liabilitieswhat is required 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 similarany new laws and regulations, in other jurisdictions;and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers.
varying levelsAny 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 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 U.K. and European markets caused by Brexit; and
barriers to international trade, such as tariffs, customs or other taxes.
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. In particular, buyers and sellers seekingand our partners and vendors to engage in cross-border sales may become subjectdo business with us, or investors’ willingness to an increasing number of barriers to international trade such as tariffs, customspurchase 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 United Kingdom’s recent departure 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 January 31, 2020, the United Kingdom formally withdrew from the E.U. Under the terms of its withdrawal, the United Kingdom will be subject to a transition period until December 31, 2020, during which the United Kingdom will remain in the single market and customs union. The United Kingdom and the E.U. have begun negotiations to determine these relationships following the expiration of the transition period.
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 laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, privacy and information security laws, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the United Kingdom, increase costs and depress economic activity. 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 going forward.
The United Kingdom is onehold shares of our core markets. We are continuing to monitor Brexit developments to enable us to adjust our business and operations as appropriate with the goal of continuing to provide services to our United Kingdom and E.U. buyers and sellers after the transition period ends, including in the event of loss of all U.K. access to E.U. markets as well as lack of favorable resolution with regard to other E.U. rules and regulations. A failure by the U.K. and E.U. to negotiate agreements favorable to the United Kingdom by the end of the transition period and ongoing uncertainty with respect to potential divergent
regulatory standards, however, could result in additional operational, regulatory and compliance costs to us as well as decreased revenue, allcommon stock, any of which could adversely affect our business, financial performance, and growth.
If we are unable to successfully execute on our business strategy or if our strategy proves to be ineffective, our business, financial performance, and growth could be adversely affected.
Our ability to execute our strategy, including our ”House of Brands” strategy, is dependent on a number of factors, including the ability of our senior management team and key team leaders to execute the strategy, our ability to iterate in a rapidly evolving e-commerce landscape, maintain our pace of product experiments coupled with the success of such initiatives, our ability to meet the changing needs of our sellers and buyers, and the ability of our employees to perform at a high level. If we are unable to execute our strategy, if our strategy does not drive the growth that we anticipate, if the public perception is that we are not executing on our strategy, or if our market opportunity is not as large as we have estimated, it could adversely affect our business, financial performance, and 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- and long-term investments, together with cash generated from operations, will be sufficient to meet our anticipated operating 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.
We 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 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 “2018 Notes”), the 0.125% Convertible Senior Notes due 2026 we issued in September 2019 (the “2019 Notes”), the 0.125% Convertible Senior Notes due 2027 we issued in August 2020 (the “2020 Notes”), and the 0.25%
Convertible Senior Notes due 2028 we issued in June 2021 (the “2021 Notes” and together with the 2018 Notes, the 2019 Notes, and the 2020 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 ability 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, 2021, 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 Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” 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.
Our operations are subject to anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act (“FCPA”), which generally prohibit us and our officers, employees, and third party intermediaries from, directly or indirectly, offering, authorizing, or making improper payments to government officials and other persons for the purpose of obtaining or retaining business or another advantage. Our operations are also subject to U.S. and foreign export controls, trade sanctions, and import laws and regulations. Such laws may restrict or prohibit the provision of certain products and/or services to countries, governments, and persons targeted by U.S. sanctions. 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. In addition, we could be subject to penalties, fines, other sanctions, and/or significant expenses.
Our brands may be harmed if third parties or members of our communities use or attempt to use our marketplaces 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 communities. 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. We also expect our suppliers to comply with our Supplier Code of Conduct. We expect that once we fully integrate Depop and Elo7 into our supply chain management program, Depop and Elo7 suppliers will also be subject to the Supplier Code of Conduct. Although we seek to influence, we do not directly control our sellers, suppliers, or other members of our communities or their business practices, and cannot ensure that they comply with our policies. If members of our communities 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 marketplaces are counterfeit, infringing, illegal, harmful or otherwise violate our policies.
We frequently receive communications alleging that items listed in our marketplaces, or other user-generated materials posted on our platforms, 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. No tools and procedures are guaranteed to function completely without error, particularly for physical, non-standardized goods, 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 platforms, especially outside the United States where laws may offer less protection for intermediaries and platforms than in the United States.
Under current U.S. copyright laws such as the Digital Millennium Copyright Act § 512 et. seq., we benefit from statutory safe harbor provisions that protect us from copyright liability for content posted on our platforms 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 platforms. 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 legislative proposals, and with regulators. These safe harbors and court rulings, including analogous ones in other state and international jurisdictions, have and may change unfavorably. Moreover, changes focused on actions by very large platforms that perform retailer-like functions, or handle mass user content, may directly or indirectly also impact us, our sellers, buyers and vendors.
Proposed and enacted 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 platforms 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 platforms, we could face regulatory, civil, or criminal penalties. As in the past, claims by third-party rights owners could require us to pay damages or refrain from permitting any further listing of the relevant items. These types of claims could seek substantial damages or force us to modify our business practices, which could lower our revenue, increase our costs, or make our platforms 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 have been involved in, and in the future 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 platforms, and/or how our business operates.
In addition to intellectual property claims, we have been involved in other litigation and regulatory matters, including matters related to consumer protection, product liability, security and privacy, commercial, or stockholder derivative lawsuits, either individually or, where available, on a class-action basis. We have been and may in the future be subject to heightened regulatory scrutiny, inquiries, or investigations, including with respect to our sellers, vendors or third parties, relating to both specific inquiries as well as 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 Etsy marketplace 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 have in the past settled lawsuits and regulatory actions and may decide in the future to settle lawsuits or regulatory actions, even if non-meritorious. Any such settlements may be 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 House Rules or 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 jurisdiction courts, and may have
reduced or no enforceability in some jurisdictions. Where 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.
Lawsuits or other enforcement actions brought against us have resulted in settlements, and may result in injunctions, 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 financial condition.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, particularly in more uncertain legal or regulatory environments. 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.
RegulationExpanding and evolving regulations in the areas of privacy and protection of user data protection could harmcreate technological, economic and complex cross-border business impediments to our business.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 sensitive or 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, andour sellers, our vendors and other third parties collect, use, and share personal information and other proprietary or confidential information. Compliance with these changing regulations havehas necessitated some specific product changes for our non-U.S. activities. Theactivities, and required additional compliance obligations for us and for our relationships with sellers, vendors, and other third parties.
In the European Union, the GDPR extendscontains strict requirements for processing the scope of E.U. data protection law to certain non-E.U. companies processingpersonal data of E.U. persons.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 the entire E.U.these jurisdictions. The regulation contains numerous requirements and changes from previous E.U. law, including more robust obligations on data controllers and 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.,EEA, 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 subjects, data breach notification requirements, increased rules for online and e-mailemail 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 communitycommunities of sellers. We may experience difficulty retaining or obtaining new E.U. sellers, or current and new sellers may limit their selling into the E.U.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 (which became effective on January 1, 2020.2020) and CPRA (effective January 1, 2023), and other state and federal laws relating to privacy, consumer protection, and data security. The CCPA introducedand CPRA introduce new requirements regarding the handling of personal information of California consumers and households. The law gives individualshouseholds, 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 salesthe sale of their personal information. The CCPA also authorizesinformation and provides a private lawsuits to recoverright of action and statutory damages for certain data breaches.
Other jurisdictions in the United States are beginning to expand existing regulations, or propose laws similar to the CCPA, which will continue to shape the data privacy environment nationally. For example, on March 2, 2021, Virginia enacted the Virginia Consumer Data Protection Act (“CDPA”), which becomes effective on January 1, 2023, and on June 8, 2021, Colorado enacted the Colorado Privacy Act (“CPA”), which takes effect on July 1, 2023. The CPA and CDPA are similar to the CCPA mayand CPRA, but aspects of these state privacy statutes remain unclear, resulting in further legal uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional costs and expenses in an effort to comply. If more stringent privacy legislation arises in the United States, it could increase our compliance costs and potential liability with respectand 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 otherthe processing of personal information, we collect about California residents.which could increase the cost and complexity of delivering our services and operating our business. In the past year, for example, Brazil enacted the General Data Protection Law, New Zealand 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 platformplatforms and may impact the scope and effectiveness of our marketing efforts, which could negatively impact our business and future outlook. Complying with the GDPR, CCPA, CPRA, CDPA, CPA, or other laws, regulations, amendments to or re-interpretations of existing laws and regulations, and contractual or other obligations relating to privacy, data protection, data transfers, data localization, or information security may require us to make changes to our services to enable us or our customers to meet new legal requirements, incur substantial operational costs, modify our data practices and policies, and restrict our business operations. Any actual or perceived failure by us to comply with these laws, regulations, or other obligations may lead to significant fines, penalties, regulatory investigations, lawsuits, significant costs for remediation, damage to our reputation, or other liabilities. Beyond GDPR and CCPA,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.
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).
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 in 2020 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 was similarly deemed insufficient in September 2020. 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 its subsidiaries’ 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. In particular, on June 4, 2021, the European Commission adopted new SCCs under the GDPR for personal data transfers outside the EEA, which may require us to expend significant resources to update our contractual arrangements and to comply with such obligations. 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 platforms 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 third party providersvendors fail to comply with our published policies and documentation. Such failuresWe are subject to occasional requests from regulators regarding these efforts. Failures can subject us to potential international, local, state, and federal action if theyunder both data protection and consumer protection laws. We are foundor may also be subject to be deceptive, unfair, or misrepresentationthe 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 have been and may in the future be subject to similar privacy requirements, which may significantly increase costs and resources dedicated to their compliance with such requirements. We have varying 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 some circumstances. 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 members of our communities 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 practices.
or perceived security breach, and may cause us to breach customer contracts. Our contracts, our representations or industry standards, to varying extents, require us to use industry-standard or reasonable measures to safeguard sensitive personal information or confidential information. A cyber incident or security breach could lead to claims by members of our communities, or other relevant stakeholders that we have failed to comply with such legal or
Our payments systems depend on third-party providers, require ongoing investment, and arecontractual obligations. As a result, we could be subject to evolving laws, regulations, rules, and standards.legal action or members of our communities 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.
Our buyers primarily payWe may not have adequate insurance coverage for purchases using our payments services (i.e., Etsy Payments and Reverb Payments)security incidents or PayPal. In the United Statesbreaches, including fines, judgments, settlements, penalties, costs, attorney fees, and other countries whereimpacts 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 payments services are available insurance coverage, is of a type not subject to insurance, or results in changes to our sellers accept various formsinsurance policies (including premium increases or the imposition of payments such as credit cards, debit cards, gift cards, PayPal, Google Wallet and Apple Pay.
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 adequatelylarge deductible or if our relationships with these service providers were to change or terminate, our sellers’ ability to receive orders or paymentco-insurance requirements), it could be adversely affected and certain financial compliance measures, including fraud prevention and detection tools may not be effective, which could increase costs, lead to potential legal liability, and negatively impacthave 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 third-party service providersinsurers 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.
Expanding our operations in Latin America and India may experience service outagesexpose us to additional risks.
We recently acquired Elo7 which currently operates principally in Brazil and we additionally recently opened offices in Mexico and India. Each of these jurisdictions has a legal framework, regulatory environment, and culture that differs materially from timethose of North America and Europe where our operations have historically been located. In addition, the timing and impact of the COVID-19 pandemic has been materially different from jurisdiction to time that negatively impact payments on our platform. We have in the past experienced, and may in the future experience, such service outages and, ifjurisdiction. 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 our sellers, some of our sellers may stop listing new items for sale or even close their accounts altogether.
Various laws and regulations govern payments, andmanage 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 and taking steps 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 our payments services 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 our platform.
We plan to invest ongoing internal resources into our payments tools and infrastructure in order 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 payments on our platform, or if our investment efforts are unsuccessful or unreliable, our payments services may not function properly or keep pace with competitive offerings, which could negatively impact their usage and our marketplaces. Further, our ability to expand our payments services into additional countries is dependent upon the third-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, we 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.
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 makerisks, 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.
If we experience a communications or 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 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, we are 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. 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. Cyber attacks could also result in the theft of our intellectual property.
A successful cyberattack could occur and persist for an extended period of time before being detected. 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.
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, 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, 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 may expand our business through acquisitions of other businesses or assets, which may divert management’s attention and/or prove to be unsuccessful, including our acquisition of Reverb.
We have acquired a number of other businesses in the past, including our 2019 acquisition of Reverb, and may acquire additional businesses or technologies, or enter into strategic partnerships, in the future. We may not realize the anticipated benefits of our acquisitions, including the acquisition of Reverb, or any partnerships, and the integration of Reverb and possible future acquisitions or relationships may disrupt our business and divert management’s time and 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. The Reverb acquisition and any future acquisitions may result in unforeseen operational difficulties and expenditures associated with:
integrating new businesses and technologies into our infrastructure;
implementing growth initiatives;
integrating administrative functions;
retaining and integrating key employees;
supporting and enhancing morale and culture;
maintaining or developing controls, procedures and policies (including effective internal control over financial reporting and disclosure controls and procedures); and
assuming liabilities related to the activities of the acquired business before and after the acquisition, including liabilities for violations of laws and regulations, commercial disputes, cyber attacks, taxes, and other matters.
We also may issue additional equity securities in connection with an acquisition, which could cause dilution to our stockholders. Finally, acquisitions could be viewed negatively by analysts, investors or the members of our community.
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 marketplaces 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 ecological 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. 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.
Failure to deal effectively with fraud or other illegal activity could harm our business.
We have measures in place to detect and limit the occurrence of fraudulent and other illegal activity in our marketplaces, however, those 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, as new technologies and ways to commit fraud and other illegal activity are continually evolving, and regulations requiring marketplaces to detect and limit these activities are increasing. If we fail to limit the impact of fraudulent and other illegal activity in our marketplaces, our business, reputation, financial performance and growth could be adversely affected.
For example, our 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 our payments services 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 marketplaces.
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 increase our expenses, 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 our sellers and buyers are inadequate could reduce our ability to attract and retain our sellers and 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 ecological 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 our 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 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, financial performance, and growth.
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 Further, the future. To be successful, we need to attract and retain sellers and buyers. As a result, we face competition from a wide range of online and offline competitors.
We compete for sellers with both 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, 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 marketplaces or otherwise. We also compete with companies that sell software and services to small businesses, enabling a seller to sell from her own website or otherwise run her business independentlysuccess of our platform, such as Bigcommerce, and Shopify.
We compete to attract, engage, and retain sellers based on many factors, including:
our brand awareness;
the global scale of our marketplaces and the breadth of our online presence;
the extent to which our tools and services can ease the administrative tasks that a seller might encounter in running her business;
the number and engagement of buyers;
seller education resources and tools;
our policies and fees;
the ability to scale her business;
our mobile apps;
the strength of our community; and
our mission.
In addition, we compete with retailers for the attention of buyers. A 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 thatElo7 marketplace may be difficult or impossible for our sellers to match.
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 the 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 to Etsy buyers;
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 our sellers to provide a fulfilling experience to our buyers.
A small portion of buyers complain to us about their experience with 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.
Negative publicity and sentiment generated as a result of these types of complaints could reduce our ability to attract and retain our sellers and buyers or damage our reputation. A perception that our levels of responsiveness and support for our sellers and buyers are inadequate could have similar results. In some situations, we may choose to reimburse our 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 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, transportation disruptions, natural disasters, inclement weather, terrorism, public health crises, or political unrest. Disruptions in the operations of a substantial number of our sellers could also result in negative experiences for a substantial number of our 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 our 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 our 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 ability to generate and grow revenue, reputation and our ability to attract and retain our sellers and buyers. As the number of sellers and 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. Upgrading our platform, software and networks may also subject us to disruptions, failures or delays.
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 marketplaces could significantly harm our business. For example, any significant disruption of, or interference with, our use of cloud infrastructure would negatively impact our operations and our business would be seriously harmed. 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 our sellers and buyers could be adversely affected which could harm ourby macroeconomic, social, and political conditions prevailing in Brazil and Latin America. Decreases in the growth prospectsrate, periods of negative growth, increases in inflation, persistent deflation, changes in law, regulation, policy, or future judicial rulings and our business.
We rely on Google Cloud for a substantial portioninterpretations of the computing, storage, data processing, networking,policies involving exchange and capital controls and other services for Etsy.com.
Google Cloud Platform provides a distributed computing infrastructurematters such as a service platform for(but not limited to) currency depreciation, foreign exchange regulations, inflation, interest rates, taxation, employment and labor laws, banking laws, anti-corruption laws, and regulations and other political, economic, or regulatory developments in or affecting Brazil and/or other parts of Latin America may affect the overall business operations,environment and we have migrated Etsy’s 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. Any significant disruption of, or interference with, our use of Google Cloud would negativelymay, in turn, adversely 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 andElo7’s financial condition could be adversely affected.
We may be subjectand results of operations in the future or create obstacles to claims that items listed in our marketplace are counterfeit, infringing, or illegal.
We frequently receive communications alleging that items listed in our marketplaces 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 marketplaces, along with anti-counterfeiting measures our platform employs and continues to develop. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removalsuccessful integration 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 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 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 sellers and 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 our 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 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 platforms less user-friendly. These claims, or legal and regulatory changes, could require the removal of non-infringing or completely unrelated content, which could negatively impact our business and our ability to retain sellers. Moreover, public perception that counterfeit or other unauthorized items are common in our marketplaces, even if factually incorrect, could result in negative publicity and damage to our reputation.Elo7 into Etsy.
Our business and our sellers and buyers may be subject to evolving sales and other taxes.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, and 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 European UnionE.U. member states) are seeking to, or have recently imposed additional reporting, record-keeping, or indirect tax collection and remittance obligations, or revenue-based taxes on businesses like ours that facilitate online commerce. For example, the recently enacted American Rescue Plan Act of 2021 included a provision which significantly increases the number of sellers for whom we must report payment transactions. If requirements like these become applicable in additional jurisdictions, our business, collectively with Etsyour sellers’ businesses, could be harmed. For example, taxing authorities in many U.S. states and in other countries have identifiedtargeted 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 relatedsimilar 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, U.S. states have begun to adopt and enforce laws requiring us or our 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 our marketplaces causes our marketplaces to be less attractive to current and prospective buyers, which could materially impact our business financial performance, and growth. Additionally, thisour 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 inon our marketplaces less attractive. If we are found to be deficient inAdditionally, the calculation, collectionEuropean Union, certain member states, and remittance ofother countries have proposed or enacted taxes in the jurisdictions in which we do business our businesson online advertising and marketplace service revenues. Our results of operations and cash flows could be adversely impacted.affected 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, accessibility requirements, 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, marketplace seller regulation, intellectual property, product liability, and consumer protection. In addition, new regulations, laws, policies, and international accords relating to environmental and social matters, including sustainability, climate change, human capital, and diversity, are being developed and formalized in Europe, the United States, and elsewhere, which may entail specific, target-driven frameworks and/or disclosure requirements. 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 subject us to attempts to apply 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.
Etsy and its marketplaces.
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.platforms. This may even be the case for new laws or regulations focused on other technology areas, business practices, or other third parties that nonetheless indirectly or unintentionally impact us, our sellers, or our vendors. For example, the European UnionUnion’s pending Digital Services Act (“DSA”), Digital Markets Act (“DMA”), and proposed changes to the General Product Safety Directive (“GPSD”), may impact us directly, as well as impacting our sellers and vendors. Similarly, recently passedadopted anti-waste regulations in Germany and France may directly impact our sellers, as well as impose compliance verification obligations on us. If we and our sellers are unable to cost-effectively comply with new regulatory regimes, such as if the regulations place requirements on our sellers that they find difficult or impossible to comply with, or require us to take actions at a directive expanding online platform liability for copyright infringement, which member states are expectedscale inconsistent with the size, investment, and operation of our marketplaces, our sellers may elect not to implement by 2021.ship into, or we may be required to restrict shipping into, the impacted jurisdictions, and our business could be harmed. In addition, there have been various Congressional efforts to require platforms to vet and police sellers, restrict the scope of the protections available to online platforms for third party user content under Sectionintellectual property laws such as the Digital Millennium Copyright Act § 512 et. seq., or limit user content platform protections under 47 U.S.C. § 230 of the Communications Decency
Act, and(commonly referred to as CDA § 230). As a result, our current protections from liability for third-party content in the United States could significantly decrease or change. We could incur significant costs implementing required changes, investigating and defending such claims and, if we are found liable, significant damages.
Some providersWe also operate under an increasing number of consumer devicesregulatory regimes protecting us and web browsersour 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. For example, upcoming regulations may impose significant verification, certification or additional compliance hurdles on both us and our sellers. These laws, and court or regulatory interpretations of these laws, may shift quickly in the United States and worldwide. We may not have implemented,the resources or have announced plansscale to implement, wayseffectively adapt to block tracking technologiesand comply with any changes to these regulatory regimes 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 buyers, increase our costs andmay limit our ability to attract and retaintake advantage of the protections these regimes offer. In addition, some of these changes may be at least partially inconsistent with how our platforms operate, 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 platforms, sellers and buyers under these regulatory regimes, such as if the regulations place requirements on cost-effective terms. Asour sellers that they find difficult or impossible to comply with, limit the functions or features our marketplaces can offer, or require us to take actions at a result,scale inconsistent with the size, investment, and operation of our marketplaces, our business could be adversely affected.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, packaging and recycling requirements, seller certification and representative requirements, and rules related to security, privacy, or national security, which may impede us, our users, or our users.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.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.
Our softwareWe may be subject to intellectual property claims, which, even if untrue, could be extremely costly to defend, damage our brands, 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 sometimes allege a company is highlysecondarily 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 platforms, 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, have been and could in the future 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 have been and might in the future 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 contain undetected errors.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 platforms incorporate, and we contribute to, open source software, potentially impairing our ability to adequately protect our intellectual property.
The software underlyingpowering our platformplatforms 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 highly interconnecteda 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.
To avoid the public release of the affected portions of our source code, we could be required to expend substantial time and complexresources 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 also presents 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 platforms, and availability of patches or fixes may contain undetectednot 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.
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, 2021, 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 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,” meaningtimely basis. If we have difficulty implementing and maintaining effective internal control over financial reporting at the businesses we recently acquired or that we typically release software code many times per day. This practice may in the future 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 more frequent introduction of errors or vulnerabilities into the software underlying our platform, which can impact the user experience on our marketplaces. Additionally, duerequirements related to the interconnected naturemaintenance and reporting of our internal controls, such as Section 404 of the software underlying our platform, updates to certain partsSarbanes-Oxley Act, investors may lose confidence in the accuracy and completeness of our code, including changes to our or third party APIs on which we rely,financial reports and that could have an unintended impact on other sectionscause the price of our code,common stock to decline. We could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which may result in errors or vulnerabilities to our platform that negatively impact the user experiencecould require additional management attention and functionality of our marketplaces. 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 prospectsbusiness.
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.
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.
Our business dependsFor example, between January 1, 2021 and February 18, 2022, our common stock’s daily closing price on continuedNasdaq has ranged from a low of $126.96 to a high of $296.91. 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 unimpeded access toother financial and operational metrics, including the internetkey financial and mobile networks.
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. In 2015, rules approved by the Federal Communications Commission (“FCC”) went into effect that prohibited internet service providers from charging content providers higher ratesmetrics disclosed in order to deliver their content over certain “fast traffic” lanes; however, those rules were repealed in June 2018, and efforts to challenge the repeal in the courts have failed to reverse the FCC’s 2018 decision, and in October 2019, the U.S. Court of Appeals for the D.C. Circuit provided a mixed ruling that did not reverse the FCC’s 2015 decision in its entirety. Although this recent court ruling allows states to enact their own net neutrality rules, the repeal of federal protections may make it more difficult or costly for many small businesses such as our community of sellers,Annual Report, as well as how those results and metrics compare to analyst and investor expectations;
•forward-looking statements related to our buyers,financial guidance or projections, our failure to accessmeet or exceed our platformfinancial 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 may result inour 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;
increased costs•changes in our Board of Directors or senior management team;
•disruptions in our marketplaces 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 communities;
•the trading activity of our largest stockholders;
•the number of shares of our common stock that are available for us, whichpublic trading;
•litigation or other claims against us;
•stockholder activism;
•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 significantly harmdecline for reasons unrelated to our business, financial performance, or growth. Stock prices of many internet and technology companies have historically been highly volatile.
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.
We may issue additional common stock, convertible securities, or other equity in the 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.
The conversion of some 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 the event the conditional conversion features of such series of Notes are triggered. Based on the daily closing prices of our stock during the quarter ended December 31, 2021, holders of the 2018 Notes and the millions2019 Notes are eligible to convert their 2018 Notes and 2019 Notes, as applicable, during the first quarter of microbusinesses that utilize our platform.
Outside of the United States, it is possible that governments of2021. If one or more countriesholders 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 be required to deliver to them a significant number of shares of our common stock, increasing the number of outstanding shares of our common stock. The 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 adversely affect prevailing market prices of our common stock. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” 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 the following types of actions or proceedings under Delaware statutory or common law:
•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 Delaware General Corporation Law; and
•any action asserting a claim against us that is governed by the internal affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. While the Delaware courts have determined that choice of forum provisions are facially valid, a stockholder may nevertheless seek to censor content available onbring a claim in a venue other than that designated
in our platform orexclusive forum provision. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provision of our certificate of incorporation. This may even attempt to block access to our platform. If we are restricted from operatingrequire significant additional costs associated with resolving such action in one or more countries, ourother jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
This choice of forum provision may limit a stockholder’s ability to attractbring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees and retain sellers and buyers 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 adversely affected andinapplicable or unenforceable in an action, we may not be able to grow our business as we anticipate.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.
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, including claims that Etsy is liable, either directly, indirectly or vicariously, for infringement claims against sellers or 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. In addition, 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 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 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 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, patent filings may not be adequate alone to protect our intellectual property, and 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 unenforceable. 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 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 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. 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. 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 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 legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017, including regulations, administrative practices, outcomes of court cases and changes to the global tax framework. Further, 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 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 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 differs from original or adjusted estimates, they could have a material impact 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.
We may be involved in litigation and regulatory matters that are expensive and time consuming.
In addition to intellectual property claims, we may become involved in other litigation matters, including class action or shareholder derivative lawsuits. We may become subject to heightened regulatory scrutiny, inquiries or investigations, including with respect to our community, relating to broad, industry-wide concerns, such as antitrust and privacy, that could lead to increased expenses or reputational damage.
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.
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.
If 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 able to, or may choose not to, acquire insurance. In addition, our insurance may not adequately mitigate the risks we face or we may have to pay high premiums and/or deductibles for the coverage we do obtain. Additionally, if any of our insurers becomes insolvent, it would be unable to pay any claims that we make.
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, 2019, 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. We are currently integrating Reverb into our operations and financial internal control processes and, pursuant to the SEC’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our internal controls over financial reporting at December 31, 2019 will not include Reverb. We cannot assure you that Reverb will be effectively integrated into our operational or financial internal control processes or that that we or our independent registered public accounting firm will not identify a material weakness relating to Reverb in our internal control processes 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 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.
We 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 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 and the 0.125% Convertible Senior Notes due 2026 we issued in September 2019 (together, 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. 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. Our ability 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.
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.
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”), 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 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 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 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock 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.
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 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 Related to Ownership of Our Common Stock
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. For example, since January 1, 2019, our common stock’s daily closing price on Nasdaq has ranged from a low of $40.51 to a high of $72.77 through February 21, 2020. 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;
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 marketplaces 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, 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 of their stock have been the subject of securities class action 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.
Our stock repurchases are discretionary and even if effected, they may not achieve the desired objectives.
In November 2018, ourOur Board of Directors approved a stock repurchase program authorizing us to repurchase up to $200$250 million of our common stock.stock, of which approximately $127 million remained available as of December 31, 2021. In addition, in connection with issuance of the 2021 Notes, our Board of Directors approved the repurchase of $180.0 million of our common stock and we used approximately $180.0 million of the net proceeds from the offering to repurchase approximately 1.1 million shares of our common stock at a purchase price equal to $170.21 (the last reported sale price per share of our common stock on June 8, 2021). There can be no assurance that theseeither the June 2021 stock repurchases or any repurchases pursuant to our stock repurchase program 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.vesting or of any issuance of common stock in connection with the conversion of Notes. 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.
We do not intend to pay dividends on our capital stock, soactivity at 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, 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.
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 boardBoard of directorsDirectors 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.
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, 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.69
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters are located in Brooklyn, New York where we occupy approximately 225,135225,000 square feet under a lease that expires in 2026.2039. We use these facilities for our principal administration, technology and development, and engineering activities.
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 “Part II, Item 8, “Financial Statements and Supplementary Data—Note 14—13—Commitments and Contingencies—Contingencies—Legal ProceedingsProceedings.” in the Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.
48
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, 2020,18, 2022, there were approximately 196690 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 think are relevant.
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, 2019:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1) | | 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 | 301,585 | | | $ | 209.53 | | | 102,146 | | | $ | 173,136 | |
November 1 - 30 | 99,815 | | | 263.05 | | | 84,171 | | | 150,689 | |
December 1 - 31 | 116,854 | | | 235.92 | | | 101,051 | | | 127,217 | |
Total | 518,254 | | | 225.79 | | | 287,368 | | | 127,217 | |
(1) The total number of shares purchased includes 230,886 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 December 2020, our Board of Directors approved a stock repurchase program for the repurchase of up to $250 million of our common stock. The stock repurchase program has no expiration date.
(4) All 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, 2019 (1) | 409,052 |
| | $ | 55.81 |
| | 255,360 |
| | $ | 110,371 |
|
November 1 - 30, 2019 (1) | 175,619 |
| | 46.35 |
| | 169,718 |
| | 102,500 |
|
December 1 - 31, 2019 (1) | 3,995 |
| | 43.39 |
| | — |
| | 102,500 |
|
Total | 588,666 |
| | 52.90 |
| | 425,078 |
| | 102,500 |
|
71 | |
(1) | The total number of shares purchased includes 163,588 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. 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. |
Performance Graph
Our 2018 Annual Report on Form 10-K included a comparison of the cumulative total return of our common stock with the NASDAQ Composite Index and the Russell 2000 Index since our initial public offering on April 16, 2015. As a result of changes in 2019 to the indices that Etsy is included in, we believe that the S&P MidCap 400 and the Russell 1000 Index are more appropriate indices 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, theThe following graph shows a comparison from April 16, 2015 (the date our common stock commenced trading on Nasdaq)December 31, 2016 through December 31, 2019,2021, of the cumulative total returns for our common stock, the S&P MidCap 400, the Russell 1000 Index, the Nasdaq Composite Index, and the Russell 2000S&P 500 Index. The graph assumes $100 was invested at the market close on April 16, 2015December 31, 2016 in the common stock of Etsy, Inc. Such returns are based on historical results and are not intended to suggest future performance. The S&P Mid Cap 400, the Russell 1000 Index the Nasdaq Composite Index, and the Russell 2000S&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. Selected Consolidated Financial and Other Data.[Reserved].
The following tables show selected consolidated financial data. The selected Consolidated Statements
Table of Operations data for the years ended December 31, 2019, 2018, and 2017, and the selected Consolidated Balance Sheets data as of December 31, 2019 and 2018, are derived from our audited Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected Consolidated Statements of Operations data for the years ended December 31, 2016 and 2015, and the selected Consolidated Balance Sheets data as of December 31, 2017, 2016, and 2015 is derived from our audited Consolidated Financial Statements and related notes not included in this Annual Report.Contents 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
Item 7. 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 buyers,” “active sellers,” “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, |
| 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
| (in thousands, except share and per share amounts) |
Consolidated Statements of Operations Data: | | | | | | | | | |
Revenue: | | | | | | | | | |
Marketplace (2) | $ | 593,646 |
| | $ | 444,765 |
| | $ | 329,362 |
| | $ | 275,534 |
| | $ | 208,576 |
|
Services | 224,733 |
| | 158,928 |
| | 111,869 |
| | 89,433 |
| | 64,923 |
|
Total revenue | 818,379 |
| | 603,693 |
| | 441,231 |
| | 364,967 |
| | 273,499 |
|
Cost of revenue (3)(4) | 271,036 |
| | 190,762 |
| | 150,986 |
| | 123,328 |
| | 96,979 |
|
Gross profit | 547,343 |
| | 412,931 |
| | 290,245 |
| | 241,639 |
| | 176,520 |
|
Operating expenses: | | | | | | | | | |
Marketing (3)(4) | 215,570 |
| | 158,013 |
| | 109,085 |
| | 82,248 |
| | 66,771 |
|
Product development (3)(4) | 121,878 |
| | 97,249 |
| | 74,616 |
| | 55,083 |
| | 42,694 |
|
General and administrative (3)(4) | 121,134 |
| | 82,883 |
| | 91,486 |
| | 86,180 |
| | 68,939 |
|
Asset impairment charges | — |
| | — |
| | 3,162 |
| | 551 |
| | — |
|
Total operating expenses | 458,582 |
| | 338,145 |
| | 278,349 |
| | 224,062 |
| | 178,404 |
|
Income (loss) from operations | 88,761 |
| | 74,786 |
| | 11,896 |
| | 17,577 |
| | (1,884 | ) |
Other (expense) income, net | (8,115 | ) | | (19,708 | ) | | 20,369 |
| | (20,453 | ) | | (26,110 | ) |
Income (loss) before income taxes | 80,646 |
| | 55,078 |
| | 32,265 |
| | (2,876 | ) | | (27,994 | ) |
Benefit (provision) for income taxes (5) | 15,248 |
| | 22,413 |
| | 49,535 |
| | (27,025 | ) | | (26,069 | ) |
Net income (loss) | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | | $ | (54,063 | ) |
Net income (loss) per share attributable to common stockholders: |
Basic | $ | 0.80 |
| | $ | 0.64 |
| | $ | 0.69 |
| | $ | (0.26 | ) | | $ | (0.59 | ) |
Diluted | $ | 0.76 |
| | $ | 0.61 |
| | $ | 0.68 |
| | $ | (0.26 | ) | | $ | (0.59 | ) |
Weighted average common shares outstanding: | | | | | | | | | |
Basic | 119,665,248 |
| | 120,146,076 |
| | 118,538,687 |
| | 113,562,738 |
| | 91,122,291 |
|
Diluted | 125,720,073 |
| | 127,084,785 |
| | 122,267,673 |
| | 113,562,738 |
| | 91,122,291 |
|
| |
(1) | The financial results of Reverb have been included in our consolidated financial results from August 15, 2019 (the date of acquisition). |
| |
(2) | In the fourth quarter of 2019, we reclassified Other revenue to Marketplace revenue. The following table provides our Marketplace and Other revenue under our previous and current presentation: |
|
| | | | | | | | | | | | | | | |
| Year-to-Date Period Ended |
| Previous Presentation | | Current Presentation |
| Marketplace Revenue | | Other Revenue | | Marketplace Revenue | | Other Revenue |
| | | | | | | |
| (in thousands) |
December 31, 2018 | $ | 440,740 |
| | $ | 4,025 |
| | $ | 444,765 |
| | $ | — |
|
December 31, 2017 | 326,076 |
| | 3,286 |
| | 329,362 |
| | — |
|
December 31, 2016 | 269,628 |
| | 5,906 |
| | 275,534 |
| | — |
|
December 31, 2015 | 204,333 |
| | 4,243 |
| | 208,576 |
| | — |
|
| |
(3) | Includes total stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
| (in thousands) |
Cost of revenue | $ | 5,787 |
| | $ | 3,357 |
| | $ | 1,739 |
| | $ | 1,057 |
| | $ | 871 |
|
Marketing | 3,774 |
| | 2,507 |
| | 1,933 |
| | 971 |
| | 560 |
|
Product development | 21,085 |
| | 21,234 |
| | 8,274 |
| | 5,079 |
| | 2,860 |
|
General and administrative | 13,749 |
| | 11,133 |
| | 14,613 |
| | 8,794 |
| | 6,550 |
|
Total stock-based compensation expense | $ | 44,395 |
| | $ | 38,231 |
| | $ | 26,559 |
| | $ | 15,901 |
| | $ | 10,841 |
|
| |
(4) | 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. |
| |
(5) | In the year ended December 31, 2019, we recognized an income tax benefit associated with stock-based compensation of $16.3 million and research and development credit of $9.9 million. Although these items are recurring in nature, the amount of the benefit derived is largely dependent on several factors, including our stock price and certain research and development expenses incurred in any given year. 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, |
| 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
| (in thousands, except percentages) |
Other Operational and Non-GAAP Financial Data: | | | | | | | | | |
GMS | $ | 4,974,944 |
| | $ | 3,931,745 |
| | $ | 3,253,609 |
| | $ | 2,841,985 |
| | $ | 2,388,387 |
|
Adjusted EBITDA (Non-GAAP) | 186,268 |
| | 139,510 |
| | 80,009 |
| | 57,124 |
| | 31,007 |
|
Active sellers | 2,699 |
| | 2,115 |
| | 1,933 |
| | 1,748 |
| | 1,563 |
|
Active buyers | 46,351 |
| | 39,447 |
| | 33,364 |
| | 28,566 |
| | 24,046 |
|
Percent mobile GMS | 58 | % | | 55 | % | | 51 | % | | 48 | % | | 43 | % |
Percent international GMS | 36 | % | | 35 | % | | 33 | % | | 30 | % | | 30 | % |
| |
(1) | The financial results of Reverb have been included in our consolidated results from August 15, 2019 (the date of acquisition). |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
| (in thousands) |
Net income (loss) | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
| | $ | (29,901 | ) | | $ | (54,063 | ) |
Excluding: | | | | | | | | | |
Interest and other non-operating expense, net | 11,121 |
| | 13,221 |
| | 8,736 |
| | 5,502 |
| | 1,202 |
|
(Benefit) provision for income taxes | (15,248 | ) | | (22,413 | ) | | (49,535 | ) | | 27,025 |
| | 26,069 |
|
Depreciation and amortization | 48,031 |
| | 26,742 |
| | 27,197 |
| | 22,525 |
| | 18,550 |
|
Stock-based compensation expense (2) | 44,395 |
| | 38,231 |
| | 23,857 |
| | 15,901 |
| | 10,841 |
|
Foreign exchange (gain) loss | (3,006 | ) | | 6,487 |
| | (29,105 | ) | | 14,951 |
| | 21,775 |
|
Acquisition-related expenses | 3,917 |
| | — |
| | — |
| | 570 |
| | — |
|
Non-ordinary course disputes | 1,164 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring and other exit costs (income) | — |
| | (249 | ) | | 13,897 |
| | — |
| | — |
|
Asset impairment charges | — |
| | — |
| | 3,162 |
| | 551 |
| | — |
|
Net unrealized loss on warrant and other liabilities | — |
| | — |
| | — |
| | — |
| | 3,133 |
|
Contribution to Good Work Institute (formerly Etsy.org) | — |
| | — |
| | — |
| | — |
| | 3,500 |
|
Adjusted EBITDA | $ | 186,268 |
| | $ | 139,510 |
| | $ | 80,009 |
| | $ | 57,124 |
| | $ | 31,007 |
|
| |
(1) | The financial results of Reverb have been included in our consolidated results from August 15, 2019 (the date of acquisition). |
| |
(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. |
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
| (in thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash, cash equivalents and short- and long-term investments | $ | 906,595 |
| | $ | 624,287 |
| | $ | 340,550 |
| | $ | 282,086 |
| | $ | 292,864 |
|
Net working capital | 732,510 |
| | 568,227 |
| | 336,787 |
| | 287,024 |
| | 278,932 |
|
Total assets | 1,542,352 |
| | 901,851 |
| | 605,583 |
| | 581,193 |
| | 553,061 |
|
Long-term debt, net (2) | 785,126 |
| | 276,486 |
| | — |
| | — |
| | — |
|
Long-term liabilities | 947,190 |
| | 388,891 |
| | 106,212 |
| | 152,428 |
| | 142,441 |
|
Total stockholders’ equity | 406,634 |
| | 400,898 |
| | 396,894 |
| | 344,757 |
| | 330,498 |
|
| |
(1) | The financial results of Reverb have been included in our consolidated results from August 15, 2019 (the date of acquisition). |
| |
(2) | In September 2019, we issued $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). In March 2018, we issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “2018 Notes”) in a private placement to qualified institutional buyers pursuant to the Securities Act. For more information on the 2019 and 2018 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.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.Report. 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 Part I, Item 1A, “Risk Factors.” We have omitted discussion of 2019 results where it would be redundant to the “Risk Factors” section. For more information regarding key factors affectingdiscussion previously included in Part II, Item 7 of our performance, see “Key Factors Affecting Our Performance” below.Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Business
Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Oursellers around the world. These marketplaces - which collectively create a “House of Brands” - share our mission, iscommon levers for growth, similar business models, and a strong commitment to “Keep Commerce Human,” and we’re committed to using the power ofuse business and technology to strengthen communities and empower people around the world.people.
Our primary marketplace, Etsy.com, is the global destination for unique and creative goods.goods made by independent sellers. The Etsy marketplaceconnectsmarketplace connects creative artisans and entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflecta joyful expression of their sense of style, or represent a meaningful occasion.Ourtaste and values. 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 EtsyEtsy.com sellers a marketplace with tens of 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 buyersIn addition to theour core Etsy marketplace, for those “special” purchaseoccasions that happen throughout the year, and for everyday items that have meaning. We are deepening engagement with our existing buyers by inspiring purchases across our many retail categories and special occasions. Special purchases for use in the every day include handmade or vintage unique clothing, accessories, household items, or furniture that the buyer wants to reflect her sense“House of style. Special purchase occasions can occur many times throughout the year and include shopping for special occasions that reflects an individual’s unique style; gifting that demonstrates thought and care; and celebrations that express creativity and fun. Buyers tell us that they come to Etsy because Etsy sellers offer items that they can’t find anywhere else.
On August 15, 2019, we acquired all of the outstanding capital stockBrands” consists of Reverb Holdings, Inc. (“Reverb”), our musical instrument marketplace, Depop Limited (“Depop”), our fashion resale marketplace, and Elo7 Serviços de Informática S.A. (“Elo7”), our Brazil-based marketplace for $270.4 million, nethandmade and unique items. Each of cash acquired.our marketplaces operates independently, while benefiting from shared expertise in product, marketing, technology, and customer support. The results of Reverb, marketplace is a leading global online marketplace dedicated to buyingElo7, and selling new, used,Depop, acquired on August 15, 2019, July 2, 2021, 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., isJuly 12, 2021, respectively, are included in all financial and other metrics from August 15, 2019 (the date of acquisition),discussed in this report, unless otherwise noted.noted, from their respective dates of acquisition.
OurWe generate revenue is diversified, generatedprimarily from a mix of marketplace activities, including transaction, listing, and otherpayments processing fees, and optional services we provide to sellers to help them generate more sales and scale their businesses.
Marketplace revenue is 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, and using our payments services to process payments, including foreign currency transactions. Marketplace revenue also includes revenue generated through our commercial partnerships, which was recorded in its own Other revenue line prior to the fourth quarter of 2019.
Services revenue is comprised of the fees a seller pays us for our optional other services (“Services”). Services primarily include advertising services, which allows sellers to pay for prominent placement of their listings in search results;include on-site advertising and shipping labels, which allows sellers in the United States, Canada, United Kingdom, and Australia to purchase discounted shipping labels.
Our strategy is focused on growingaround:
•Building a sustainable competitive advantage - our “Right to Win;”
•Growing the Etsy marketplace in our sixseven core geographiesgeographies; and building a sustainable competitive advantage around four elements
•Leveraging our marketplace expertise and playbook across our “House of our business that we believe differentiate us from our competitors, or what we call our “Right to Win.Brands.” The foundation of Etsy’s competitive advantage is our collection of our seller’s 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 e-commerce platforms and marketplaces.
Our investments in technology infrastructure, product development, marketing, trust and talent will be focused on capitalizing on these four elementssafety, member support, and sellers tools and education, and other areas support our strategy, which you can read more about in Part 1, Item 1, “Business—Primary Business Drivers.” In 2021, our first two strategies contributed to growth of our business. Ultimately, the goal of our long-term strategy isEtsy marketplace compared to drive
2020 by driving more new buyers to the website, giveour marketplace, giving existing buyers reasons to come back more often, encourageand encouraging buyers to spend more per order and fuelthereby fueling success for our sellers.
Annual Highlights
As of December 31, 2021, our marketplaces connected 7.5 million active sellers and 96.3 million active buyers in nearly every country in the world. In the year ended December 31, 2021, sellers generated GMS of $13.5 billion, approximately 64% of which came from purchases made on mobile devices. 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 buildingare a global brandcompany and user community.
Year Highlights
Total revenue was $818.4 millionapproximately 42% of our GMS in the year ended December 31, 2019,2021 came from transactions in which either a seller or a buyer was located outside of the United States. Total revenue was $2.3 billion in the year ended December 31, 2021, driven by strong growth in both Marketplace and Services revenue. In the year ended December 31, 2019,2021, we recorded net income of $95.9$493.5 million, and non-GAAP Adjusted EBITDA of $186.3$716.6 million. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated in accordance with GAAP.
Cash and cash equivalents and short-term investments were $984.6 million as of December 31, 2021. As of December 31, 2019,2021, we had outstanding $1.0 billion aggregate principal amount of 0.25% Convertible Senior Notes due 2028 (the “2021 Notes”), $650.0 million aggregate 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 together with the 2021 Notes, 2020 Notes, and 0% Convertible Senior Notes due 2023 (the “2018 Notes”), the “Notes”). Additionally, we have the ability to draw down on our marketplaces connected 2.7$200.0 million active sellers and 46.4 million active buyers, in nearly every country in the world.senior secured revolving credit facility. In the year ended December 31, 2019, sellers generated GMS2021, we had positive operating cash flows of $5.0 billion$651.6 million.
Acquisitions
On July 2, 2021, we completed our acquisition of which approximately 58% came from purchases made on mobile devices. We areElo7, a global company and approximately 36% of our GMSmarketplace in the year ended December 31, 2019 came from transactions where either a seller or a buyer was located outside of the United States.
Other Operational Highlights
In 2019 weBrazil focused on growing the Etsy marketplace inunique, handmade items, for consideration having a fair value of approximately $212.1 million, net of cash acquired, after giving effect to purchase price adjustments.
On July 12, 2021, we completed our six core geographies, and owning special purchase occasions – style, gifting, and celebrations – throughout the year. Below are key operational highlights:
We continued to launch new product enhancements and build upon prior launches to help Etsy buyers find the right product at the right time, or discover inspiration among the items in the Etsy marketplace. Product experiment velocity reached a record high during the year. We made a foundational upgrade to our ranking algorithms, which will continue to enable us to provide more relevant search results to Etsy buyers. In addition, we continued to improve our mobile app, highlighting items that are similar to items Etsy buyers have made a favorite in the past, launched variation photos, and integrated several shipping solutions, all geared to helping improve their shopping experience. We focused on our collectionacquisition of unique items by enhancing the image quality for listings on desktop, our largest channel by device, which is intended to convert more visits into purchases.
We continued to focus on utilizing our marketing efforts to drive new and existing buyers to Etsy. We launched a new national television campaign, which had a positive impact on visits and purchase intent. We also launched our 2019 holiday television campaign in the second half of the year, which continued to positively move brand metrics on purchase intent and brand awareness. We kicked off our first international television campaign towards the end of 2019.
We continued to enhance, expand, and introduce new product offerings and seller tools. In July, we began providing Etsy sellers with tools and support to make it easy for them to guarantee free shipping on orders of $35 or more to U.S. buyers. We also launched a regional sales feature, which allows for Etsy sellers to set a country-specific sale, with a focus on their domestic listings. As of the end of the year, 65% of U.S. buyer GMS shipped for free, 74% of U.S. listing views were eligible to ship for free, and 48% of orders were delivered with free shipping.
We made progress simplifying our marketing tools for Etsy sellers to enable them to more easily invest in their growth. In the third quarter of 2019, we streamlined Promoted Listings, Etsy’s onsite ads platform, and Google Shopping, an off-site marketing tool for Etsy.com sellers, into one unified ad platform, called Etsy Ads. Etsy Ads enables Etsy sellers to set a budget and Etsy then allocates that budget between channels, targeting optimal return on seller spend. With the initial launch of Etsy Ads, our Promoted Listings service was no longer offered as a standalone advertising option during the fourth quarter of 2019.
We progressed on our impact goals, including our ecological goal to build long-term resilience by eliminating our carbon impacts and fostering responsible resource use. In February 2019, we began offsetting 100% of carbon emissions generated by shipping on Etsy.com, which represent 97% of our total measured emissions.
We have also focused on growth investments, such as our migration to Google Cloud. In 2019, we achieved significant milestones in the process by beginning to serve our search traffic from Google Cloud and migrating a majority of our systems to Google Cloud, including our machine learning efforts. As a result of migrating our Etsy.com search efforts to Google Cloud, we were able to make the foundational upgrade to our ranking algorithms for the Etsy marketplace. We spent approximately $30 million on cloud migration costs in 2019, which includes
implementation costs and costs related to cloud usage for growth initiatives, and completed the migration in February 2020.
While our Etsy Ads platform delivered positive returns for many Etsy sellers and revenue growth for Etsy in the fourth quarter of 2019, we will be iterating on our advertising offerings to help sellers more effectively drive traffic to their listings. In the second quarter of 2020, Etsy is planning to launch a new advertising service for Etsy sellers, called Offsite Ads. Etsy will pay the upfront costs to promote Etsy sellers’ listings on multiple internet platforms without any upfront costs for sellers. When a shopper clicks onDepop, an online offsite ad featuringglobal peer-to-peer fashion resale marketplace for consideration having a seller’s listing and purchases from their shop, the seller will pay Etsy an advertising fee on that order - only when they make a sale. The Etsy Ads service will be a dedicated on-site advertising program for sellersfair value of approximately $1.493 billion, net of cash acquired, after giving effect to promote their listings to shoppers on Etsy.purchase price adjustments.
Convertible Debt
In September 2019,June 2021, we issued $650.0 million aggregate principal amount of the 20192021 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.Act of 1933, as amended (the “Securities Act”). The initial conversion price of the 20192021 Notes represented a premium of approximately 47.5%45% over the closing price of our common stock.stock on June 8, 2021, the date the 2021 Notes offering was priced. The net proceeds from the sale of the 20192021 Notes were $639.5$986.7 million after deducting the initial purchasers' discount and offering expenses. The 20192021 Notes will mature on October 1, 2026,June 15, 2028, unless earlier converted, redeemed, or repurchased.
We used $76.2$85.0 million of the net proceeds from the 20192021 Notes offering to enter into separate capped call transactionsinstruments (“20192021 Capped Call Transactions”) with certain financial institutions. The 20192021 Capped Call Transactions effectively increaselimit the premium for conversion of the 20192021 Notes at maturity to 100% and are generally expected to reduce potential dilution to our common stock upon any conversion of the 20192021 Notes andand/or offset any payments we make upon conversion.
In addition, we used $124.5repurchased approximately 1.1 million of the net proceeds from the 2019 Notes to repurchase 2,094,196 shares of our common stock. We intend to usestock for approximately $180.0 million concurrently with the remainderissuance of the net proceeds from the 2019 Notes offering2021 Notes.
See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for general corporate purposes.
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.
For more information on the 20192021 Notes 2019and 2021 Capped Call Transactions, and 2019 Credit Agreement, see “Note 13—Debt” inas well as the Notes issued in previous years.
Etsy Marketplace Transaction Fee Increase
We are increasing our seller transaction fee from 5% to Consolidated Financial Statements.
Reclassification6.5%, effective April 11, 2022. Our plan is to invest even more in making Etsy the best place to run a creative business. We expect to invest most of Revenue Categories
In the fourth quarter of 2019, we reclassified Otherincremental revenue to Marketplace revenue. The following table provides our Marketplace revenuefrom this fee increase in marketing, seller tools, and Other revenue under our previous and current presentation for the years ended December 31, 2018 and 2017:creating world-class customer experiences.
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| | | | | | | | | | | | | | | |
| Previous Presentation | | Current Presentation |
Year-to-Date Period Ended | Marketplace Revenue | | Other Revenue | | Marketplace Revenue | | Other Revenue |
| | | | | | | |
| (in thousands) |
December 31, 2018 | $ | 440,740 |
| | $ | 4,025 |
| | $ | 444,765 |
| | $ | — |
|
December 31, 2017 | 326,076 |
| | 3,286 |
| | 329,362 |
| | — |
|
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 financial results of Depop, Elo7, and Reverb have been included in our consolidated financial results (“Consolidated”) from July 12, 2021, July 2, 2021, and August 15, 2019 (the datedates of acquisition)., respectively. We are providing Etsy.com standalone information in certain instances where particularly relevant. The unaudited non-GAAP financial measure and key operating and financial metrics we use are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % Growth / (Decline) Y/Y | | Year Ended December 31, | | % Growth Y/Y |
| | 2021 | | 2020 | | | 2019 | |
| | | | | | | | | | |
| | (in thousands, except percentages) |
GMS (1)(2) | | $ | 13,491,828 | | | $ | 10,281,101 | | | 31.2 | % | | $ | 4,974,944 | | | 106.7 | % |
Revenue | | $ | 2,329,114 | | | $ | 1,725,625 | | | 35.0 | % | | $ | 818,379 | | | 110.9 | % |
Marketplace revenue | | $ | 1,745,824 | | | $ | 1,303,126 | | | 34.0 | % | | $ | 593,646 | | | 119.5 | % |
Services revenue | | $ | 583,290 | | | $ | 422,499 | | | 38.1 | % | | $ | 224,733 | | | 88.0 | % |
Gross profit | | $ | 1,674,602 | | | $ | 1,260,880 | | | 32.8 | % | | $ | 547,343 | | | 130.4 | % |
Operating expenses | | $ | 1,208,870 | | | $ | 836,871 | | | 44.5 | % | | $ | 458,582 | | | 82.5 | % |
Net income | | $ | 493,507 | | | $ | 349,246 | | | 41.3 | % | | $ | 95,894 | | | 264.2 | % |
Adjusted EBITDA (Non-GAAP) (1) | | $ | 716,613 | | | $ | 549,116 | | | 30.5 | % | | $ | 186,268 | | | 194.8 | % |
Adjusted EBITDA margin (Non-GAAP) (1) | | 31 | % | | 32 | % | | (100) | bps | | 23 | % | | 920 | bps |
| | | | | | | | | | |
Active sellers (1)(3) | | 7,522 | | | 4,365 | | | 72.3 | % | | 2,699 | | | 61.7 | % |
Active buyers (1)(3) | | 96,336 | | | 81,898 | | | 17.6 | % | | 46,351 | | | 76.7 | % |
| | | | | | | | | | |
Percent mobile GMS (1) | | 64 | % | | 61 | % | | 300 | bps | | 58 | % | | 300 | bps |
Percent non-U.S. GMS (1)(4) | | 42 | % | | 36 | % | | 600 | bps | | 36 | % | | — | bps |
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| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % Growth Y/Y | | Year Ended December 31, | | % Growth (Decline) Y/Y |
| | 2019 | | 2018 | | | 2017 | |
| | | | | | | | | | |
| | (in thousands, except percentages) |
GMS (1) | | $ | 4,974,944 |
| | $ | 3,931,745 |
| | 26.5 | % | | $ | 3,253,609 |
| | 20.8 | % |
Revenue (2) | | $ | 818,379 |
| | $ | 603,693 |
| | 35.6 | % | | $ | 441,231 |
| | 36.8 | % |
Marketplace revenue (3) | | $ | 593,646 |
| | $ | 444,765 |
| | 33.5 | % | | $ | 329,362 |
| | 35.0 | % |
Services revenue | | $ | 224,733 |
| | $ | 158,928 |
| | 41.4 | % | | $ | 111,869 |
| | 42.1 | % |
Net income | | $ | 95,894 |
| | $ | 77,491 |
| | 23.7 | % | | $ | 81,800 |
| | (5.3 | )% |
Adjusted EBITDA (Non-GAAP) | | $ | 186,268 |
| | $ | 139,510 |
| | 33.5 | % | | $ | 80,009 |
| | 74.4 | % |
| | | | | | | | | | |
Active sellers (4) | | 2,699 |
| | 2,115 |
| | 27.6 | % | | 1,933 |
| | 9.4 | % |
Active buyers (4) | | 46,351 |
| | 39,447 |
| | 17.5 | % | | 33,364 |
| | 18.2 | % |
Percent mobile GMS | | 58 | % | | 55 | % | | 300 | bps | | 51 | % | | 400 | bps |
Percent international GMS (1) | | 36 | % | | 35 | % | | 100 | bps | | 33 | % | | 200 | bps |
(1)Unaudited. | |
(1) | GMS for the year ended December 31, 2019, includes Reverb’s GMS of $242.4 million. Percent international GMS includes Reverb’s percent international GMS of 18% for the year ended December 31, 2019. Etsy.com GMS for the year ended December 31, 2019 was $4.7 billion. |
| |
(2) | Revenue for the year ended December 31, 2019, includes Reverb’s revenue of $19.1 million. Etsy.com revenue for the year ended December 31, 2019 was $799.3 million. |
| |
(3) | In the fourth quarter of 2019, we reclassified Other revenue to Marketplace revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Reclassification of Revenue Categories” for our Marketplace and Other revenue under our previous and current presentation for the years ended December 31, 2018 and 2017.(2)Consolidated GMS for the year ended December 31, 2021 includes Etsy.com GMS of $12.2 billion, Reverb GMS of $948.0 million, Depop GMS of $294.4 million, and Elo7 GMS of $32.0 million. (3)Consolidated active sellers and active buyers includes Etsy.com active sellers and active buyers of 5.3 million and 90.1 million, respectively, as of December 31, 2021. (4)Percent non-U.S. GMS was formerly referred to as percent international GMS. Percent non-U.S. GMS for Etsy.com for the year ended December 31, 2021 was 43%. For further details, refer to “Non-U.S. GMS” definition below. |
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(4) | Active sellers and active buyers includes Reverb’s active sellers and active buyers of 162 thousand and 624 thousand, respectively, as of December 31, 2019. Reverb active sellers and active buyers are sellers and buyers who have incurred at least one charge or made at least one purchase, respectively, from Reverb in the last 12 months. Etsy.comactive sellers and active buyers were approximately 2.5 million and 45.7 million, respectively. |
GMS
Gross merchandise sales (“GMS”) is the dollar value of items sold in our marketplaces within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by us. GMS is largely driven by transactions in our marketplaces 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 our sellers, the satisfaction of our 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.
GMS increased $3.2 billion to $13.5 billion in the year ended December 31, 2021 compared to the year ended December 31, 2020. Driving this growth in GMS, were increases as compared to December 31, 2020 in active sellers, primarily due to strong growth in U.S. sellers on the Etsy.com marketplace, in active buyers on the Etsy.com marketplace, and in GMS per active buyer on a trailing twelve month (“TTM”) basis, as well as the acquisitions of Depop and Elo7 in the third quarter of 2021. As of December 31, 2021, habitual buyers, or Etsy.com buyers who have spent $200 or more and made purchases on six or more days in the previous 12 months, grew to 8.1 million, an increase of 26% compared to December 31, 2020. Additionally, we experienced the following growth in both new buyer and existing buyer GMS in the periods presented:
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| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
| | % Growth Y/Y | % of GMS | | % Growth Y/Y | % of GMS | | % Growth Y/Y | % of GMS |
New Buyer GMS | | 6 | % | 13 | % | | 105 | % | 16 | % | | 16 | % | 17 | % |
Existing Buyer GMS | | 36 | % | 87 | % | | 107 | % | 84 | % | | 37 | % | 83 | % |
Uncertainty caused by the ongoing COVID-19 pandemic may continue to impact our business in 2022. While our growth continued in 2021, our rate of growth decelerated as compared to the rapid growth we experienced in 2020, which was driven at least in part by the pandemic-related shift to online purchasing. Our growth rate may continue to be impacted by macroeconomic factors beyond our control such as inflation, retail businesses reopening, increased consumer spending on travel and other discretionary items, and the absence of new U.S. and other government economic stimulus programs, among other things, as well as an anticipated deceleration in our rate of acquisition of new buyers, the effects of which may be offset to some extent by incremental GMS from our recent acquisitions.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA 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 (gain) loss; acquisition-related expenses; non-ordinary course disputes; restructuring and other exit costs (income); asset impairment charges; net unrealized loss on warrant and other liabilities; and contributions to Good Work Institute (formerly Etsy.org).extinguishment of debt. Adjusted EBITDA margin is Adjusted EBITDA divided by revenue. See “Non-GAAP Financial Measures” for more information regarding our use of Adjusted EBITDA and Adjusted EBITDA margin, including itstheir limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable GAAP financial measure calculated in accordance with GAAP.measure.
Active Sellers
An active seller is a seller who has incurred at least onehad a charge from usor sale in the last 12 months. Charges include Marketplace and Services Revenuerevenue fees, discussed in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies —RevenuePolicies—Revenue Recognition” in the Notes to Consolidated Financial Statements. A seller is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple seller accounts and can count as a distinct active seller in each of our marketplaces. As part of our commitment to integrity and transparency, we continuously monitor the criteria for disqualifying a seller as an active seller. Commencing in the first quarter of 2021, we expanded our disqualifying criteria, but we did not apply such criteria to prior periods as the impact of such criteria was immaterial to such periods. Additionally, commencing in the third quarter of 2021, as part of our integration of the Depop and Elo7 marketplaces into our “House of Brands,” we expanded our definition of active sellers to include any seller who has had a sale in the last 12 months, even if no charge was incurred in connection with the sale. This update did not result in any change to prior period disclosures. We succeed when sellers succeed, so we view the number of active sellers as a key indicator of theconsumer awareness of our brand,brands, the reach of our platform,platforms, the potential for growth in GMS and revenue, and the health of our business.
Active Buyers
An active buyer is a buyer who has made at least one purchase in the last 12 months. A buyer is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple buyer accounts and can count as a distinct active buyer in each of our marketplaces. We generate revenue when buyers order items from 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,platforms, consumer awareness of our brand,brands, the engagement and loyalty of 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 orders initiated on mobile devices but ultimately completed on a desktop. When calculating the 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.
InternationalDuring the year ended December 31, 2021, mobile GMS increased as a percentage of total GMS to approximately 64%, up from approximately 61% for the year ended December 31, 2020. Mobile GMS growth during the year ended December 31, 2021 was approximately 39%, with mobile GMS growing faster than desktop GMS during the year.
Non-U.S. GMS
InternationalNon-U.S. GMS (formerly referred to as international GMS) is GMS from transactions wherein which either the billing address for the seller or the shipping address for the buyer at the time of sale is outside of the United States. When calculating percent internationalnon-U.S. GMS, we do not take into account refunds associated with canceled transactions. We believe that internationalnon-U.S. GMS shows the level of engagement of our community outside the United States and demonstrates our ability to grow GMS and revenue.
For the year ended December 31, 2021, non-U.S. GMS increased as a percentage of total GMS to approximately 42%, up from approximately 36% for the year ended December 31, 2020. Non-U.S. GMS increased approximately 54% in the year ended December 31, 2021 compared to the year ended December 31, 2020, or 49% on a currency-neutral basis, driven by our fastest growing non-U.S. trade route, non-U.S. domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country. Non-U.S. domestic GMS grew approximately 77% in 2021 compared to 2020, driven primarily by growth in the Etsy.com marketplace, and, to a lesser extent, our acquisitions of Depop and Elo7 in the third quarter of 2021.
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 and include the operations of Reverb since August 15, 2019 (the date of acquisition):
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| | | | | | | | | |
Year-to-Date Period Ended | | As Reported | | Currency-Neutral | | FX Impact |
December 31, 2019 | | 26.5 | % | | 27.5 | % | | (1.0 | )% |
December 31, 2018 | | 20.8 | % | | 20.4 | % | | 0.4 | % |
December 31, 2017 | | 14.5 | % | | 14.3 | % | | 0.2 | % |
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; benefit for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange (gain) loss; acquisition-related expenses; non-ordinary course disputes; restructuring and other exit costs (income); and asset impairment charges. 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 (gain) loss;
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 costs (income);
Adjusted EBITDA does not consider the impact of asset impairment charges;
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, |
| 2019 | | 2018 | | 2017 |
| | | | | |
| (in thousands) |
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
Excluding: | | | | | |
Interest and other non-operating expense, net (1) | 11,121 |
| | 13,221 |
| | 8,736 |
|
Benefit for income taxes | (15,248 | ) | | (22,413 | ) | | (49,535 | ) |
Depreciation and amortization (1) | 48,031 |
| | 26,742 |
| | 27,197 |
|
Stock-based compensation expense (2) | 44,395 |
| | 38,231 |
| | 23,857 |
|
Foreign exchange (gain) loss (3) | (3,006 | ) | | 6,487 |
| | (29,105 | ) |
Acquisition-related expenses (4) | 3,917 |
| | — |
| | — |
|
Non-ordinary course disputes | 1,164 |
| | — |
| | — |
|
Restructuring and other exit costs (income) (5) | — |
| | (249 | ) | | 13,897 |
|
Asset impairment charges (6) | — |
| | — |
| | 3,162 |
|
Adjusted EBITDA | $ | 186,268 |
| | $ | 139,510 |
| | $ | 80,009 |
|
(1) Included in interest and depreciation expense amounts above are interest and depreciation expense related to our headquarters. As part of the adoption of ASU 2016-02—Leases in the first quarter of 2019, we now account for our headquarters as a financing lease. Previously, we accounted for our headquarters under build-to-suit accounting requirements. For further information, see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” in the Notes to Consolidated Financial Statements. For the years ended December 31, 2019, 2018, and 2017 those amounts are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
| (in thousands) |
Interest expense | $ | 2,675 |
| | $ | 8,996 |
| | $ | 9,000 |
|
Depreciation | 8,789 |
| | 3,276 |
| | 3,276 |
|
(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 (5) below. Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
| (in thousands) |
Cost of revenue | $ | 5,787 |
| | $ | 3,357 |
| | $ | 1,739 |
|
Marketing | 3,774 |
| | 2,507 |
| | 1,933 |
|
Product development | 21,085 |
| | 21,234 |
| | 8,274 |
|
General and administrative | 13,749 |
| | 11,133 |
| | 14,613 |
|
Total stock-based compensation expense | $ | 44,395 |
| | $ | 38,231 |
| | $ | 26,559 |
|
| |
(3) | See “Results of Operations—Other Expense, net” for more information on the fluctuation in foreign exchange (gain) loss in the years ended December 31, 2019, 2018, and 2017. |
| |
(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) | See “Note 17—Restructuring and Other Exit Costs (Income)” in the Notes to Consolidated Financial Statements for a description of the matters related to these events. |
Total restructuring and other exit costs (income) included in the Consolidated Statements of Operations are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | |
Year-to-Date Period Ended | | As Reported | | Currency-Neutral | | FX Impact |
December 31, 2021 | | 31.2 | % | | 29.6 | % | | 1.6 | % |
December 31, 2020 | | 106.7 | % | | 105.7 | % | | 1.0 | % |
December 31, 2019 | | 26.5 | % | | 27.5 | % | | (1.0) | % |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
| (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 |
|
| |
(6) | 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. |
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, including those discussed in Part I, Item 1, “Business,” but also pose risks and challenges, including those discussed in the section titledPart I, Item 1A, “Risk Factors.”
Components of Our primary marketplace, Etsy.com, is the largest driverResults of our business and thus the following key factors affecting our performance most significantly relate to the Etsy marketplace.Operations
Growth and Retention of Active Buyers and Active Sellers on the Etsy MarketplaceRevenue
Our success depends in part on the growth and retention of our active buyers and active sellers. Our revenue is driven by the numberdiversified and generated from a mix of active buyers, buyer engagement, activemarketplace activities and other optional services we provide to sellers seller engagement, and our ability to maintain a trusted marketplace. We believe two of our most significant opportunities to drive growth in our primary marketplace are to bring new buyers to Etsy.com and encourage existing 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 2019, the Etsy marketplace had 19 million new Etsy buyers, or buyers who made their first-ever purchase on Etsy. GMS from new buyers was up 11% year-over-year and represented approximately 16% of overall Etsy.com GMS, a decrease compared to last year. Etsy.com GMS from existing buyers grew 24% year-over-year in 2019 and represented approximately 84% of overall Etsy.com GMS, an increase compared to last year. Repeat purchases demonstrate the loyalty of Etsy buyers. In 2019, on the Etsy marketplace, approximately 41.4% of our active buyers made purchases on two or more days in the previous 12 months, up from 40.1% in 2018.
Habitual buyers represented approximately 5.5% of Etsy.com’s active buyers as of December 31, 2019. Habitual buyers grew to 2.5 million as of December 31, 2019, an increase of 22.9% compared to 2018. 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 and active sellers.
Active Buyer Cohorts on the Etsy Marketplace
We refer to active buyers as of December 31, 2016 as “2016 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,” and as of December 31, 2012 as “2012 Active Buyers.” Of total 2016 Active Buyers, 37.9% remained active buyers through their fourth year on the platform, compared to 37.5% for 2015 Active Buyers, 38.7% for 2014 Active Buyers, 41.1% for 2013 Active Buyers, and 42.5% for 2012 Active Buyers. The average annual GMS per 2016 Active Buyer during their fourth year on the platform was 85% higher than their first year, compared to 78% for 2015 Active Buyers, 70% for 2014 Active Buyers, 81% for 2013 Active Buyers, and 88% for 2012 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.
|
| | | | | | | | | | | | |
| | | | | Year 1 | | Year 2 | | Year 3 | | Year 4 | |
| | | | | | | | | | | | |
| AVG GMS | | 2012 | | $96 | | $163 | | $173 | | $181 | |
| | | | | | | | | | | | |
| PER BUYER | | 2013 | | $96 | | $161 | | $168 | | $174 | |
| | | | | | | | | | | | |
| | | 2014 | | $99 | | $157 | | $164 | | $169 | |
| | | | | | | | | | | | |
| | | 2015 | | $101 | | $158 | | $163 | | $180 | |
| | | | | | | | | | | | |
| | | 2016 | | $101 | | $157 | | $174 | | $187 | |
| | | | | | | | | | | | |
|
|
Etsy Cohort of 2016, 2015, 2014, 2013, and 2012 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 millions of items listed on Etsy.com, driving buyer growth and retention.
Active Seller Cohorts on the Etsy Marketplace
We refer to active sellers as of December 31, 2016 as “2016 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” and December 31, 2012 as “2012 Active Sellers.” Of the 2016 Active Sellers, 36.2% remained active through their fourth year on the platform, compared to 33.1% for 2015 Active Sellers, 31.8% for 2014 Active Sellers, 31.5% for 2013 Active Sellers, and 32.3% for 2012 Active Sellers. The average annual GMS per 2016 Active Seller during their fourth year on the platform was three times higher than their first year, compared to over three times higher for 2015 Active Sellers, also over three times higher for 2014 Active Sellers, almost four times higher for 2013 Active Sellers, and over four times higher for 2012 Active Sellers.
|
| | | | | | | | | | | | |
| | | | | Year 1 | | Year 2 | | Year 3 | | Year 4 | |
| | | | | | | | | | | | |
| AVG GMS | | 2012 | | $1,079 | | $2,598 | | $3,935 | | $4,557 | |
| | | | | | | | | | | | |
| PER SELLER | | 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 | |
| | | | | | | | | | | | |
| | | 2016 | | $1,660 | | $3,198 | | $4,278 | | $5,004 | |
| | | | | | | | | | | | |
|
|
Etsy Cohort of 2016, 2015, 2014, 2013, and 2012 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 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 entrepreneursthem 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. As of December 31, 2019, on the Etsy
Marketplace Revenue: Etsy.com marketplace 16.6% of active sellers used advertising services, and 22.9% 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 and shape perceptionsrevenue is comprised of the fees an Etsy seller pays for marketplace as the go-to shopping destination for special purchases and 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 2019, Paid GMS was 15% of total Etsy.com GMS and grew 7% compared to 2018. Paid GMS only reflects Etsy.com GMS related to performance marketing spend and excludes brand marketing channels such as TV. 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. We believe these campaigns can increase brand awareness, visits, and purchase intent.
In 2019, we spent $215.6 million on marketing expenses, or 26.3% of revenue, up 36.4% over 2018. In 2018, we spent $158.0 million on marketing expenses, or 26.2% of revenue, up 44.9% over 2017. We increased digital marketing spend, which excludes brand marketing channels such as TV, by 19% in 2019 to $134.0 million, including $129.3 million of which was spend for the Etsy marketplace, up 15% from 2018.
Investment in Technology
Our engineering team has built a platform that enables millions of Etsy sellers and 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 the Etsy marketplace and enhance their experience.
In September 2016, we acquired Blackbird Technologies, Inc., (“Blackbird”), a machine learning company, and, during 2017, fully integrated it into our search team. During 2017, we launched Context Specific Ranking (“CSR”), which leverages our internal data to create a more personalized search experience. On the Etsy marketplace, we continued to improve the search experience using CSR throughout 2018 and migrated to non-linear search models in 2019. We completed our migration to Google Cloud in February 2020, and our technology infrastructure allows us to scale our efforts across the platform. We expect to continue to leverage artificial intelligence and machine learning to enable shoppers to more easily browse, filter and transact on the Etsy marketplace, even when they may not have something specific in mind.
In 2019, we spent $121.9 million on product development expenses, or 14.9% of revenue, up 25.3% over 2018, and in 2018 we spent $97.2 million on product development expenses, or 16.1% of revenue, up 30.3% over 2017. In addition, we capitalized website development and internal-use software costs of $8.7 million and $22.1 million in 2019 and 2018, respectively, on a consolidated basis. Additionally, in 2019 we acquired developed technology valued at $30.3 million in the Reverb acquisition. 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 buyers wherever they are and to provide an enjoyable and accessible shopping experience no matter what device they use to access our marketplaces. Mobile is integrated into everything that we do, and expanding our mobile capabilities is an important focus area. Our mobile websites and mobile apps include search, discovery, curation, personalization, and social shopping features, optimized for a personal mobile experience. Etsy.com mobile GMS was 59% of total Etsy.com GMS in 2019, up from 55% in 2018. We are focused on increasing conversion rates in general; however, we are particularly focused on mobile web, which continued to be the largest driver of overall visits growth. If mobile web visits continue to grow as a percentage of overall visits, it could be a headwind to future conversion rate gains. We are focused on continuing to enhance the buyer experience through mobile offering improvements in 2020.
International Growth
Our growth will depend in part on international sellers and international buyers constituting an increasing portion of our community. Our vision is global and local. Our websites are available in many 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.
On a consolidated basis, international GMS was 36% of total GMS in 2019 compared to 35% in 2018.
For the Etsy marketplace, we expect international GMS to continue to grow faster than U.S. GMS in 2020, assuming that currency rates remain stable compared to average levels in December 2019, driven by our efforts to build local communities and foster local connections. In 2019, 40% 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 37% in 2019 compared with 2018, 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 focused on building local marketplaces globally, and deepening local communities around the world, each with its own ecosystem of sellers and buyers. To execute on our international strategy, we plan to continue to invest in local marketing and other locally-relevant tools and enhancements, such as local search boost, to encourage these connections around the world.
Our Company Culture•The $0.20 listing fee for each item listed (for up to four months);
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. 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, 2019, our Board of Directors and leadership were at least 50% female.
Components of Our Results of Operations•
Revenue
Our revenue consists of Marketplace revenue and Services revenue.
Etsy.com Marketplace revenue. Marketplace revenue is primarily comprised of theThe 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, the listingand where applicable, an additional transaction fee of $0.20 she pays12% or 15% related to offsite advertising (“Offsite Ads”);
•A fee 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. Etsy Payments processing fees varyproduct, which typically varies between 3.0% toand 4.5% of an item’s total sale price, including shipping, plus a flat fee per order, dependingthat depends on the country in which a seller’s bank account is located. The Company earnsWe earn additional fees on transactions in which currency conversions are performed. Marketplace revenue also includes revenue generated through our commercial partnerships, which was recorded in its own Other revenue line prior to
Reverb fees include the fourth quarter of 2019.
Reverb.com Marketplace revenue. The5.0% transaction fee that a Reverb seller transaction fee is a variable fee, which is 3.5% ofpays for each completed transaction, including both the costinclusive of the itemshipping fees charged, and the shipping. There are no Reverba fee for payment processing. Similarly, Depop and Elo7 sellers pay a 10% and 7% transaction fee, respectively, for each completed transaction, and also pay a fee for payment processing. None of these other marketplaces charge listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments. Payments processing fees vary between 2.5% - 2.7% of an item’s total sale price, including shipping, plus a flat fee per order, depending on the currency in which a listing is denominated.
Etsy.com Services revenue.Revenue: Services revenue is derived from optional services offered to sellers, which primarily include advertising services and shipping labels.
Revenue from Promoted Listings, our on-site advertising service, consistscomprised of cost-per-clickthe fees an Etsy seller pays us for our optional services (“Services”), including:
•On-site advertising services (“Etsy Ads”), which allow Etsy sellers to pay for prominent placement of hertheir listings in search results in our marketplace. In the third quarter of 2019, Etsy streamlined Promoted Listingsresults; and Google Shopping, an off-site marketing tool for Etsy sellers, into one unified ad platform called Etsy Ads, where Etsy sellers can set a budget,
•Shipping labels, which allows Etsy to allocate that budget between channels, targeting optimal return on seller spend. Due to this new offering, Etsy no longer offered its Promoted Listings service as a standalone advertising service after September 30, 2019. Revenue from Etsy Ads consists of cost-per-click fees, which are nonrefundable and are charged to a seller’s Etsy bill when the ad is clicked. The revenue that we recognize related to Etsy Ads is recorded on a gross basissellers in Services revenue with an offsetting expense recorded in cost of revenue.
Revenue from shipping labels consists of fees an Etsy seller pays us when she purchases shipping labels directly through our platform, net of the cost we incur 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, Australia, and DAI Post at discounted pricing due to the volume of purchases through our platform.
Reverb.com 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. Reverb also provides its sellers accessIndia 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 us when they purchase shipping labels directly through the Reverb platform, net of the cost we incur in purchasing those shipping labels.
OurAcross our other marketplaces, Reverb and Elo7 offer on-site advertising services, and all of our other marketplaces offer shipping labels services.
See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for a discussion of our revenue recognition policies are discussed under “Critical Accounting Policies and Significant Judgments and Estimates.”policies.
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 we are not able to collect from sellers. Cost of revenue also includes expenses associated with the usage of cloud infrastructure, including employee-related costs,employee compensation-related expenses, hosting and bandwidth costs, and depreciation and amortization. With the shift to Etsy Ads in the third quarter of 2019, amounts spent on Google Shopping, which were previously recorded on a net basis in Other revenue, are recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue. Our cost of revenue as a percentage of revenue may change over time as our revenue mix changes; for example, to the extent that payments revenue increases as a percentage of revenue, there may be a dampening effect on our gross margin, as our payments services are lower margin products 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 ad and digital video public relations and communications, market research, marketing partnerships, and customer relationship management.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, display advertising and social channels, which are focused on buyer acquisition and retargeting. To a lesser extent, direct marketing expenses also include brand marketing, public relations and communications, marketing partnerships, and customer relationship
management. Marketing expenses also include employee compensation-related expenses to support our marketing initiatives and amortization expense related to acquired customer relationships and trademark intangible assets.
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 administrativeadministrative:. 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, digital service tax, 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,Expense, net
Other (expense) income,expense, net consists of interest expense, interest and other income, and foreign exchange gain (loss)., and in 2020, also loss on extinguishment of debt which relates to the partial repurchase of our 2018 Notes in 2020. Interest expense consists primarily of non-cash interest andamortization of the debt discount, amortization of debt issuance costs, and coupon interest expense related to our Convertible Senior Notes due 2023 and 2026. As part ofNotes. With the adoption of ASU 2016-02—LeasesAccounting Standards Update (“ASU”) 2020-06 in the first quarter of 2019,2021, non-cash interest expense related to the Notes decreased as there is no further amortization of the debt discount due to its derecognition. Interest expense also 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 treatmentportion of our Brooklyn headquarters lease and, to a lesser extent, interest on our hosting and computer equipment leases,which is accounted for as capital lease obligations.a finance lease. Interest and other income is primarily comprised of interest and dividend income from our investment accounts.
Benefit (Provision) 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 Statementsconsolidated 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, of the Company, 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 the 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, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| (in thousands) |
Revenue: | | | | | |
Marketplace | $ | 1,745,824 | | | $ | 1,303,126 | | | $ | 593,646 | |
Services | 583,290 | | | 422,499 | | | 224,733 | |
| | | | | |
Total revenue | 2,329,114 | | | 1,725,625 | | | 818,379 | |
Cost of revenue | 654,512 | | | 464,745 | | | 271,036 | |
Gross profit | 1,674,602 | | | 1,260,880 | | | 547,343 | |
Operating expenses: | | | | | |
Marketing | 654,804 | | | 500,756 | | | 215,570 | |
Product development | 271,535 | | | 180,080 | | | 121,878 | |
General and administrative | 282,531 | | | 156,035 | | | 121,134 | |
| | | | | |
Total operating expenses | 1,208,870 | | | 836,871 | | | 458,582 | |
Income from operations | 465,732 | | | 424,009 | | | 88,761 | |
Other income (expense), net | 5,922 | | | (58,300) | | | (8,115) | |
Income before income taxes | 471,654 | | | 365,709 | | | 80,646 | |
Benefit (provision) for income taxes | 21,853 | | | (16,463) | | | 15,248 | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
| | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenue: | | | | | |
Marketplace | 75.0 | % | | 75.5 | % | | 72.5 | % |
Services | 25.0 | | | 24.5 | | | 27.5 | |
| | | | | |
Total revenue | 100.0 | | | 100.0 | | | 100.0 | |
Cost of revenue | 28.1 | | | 26.9 | | | 33.1 | |
Gross profit | 71.9 | | | 73.1 | | | 66.9 | |
Operating expenses: | | | | | |
Marketing | 28.1 | | | 29.0 | | | 26.3 | |
Product development | 11.7 | | | 10.4 | | | 14.9 | |
General and administrative | 12.1 | | | 9.0 | | | 14.8 | |
| | | | | |
Total operating expenses | 51.9 | | | 48.5 | | | 56.0 | |
Income from operations | 20.0 | | | 24.6 | | | 10.8 | |
Other income (expense), net | 0.3 | | | (3.4) | | | (1.0) | |
Income before income taxes | 20.3 | | | 21.2 | | | 9.9 | |
Benefit (provision) for income taxes | 0.9 | | | (1.0) | | | 1.9 | |
Net income | 21.2 | % | | 20.2 | % | | 11.7 | % |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
| (in thousands) |
Revenue: | | | | | |
Marketplace | $ | 593,646 |
| | $ | 444,765 |
| | $ | 329,362 |
|
Services | 224,733 |
| | 158,928 |
| | 111,869 |
|
Total revenue | 818,379 |
| | 603,693 |
| | 441,231 |
|
Cost of revenue | 271,036 |
| | 190,762 |
| | 150,986 |
|
Gross profit | 547,343 |
| | 412,931 |
| | 290,245 |
|
Operating expenses: | | | | | |
Marketing | 215,570 |
| | 158,013 |
| | 109,085 |
|
Product development | 121,878 |
| | 97,249 |
| | 74,616 |
|
General and administrative | 121,134 |
| | 82,883 |
| | 91,486 |
|
Asset impairment charges | — |
| | — |
| | 3,162 |
|
Total operating expenses | 458,582 |
| | 338,145 |
| | 278,349 |
|
Income from operations | 88,761 |
| | 74,786 |
| | 11,896 |
|
Other (expense) income, net | (8,115 | ) | | (19,708 | ) | | 20,369 |
|
Income before income taxes | 80,646 |
| | 55,078 |
| | 32,265 |
|
Benefit for income taxes | 15,248 |
| | 22,413 |
| | 49,535 |
|
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
| | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Revenue: | | | | | |
Marketplace | 72.5 | % | | 73.7 | % | | 74.6 | % |
Services | 27.5 |
| | 26.3 |
| | 25.4 |
|
Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenue | 33.1 |
| | 31.6 |
| | 34.2 |
|
Gross profit | 66.9 |
| | 68.4 |
| | 65.8 |
|
Operating expenses: | | | | | |
Marketing | 26.3 |
| | 26.2 |
| | 24.7 |
|
Product development | 14.9 |
| | 16.1 |
| | 16.9 |
|
General and administrative | 14.8 |
| | 13.7 |
| | 20.7 |
|
Asset impairment charges | — |
| | — |
| | 0.7 |
|
Total operating expenses | 56.0 |
| | 56.0 |
| | 63.1 |
|
Income from operations | 10.8 |
| | 12.4 |
| | 2.7 |
|
Other (expense) income, net | (1.0 | ) | | (3.3 | ) | | 4.6 |
|
Income before income taxes | 9.9 |
| | 9.1 |
| | 7.3 |
|
Benefit for income taxes | 1.9 |
| | 3.7 |
| | 11.2 |
|
Net income | 11.7 | % | | 12.8 | % | | 18.5 | % |
Comparison of Years Ended December 31, 20192021 and 20182020
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | | | | | | | | | | | | | |
| | (in thousands, except percentages) |
Revenue: | | | | | | | | | | | | | | |
Marketplace | | $ | 1,745,824 | | | $ | 1,303,126 | | | $ | 442,698 | | | 34.0 | % | | $ | 593,646 | | | $ | 709,480 | | | 119.5 | % |
Percentage of total revenue | | 75.0 | % | | 75.5 | % | | | | | | 72.5 | % | | | | |
Services | | $ | 583,290 | | | $ | 422,499 | | | $ | 160,791 | | | 38.1 | % | | $ | 224,733 | | | $ | 197,766 | | | 88.0 | % |
Percentage of total revenue | | 25.0 | % | | 24.5 | % | | | | | | 27.5 | % | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total revenue | | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 603,489 | | | 35.0 | % | | $ | 818,379 | | | $ | 907,246 | | | 110.9 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Revenue: | | | | | | | | |
Marketplace | | $ | 593,646 |
| | $ | 444,765 |
| | $ | 148,881 |
| | 33.5 | % |
Percentage of total revenue | | 72.5 | % | | 73.7 | % | | | | |
Services | | $ | 224,733 |
| | $ | 158,928 |
| | $ | 65,805 |
| | 41.4 | % |
Percentage of total revenue | | 27.5 | % | | 26.3 | % | | | | |
Total revenue | | $ | 818,379 |
| | $ | 603,693 |
| | $ | 214,686 |
| | 35.6 | % |
GMSRevenue increased $1.0 billion, or 26.5%,$603.5 million to $5.0$2.3 billion in the year ended December 31, 2019, which included $242.4 million related to the results of Reverb,2021 compared to the year ended December 31, 2018. On a currency-neutral basis (excluding the direct impact2020, of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth for the year ended December 31, 2019 would have been 27.5%, or approximately 100 basis points higher than the reported 26.5% growth. Supporting this growth in GMS, active sellerswhich 75.0% consisted of Marketplace revenue and 25.0% consisted of Services revenue.
Marketplace revenue increased 27.6%$442.7 million to 2.7 million, driven in large part by growth in international sellers and the acquisition of Reverb, and active buyers increased 17.5% to 46.4 million at December 31, 2019 compared to December 31, 2018. In the year ended December 31, 2019, GMS from new buyers grew 16% year-over-year and represented approximately 17% of overall GMS, a decrease compared to last year. In the year ended December 31, 2019, GMS from existing buyers grew 37% year-over-year and represented approximately 83% of overall GMS, an increase compared to last year. We anticipate continued visit growth and improved conversion in 2020. We believe conversion improvements will be driven primarily by product launches enhancing the buyer experience.
During the year ended December 31, 2019, mobile GMS increased as a percentage of total GMS to approximately 58% up from approximately 55% for the year ended December 31, 2018. Mobile GMS growth during the year ended December 31, 2019 was approximately 34%, with mobile web and mobile app GMS each continuing to grow faster than desktop GMS during the year.
For the year ended December 31, 2019, international GMS increased as a percentage of total GMS to approximately 36%, up from approximately 35% for the year ended December 31, 2018. International GMS was up approximately 32%$1.7 billion in the year ended December 31, 20192021 compared to the year ended December 31, 2018, 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 both2020. This growth was substantially all due to an increase in the same country, and byvolume of GMS between U.S. buyers and international sellers. International domestic GMS grew approximately 40% in 2019 compared with 2018. The increase in international GMS was partially offset by decreases related to changes in foreign currency rates year-over-year. On a currency-neutral basis international GMS growthon our marketplaces for the year ended December 31, 2019 would have been 37%. We expect international GMS to continue to grow faster than U.S. GMS on a currency-neutral basis, driven by our global product enhancements and marketing.
Revenue increased $214.7 million, or 35.6%, to $818.4 million in the year ended December 31, 2019, which included $19.1 million related to the results of Reverb, compared to the year ended December 31, 2018, of which 72.5% consisted of Marketplace revenue and 27.5% consisted of Services revenue.
Marketplace revenue increased $148.9 million, or 33.5%, to $593.6 million in the year ended December 31, 2019 compared to the year ended December 31, 2018. This growth corresponded with a 26.5% increase in GMS2021 to a total of $5.0$13.5 billion, forand the year ended December 31, 2019. Marketplace revenue increased at a faster rate thanbalance was due to pricing related to our Offsite Ads transaction fee, which was introduced in May 2020. A significant majority of the growth in volume of GMS was driven by the Etsy marketplace. The balance was primarily due to the acquisitions of Depop and Elo7 in the third quarter of 2021. Marketplace revenue also increased due to Reverb, whose revenue consisted principally of Marketplace revenue.
Within the increase in volume of GMS, transaction fee revenue andincreased 35.5%, payments revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018. Transactionincreased 31.4%, and listing fee revenue increased 48.9% year-over-year, primarily driven by our 2018 pricing updates, which drove approximately 30% of the 48.9% increase. Payments revenue increased 25.7%, largely driven by overall GMS growth trends.grew 23.8% year-over-year. The share of Etsy.com GMS processed through our Etsy Payments platform was 89%92% for the yearyears ended December 31, 2019, up from 86% for the year ended December 31, 2018, primarily due to the transition of sellers in eligible countries to the platform. Listing fee revenue grew 16.6%, driven by an increase in charged listings year-over-year corresponding with the increase in overall GMS growth. Marketplace revenue also increased due to the acquisition of Reverb.
2021 and 2020.
Services revenue increased $65.8$160.8 million or 41.4%, to $224.7$583.3 million in the year ended December 31, 20192021 compared to the year ended December 31, 2018.2020. The growth in Services revenue was primarily driven by an increase of 42.8% in on-site advertising revenue, (formerly referred to as Promoted Listings and Google Shopping), up 51.3%. We launched our new unified ad platform, Etsy Ads, inwhich represented a significant majority of the third quarter of 2019, which combines Promoted Listings, Etsy.com’s on-site ads platform, and Google Shopping, an off-site marketing tool for Etsy.com sellers. With the shift to Etsy Ads, amounts spent on Google Shopping, which were previously recorded on a net basis in Other revenue, are recorded on a gross basis inoverall Services revenue withgrowth, and, to a lesser extent, an offsetting expense recordedincrease in costshipping label revenue of revenue.11.4% from the prior year. The increase in advertising revenue was primarily due to higher click volume on Etsy Ads. The increase in shipping label revenue was primarily driven by an increase in label volume, the majority of which is driven by the increase in GMS. Additionally, services revenue increased due to the acquisitions of Depop and revenueElo7 in the third quarter of 2021.
On February 24, 2022, we announced that we are increasing our Etsy.com seller transaction fee starting April 11, 2022, from Google Shopping. At December 31, 2019, 16.6%5% to 6.5%. The updated fee structure is intended to support increased investments in the growth and health of Etsy active sellers used Etsy advertising services.the Etsy.com marketplace. We expect our new pricing model will have a positive effect on revenue.
Cost of Revenue
| | | | Year Ended December 31, | | Change | | | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2019 | | 2018 | | $ | | % | | | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands, except percentages) | | | (in thousands, except percentages) |
Cost of revenue | | $ | 271,036 |
| | $ | 190,762 |
| | $ | 80,274 |
| | 42.1 | % | Cost of revenue | | $ | 654,512 | | | $ | 464,745 | | | $ | 189,767 | | | 40.8 | % | | $ | 271,036 | | | $ | 193,709 | | | 71.5 | % |
Percentage of total revenue | | 33.1 | % | | 31.6 | % | | | | | Percentage of total revenue | | 28.1 | % | | 26.9 | % | | 33.1 | % | |
Cost of revenue increased $80.3$189.8 million or 42.1%, to $271.0$654.5 million in the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, primarily driven by increased costs related to overall volume increases on our Etsy and Reverb marketplaces, including payments processing Etsy Payments, corresponding to the increase in Etsy Payments revenue,fees and increased costs related to the Google Shopping portion of the new Etsy Ads platform. With the shift to Etsy Ads, Google Shopping expense is recorded in cost of revenue, but was previously recorded on a net basis in Other revenue. The increase in cost of revenue was also driven by increased cloud-related hosting and bandwidth costs,costs. The increase was also due to the cost of revenue associated with the Reverb business, which includesDepop and Elo7 acquisitions, including employee compensation-related expenses and the amortization expense forof developed technology, and,technology. Cost of revenue increased to a lesser extent employee-relateddue to increased employee compensation-related expenses, including stock-based compensation, primarilymainly driven by increasesan increase in average salaryheadcount at Etsy.com and headcount. We spent approximately $30 million on cloud migration in 2019, which includes implementation costs and costs related to cloud usage for growth initiatives, and completed the migration in February 2020. Starting in the second quarterReverb. Additionally, outsourced customer support expenses increased.
Operating Expenses
There were a total of 1,2402,402 employees worldwide on December 31, 2019,2021, inclusive of Reverb, which had 245 employees, Depop, which had 390 employees, and Elo7, which had 184 were Reverb employees, compared with 8741,414 employees worldwide on December 31, 2018.2020.
Marketing
| | | | Year Ended December 31, | | Change | | | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2019 | | 2018 | | $ | | % | | | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands, except percentages) | | | (in thousands, except percentages) |
Marketing | | $ | 215,570 |
| | $ | 158,013 |
| | $ | 57,557 |
| | 36.4 | % | Marketing | | $ | 654,804 | | | $ | 500,756 | | | $ | 154,048 | | | 30.8 | % | | $ | 215,570 | | | $ | 285,186 | | | 132.3 | % |
Percentage of total revenue | | 26.3 | % | | 26.2 | % | | | | | Percentage of total revenue | | 28.1 | % | | 29.0 | % | | 26.3 | % | |
Marketing expenses increased $57.6$154.0 million or 36.4%, to $215.6$654.8 million in the year ended December 31, 20192021 compared to the year ended December 31, 2018. The increase was2020, primarily as a result of increased spend relatedin digital marketing, and, to buyer acquisition, including the launch of our holidaya lesser extent, television ad campaign,campaigns. The increase in digital marketing expense was largely due to the shift to our Offsite Ads offering beginning in May 2020 and the acquisition of Reverb.increased site traffic. Paid GMS was 15%19% of overall Etsy.com GMS in the year ended December 31, 2019,2021, down slightly from paid GMS of 17%20% in the year ended December 31, 2018, which we believe is a result2020. Etsy.com began charging sellers an offsite advertising transaction fee on May 4, 2020; 9% of our television ad campaigns driving more organic traffic. In 2020, we expectEtsy GMS was subject to increase our investmentan Offsite Ads transaction fee in marketing, including into channels such as television. Beginning2021, in line with 9% in the second quarterhalf of 2020, Marketing expense will include costs related2020. The acquisitions of Depop and Elo7, including the amortization of acquired intangible assets and employee compensation-related expenses, also contributed to our new Offsite Ads product.
the increase in marketing expenses.
Product development
| | | | Year Ended December 31, | | Change | | | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2019 | | 2018 | | $ | | % | | | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands, except percentages) | | | (in thousands, except percentages) |
Product development | | $ | 121,878 |
| | $ | 97,249 |
| | $ | 24,629 |
| | 25.3 | % | Product development | | $ | 271,535 | | | $ | 180,080 | | | $ | 91,455 | | | 50.8 | % | | $ | 121,878 | | | $ | 58,202 | | | 47.8 | % |
Percentage of total revenue | | 14.9 | % | | 16.1 | % | | | | | Percentage of total revenue | | 11.7 | % | | 10.4 | % | | 14.9 | % | |
Product development expenses increased $24.6$91.5 million or 25.3%, to $121.9$271.5 million in the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, primarily as a result of an increase in employee-relatedincreased employee compensation-related expenses, including stock-based compensation, mainly the result ofdriven by an increase in average headcount. Thisheadcount, including an increase in headcount from the acquisitions of Depop and Elo7. The increase was also driven,due to a lesser extent,an increase in expenses for third-party contractors and consultants, offset in part by a decrease in the amount of employee-related costshigher capitalized as a result of several larger project launches in 2018, mainly related to cloud migration.website development and internal-use software costs.
General and administrative
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | | | | | | | | | | | | | |
| | (in thousands, except percentages) |
General and administrative | | $ | 282,531 | | | $ | 156,035 | | | $ | 126,496 | | | 81.1 | % | | $ | 121,134 | | | $ | 34,901 | | | 28.8 | % |
Percentage of total revenue | | 12.1 | % | | 9.0 | % | | | | | | 14.8 | % | | | | |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
General and administrative | | $ | 121,134 |
| | $ | 82,883 |
| | $ | 38,251 |
| | 46.2 | % |
Percentage of total revenue | | 14.8 | % | | 13.7 | % | | | | |
General and administrative expenses increased $38.3$126.5 million or 46.2%, to $121.1$282.5 million in the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, primarily due to increased amortization expense related toemployee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount, including an increase in headcount from the change in accounting treatmentacquisitions of Depop and Elo7, and performance based restricted stock units, which were granted for our Brooklyn headquarters lease associated with the adoption of ASU 2016-02—Leases in the first quarter of 2019. The increasetime in 2021. Additionally, general and administrative expenses is alsoincreased due to acquisition-related expenses associated with the Depop and Elo7 acquisitions, which closed in July 2021. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5—Business Combinations” for more information on acquisition-related expenses. General and administrative expenses increased to a lesser extent due to increased digital service tax expenses, primarily driven by increased bad debt expense, primarily related to countries not covered by Etsy Payments. Additionally, there were increases in professional services as well as employee-related expenses, including stock-based compensation, which were mainly the resultbusiness growth.
Other Expense,Income (Expense), net
| | | | | | | | | | | | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| Year Ended December 31, | | Change | | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| 2019 | | 2018 | | $ | | % | | | | | | | | | | | | | | |
| | | | | | | | | (in thousands, except percentages) |
| (in thousands, except percentages) | |
Other expense, net: | | | | | | | | |
Other income (expense), net: | | Other income (expense), net: | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | $ | — | | | $ | (16,855) | | | $ | 16,855 | | | NM | | $ | — | | | $ | (16,855) | | | NM |
Percentage of total revenue | | Percentage of total revenue | — | % | | (1.0) | % | | — | % | |
Interest expense | $ | (24,320 | ) | | $ | (22,178 | ) | | $ | (2,142 | ) | | 9.7 | % | Interest expense | $ | (9,885) | | | $ | (42,025) | | | $ | 32,140 | | | (76.5) | % | | $ | (24,320) | | | $ | (17,705) | | | 72.8 | % |
Percentage of total revenue | (3.0 | )% | | (3.7 | )% | | | | | Percentage of total revenue | (0.4) | % | | (2.4) | % | | (3.0) | % | |
Interest and other income | $ | 13,199 |
| | $ | 8,957 |
| | $ | 4,242 |
| | 47.4 | % | Interest and other income | $ | 2,137 | | | $ | 7,102 | | | $ | (4,965) | | | (69.9) | % | | $ | 13,199 | | | $ | (6,097) | | | (46.2) | % |
Percentage of total revenue | 1.6 | % | | 1.5 | % | | | | | Percentage of total revenue | 0.1 | % | | 0.4 | % | | 1.6 | % | |
| Foreign exchange gain (loss) | $ | 3,006 |
| | $ | (6,487 | ) | | $ | 9,493 |
| | (146.3 | )% | Foreign exchange gain (loss) | $ | 13,670 | | | $ | (6,522) | | | $ | 20,192 | | | (309.6) | % | | $ | 3,006 | | | $ | (9,528) | | | (317.0) | % |
Percentage of total revenue | 0.4 | % | | (1.1 | )% | | | | | Percentage of total revenue | 0.6 | % | | (0.4) | % | | 0.4 | % | |
Other expense, net | $ | (8,115 | ) | | $ | (19,708 | ) | | $ | 11,593 |
| | (58.8 | )% | |
Other income (expense), net | | Other income (expense), net | $ | 5,922 | | | $ | (58,300) | | | $ | 64,222 | | | (110.2) | % | | $ | (8,115) | | | $ | (50,185) | | | 618.4 | % |
Percentage of total revenue | (1.0 | )% | | (3.3 | )% | | | | | Percentage of total revenue | 0.3 | % | | (3.4) | % | | (1.0) | % | |
Other expense,income, net was $8.1$5.9 million in the year ended December 31, 2019,2021, which decreased $11.6increased $64.2 million from $19.7other expense, net of $58.3 million in the year ended December 31, 2018.2020. The decrease in expenseincrease was primarily driven by thea decrease in non-functional currency intercompany balances,interest expense as a result of the adoption of ASU 2020-06 in the first quarter of 2021 as there was no further amortization of the debt discount related to the Notes due to its derecognition and by a non-cash loss on extinguishment of debt of $16.9 million related to the changepartial repurchase of the 2018 Notes in 2020, which will not recur as there is no loss on extinguishment of debt under ASU 2020-06. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” for more information on the adoption of ASU 2020-06. In addition, the increase was driven by both favorable changes in U.S. Dollar todollar, Euro, Pound Sterling, and Canadian dollar exchange rates onin the current year versus unfavorable changes in the exchange rates for the same currencies in the prior year which impact our intercompany and other non-functional currency cash balances, increased interest and dividend income related to our investment accounts, and decreased interest expense related to the changeresulting in accounting treatment for our Brooklyn headquarters lease associated with the adoption of ASU
2016-02—Leasesa foreign exchange gain in the first quarter of 2019. This was partially offset by non-cash interest related to our convertible debt issuedcurrent year versus a foreign exchange loss in the third quarter of 2019.prior year.
Benefit (Provision) for Income Taxes
| | | | | | | | | | | | | Year Ended December 31, | | Change Y/Y | | Year Ended December 31, | | Change Y/Y |
| | Year Ended December 31, | | Change | | | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
| | 2019 | | 2018 | | $ | | % | | | | | | | | | | | | | | |
| | | | | | | | | | | (in thousands, except percentages) |
| | (in thousands, except percentages) | |
Benefit for income taxes | | $ | 15,248 |
| | $ | 22,413 |
| | $ | (7,165 | ) | | (32.0 | )% | |
Benefit (provision) for income taxes | | Benefit (provision) for income taxes | | $ | 21,853 | | | $ | (16,463) | | | $ | 38,316 | | | (232.7) | % | | $ | 15,248 | | | $ | (31,711) | | | 208.0 | % |
Percentage of total revenue | | 1.9 | % | | 3.7 | % | | | | | Percentage of total revenue | | 0.9 | % | | (1.0) | % | | 1.9 | % | |
Our income tax benefit and provision for the years ended December 31, 20192021 and 20182020 was $15.2$21.9 million and $22.4$16.5 million, respectively.
The primary drivers of our income tax benefit for the year ended December 31, 20192021 were excess tax benefits from employee stock-based compensation of $16.3$83.2 million and a benefit related to research and development tax creditcredits of $9.9$23.4 million, partially offset by tax expense on pretax book income of $11.5 million.
The primary driver of our income tax benefit for the year ended December 31, 2018 were tax benefit related to valuation allowance of $28.7$72.8 million stock-based compensation of $11.7 million, and our research and development tax credit of $4.1 million. These were partially offset by tax expense related toon income before income taxes of $11.3 million,and state and local tax expense of $3.8 million, and the inclusion of additional taxes of $3.9 million due to certain tax provision introduced by the Tax Cuts and Jobs Act of 2017, as enacted by the U.S. Federal Government on December 22, 2017, (the “TCJA”).
For both periods, other drivers include the mix of income and losses in jurisdictions with a wide range of tax rates.
$11.1 million.
Comparison of Years Ended December 31, 2018
and 2017
Revenue
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Revenue: | | | | | | | | |
Marketplace | | $ | 444,765 |
| | $ | 329,362 |
| | $ | 115,403 |
| | 35.0 | % |
Percentage of total revenue | | 73.7 | % | | 74.6 | % | | | | |
Services | | $ | 158,928 |
| | $ | 111,869 |
| | $ | 47,059 |
| | 42.1 | % |
Percentage of total revenue | | 26.3 | % | | 25.4 | % | | | | |
Total revenue | | $ | 603,693 |
| | $ | 441,231 |
| | $ | 162,462 |
| | 36.8 | % |
GMS increased $678.1 million, or 20.8%, to $3.9 billion in the year ended December 31, 2018 compared to the year ended December 31, 2017. 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, 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 million 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 increased 16% year-over-year and represented approximately 18% of overall GMS, a decrease compared to last year. In the year ended December 31, 2018, GMS from existing buyers increased 23% year-over-year and represented approximately 82% of overall GMS, an increase compared to last year.
During the year ended December 31, 2018, mobile GMS increased as a percentage of total GMS to approximately 55%, up from approximately 51% 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%, with mobile web and mobile app GMS each continuing 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% in the year ended December 31, 2018 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 both in the same country. International domestic GMS grew approximately 36% in 2018 compared with 2017. On a currency-neutral basis international GMS growth for the year ended December 31, 2018 would have been 27%.
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 73.7% consisted of Marketplace revenue and 26.3% consisted of Services revenue.
Marketplace revenue increased $115.4 million, or 35.0%, to $444.8 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 GMS to a total of $3.9 billion in the year ended December 31, 2018. Marketplace revenue increased at a faster rate than GMS primarily due to the increase in transaction revenue and Etsy Payments revenue for the year ended December 31, 2018 compared to the year ended December 31, 2017. Transaction revenue increased 59.6% year-over-year, primarily driven by our 2018 pricing updates, which drove approximately 41% of the 59.6% increase. Etsy Payments revenue increased 24.4%, largely driven by overall GMS growth trends and increased seller adoption. The share of GMS processed through our Etsy Payments platform was 86%, for the year ended December 31, 2018, up from 85% in the year ended December 31, 2017, 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 million, or 42.1%, to $158.9 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. The growth in Services revenue was primarily driven by an increase in Promoted Listings, up 41.4%, and, to a lesser extent, Etsy Shipping Labels, up 39.9%. The increase in Promoted Listings revenue was due to higher click volume and overall product enhancements, including expansion of Promoted Listing budgets and context specific ranking on Promoted Listings, which increased the relevance of promoted ads in our search results. The increase in Etsy Shipping Label revenue was primarily driven by a combination of an increase in label volume and an 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.
Cost of Revenue
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Cost of revenue | | $ | 190,762 |
| | $ | 150,986 |
| | $ | 39,776 |
| | 26.3 | % |
Percentage of total revenue | | 31.6 | % | | 34.2 | % | | | | |
Cost of revenue increased $39.8 million, or 26.3%, to $190.8 million in the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily driven by additional costs as a result of the increase in transactions and related revenue generated on the Etsy platform. The remaining increase was driven by hosting and bandwidth costs incurred as a result of our migration to the cloud while also maintaining our current infrastructure, and, to a lesser extent, increases in employee-related and professional services expenses. Cost of revenue decreased as a percentage of revenue largely due to 2018 changes in our pricing.
Operating Expenses
There were a total of 874 employees on December 31, 2018, compared with 744 on December 31, 2017.
Marketing
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Marketing | | $ | 158,013 |
| | $ | 109,085 |
| | $ | 48,928 |
| | 44.9 | % |
Percentage of total revenue | | 26.2 | % | | 24.7 | % | | | | |
Marketing expenses increased $48.9 million, or 44.9%, to $158.0 million in the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily as a result of increased spend on 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 decreases in employee-related expenses due to a reduction in average headcount and $3.0 million of restructuring and other exit costs associated with the Actions included in marketing expense for the year ended December 31, 2017 that did not recur in 2018.
Product development
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Product development | | $ | 97,249 |
| | $ | 74,616 |
| | $ | 22,633 |
| | 30.3 | % |
Percentage of total revenue | | 16.1 | % | | 16.9 | % | | | | |
Product development expenses increased $22.6 million, or 30.3%, to $97.2 million in the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily as a result of an increase in employee-related expenses, including stock-based compensation, and professional services expenses for consultants working on our product and engineering teams. The increase in employee-related expenses includes approximately $8.5 million of expense in connection with certain employee departures, including $7.0 million in expense resulting from the modification of stock options and RSUs. Additionally, $3.2 million of restructuring and other exit costs associated with the Actions is included in product development expenses for the year ended December 31, 2017.
General and administrative
|
| | | | | | | | | | | | | | | |
| | 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 $8.6 million, or 9.4%, to $82.9 million in the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due to decreased employee-related expenses, including stock-based compensation, mainly the result of a reduction in average headcount and $7.0 million of restructuring and other exit costs associated with the Actions included in general and administrative expenses for the year ended December 31, 2017 that did not recur in 2018.
Asset impairment charges
|
| | | | | | | | | | | | | | | |
| | 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 $3.2 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, 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.
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 $19.7 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. The increase in expense was primarily driven by the change in U.S. Dollar to Euro exchange rates on our intercompany and other non-functional currency balances, and higher interest expense, mainly non-cash interest related to our convertible debt issued in the first quarter of 2018, partially offset by increased interest and dividend income related to our investment accounts. Interest expense also includes non-cash interest expense associated with the build-to-suit lease accounting related to our corporate headquarters, which remained flat year-over-year.
Benefit for Income Taxes
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | | | | | | | |
| | (in thousands, except percentages) |
Benefit (provision) for income taxes | | $ | 22,413 |
| | $ | 49,535 |
| | $ | (27,122 | ) | | 54.8 | % |
Percentage of total revenue | | 3.7 | % | | 11.2 | % | | | | |
Our income tax benefit for the years ended December 31, 2018 and 2017 was $22.4 million and $49.5 million, respectively.
The primary driver of the income tax benefit for the year ended December 31, 2018 were tax benefit related to valuation allowance of $28.7 million, stock-based compensation of $11.7 million, and our research and development tax credit of $4.1 million. These were partially offset by tax expense related to 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 drivers of our income tax benefitprovision for the year ended December 31, 20172020 was the impacttax expense of $63.6 million 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 forbefore 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 excesspartially offset by tax benefits from employee stock-based compensation as a result of the adoption of ASU 2016-09$45.4 million.
—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.83
Non-GAAP Financial Measures
Quarterly Results of Operations
The following tables show selected unaudited quarterly results of operationsAdjusted EBITDA and other unaudited operational and non-GAAP financial data for the eight quarters ended December 31, 2019 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 inAdjusted EBITDA Margin
In this Annual Report, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income adjusted to exclude: interest and other non-operating expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange (gain) loss; acquisition-related expenses; non-ordinary course disputes; and loss on Form 10-Kextinguishment of debt. We also provide Adjusted EBITDA margin, a non-GAAP financial measure that presents Adjusted EBITDA divided by revenue. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA and includes all adjustments, which include only normal recurring adjustments, necessaryAdjusted EBITDA margin because they are key measures 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 platforms.
We believe that Adjusted EBITDA and Adjusted EBITDA margin can provide useful measures for period-to-period comparisons of our business as they remove the fair statementimpact of certain non-cash items and certain variable charges.
Adjusted EBITDA and Adjusted EBITDA margin 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 operations for these periods. This data shouldlimitations 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 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 varyreplaced in the future. These quarterly operating results arefuture, and Adjusted EBITDA does not necessarily indicativereflect 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 (gain) loss;
•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 the loss on extinguishment of debt; and
•other companies, including companies in our operating results for any future quarter or year.industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA and Adjusted EBITDA margin alongside other financial performance measures, including net income, revenue, and our other GAAP results.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Dec. 31, 2019 (1) | Sept. 30, 2019 (1) | June 30, 2019 | Mar. 31, 2019 | Dec. 31, 2018 (2) | Sept. 30, 2018 | June 30, 2018 | Mar. 31, 2018 |
| (in thousands, except share and per share amounts) |
Revenue: | | | | | | | | |
Marketplace (3) | $ | 189,651 |
| $ | 141,628 |
| $ | 135,199 |
| $ | 127,168 |
| $ | 151,406 |
| $ | 112,172 |
| $ | 92,880 |
| $ | 88,307 |
|
Services | 80,347 |
| 56,319 |
| 45,896 |
| 42,171 |
| 48,622 |
| 38,194 |
| 39,507 |
| 32,605 |
|
Total revenue | 269,998 |
| 197,947 |
| 181,095 |
| 169,339 |
| 200,028 |
| 150,366 |
| 132,387 |
| 120,912 |
|
Cost of revenue (4)(5) | 90,824 |
| 68,949 |
| 58,605 |
| 52,658 |
| 57,111 |
| 46,947 |
| 45,409 |
| 41,295 |
|
Gross profit | 179,174 |
| 128,998 |
| 122,490 |
| 116,681 |
| 142,917 |
| 103,419 |
| 86,978 |
| 79,617 |
|
Operating expenses: | | | | | | | | |
Marketing (4)(5) | 84,034 |
| 50,098 |
| 45,994 |
| 35,444 |
| 63,362 |
| 39,516 |
| 28,941 |
| 26,194 |
|
Product development (4)(5) | 35,701 |
| 32,465 |
| 28,765 |
| 24,947 |
| 28,542 |
| 24,418 |
| 23,568 |
| 20,721 |
|
General and administrative (4)(5) | 34,401 |
| 32,203 |
| 29,883 |
| 24,647 |
| 21,524 |
| 20,748 |
| 21,707 |
| 18,904 |
|
Total operating expenses | 154,136 |
| 114,766 |
| 104,642 |
| 85,038 |
| 113,428 |
| 84,682 |
| 74,216 |
| 65,819 |
|
Income from operations | 25,038 |
| 14,232 |
| 17,848 |
| 31,643 |
| 29,489 |
| 18,737 |
| 12,762 |
| 13,798 |
|
Other expense, net | (2,287 | ) | (4,143 | ) | (1,479 | ) | (206 | ) | (6,613 | ) | (4,141 | ) | (8,137 | ) | (817 | ) |
Income before income taxes | 22,751 |
| 10,089 |
| 16,369 |
| 31,437 |
| 22,876 |
| 14,596 |
| 4,625 |
| 12,981 |
|
Benefit (provision) for income taxes (6) | 8,540 |
| 4,712 |
| 1,854 |
| 142 |
| 18,375 |
| 5,298 |
| (1,246 | ) | (14 | ) |
Net income | $ | 31,291 |
| $ | 14,801 |
| $ | 18,223 |
| $ | 31,579 |
| $ | 41,251 |
| $ | 19,894 |
| $ | 3,379 |
| $ | 12,967 |
|
Net income per share attributable to common stockholders: |
Basic | $ | 0.26 |
| $ | 0.12 |
| $ | 0.15 |
| $ | 0.26 |
| $ | 0.34 |
| $ | 0.17 |
| $ | 0.03 |
| $ | 0.11 |
|
Diluted (7) | $ | 0.25 |
| $ | 0.12 |
| $ | 0.14 |
| $ | 0.24 |
| $ | 0.32 |
| $ | 0.15 |
| $ | 0.03 |
| $ | 0.10 |
|
Weighted average common shares outstanding: |
Basic | 118,403,747 |
| 120,351,095 |
| 120,198,526 |
| 119,679,149 |
| 120,192,912 |
| 119,870,711 |
| 119,450,194 |
| 121,267,092 |
|
Diluted (7) | 123,397,255 |
| 126,243,168 |
| 130,807,743 |
| 130,237,875 |
| 129,012,508 |
| 129,086,137 |
| 125,551,759 |
| 125,772,315 |
|
84
| |
(1) | The financial results of Reverb have been included in our consolidated results from August 15, 2019 (the date of acquisition). |
| |
(2) | 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. We have 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. |
| |
(3) | In the fourth quarter of 2019, we reclassified Other revenue to Marketplace revenue. The following table provides our Marketplace and Other revenue under our previous and current presentation: |
|
| | | | | | | | | | | | | | | |
| Quarter-to-Date Period Ended |
| Previous Presentation | | Updated Presentation |
| Marketplace Revenue | | Other Revenue | | Marketplace Revenue | | Other Revenue |
| | | | | | | |
| (in thousands) |
September 30, 2019 | $ | 140,966 |
| | $ | 662 |
| | $ | 141,628 |
| | $ | — |
|
June 30, 2019 | 134,403 |
| | 796 |
| | 135,199 |
| | — |
|
March 31, 2019 | 126,130 |
| | 1,038 |
| | 127,168 |
| | — |
|
December 31, 2018 | 150,540 |
| | 866 |
| | 151,406 |
| | — |
|
September 30, 2018 | 110,927 |
| | 1,245 |
| | 112,172 |
| | — |
|
June 30, 2018 | 91,306 |
| | 1,574 |
| | 92,880 |
| | — |
|
March 31, 2018 | 87,967 |
| | 340 |
| | 88,307 |
| | — |
|
| |
(4) | Includes total stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | Mar. 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | Mar. 31, 2018 |
| (in thousands) |
Cost of revenue | $ | 1,658 |
| $ | 1,574 |
| $ | 1,456 |
| $ | 1,099 |
| $ | 990 |
| $ | 894 |
| $ | 927 |
| $ | 546 |
|
Marketing | 1,224 |
| 1,196 |
| 723 |
| 631 |
| 688 |
| 642 |
| 699 |
| 478 |
|
Product development (a) | 6,519 |
| 5,752 |
| 5,294 |
| 3,520 |
| 9,873 |
| 4,697 |
| 4,025 |
| 2,639 |
|
General and administrative | 3,938 |
| 3,615 |
| 3,364 |
| 2,832 |
| 2,693 |
| 2,683 |
| 2,966 |
| 2,791 |
|
Total stock-based compensation expense | $ | 13,339 |
| $ | 12,137 |
| $ | 10,837 |
| $ | 8,082 |
| $ | 14,244 |
| $ | 8,916 |
| $ | 8,617 |
| $ | 6,454 |
|
| |
(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. |
| |
(5) | Includes restructuring and other exit income, as shown in the quarterly reconciliation of net income 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. |
| |
(6) | 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. |
| |
(7) | Since the Company expects to settle in cash the principal outstanding under the 2019 Notes (see “Note 13—Debt”), we use the treasury stock method when calculating the potential dilutive effect of the conversion spread on diluted net income per share, if applicable. We used the if-converted method when calculating the dilutive effect of the 2018 Notes for the three months ended December 31, 2019 and September 30, 2019 and used the treasury stock method for the three months ended June 30, 2019, March 31, 2019, and all quarterly periods in 2018. |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | Mar. 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | Mar. 31, 2018 |
Revenue: | | | | | | | | |
Marketplace | 70.2 | % | 71.5 | % | 74.7 | % | 75.1 | % | 75.7 | % | 74.6 | % | 70.2 | % | 73.0 | % |
Services | 29.8 |
| 28.5 |
| 25.3 |
| 24.9 |
| 24.3 |
| 25.4 |
| 29.8 |
| 27.0 |
|
Total revenue | 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
| 100.0 |
|
Cost of revenue | 33.6 |
| 34.8 |
| 32.4 |
| 31.1 |
| 28.6 |
| 31.2 |
| 34.3 |
| 34.2 |
|
Gross profit | 66.4 |
| 65.2 |
| 67.6 |
| 68.9 |
| 71.4 |
| 68.8 |
| 65.7 |
| 65.8 |
|
Operating expenses: | | | | | | | | |
Marketing | 31.1 |
| 25.3 |
| 25.4 |
| 20.9 |
| 31.7 |
| 26.3 |
| 21.9 |
| 21.7 |
|
Product development | 13.2 |
| 16.4 |
| 15.9 |
| 14.7 |
| 14.3 |
| 16.2 |
| 17.8 |
| 17.1 |
|
General and administrative | 12.7 |
| 16.3 |
| 16.5 |
| 14.6 |
| 10.8 |
| 13.8 |
| 16.4 |
| 15.6 |
|
Total operating expenses | 57.1 |
| 58.0 |
| 57.8 |
| 50.2 |
| 56.7 |
| 56.3 |
| 56.1 |
| 54.4 |
|
Income from operations | 9.3 |
| 7.2 |
| 9.9 |
| 18.7 |
| 14.7 |
| 12.5 |
| 9.6 |
| 11.4 |
|
Other expense, net | (0.8 | ) | (2.1 | ) | (0.8 | ) | (0.1 | ) | (3.3 | ) | (2.8 | ) | (6.1 | ) | (0.7 | ) |
Income before income taxes | 8.4 |
| 5.1 |
| 9.0 |
| 18.6 |
| 11.4 |
| 9.7 |
| 3.5 |
| 10.7 |
|
Benefit (provision) for income taxes | 3.2 |
| 2.4 |
| 1.0 |
| 0.1 |
| 9.2 |
| 3.5 |
| (0.9 | ) | — |
|
Net income | 11.6 | % | 7.5 | % | 10.1 | % | 18.6 | % | 20.6 | % | 13.2 | % | 2.6 | % | 10.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | Mar. 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | Mar. 31, 2018 |
| (in thousands, except percentages) |
Other financial and operations data (1): |
GMS | $ | 1,655,716 |
| $ | 1,200,371 |
| $ | 1,094,829 |
| $ | 1,024,028 |
| $ | 1,246,472 |
| $ | 922,513 |
| $ | 901,685 |
| $ | 861,075 |
|
GMS growth | 32.8 | % | 30.1 | % | 21.4 | % | 18.9 | % | 22.3 | % | 20.4 | % | 20.4 | % | 19.8 | % |
Currency-neutral GMS growth | 33.0 | % | 31.1 | % | 22.8 | % | 20.6 | % | 23.1 | % | 20.8 | % | 19.3 | % | 17.6 | % |
Adjusted EBITDA | $ | 54,624 |
| $ | 42,076 |
| $ | 39,701 |
| $ | 49,867 |
| $ | 51,359 |
| $ | 34,035 |
| $ | 27,695 |
| $ | 26,421 |
|
Active sellers | 2,699 |
| 2,592 |
| 2,333 |
| 2,227 |
| 2,115 |
| 2,043 |
| 1,983 |
| 1,970 |
|
Active buyers | 46,351 |
| 44,807 |
| 42,742 |
| 41,029 |
| 39,447 |
| 37,134 |
| 35,830 |
| 34,693 |
|
Percent mobile GMS | 58 | % | 59 | % | 58 | % | 58 | % | 56 | % | 56 | % | 55 | % | 54 | % |
Percent international GMS | 35 | % | 36 | % | 38 | % | 38 | % | 36 | % | 35 | % | 34 | % | 35 | % |
| |
(1) | See “Key Operating and Financial Metrics” for the definitions of the following terms: “active buyers,” “active sellers,” “Adjusted EBITDA,” “GMS,” “currency-neutral GMS growth,” “international GMS,” and “mobile GMS.” |
The following table reflects the reconciliation of net income to Adjusted EBITDA and the calculation of Adjusted EBITDA margin for each of the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2021 | | 2020 | | 2019 |
| | | | | | | | |
| | | | (in thousands) |
Net income | | | | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Excluding: | | | | | | | | |
Interest and other non-operating expense, net (1) | | | | 7,748 | | | 34,923 | | | 11,121 | |
(Benefit) provision for income taxes (2) | | | | (21,853) | | | 16,463 | | | (15,248) | |
Depreciation and amortization (3) | | | | 74,267 | | | 58,189 | | | 48,031 | |
Stock-based compensation expense (4) | | | | 139,910 | | | 65,114 | | | 44,395 | |
| | | | | | | | |
Foreign exchange (gain) loss (5) | | | | (13,670) | | | 6,522 | | | (3,006) | |
Acquisition-related expenses (6) | | | | 36,704 | | | 1,804 | | | 3,917 | |
Non-ordinary course disputes | | | | — | | | — | | | 1,164 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Loss on extinguishment of debt (7) | | | | — | | | 16,855 | | | — | |
Adjusted EBITDA | | | | $ | 716,613 | | | $ | 549,116 | | | $ | 186,268 | |
Divided by: | | | | | | | | |
Revenue | | | | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
Adjusted EBITDA margin | | | | 31 | % | | 32 | % | | 23 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | Mar. 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | Mar. 31, 2018 |
| (in thousands) |
Net income | $ | 31,291 |
| $ | 14,801 |
| $ | 18,223 |
| $ | 31,579 |
| $ | 41,251 |
| $ | 19,894 |
| $ | 3,379 |
| $ | 12,967 |
|
Excluding: | | | | | | | | |
Interest and other non-operating expense, net | 6,372 |
| 2,194 |
| 1,287 |
| 1,268 |
| 3,099 |
| 3,768 |
| 3,687 |
| 2,667 |
|
(Benefit) provision for income taxes | (8,540 | ) | (4,712 | ) | (1,854 | ) | (142 | ) | (18,375 | ) | (5,298 | ) | 1,246 |
| 14 |
|
Depreciation and amortization | 15,271 |
| 12,808 |
| 9,810 |
| 10,142 |
| 7,626 |
| 6,439 |
| 6,357 |
| 6,320 |
|
Stock-based compensation expense | 13,339 |
| 12,137 |
| 10,837 |
| 8,082 |
| 14,244 |
| 8,916 |
| 8,617 |
| 6,454 |
|
Foreign exchange (gain) loss | (4,085 | ) | 1,949 |
| 192 |
| (1,062 | ) | 3,514 |
| 373 |
| 4,450 |
| (1,850 | ) |
Acquisition-related expenses | 976 |
| 1,735 |
| 1,206 |
| — |
| — |
| — |
| — |
| — |
|
Non-ordinary course disputes | — |
| 1,164 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Restructuring and other exit costs (income) | — |
| — |
| — |
| — |
| — |
| (57 | ) | (41 | ) | (151 | ) |
Adjusted EBITDA | $ | 54,624 |
| $ | 42,076 |
| $ | 39,701 |
| $ | 49,867 |
| $ | 51,359 |
| $ | 34,035 |
| $ | 27,695 |
| $ | 26,421 |
|
Seasonality
Etsy sellers experience increased sales(1) Included in interest and use more Services during the fourth-quarter holiday shopping season. This has resultedother 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 increased GMSMarch 2018, September 2019, August 2020, and revenue for us during the fourth quarterJune 2021. The adoption of each fiscal year, which can compare to lower GMS and revenueASU 2020-06 in the first quarter of 2021 resulted in a decrease in non-cash interest expense related to the following fiscal year. For example, revenueNotes as there was no amortization of the debt discount due to its derecognition. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” for more information on the adoption of ASU 2020-06.
(2) See “Results of Operations—Benefit (Provision) for Income Taxes” for more information on the fluctuation in (benefit) provision for income taxes in the firstyears ended December 31, 2021 and 2020.
(3) Included in depreciation and amortization is amortization expense of acquired intangible and developed technology assets related to the acquisitions of Depop and Elo7 in the third quarter of 2019 decreased when compared with revenue2021 and the acquisition of Reverb in the fourththird quarter of 2018. We expect this seasonality to continue in future years. Our cost2019.
(4) See Part II, Item 8, “Financial Statements and Supplementary Data—Note 15—Stock-based Compensation” for disclosure of revenue and marketing expenses also follow this trend, with the highest costs corresponding with the fourth quarter and lower costsstock-based compensation expense included in the firstConsolidated Statements of Operations by financial statement line item classification.
(5) See “Results of Operations—Other Income (Expense), net” for more information on the fluctuation in foreign exchange (gain) loss in the years ended December 31, 2021 and 2020.
(6) Acquisition-related expenses for the year ended December 31, 2021 are related to our acquisitions of Depop and Elo7. Acquisition-related expenses for the years ended December 31, 2020 and December 31, 2019 are related to our acquisition of Reverb. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5—Business Combinations” for further information.
(7) During the third quarter of each fiscal year. As2020, we repurchased $301.1 million aggregate principal amount of our growth rates moderate,outstanding 2018 Notes. We recognized a non-cash loss on extinguishment of debt of $16.9 million as a result. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for more information.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments were $984.6 million as of December 31, 2021. Additionally, we have $85.0 million in long-term investments that we can liquidate at short notice and with minimal penalties if needed. We also have the impact of these seasonality trendsability to draw down on our results$200.0 million senior secured revolving credit facility. In the year ended December 31, 2021, we had positive operating cash flows of operations may become more pronounced.
Our quarterly revenue increased sequentially quarter-to-quarter for all periods presented above, other than the first quarter of 2019, corresponding to our GMS performance in the same periods. We cannot assure you that this pattern of sequential revenue and GMS growth will continue.$651.6 million. We believe that it is generally more meaningfulthis capital structure, as well as the nature and framework of our business will allow us to compare year-over-year results than sequential quarter-over-quarter results.
Liquiditymeet all debt covenants, sustain our business operations, and Capital Resourcesbe able to react to changing macroeconomic conditions.
The following tables showtable shows our cash and cash equivalents, short-term investments, accounts receivable, long-term investments, and net working capital as of the dates indicated:
| | | | As of December 31, | | | As of December 31, |
| | 2019 | | 2018 | | | 2021 | | 2020 |
| | | | | | | | |
| | (in thousands) | | | (in thousands) |
Cash and cash equivalents | | $ | 443,293 |
| | $ | 366,985 |
| Cash and cash equivalents | | $ | 780,196 | | | $ | 1,244,099 | |
Short-term investments | | 373,959 |
| | 257,302 |
| Short-term investments | | 204,416 | | | 425,119 | |
Accounts receivable, net | | 15,386 |
| | 12,244 |
| |
| Long-term investments | | 89,343 |
| | — |
| Long-term investments | | 85,034 | | | 39,094 | |
Total cash and cash equivalents, and short- and long-term investments | | Total cash and cash equivalents, and short- and long-term investments | | $ | 1,069,646 | | | $ | 1,708,312 | |
Net working capital | | 732,510 |
| | 568,227 |
| Net working capital | | $ | 725,913 | | | $ | 1,440,117 | |
As of December 31, 2019,2021, 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 non-U.S. operations from our funds held in the United States on an as-needed basis.
We invest in short- 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 37 months, with the average maturity of these investments maintained at 12 months or less.
Sources of Liquidity
We expect to continue to generate net positive operating cash flow, and the cash we generate from our core operations enables us to fund ongoing operations and our investments which are outlined in Part 1, Item 1, “Business—Primary Business Drivers.”
In September 2019,June 2021, we issued the 20192021 Notes, pursuant to the Securities Act. The initial conversion pricenet proceeds of which were $986.7 million after deducting the offering expenses. We used $85.0 million 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 of2021 Notes offering to enter into the 2019 Notes were $639.52021 Capped Call Transactions with certain financial institutions. In addition, we repurchased approximately 1.1 million after deducting initial purchasers' discount and offering expenses. The 2019 Notes will mature on October 1, 2026, unless earlier converted or repurchased. For more information on the 2019 Notes, see “Note 13—Debt” in the Notes to Consolidated Financial Statements.
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 “Note 13—Debt” in the Notes to Consolidated Financial Statements for additional information.
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. The 2018 Notes will mature on March 1, 2023, unless earlier converted or repurchased. Based on the daily closing pricesshares of our common stock duringfor approximately $180.0 million concurrently with the quarter endedissuance of the 2021 Notes. As of December 31, 2021, the 2021 Notes are outstanding along with the 2020 Notes, 2019 holdersNotes and 2018 Notes, and collectively the net carrying value is $2.3 billion.Based on the terms of the 2018 Notes, are not eligible to convert their 2018 Notes during the first quarter of 2020. When a conversion notice is received, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof. Accordingly,thereof, when a conversion notice is received. Based on the daily closing prices of our stock during the year ended December 31, 2021, holders of the 2019 Notes and 2018 Notes are eligible to convert their Notes during the first quarter of 2022 and holders of the 2021 Notes and 2020 Notes are not eligible to convert their Notes during the first quarter of 2022.
During 2021 we cannot be required to settle the 2018 Notespaid $43.9 million in cash and therefore,issued approximately 1.0 million shares of Etsy’s common stock to settle conversion notices of $43.9 million aggregate principal amount of the outstanding 2018 Notes.
We also have the ability to draw down on a $200.0 million senior secured revolving credit facility (the “2019 Credit Agreement”). At December 31, 2021, we did not have any borrowings under the 2019 Credit Agreement.
See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for more information on the Notes are classified as long-term debtand the 2019 Credit Agreement.
Material Cash Requirements
Our cash commitments as of December 31, 2019. For more information on2021 were as follows:
| | | | | | | | | | | | | | | | | |
| Total | | Short-Term | | Long-Term |
| | | | | |
| (in thousands) |
Finance lease obligations | $ | 174,367 | | | $ | 6,917 | | | $ | 167,450 | |
Operating lease obligations | 67,628 | | | 5,723 | | | 61,905 | |
Debt obligations | 2,300,020 | | | — | | | 2,300,020 | |
Interest payments | 25,188 | | | 4,125 | | | 21,063 | |
Purchase obligations | 487,745 | | | 79,567 | | | 408,178 | |
Total cash commitments | $ | 3,054,948 | | | $ | 96,332 | | | $ | 2,958,616 | |
Finance lease obligations consist of obligations under finance leases, primarily the portion of our headquarters in Brooklyn, New York that is accounted for as a finance lease, and include imputed interest and tenant improvement allowances.
Operating lease obligations consist of obligations under non-cancelable operating leases, including for a portion of our headquarters in Brooklyn, New York and for a majority of our other office locations, and include imputed interest and tenant improvement allowances.
In the fourth quarter of 2021, we entered into a First Amendment to Lease (the "First Amendment") related to our headquarters, which extends the expiration of the term of the current lease from July 31, 2026 to July 31, 2039 and increases the future minimum payment obligation for payments under both our finance and operating lease commitments.
Debt obligations consist of the 2021 Notes, 2020 Notes, 2019 Notes, and 2018 Notes, see “Note 13—Debt”which will mature on June 15, 2028, September 1, 2027, October 1, 2026, and March 1, 2023, respectively, unless earlier converted or repurchased.
Interest payments consist of interest due in connection with our 2021 Notes, 2020 Notes, and 2019 Notes.
Purchase obligations consist of commitments related to cloud 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 $28.8 million and non-income tax related contingency reserves of $38.8 million, which amounts are not reflected in the Notestable as the ultimate resolution and timing are uncertain. These non-income tax contingency reserves include $2.8 million due to Consolidated Financial Statements.the acquisition of Reverb, which is wholly offset by an indemnification asset of $2.2 million, and a deferred tax asset of $0.6 million. We recorded additional non-income tax reserves of $29.5 million as part of the acquisitions of Depop and Elo7 we completed in 2021, which is partially offset by an indemnification asset of $1.7 million related to Elo7.
In December 2020, our Board of Directors approved a stock repurchase program that enables us to repurchase up to $250 million of our common stock. As of December 31, 2021, the remaining amount available to be repurchased under the approved plan was $127.2 million.
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 at least the next 12 months. OurWhile this belief is based on our current expectations and assumptions in light of current macroeconomic conditions, 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 ourPart I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.Report.
The majority of our cash and cash equivalents and short- and long-term investments are held in the United States. We fund our international operations from our funds held in the United States on an as-needed basis.
Historical Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (in thousands) |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 651,551 | | | $ | 678,956 | | | $ | 206,920 | |
Investing activities | | (1,557,969) | | | (11,379) | | | (488,373) | |
Financing activities | | 452,749 | | | 119,282 | | | 359,607 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| | (in thousands) |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 206,920 |
| | $ | 198,925 |
| | $ | 69,101 |
|
Investing activities | | (488,373 | ) | | (285,393 | ) | | 61,836 |
|
Financing activities | | 359,607 |
| | 144,006 |
| | 6,555 |
|
Net Cash Provided by Operating Activities
Our cash flows from operations are largely dependent on the amount of revenue generated on our platform,platforms, 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 working capital.
Net cash provided by operating activities was $206.9$651.6 million in the year ended December 31, 2019,2021, primarily driven by cash net income of $196.9$627.7 million as a result of revenue generated on our platforms, and changes in our operating assets and liabilities that provided $23.9 million in cash, primarily driven by timing of payment of accrued expenses in the period.
Net cash provided by operating activities was $679.0 million in the year ended December 31, 2020, primarily driven by cash net income of $554.8 million as a result of increased revenue generated on our platform,platforms, and changes in our operating assets and liabilities that provided $10.0$124.2 million in 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 $198.9 million in the year ended December 31, 2018, primarily driven by cash net income of $139.6 million as a result of increased revenue generated on our platform,volume and changes in our operating assets and liabilities that provided $59.3 million in cash, largely driven by timing of collectionspayment of accounts receivable due to the launch of our redesigned payment accountaccrued expenses 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 account and payment timing of payables.period.
Net cash provided by operating activities was $69.1 millionCash Used in the year ended December 31, 2017, primarily driven by cash net income of $68.8 million as a result of increased revenue generated on our platform and changes in our operating assets and liabilities that provided $0.3 million in cash.
Net Cash (Used in) Provided by Investing Activities
Our primary investing activities consist of cash paid in the acquisition of Reverb,for acquisitions, sales and purchases of short- 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 $488.4 million$1.6 billion in the year ended December 31, 2019.2021. This was primarily attributable to $270.4 million$1.7 billion in cash paid to acquire Reverb, net purchases of marketable securities of $200.7 million,Depop and $15.3Elo7. In addition, investing activities included $28.2 million in capital expenditures, including $7.8$16.9 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to the Etsy platformour platforms. This was partially offset by net sales and focused on growth investments, such as our migration to Google Cloud.maturities of marketable securities of $172.1 million.
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 net purchases of marketable securities of $229.3 million, $35.3 million in cash paid for the DaWanda intangible asset acquisition, and $20.6$7.1 million in capital expenditures, including $19.5$5.7 million for website development and internal-use software.
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 Provided by Financing Activities
Our primary financing activities include proceeds from the issuance of convertible senior notes, repurchasesettlement of convertible senior notes, repurchases of common stock, under share repurchase programs, payments related to capped call transactions, with the initial purchasers and/or their respective affiliates in connection with 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, and payments on finance lease obligations, and payments on our facility financing obligation related to the build-to-suit accounting treatment of our Brooklyn headquarters lease prior to the adoption of ASC 842, Leases.obligations.
Net cash provided by financing activities was $359.6$452.7 million in the year ended December 31, 2019.2021. This was primarily attributable to proceeds from the issuance of the 20192021 Notes of $650.0$1.0 billion and proceeds from the exercise of stock options of $22.7 million, partially offset by stock repurchases of $177.0$302.8 million ($180.0 million in conjunction with the issuance of the 2021 Notes and $122.8 million as part of our stock repurchase program), payments of $76.2$85.0 million for the 20192021 Capped Call Transactions, payment of tax obligations on vested equity awards of $32.5$118.2 million, $43.9 million primarily related to the conversion of the 2018 Notes, and payment of debt issuance costs of $11.9 million and payments on finance lease obligations of $10.8 million, partially offset by proceeds from the exercise of stock options of $9.8$13.3 million.
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 20182020 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 20182020 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.
Net cash provided by financing activities was $6.6 million in the year ended December 31, 2017. This was primarily attributable to proceeds from the exercise of stock options of $33.8 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.
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 2019, 2018, or 2017.
$47.7 million.
Contractual Obligations
The following table summarizes our future fixed contractual obligations as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 2–3 Years | | 4–5 Years | | More than 5 Years |
| | | | | | | | | | |
| | (in thousands) |
Finance lease obligations, including imputed interest | | $ | 70,948 |
| | $ | 10,805 |
| | $ | 21,829 |
| | $ | 21,277 |
| | $ | 17,037 |
|
Operating lease obligations, including imputed interest | | 29,989 |
| | 5,152 |
| | 9,870 |
| | 9,279 |
| | 5,688 |
|
Long-term obligations | | 995,089 |
| | 89 |
| | — |
| | 345,000 |
| | 650,000 |
|
Interest payments | | 5,703 |
| | 828 |
| | 1,625 |
| | 1,625 |
| | 1,625 |
|
Purchase obligations | | 97,710 |
| | 34,153 |
| | 62,857 |
| | 700 |
| | — |
|
Total contractual obligations | | $ | 1,199,439 |
| | $ | 51,027 |
| | $ | 96,181 |
| | $ | 377,881 |
| | $ | 674,350 |
|
Finance lease obligations consist of obligations under finance leases for computer and hosting 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 our headquarters in Brooklyn, New York and for our offices in San Francisco, Hudson (New York), Chicago, Dublin, and London.
Long-term obligations primarily consist of the issuance of Convertible Senior Notes in 2019 and 2018, which will mature on October 1, 2026 and March 1, 2023, respectively, unless earlier converted or repurchased.
Interest payments consist of interest due in connection with our 2019 Notes.
Purchase obligations consist of commitments related to cloud 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 $19.9 million and non-income tax related contingency reserves of $7.2 million, which amounts are not reflected in the table as the ultimate resolution and timing are uncertain. These non-income tax contingency reserves include $4.8 million due to the acquisition of Reverb, which is wholly offset by an indemnification asset of $3.7 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 estimatesThe future effects of the ongoing COVID-19 pandemic on our results of operations, cash flows, and financial position are based on historical experience and various other assumptions thatuncertain; however we believe to bewe have used reasonable underestimates and assumptions in preparing the circumstances.consolidated financial statements. Our actual results could differ from these estimates.
We believe that thecertain assumptions and estimates associated with stock-based compensation; income taxes, includingtaxes; the evaluationvaluation of uncertain tax positions;acquired intangible assets, developed technology, and goodwill as part of 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, including determining the incremental borrowing rate;goodwill; leases; 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 the assumptions and estimates associated with these (as further detailed below) to be our critical accounting policiesestimates. See Part II, Item 8, “Financial Statements and estimates. For further information on all of our significant accounting policies, see “NoteSupplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for further information on our critical accounting policies related to revenue recognition, stock-based compensation, income taxes, business combinations, goodwill, leases, and fair value of financial instruments.
Stock-Based Compensation
Service-based stock options and service-based restricted stock units (“RSUs”) are awarded to employees and members of our Board of Directors and performance-based restricted stock units (“PBRSUs”) are awarded to employees. All such awards are measured at fair value at each grant 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. Our Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected volatility of the price of our common stock and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and these assumptions either increase or decrease, our stock-based compensation expense could materially differ in the future.
•Expected Volatility: Given our sufficient trading history as of the second quarter of 2021, we calculate expected volatility based solely on the historical volatility of Etsy’s stock price observations over a period equivalent to the expected term of the stock option grants. Prior to the second quarter of 2021, we estimated expected volatility 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.
•Expected Term: The expected term represents the period that our stock-based awards are expected to be outstanding. Given that we have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of our stock options, beginning in the second quarter of 2021, we estimate our expected term using historical option exercise behavior and expected post-vest cancellation data, averaged with an assumption that recently granted options will be exercised ratably from vesting to the expiration of the stock option. Prior to the second quarter of 2021, we used the simplified method, which represented the average period from vesting to the expiration of the stock option, to calculate the expected term for awards issued to employees or members of our Board of Directors.
For these assumptions, the weighted-average used in the Black-Scholes option-pricing model in order to determine the fair value of stock options granted in the periods indicated were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Expected volatility | | 43.4% - 57.4% | | 38.9% - 41.7% | | 39.1% - 39.5% |
| | | | | | |
Expected term (in years) | | 4.6 - 6.2 | | 5.5 - 6.2 | | 5.5 - 6.2 |
| | | | | | |
We expect to continue to grant RSUs and PBRSUs in the future, and, to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
Income Taxes
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
Determining the fair value of the assets acquired and liabilities assumed requires management to use significant judgment and estimates, including estimates of future revenue, attrition rate, net available cash flows, discount rates, royalty rate, and estimated replacement costs. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.
Valuation of Goodwill
Goodwill recorded represents the excess of the aggregate fair value of the consideration transferred for a 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. A quantitative assessment for impairment requires management to use significant judgment and estimates, including estimates of future revenue, net available cash flows, and a discount rate. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.
As of the annual impairment testing date in 2021, we completed a qualitative analysis for both the Etsy and the Reverb reporting units, and completed a quantitative analysis for both the Depop and Elo7 reporting units. The quantitative analysis assumed that the purchase consideration for the Depop and Elo7 acquisitions approximated fair value of each of the reporting units given the proximity to the respective acquisition dates. If actual results are materially lower than originally 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 completed a qualitative analysis for both the Etsy and the Reverb reporting units.
As of the annual impairment testing date in 2019, we completed a qualitative analysis for the Etsy reporting unit and 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 to the impairment testing date. Accordingly, we prepared a quantitative assessment for the Reverb reporting unit, in which determining the fair value requires management to use significant judgment and estimates, including estimates of future revenue and net available cash flows and the discount rate.
We did not recognize any goodwill impairment during the three years ended December 31, 2021, 2020, and 2019.
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. Additionally, the estimates of the present value of lease payments over the expected lease term along with the estimated fair value of the real estate properties or other assets leased by us affect the recognition of a lease transaction either as an operating or finance lease, which impacts the classification in our consolidated financial statements.
Fair Value of Convertible Senior Notes
In accounting for the issuance of the Notes prior to 2021 and the partial extinguishment of the 2018 Notes in 2020, 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. Following the adoption of ASU 2020-06 in the first quarter of 2021, we no longer consider this a critical estimate as under this standard there is no bifurcation of the liability and equity components of the Notes. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” in the Notes to Consolidated Financial Statements.Statements for additional information.
Recent Accounting Pronouncements
See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements.
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. We monitor our exposure to foreign currency exchange rate risk and the different mechanisms available for use in managing such risk. Although to date we have not entered into any derivatives or hedging transactions, we may elect to do so in the future should we deem it prudent in light of our exposure.
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 $79.3 million or approximately 3.4% of total revenue for the year ended December 31, 2021. Additionally, a 10% adverse change in foreign currency exchange rates would result in a currency exchange loss of $1.8 million based on balance sheet balances as of December 31, 2021. This compares to a revenue decrease of $47.6 million or approximately 2.8% of total revenue for the year ended December 31, 2020 and currency exchange loss of $11.9 million based on the same analysis performed on balance sheet balances as of December 31, 2020.
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 (PCAOB ID 238) |
| 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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 convertible debt in 2021.
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 consolidatedfinancial 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.
As described in Management’s Report on Internal Controls over Financial Reporting,management has excluded Elo7 Serviços de Informática S.A. (“Elo7”) and Depop Limited (“Depop”) from its assessment of internal control over financial reporting as of December 31, 2021 because Elo7 and Depop were acquired by the Company in purchase business combinations during 2021. We have also excluded Elo7 and Depop from our audit of internal control over financial reporting. Elo7 and Depop are wholly-owned subsidiaries whose combined total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.
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.
Valuation of Customer Relationships and Trademark Intangible Assets Acquired in the Depop Acquisition
As described in Notes 1 and 5 to the consolidated financial statements, on July 12, 2021, Etsy acquired all of the issued share capital of Depop pursuant to a share purchase. The fair value of consideration transferred was $1.493 billion. The acquisition of Depop resulted in the recording of $148.5 million of customer relationships and $249.8 million of trademark intangible assets. The fair value of customer relationships was estimated using a multi-period excess earnings valuation method and the fair value of the trademark was estimated using a relief from royalty valuation method. As disclosed by management, determining the fair value of the assets acquired and liabilities assumed required management to use significant judgment and estimates, including estimates of future revenue, attrition rate, net available cash flows, discount rates, and royalty rate.
The principal considerations for our determination that performing procedures relating to the valuation of customer relationships and trademark intangible assets acquired in the Depop acquisition is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the customer relationships and trademark intangible assets; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimates of future revenue, the attrition rate, and the discount rate used in the valuation of the customer relationships and estimates of future revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset; 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 acquisition accounting, including controls over management’s valuation of the customer relationships and trademark intangible assets and controls over the development of management’s assumptions related to estimates of future revenue, the attrition rate, the royalty rate, and the discount rates. These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for determining the fair value estimates of the customer relationships and trademark intangible assets. Testing management’s process included evaluating the appropriateness of the multi-period excess earnings and relief from royalty valuation methods, testing the completeness and accuracy of underlying data provided by management, and evaluating the reasonableness of the significant assumptions related to estimates of future revenue, the attrition rate, and the discount rate used in the valuation of the customer relationships and estimates of future revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset. Evaluating the reasonableness of the estimates of future revenue used in the valuation of the customer relationships and the trademark intangible assets involved considering the past performance of the acquired business, the past performance of the Company, and the consistency with industry data. Evaluating the reasonableness of the attrition rate used in the valuation of the customer relationships intangible asset involved considering the past performance of the acquired business and the past performance of the Company. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s multi-period excess earnings and relief from royalty valuation methods and in the evaluation of the reasonableness of the discount rate used in the valuation of the customer relationships and the discount rate and royalty rate used in the valuation of the trademark intangible asset.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2022
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, |
| 2021 | | 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | |
Short-term investments | 204,416 | | | 425,119 | |
Accounts receivable, net | 27,266 | | | 22,605 | |
Prepaid and other current assets | 109,417 | | | 56,152 | |
| | | |
| | | |
Funds receivable and seller accounts | 220,206 | | | 146,806 | |
Total current assets | 1,341,501 | | | 1,894,781 | |
Restricted cash | 5,341 | | | 5,341 | |
Property and equipment, net | 275,062 | | | 112,495 | |
Goodwill | 1,371,064 | | | 140,810 | |
Intangible assets, net | 607,170 | | | 187,449 | |
Deferred tax assets | 95,863 | | | 115 | |
Long-term investments | 85,034 | | | 39,094 | |
Other assets | 50,774 | | | 24,404 | |
Total assets | $ | 3,831,809 | | | $ | 2,404,489 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 28,007 | | | $ | 40,883 | |
Accrued expenses | 328,118 | | | 232,352 | |
Finance lease obligations—current | 2,418 | | | 8,537 | |
Funds payable and amounts due to sellers | 220,206 | | | 146,806 | |
Deferred revenue | 12,339 | | | 11,264 | |
Other current liabilities | 24,500 | | | 14,822 | |
Total current liabilities | 615,588 | | | 454,664 | |
Finance lease obligations—net of current portion | 110,283 | | | 44,979 | |
| | | |
Deferred tax liabilities | 79,484 | | | 58,481 | |
| | | |
Long-term debt, net | 2,275,418 | | | 1,062,299 | |
Other liabilities | 122,417 | | | 41,642 | |
Total liabilities | 3,203,190 | | | 1,662,065 | |
Commitments and contingencies (Note 13) | 0 | | 0 |
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Stockholders’ equity: | | | |
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2021 and 2020; 127,022,118 and 125,835,931 shares issued and outstanding as of December 31, 2021 and 2020, respectively) | 127 | | | 126 | |
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2021 and 2020) | — | | | — | |
Additional paid-in capital | 631,762 | | | 883,166 | |
Retained earnings (accumulated deficit) | 71,744 | | | (146,819) | |
Accumulated other comprehensive (loss) income | (75,014) | | | 5,951 | |
Total stockholders’ equity | 628,619 | | | 742,424 | |
Total liabilities and stockholders’ equity | $ | 3,831,809 | | | $ | 2,404,489 | |
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, |
| 2021 | | 2020 | | 2019 |
Revenue | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
Cost of revenue | 654,512 | | | 464,745 | | | 271,036 | |
Gross profit | 1,674,602 | | | 1,260,880 | | | 547,343 | |
Operating expenses: | | | | | |
Marketing | 654,804 | | | 500,756 | | | 215,570 | |
Product development | 271,535 | | | 180,080 | | | 121,878 | |
General and administrative | 282,531 | | | 156,035 | | | 121,134 | |
| | | | | |
Total operating expenses | 1,208,870 | | | 836,871 | | | 458,582 | |
Income from operations | 465,732 | | | 424,009 | | | 88,761 | |
Other income (expense): | | | | | |
Loss on extinguishment of debt | — | | | (16,855) | | | — | |
Interest expense | (9,885) | | | (42,025) | | | (24,320) | |
Interest and other income | 2,137 | | | 7,102 | | | 13,199 | |
| | | | | |
Foreign exchange gain (loss) | 13,670 | | | (6,522) | | | 3,006 | |
Total other income (expense) | 5,922 | | | (58,300) | | | (8,115) | |
Income before income taxes | 471,654 | | | 365,709 | | | 80,646 | |
Benefit (provision) for income taxes | 21,853 | | | (16,463) | | | 15,248 | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Net income per share attributable to common stockholders: | | | | | |
Basic | $ | 3.88 | | | $ | 2.88 | | | $ | 0.80 | |
Diluted | $ | 3.40 | | | $ | 2.69 | | | $ | 0.76 | |
Weighted average common shares outstanding: | | | | | |
Basic | 127,224,974 | | | 121,251,588 | | | 119,665,248 | |
Diluted | 146,683,324 | | | 136,414,592 | | | 125,720,073 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Other comprehensive (loss) income: | | | | | |
Cumulative translation adjustment | (80,203) | | | 14,468 | | | (1,078) | |
Unrealized (losses) gains on marketable securities, net of tax (benefit) expense of $(240), $73, and $65, respectively | (762) | | | 182 | | | 192 | |
Total other comprehensive (loss) income | (80,965) | | | 14,650 | | | (886) | |
Comprehensive income | $ | 412,542 | | | $ | 363,896 | | | $ | 95,008 | |
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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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 | |
Cumulative effect of adoption of accounting standard changes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (228,738) | | | 27,828 | | | — | | | (200,910) | |
Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 139,280 | | | — | | | — | | | 139,280 | |
Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 994,456 | | | 1 | | | | | | | 22,705 | | | — | | | — | | | 22,706 | |
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Purchase of capped calls, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (64,673) | | | — | | | — | | | (64,673) | |
Settlement of convertible senior notes, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 985,522 | | | 1 | | | | | | | (424) | | | — | | | — | | | (423) | |
Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 818,442 | | | 1 | | | | | | | (119,554) | | | — | | | — | | | (119,553) | |
Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,612,233) | | | (2) | | | | | | | — | | | (302,772) | | | — | | | (302,774) | |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (80,965) | | | (80,965) | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | $ | 493,507 | | | — | | | 493,507 | |
Balance as of December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 127,022,118 | | | $ | 127 | | | | | | | $ | 631,762 | | | $ | 71,744 | | | $ | (75,014) | | | $ | 628,619 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cash flows from operating activities | | | | | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Stock-based compensation expense | 139,910 | | | 65,114 | | | 44,395 | |
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Depreciation and amortization expense | 74,267 | | | 58,189 | | | 48,031 | |
Provision for expected credit losses | 16,031 | | | 15,033 | | | 10,963 | |
Foreign exchange (gain) loss | (14,071) | | | 7,349 | | | (5,708) | |
Amortization of debt issuance costs | 3,719 | | | 2,751 | | | 2,006 | |
Non-cash interest expense | 578 | | | 36,086 | | | 19,108 | |
Interest expense (income) on marketable securities | 3,154 | | | 2,729 | | | (4,182) | |
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Deferred (benefit) provision for income taxes | (88,952) | | | 2,202 | | | (15,248) | |
Loss on extinguishment of debt | — | | | 16,855 | | | — | |
Other non-cash (income) expense, net | (475) | | | (795) | | | 1,667 | |
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Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (19,256) | | | (22,540) | | | (12,656) | |
Funds receivable and seller accounts | (83,941) | | | (90,141) | | | (23,177) | |
Prepaid expenses and other current assets | (44,186) | | | (16,963) | | | (14,156) | |
Other assets | (25,159) | | | 4,816 | | | 4,045 | |
Accounts payable | (14,169) | | | 14,550 | | | (953) | |
Accrued and other current liabilities | 84,789 | | | 146,634 | | | 37,410 | |
Funds payable and amounts due to sellers | 83,941 | | | 90,141 | | | 23,177 | |
Deferred revenue | 1,441 | | | 3,312 | | | 191 | |
Other liabilities | 40,423 | | | (5,612) | | | (3,887) | |
Net cash provided by operating activities | 651,551 | | | 678,956 | | | 206,920 | |
Cash flows from investing activities | | | | | |
Acquisition of businesses, net of cash acquired | (1,699,974) | | | — | | | (270,409) | |
Cash paid for asset acquisition and intangible assets | (1,937) | | | (880) | | | (1,963) | |
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Purchases of property and equipment | (11,248) | | | (1,445) | | | (7,528) | |
Development of internal-use software | (16,922) | | | (5,665) | | | (7,750) | |
Purchases of marketable securities | (418,518) | | | (499,237) | | | (661,821) | |
Sales and maturities of marketable securities | 590,630 | | | 495,848 | | | 461,098 | |
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Net cash used in investing activities | (1,557,969) | | | (11,379) | | | (488,373) | |
Cash flows from financing activities | | | | | |
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Payment of tax obligations on vested equity awards | (118,167) | | | (47,716) | | | (32,547) | |
Repurchase of stock | (302,774) | | | (268,653) | | | (176,985) | |
Proceeds from exercise of stock options | 22,706 | | | 25,319 | | | 9,791 | |
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Proceeds from issuance of convertible senior notes | 1,000,000 | | | 650,000 | | | 650,000 | |
Payment of debt issuance costs | (13,300) | | | (10,531) | | | (11,904) | |
Purchase of capped calls | (85,000) | | | (74,685) | | | (76,180) | |
Settlement of convertible senior notes | (43,900) | | | (137,168) | | | — | |
Payments on finance lease obligations | (8,864) | | | (9,211) | | | (10,833) | |
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Other financing, net | 2,048 | | | (8,073) | | | 8,265 | |
Net cash provided by financing activities | 452,749 | | | 119,282 | | | 359,607 | |
Effect of exchange rate changes on cash | (10,234) | | | 13,947 | | | (1,846) | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (463,903) | | | 800,806 | | | 76,308 | |
Cash, cash equivalents, and restricted cash at beginning of period | 1,249,440 | | | 448,634 | | | 372,326 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Supplemental cash flow disclosures: | | | | | |
Cash paid for interest | $ | 6,054 | | | $ | 3,405 | | | $ | 3,206 | |
Cash paid for income taxes, net of refunds | $ | 94,160 | | | $ | 8,535 | | | $ | 2,084 | |
Supplemental non-cash disclosures: | | | | | |
Replacement share-based awards issued in conjunction with acquisitions | $ | 5,686 | | | $ | — | | | $ | — | |
Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 7,297 | | | $ | 2,852 | | | $ | 2,450 | |
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Lease assets obtained in exchange for new lease liabilities | $ | 68,023 | | | $ | 3,183 | | | $ | 849 | |
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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 12—Debt” 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, |
| 2021 | | 2020 | | 2019 |
Beginning 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 | |
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Ending balance: | | | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | | | $ | 443,293 | |
Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
Total cash and cash equivalents, and restricted cash | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
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 around the world. These marketplaces - which collectively create a “House of Brands” - share the Company’s mission, common levers for growth, similar business models, and a strong commitment to use the power of business and technology to strengthen communities and empower people. The Company’s primary marketplace, Etsy.com, is the global destination for unique and creative goods. The Company generates revenue primarily from marketplace activities, including transaction, listing, and payments processing fees, and fees for optional seller services, which include on-site advertising and shipping label services.
Basis of Consolidation
The consolidated financial statements include the accounts of Etsy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. On July 12, 2021, Etsy acquired all of the issued share capital of Depop Limited (“Depop”) pursuant to a share purchase; on July 2, 2021, Etsy acquired all the outstanding shares of Elo7 Serviços de Informática S.A. (“Elo7”) by means of a merger; and on August 15, 2019, Etsy acquired all of the issued and outstanding capital stock of Reverb Holdings, Inc. (“Reverb”). The financial results of Depop, Elo7, and Reverb have been included in Etsy’s consolidated financial statements from the dates 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 the Company 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 judgments. The accounting estimates that require management’s most subjective judgments include: stock-based compensation; income taxes; the valuation of acquired intangible assets, developed technology, and goodwill as part of purchase price allocations for business combinations; valuation of goodwill; leases; and fair value of convertible senior notes. As of December 31, 2021, the effects of the ongoing COVID-19 pandemic on the Company’s business, results of operations, and financial condition continue to evolve. As a result, many of the Company’s estimates and judgments require increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may change materially in future periods.
Revenue Recognition
OurThe Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services the Company provides to sellers to help sellersthem generate more sales and scale their businesses. We recognize revenueRevenues are recognized as we transferthe Company transfers control of promised goods or services to sellers, in an amount that reflects the consideration we expectthe Company expects to be entitled to in exchange for those goods or services. We evaluateThe Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon ourits evaluation of whether we obtainthe Company obtains control of the specified goods or services by considering if we areit is primarily responsible for fulfillment of the promise, havehas inventory
risk, and havehas the latitude in establishing pricing and selecting suppliers, among other factors. Based on ourits evaluation of these factors, revenue is recorded either gross or net of costs associated with the transaction. With the exception of shipping labels, ourThe Company’s revenues are recognized on a gross basis, with the primary exception being shipping label revenue, which is recorded on a net basis. Sales and usage-based taxes are excluded from revenues.
Etsy.com Marketplace revenue: As members of the Etsy.com 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 marketplace 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 includeand the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and fees for processing payments, including foreign currency payments. On July 16, 2018, we increased our seller transaction fee from 3.5% to 5% of each completed transaction, and now apply it to the cost of shipping in addition to the cost of the item. Payments processing fees vary between 3.0% 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 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 payments processing fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable whilenonrefundable. Variable fees include transaction fees and payments processing fees are recorded net of refunds.
Marketplace revenue also includes revenue generated through our commercial partnerships, which was recorded in its own Other revenue line prior to the fourth quarter of 2019.
Reverb.com Marketplace revenue: The Reverb sellerfees. Etsy marketplace sellers pay a 5% transaction fee is a variable fee, which is 3.5% offor each completed transaction, including bothinclusive of shipping fees charged. In May 2020, the costEtsy marketplace started charging sellers for Offsite Ads, whereby sellers pay a transaction fee of 12% or 15% of the item andvalue of a sale based on the shipping. There are no Reverb listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments.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 marketplace sellers pay Etsy Payments processing fees, which typically vary between 2.5% - 2.7%3.0% and 4.5% of an item’s total sale price, including shipping, plus a flat fee per order dependingthat depends on the currencycountry in which a listingseller’s bank account is denominated.located, plus an additional transaction fee for
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
foreign currency payments. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated, and are recorded net of refunds.
Reverb, Depop, and Elo7 marketplace revenue is comprised of seller transaction fees and payments processing fees, which are recognized when the transaction is consummated, and are recorded net of refunds. Reverb sellers, Elo7 sellers, and Depop sellers pay a 5%, 7%, and 10% transaction fee, respectively, for each completed transaction, inclusive of shipping fees charged.
Services revenue: Services revenue is derived from optional services we offeroffered to Etsy sellers, which primarily include on-site advertising services (formerly Promoted Listings) and shipping labels. Each service below represents an individual obligation that wethe Company must perform when an Etsya seller chooses to use the service.
Revenue from Promoted Listings, Etsy.com’s on-siteOn-site advertising service, consistsservices consist of cost-per-click fees an Etsy seller pays for prominent placement of her listings in search results in the Etsy.com 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 ListingThese fees are nonrefundable and are charged to a seller’s Etsy bill when the Promoted Listinglisting is clicked, at which time revenue is recognized. InOn-site advertising services, beginning in the second quarter of 2020 are referred to as “Etsy Ads,” and prior to the third quarter of 2019 were referred to as “Promoted Listings.” From the third quarter of 2019 to the beginning of the second quarter of 2020, Etsy offered a combined “Etsy Ads” offering. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into one1 unified ad platform, called Etsy Ads, wherein which Etsy sellers cancould set a budget which allowsthat allowed Etsy to allocate that budget between channels, targeting optimal return on seller spend. Due to this new offering, Etsy no longer offers its Promoted Listings service as a standalone advertising service after September 30, 2019. Revenue from Etsy Ads consiststhis unified ad platform consisted of cost-per-click fees, which arewere nonrefundable and arewere charged to a seller’s Etsy bill when the ad is clicked, at which time revenue is recognized.was clicked. The revenue we recognizethat the Company recognized related to Etsy Ads isthe unified ad platform was recorded on a gross basis in Services revenue with an offsetting expense recorded in Costcost of Revenue.revenue. During the second quarter of 2020, Etsy transitioned from the combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: on-site advertising services referred to as “Etsy Ads” as described above (and formerly referred to as “Promoted Listings”) and reported in Services revenue, and Offsite Ads as reported in Marketplace revenue and referred to above in Marketplace revenue.
Revenue from shipping labels consists of fees an Etsy seller pays usthe Company when she purchases shipping labels through ourits platform, net of the cost we incurthe Company incurs 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 shipping label revenue when an Etsy seller purchases a shipping label. We recognize 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. 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 alsoThe Company 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 we incur in purchasing those shipping labels. ReverbThe Company recognizes shipping label revenue when a Reverban Etsy seller purchases a shipping label. ReverbThe Company 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 ReverbEtsy seller. ShippingEtsy shipping label revenue is recorded net of refunds.
The Reverb and Elo7 marketplaces offer on-site advertising services. They, as well as the Depop marketplace, also offer shipping labels services. Each service represents an individual obligation that the Company must perform when a seller chooses to use the service. Advertising revenue is nonrefundable, while shipping label revenue is recorded net of refunds.
Contract balances: The Company records deferred revenues when cash payments are received or due in advance of the completion of the four-month listing period, which represents the value of the Company’s unsatisfied performance obligations, 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, 2021 that was included in the deferred balance at January 1, 2021 was $11.3 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, 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 platforms, including employee compensation-related expenses, 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. Marketing expenses also include employee compensation-related expenses to support the Company’s marketing initiatives and amortization expense related to acquired customer relationship and trademark intangible assets. 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
Etsy, Inc.
Notes to Consolidated Financial Statements
expenses on the Consolidated Statements of Operations, were $559.3 million, $442.2 million, and $175.2 million in the years ended December 31, 2021, 2020, and 2019, respectively.
Product Development
Product development expenses consist primarily of employee compensation-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 the Company’s existing technology.
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”). StockService-based stock options and RSUsrestricted stock units (“RSUs”) are awarded to employees and members of ourthe Company’s Board of Directors and performance-based restricted stock units (“PBRSUs”) are awarded to employees. All such awards are measured at fair value at each grant date. For
The PBRSUs include financial performance-based restricted stock units (“Financial PBRSUs”) and total shareholder return performance-based restricted stock units (“TSR PBRSUs”), both of which have performance and service vesting requirements. The Company recognizes forfeitures as they occur.
The Company calculates the fair value of stock 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 using the Black-Scholes option-pricing model and then vest ratably each quarterthe expense is recognized over the remaining 12-quarterrequisite service period. In general,The risk-free rate 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 followingperiods within the vesting commencement date, which is the first daycontractual life 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, whichoption 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 is measured on the grant date, based on the estimatedU.S. Treasury yield curve in effect at the time of grant. Starting in the second quarter of 2021, the Company updated certain assumptions used to determine the fair value of its stock options under the awardBlack-Scholes option-pricing model, including the expected volatility and expected term assumptions. Given the Company’s sufficient trading history as of the second quarter of 2021, the Company calculates expected volatility based solely on the historical volatility of Etsy’s stock price observations over a period equivalent to the expected term of the stock option grants. Prior to the second quarter of 2021, the Company estimated expected volatility by taking the average historical price volatility for Etsy and certain industry peers. Further, given that the Company has sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of its stock options, beginning in the second quarter of 2021, the Company estimates its expected term using a Black-Scholes pricing modelhistorical option exercise behavior and recognized asexpected post-vest cancellation data, averaged with an expense overassumption that recently granted options will be exercised ratably from vesting to the employee’sexpiration of the stock option. Prior to the second quarter of 2021, the Company used the simplified method to calculate the expected term for awards issued to employees or director’s requisite service period on a straight-line basis.members of the Company’s Board of Directors. The fair value of RSUs is determined based on the closing price of ourthe Company’s common stock on Nasdaq on the grant date. The Company recognizes forfeitures as they occur. 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, includingAdditionally, the fair value of the underlying common stock, the expected volatility of the price of our common stock, risk-free interest rates, the expected term of the option,Financial PBRSUs is determined using a probability assessment and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
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• | 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.
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• | 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 intend to continue to consistently apply this process 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 used in the calculation.
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• | 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.
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• | 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.
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• | Expected Dividend Yield: We have never declared or paid any cash dividends to common stockholders and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.
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In determining the fair value of the TSR PBRSUs with market conditions is determined using a Monte-Carlo simulation model.
The requisite service period for stock options granted,and RSUs is generally four years from the following weighted-average assumptions were usedgrant date. For PBRSUs, the Company recognizes stock-based compensation expenses on a straight-line basis over the longer of the derived, explicit, or implicit service period. As of interim and annual reporting periods, the Financial PBRSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PBRSUs stock-based compensation expense is not adjusted.
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 Black-Scholes option-pricing model for awards granted in the periods indicated:
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| | 2019 | | 2018 | | 2017 |
Expected volatility | | 39.1% - 39.5% | | 38.6% - 47.8% | | 41.7% - 44.2% |
Risk-free interest rate | | 1.6% - 2.5% | | 2.6% - 2.9% | | 1.9% - 2.2% |
Expected term (in years) | | 5.5 - 6.2 | | 5.5 - 6.3 | | 5.5 - 6.3 |
Dividend rate | | —% | | —% | | —% |
Consolidated Statements of Operations.Income Taxes
We account for theThe income tax benefit is based on income before income taxes usingand 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We assessThe 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 we expectthat are deemed not more likely than not to be realized.realizable.
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 incomeCompany records tax expense 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 beginning in 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 accountThe 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.
We recognizeThe 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 Sheets.
Business Combinations, Intangible AssetsNet 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 shares of common stock 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 Goodwillpotentially 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.
In accordance with the guidance for business combinations, we determine whether a transaction is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. The calculation of diluted net income per share excludes all anti-dilutive shares of common stock.
Segment Data
The Company accountsidentifies operating segments as components of an entity for business combinations using the acquisition method of accounting. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Under both methods, the purchase pricewhich discrete financial information is allocated to the assets acquiredavailable and liabilities assumed using the fair values determined by management as of the acquisition date. The results of businesses acquired in a business combination are included in the Company’s Consolidated Financial Statements from the date of acquisition.
Determining the fair value of assets acquired and liabilities assumed requires 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 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. Our estimates associated with the accounting for business combinations may change as additional information becomes available regarding the assets acquired and liabilities assumed. Any change in facts and circumstances that existed as of the acquisition date and impacts our preliminary estimates is recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of fair value of assets and liabilities whichever is earlier the adjustments will affect our earnings.
Acquisition-related expenses incurredregularly reviewed by the CompanyChief Operating Decision Maker (“CODM”) 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.
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. Goodwillmaking decisions regarding resource allocation and performance assessment. The Company’s CODM is not amortized, but is subject to an annual impairment
test. Managementits Chief Executive Officer. The Company has determined that we have twoit has 4 operating segments, Etsy, Reverb, Depop, and Elo7, which qualify for aggregation as one1 reportable segment, for purposes of allocating resources and evaluating financial performance. As a result, we have determined we have two reporting units. We perform our annual goodwill impairment test during the fourth quarter
Cash and Cash Equivalents, and Short- and Long-term Investments
The Company considers all investments with an original maturity of three months or more frequently if events or changes in circumstances indicate that the goodwill mayless at time of purchase to be impaired. As a result of the annual goodwill impairment test of the two reporting units conducted in the fourth quarter of 2019, no goodwill impairment was recognized.
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 itcash equivalents. Cash restricted by third parties is not more likelyconsidered 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 not that the fair value of the reporting unit isthree months but 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 each of the reporting units 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 a 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
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating leases are included in other assets, other current liabilities, and other liabilities on the Company’s Consolidated Balance Sheets. Finance leases are included in property and equipment, net, finance lease obligations, current, and finance lease obligations, net of current portion on the Company’s Consolidated Balance Sheets.
Leases with a term greater than one year when purchased, are recognizedclassified as available-for-sale and are reported at fair value using the specific identification method. Long-term investments, consisting of 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 tax (expense) benefit.
Restricted Cash
The Company classifies any cash balances that are legally restricted as to withdrawal or usage as restricted cash on the Consolidated Balance Sheet as right-of-use (“ROU”) assets,Sheets. In connection with the Company’s noncancellable Brooklyn lease obligations and, if applicable, long-term lease obligationsagreement, which expires in 2039, the Company established a $5.3 million collateral account, which is reflected in the line items cited above.restricted cash balance as of December 31, 2021 and 2020.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
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 has elected not to recognize leasesreduces credit risk by placing its cash and cash equivalents with terms of one year or less on the Consolidated Balance Sheet. Lease obligations and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equalmajor financial institutions with high credit ratings. At times, to the lease payments in a similar economic environment. Certain adjustmentsextent eligible, such amounts may exceed federally insured limits. The Company believes that minimal credit risk exists with respect to these investments due to the ROU asset may be required for items such as initial direct costs paid or incentives received. The lease term may include options to extend or terminatecredit ratings of the lease when it is reasonably certainfinancial institutions that hold its short- and long-term investments. In addition, funds receivable settle relatively quickly, and the Company will exercise that option.
The componentsCompany’s historical experience 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 Companylosses has elected to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis.not been significant.
Fair ValueChange in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible debt in 2021.
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 InstrumentsReporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial 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.
In
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.
As described in Management’s Report on Internal Controls over Financial Reporting,management has excluded Elo7 Serviços de Informática S.A. (“Elo7”) and Depop Limited (“Depop”) from its assessment of internal control over financial reporting as of December 31, 2021 because Elo7 and Depop were acquired by the Company in purchase business combinations during 2021. We have also excluded Elo7 and Depop from our audit of internal control over financial reporting. Elo7 and Depop are wholly-owned subsidiaries whose combined total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the issuanceyear ended December 31, 2021.
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 2019 and 2018 Notes discussed in “Liquidity and Capital Resources—Sources of Liquidity,” we used estimates and assumptions to calculate the carrying amountsassets of the liabilitycompany; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and equity componentsthat 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 measuringcommunicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Customer Relationships and Trademark Intangible Assets Acquired in the Depop Acquisition
As described in Notes 1 and 5 to the consolidated financial statements, on July 12, 2021, Etsy acquired all of the issued share capital of Depop pursuant to a share purchase. The fair value of consideration transferred was $1.493 billion. The acquisition of Depop resulted in the recording of $148.5 million of customer relationships and $249.8 million of trademark intangible assets. The fair value of customer relationships was estimated using a multi-period excess earnings valuation method and the fair value of similar securities.the trademark was estimated using a relief from royalty valuation method. As disclosed by management, determining the fair value of the assets acquired and liabilities assumed required management to use significant judgment and estimates, including estimates of future revenue, attrition rate, net available cash flows, discount rates, and royalty rate.
The principal considerations for our determination that performing procedures relating to the valuation of customer relationships and trademark intangible assets acquired in the Depop acquisition is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the customer relationships and trademark intangible assets; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimates of future revenue, the attrition rate, and the discount rate used in the valuation of the customer relationships and estimates of future revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset; 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 acquisition accounting, including controls over management’s valuation of the customer relationships and trademark intangible assets and controls over the development of management’s assumptions related to estimates of future revenue, the attrition rate, the royalty rate, and the discount rates. These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for determining the fair value estimates of the customer relationships and trademark intangible assets. Testing management’s process included evaluating the appropriateness of the multi-period excess earnings and relief from royalty valuation methods, testing the completeness and accuracy of underlying data provided by management, and evaluating the reasonableness of the significant assumptions related to estimates of future revenue, the attrition rate, and the discount rate used in the valuation of the customer relationships and estimates of future revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset. Evaluating the reasonableness of the estimates of future revenue used in the valuation of the customer relationships and the trademark intangible assets involved considering the past performance of the acquired business, the past performance of the Company, and the consistency with industry data. Evaluating the reasonableness of the attrition rate used in the valuation of the customer relationships intangible asset involved considering the past performance of the acquired business and the past performance of the Company. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s multi-period excess earnings and relief from royalty valuation methods and in the evaluation of the reasonableness of the discount rate used in the valuation of the customer relationships and the discount rate and royalty rate used in the valuation of the trademark intangible asset.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2022
We have served as the Company’s auditor since 2012.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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| As of December 31, |
| 2021 | | 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | |
Short-term investments | 204,416 | | | 425,119 | |
Accounts receivable, net | 27,266 | | | 22,605 | |
Prepaid and other current assets | 109,417 | | | 56,152 | |
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Funds receivable and seller accounts | 220,206 | | | 146,806 | |
Total current assets | 1,341,501 | | | 1,894,781 | |
Restricted cash | 5,341 | | | 5,341 | |
Property and equipment, net | 275,062 | | | 112,495 | |
Goodwill | 1,371,064 | | | 140,810 | |
Intangible assets, net | 607,170 | | | 187,449 | |
Deferred tax assets | 95,863 | | | 115 | |
Long-term investments | 85,034 | | | 39,094 | |
Other assets | 50,774 | | | 24,404 | |
Total assets | $ | 3,831,809 | | | $ | 2,404,489 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 28,007 | | | $ | 40,883 | |
Accrued expenses | 328,118 | | | 232,352 | |
Finance lease obligations—current | 2,418 | | | 8,537 | |
Funds payable and amounts due to sellers | 220,206 | | | 146,806 | |
Deferred revenue | 12,339 | | | 11,264 | |
Other current liabilities | 24,500 | | | 14,822 | |
Total current liabilities | 615,588 | | | 454,664 | |
Finance lease obligations—net of current portion | 110,283 | | | 44,979 | |
| | | |
Deferred tax liabilities | 79,484 | | | 58,481 | |
| | | |
Long-term debt, net | 2,275,418 | | | 1,062,299 | |
Other liabilities | 122,417 | | | 41,642 | |
Total liabilities | 3,203,190 | | | 1,662,065 | |
Commitments and contingencies (Note 13) | 0 | | 0 |
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Stockholders’ equity: | | | |
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2021 and 2020; 127,022,118 and 125,835,931 shares issued and outstanding as of December 31, 2021 and 2020, respectively) | 127 | | | 126 | |
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2021 and 2020) | — | | | — | |
Additional paid-in capital | 631,762 | | | 883,166 | |
Retained earnings (accumulated deficit) | 71,744 | | | (146,819) | |
Accumulated other comprehensive (loss) income | (75,014) | | | 5,951 | |
Total stockholders’ equity | 628,619 | | | 742,424 | |
Total liabilities and stockholders’ equity | $ | 3,831,809 | | | $ | 2,404,489 | |
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, |
| 2021 | | 2020 | | 2019 |
Revenue | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
Cost of revenue | 654,512 | | | 464,745 | | | 271,036 | |
Gross profit | 1,674,602 | | | 1,260,880 | | | 547,343 | |
Operating expenses: | | | | | |
Marketing | 654,804 | | | 500,756 | | | 215,570 | |
Product development | 271,535 | | | 180,080 | | | 121,878 | |
General and administrative | 282,531 | | | 156,035 | | | 121,134 | |
| | | | | |
Total operating expenses | 1,208,870 | | | 836,871 | | | 458,582 | |
Income from operations | 465,732 | | | 424,009 | | | 88,761 | |
Other income (expense): | | | | | |
Loss on extinguishment of debt | — | | | (16,855) | | | — | |
Interest expense | (9,885) | | | (42,025) | | | (24,320) | |
Interest and other income | 2,137 | | | 7,102 | | | 13,199 | |
| | | | | |
Foreign exchange gain (loss) | 13,670 | | | (6,522) | | | 3,006 | |
Total other income (expense) | 5,922 | | | (58,300) | | | (8,115) | |
Income before income taxes | 471,654 | | | 365,709 | | | 80,646 | |
Benefit (provision) for income taxes | 21,853 | | | (16,463) | | | 15,248 | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Net income per share attributable to common stockholders: | | | | | |
Basic | $ | 3.88 | | | $ | 2.88 | | | $ | 0.80 | |
Diluted | $ | 3.40 | | | $ | 2.69 | | | $ | 0.76 | |
Weighted average common shares outstanding: | | | | | |
Basic | 127,224,974 | | | 121,251,588 | | | 119,665,248 | |
Diluted | 146,683,324 | | | 136,414,592 | | | 125,720,073 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Other comprehensive (loss) income: | | | | | |
Cumulative translation adjustment | (80,203) | | | 14,468 | | | (1,078) | |
Unrealized (losses) gains on marketable securities, net of tax (benefit) expense of $(240), $73, and $65, respectively | (762) | | | 182 | | | 192 | |
Total other comprehensive (loss) income | (80,965) | | | 14,650 | | | (886) | |
Comprehensive income | $ | 412,542 | | | $ | 363,896 | | | $ | 95,008 | |
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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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 | |
Cumulative effect of adoption of accounting standard changes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (228,738) | | | 27,828 | | | — | | | (200,910) | |
Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | 139,280 | | | — | | | — | | | 139,280 | |
Exercise of vested options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 994,456 | | | 1 | | | | | | | 22,705 | | | — | | | — | | | 22,706 | |
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Purchase of capped calls, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | (64,673) | | | — | | | — | | | (64,673) | |
Settlement of convertible senior notes, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 985,522 | | | 1 | | | | | | | (424) | | | — | | | — | | | (423) | |
Vesting of restricted stock units, net of shares withheld | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 818,442 | | | 1 | | | | | | | (119,554) | | | — | | | — | | | (119,553) | |
Stock repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,612,233) | | | (2) | | | | | | | — | | | (302,772) | | | — | | | (302,774) | |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | — | | | (80,965) | | | (80,965) | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | | | | | — | | | $ | 493,507 | | | — | | | 493,507 | |
Balance as of December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 127,022,118 | | | $ | 127 | | | | | | | $ | 631,762 | | | $ | 71,744 | | | $ | (75,014) | | | $ | 628,619 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cash flows from operating activities | | | | | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Stock-based compensation expense | 139,910 | | | 65,114 | | | 44,395 | |
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Depreciation and amortization expense | 74,267 | | | 58,189 | | | 48,031 | |
Provision for expected credit losses | 16,031 | | | 15,033 | | | 10,963 | |
Foreign exchange (gain) loss | (14,071) | | | 7,349 | | | (5,708) | |
Amortization of debt issuance costs | 3,719 | | | 2,751 | | | 2,006 | |
Non-cash interest expense | 578 | | | 36,086 | | | 19,108 | |
Interest expense (income) on marketable securities | 3,154 | | | 2,729 | | | (4,182) | |
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Deferred (benefit) provision for income taxes | (88,952) | | | 2,202 | | | (15,248) | |
Loss on extinguishment of debt | — | | | 16,855 | | | — | |
Other non-cash (income) expense, net | (475) | | | (795) | | | 1,667 | |
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Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (19,256) | | | (22,540) | | | (12,656) | |
Funds receivable and seller accounts | (83,941) | | | (90,141) | | | (23,177) | |
Prepaid expenses and other current assets | (44,186) | | | (16,963) | | | (14,156) | |
Other assets | (25,159) | | | 4,816 | | | 4,045 | |
Accounts payable | (14,169) | | | 14,550 | | | (953) | |
Accrued and other current liabilities | 84,789 | | | 146,634 | | | 37,410 | |
Funds payable and amounts due to sellers | 83,941 | | | 90,141 | | | 23,177 | |
Deferred revenue | 1,441 | | | 3,312 | | | 191 | |
Other liabilities | 40,423 | | | (5,612) | | | (3,887) | |
Net cash provided by operating activities | 651,551 | | | 678,956 | | | 206,920 | |
Cash flows from investing activities | | | | | |
Acquisition of businesses, net of cash acquired | (1,699,974) | | | — | | | (270,409) | |
Cash paid for asset acquisition and intangible assets | (1,937) | | | (880) | | | (1,963) | |
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Purchases of property and equipment | (11,248) | | | (1,445) | | | (7,528) | |
Development of internal-use software | (16,922) | | | (5,665) | | | (7,750) | |
Purchases of marketable securities | (418,518) | | | (499,237) | | | (661,821) | |
Sales and maturities of marketable securities | 590,630 | | | 495,848 | | | 461,098 | |
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Net cash used in investing activities | (1,557,969) | | | (11,379) | | | (488,373) | |
Cash flows from financing activities | | | | | |
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Payment of tax obligations on vested equity awards | (118,167) | | | (47,716) | | | (32,547) | |
Repurchase of stock | (302,774) | | | (268,653) | | | (176,985) | |
Proceeds from exercise of stock options | 22,706 | | | 25,319 | | | 9,791 | |
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Proceeds from issuance of convertible senior notes | 1,000,000 | | | 650,000 | | | 650,000 | |
Payment of debt issuance costs | (13,300) | | | (10,531) | | | (11,904) | |
Purchase of capped calls | (85,000) | | | (74,685) | | | (76,180) | |
Settlement of convertible senior notes | (43,900) | | | (137,168) | | | — | |
Payments on finance lease obligations | (8,864) | | | (9,211) | | | (10,833) | |
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Other financing, net | 2,048 | | | (8,073) | | | 8,265 | |
Net cash provided by financing activities | 452,749 | | | 119,282 | | | 359,607 | |
Effect of exchange rate changes on cash | (10,234) | | | 13,947 | | | (1,846) | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (463,903) | | | 800,806 | | | 76,308 | |
Cash, cash equivalents, and restricted cash at beginning of period | 1,249,440 | | | 448,634 | | | 372,326 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Supplemental cash flow disclosures: | | | | | |
Cash paid for interest | $ | 6,054 | | | $ | 3,405 | | | $ | 3,206 | |
Cash paid for income taxes, net of refunds | $ | 94,160 | | | $ | 8,535 | | | $ | 2,084 | |
Supplemental non-cash disclosures: | | | | | |
Replacement share-based awards issued in conjunction with acquisitions | $ | 5,686 | | | $ | — | | | $ | — | |
Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 7,297 | | | $ | 2,852 | | | $ | 2,450 | |
| | | | | |
| | | | | |
Lease assets obtained in exchange for new lease liabilities | $ | 68,023 | | | $ | 3,183 | | | $ | 849 | |
| | | | | |
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—12—Debt” infor 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, |
| 2021 | | 2020 | | 2019 |
Beginning 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 | |
| | | | | |
Ending balance: | | | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | | | $ | 443,293 | |
Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
Total cash and cash equivalents, and restricted cash | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
The accompanying notes are an integral part of these consolidated financial statements.
Etsy, Inc.
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
Description of Business
Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers around the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both withinBrands” - share the United States and internationally and we are exposed to market risks in the ordinary course of ourCompany’s mission, common levers for growth, similar 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, 2019 and December 31, 2018, the majority of our cash and cash equivalents and short- and long-term investments were held in cash deposits, money market funds, certificates of deposit, fixed-income funds, and U.S. Government and agency securities. The fair value of our cash, cash equivalents, and short- and long-term investments would not be significantly affected by either an increase or decrease in interest rates due mainly to the relatively short maturities of these instruments. The majority of our current interest expense is attributable to debt discount related to our Notes and interest associated with our Brooklyn headquarters lease, which is accounted for as a finance lease, 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 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. In addition, in the fourth quarter of 2018, Etsy 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 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 against the U.S. dollar.
In the year ended December 31, 2019, approximately 19% 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, 2019 would have been 27.5%, or approximately 100 basis points higher than the reported 26.5% growth. On a currency-neutral basis, GMS growth for the three months ended December 31, 2019 would have been 33.0% compared with the reported 32.8% growth.
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 would have been 20.4%, or approximately 40 basis points lower than the reported 20.8% 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 experienced in the near term. An adverse 10% foreign currency exchange rate would have resulted in a decrease to revenue of $21.0 million or approximately 2.6% of total revenuemodels, and a currency exchange lossstrong commitment to use the power of $11.5 millionbusiness and technology to strengthen communities and empower people. The Company’s primary marketplace, Etsy.com, is the global destination for the year ended December 31, 2019. This compares to aunique and creative goods. The Company generates revenue decreaseprimarily from marketplace activities, including transaction, listing, and payments processing fees, and fees for optional seller services, which include on-site advertising and shipping label services.
Basis of $7.5 million or approximately 1.2% of total revenue and currency exchange loss of $17.0 million based on the same analysis performed for the year ended December 31, 2018.
Item 8. Financial Statements and Supplementary Data.
Consolidation
The supplementaryconsolidated financial information required by this item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Etsy, Inc.
Index tostatements include the Consolidated Financial Statements
|
| |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 2019 and 2018 | |
Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017 | |
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2019, 2018, and 2017 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 | |
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 sheetsaccounts of Etsy, Inc. and its subsidiaries (the “Company”) as of December 31, 2019wholly-owned subsidiaries. All intercompany balances and 2018, and the related consolidated statements of operations, comprehensive income, changestransactions have been eliminated in stockholders’ equity and cash flows for eachconsolidation. On July 12, 2021, Etsy acquired all of the three years inissued share capital of Depop Limited (“Depop”) pursuant to a share purchase; on July 2, 2021, Etsy acquired all the period ended December 31,outstanding shares of Elo7 Serviços de Informática S.A. (“Elo7”) by means of a merger; and on August 15, 2019, 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring OrganizationsEtsy acquired all of the Treadway Commission (COSO)issued and outstanding capital stock of Reverb Holdings, Inc. (“Reverb”).
In our opinion, the The financial results of Depop, Elo7, and Reverb have been included in Etsy’s consolidated financial statements referred to above present fairly, in all material respects,from the dates of acquisition. See “Note 5—Business Combinations.”
Use of Estimates
The preparation of consolidated financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019statements in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,America (“GAAP”) requires the Company maintained,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 judgments. The accounting estimates that require management’s most subjective judgments include: stock-based compensation; income taxes; the valuation of acquired intangible assets, developed technology, and goodwill as part of purchase price allocations for business combinations; valuation of goodwill; leases; and fair value of convertible senior notes. As of December 31, 2021, the effects of the ongoing COVID-19 pandemic on the Company’s business, results of operations, and financial condition continue to evolve. As a result, many of the Company’s estimates and judgments require increased judgment and carry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may change materially in future periods.
Revenue Recognition
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services the Company provides to sellers to help them 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. The Company’s revenues are recognized on a gross basis, with the primary exception being shipping label revenue, which is recorded on a net basis. Sales and usage-based taxes are excluded from revenues.
Marketplace revenue: As members of the Etsy.com 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 marketplace sellers pay a fixed listing fee of $0.20 for each item listed on Etsy.com, and 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. Listing fees are nonrefundable. Variable fees include transaction fees and payments processing fees. Etsy marketplace sellers pay a 5% transaction fee for each completed transaction, inclusive of shipping fees charged. In May 2020, the Etsy marketplace started charging sellers for Offsite Ads, whereby sellers pay a transaction 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 marketplace sellers pay Etsy Payments processing fees, which typically vary between 3.0% and 4.5% of an item’s total sale price, including shipping, plus a flat fee per order that depends on the country in which a seller’s bank account is located, plus an additional transaction fee for
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Etsy, Inc.
Notes to Consolidated Financial Statements
foreign currency payments. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated, and are recorded net of refunds.
Reverb, Depop, and Elo7 marketplace revenue is comprised of seller transaction fees and payments processing fees, which are recognized when the transaction is consummated, and are recorded net of refunds. Reverb sellers, Elo7 sellers, and Depop sellers pay a 5%, 7%, and 10% transaction fee, respectively, for each completed transaction, inclusive of shipping fees charged.
Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which primarily include on-site advertising and shipping labels. Each service represents an individual obligation that the Company must perform when a seller chooses to use the service.
On-site advertising services consist of cost-per-click fees an Etsy seller pays for prominent placement of her listings in search results in the Etsy.com marketplace. These fees are nonrefundable and are charged to a seller’s Etsy bill when the listing is clicked, at which time revenue is recognized. On-site advertising services, beginning in the second quarter of 2020 are referred to as “Etsy Ads,” and prior to the third quarter of 2019 were referred to as “Promoted Listings.” From the third quarter of 2019 to the beginning of the second quarter of 2020, Etsy offered a combined “Etsy Ads” offering. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into 1 unified ad platform, in which Etsy sellers could set a budget that 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. 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. During the second quarter of 2020, Etsy transitioned from the combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: on-site advertising services referred to as “Etsy Ads” as described above (and formerly referred to as “Promoted Listings”) and reported in Services revenue, and Offsite Ads as reported in Marketplace revenue and referred to above in Marketplace revenue.
Revenue from 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 shipping label revenue when an Etsy seller purchases a shipping label. The Company 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 Etsy seller. Etsy shipping label revenue is recorded net of refunds.
The Reverb and Elo7 marketplaces offer on-site advertising services. They, as well as the Depop marketplace, also offer shipping labels services. Each service represents an individual obligation that the Company must perform when a seller chooses to use the service. Advertising revenue is nonrefundable, while shipping label revenue is recorded net of refunds.
Contract balances: The Company records deferred revenues when cash payments are received or due in advance of the completion of the four-month listing period, which represents the value of the Company’s unsatisfied performance obligations, 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, 2021 that was included in the deferred balance at January 1, 2021 was $11.3 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, 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 platforms, including employee compensation-related expenses, 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. Marketing expenses also include employee compensation-related expenses to support the Company’s marketing initiatives and amortization expense related to acquired customer relationship and trademark intangible assets. 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
expenses on the Consolidated Statements of Operations, were $559.3 million, $442.2 million, and $175.2 million in the years ended December 31, 2021, 2020, and 2019, respectively.
Product Development
Product development expenses consist primarily of employee compensation-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 the Company’s existing technology.
Stock-Based Compensation
Service-based stock options and restricted stock units (“RSUs”) are awarded to employees and members of the Company’s Board of Directors and performance-based restricted stock units (“PBRSUs”) are awarded to employees. All such awards are measured at fair value at each grant date.
The PBRSUs include financial performance-based restricted stock units (“Financial PBRSUs”) and total shareholder return performance-based restricted stock units (“TSR PBRSUs”), both of which have performance and service vesting requirements. The Company recognizes forfeitures as they occur.
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 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. Starting in the second quarter of 2021, the Company updated certain assumptions used to determine the fair value of its stock options under the Black-Scholes option-pricing model, including the expected volatility and expected term assumptions. Given the Company’s sufficient trading history as of the second quarter of 2021, the Company calculates expected volatility based solely on the historical volatility of Etsy’s stock price observations over a period equivalent to the expected term of the stock option grants. Prior to the second quarter of 2021, the Company estimated expected volatility by taking the average historical price volatility for Etsy and certain industry peers. Further, given that the Company has sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of its stock options, beginning in the second quarter of 2021, the Company estimates its expected term using historical option exercise behavior and expected post-vest cancellation data, averaged with an assumption that recently granted options will be exercised ratably from vesting to the expiration of the stock option. Prior to the second quarter of 2021, the Company used the simplified method to calculate the expected term for awards issued to employees or members of the Company’s Board of Directors. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on the grant date. Additionally, the fair value of the Financial PBRSUs is determined using a probability assessment and the fair value of the TSR PBRSUs with market conditions is determined using a Monte-Carlo simulation model.
The requisite service period for stock options and RSUs is generally four years from the grant date. For PBRSUs, the Company recognizes stock-based compensation expenses on a straight-line basis over the longer of the derived, explicit, or implicit service period. As of interim and annual reporting periods, the Financial PBRSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PBRSUs stock-based compensation expense is not adjusted.
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 Statements 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
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.
The Company records tax expense related to Global Intangible Low Taxed Income (“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 shares of common stock 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 shares of common stock.
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 (“CODM”) in making decisions regarding resource allocation and performance assessment. The Company’s CODM is its Chief Executive Officer. The Company has determined it has 4 operating segments, Etsy, Reverb, Depop, and Elo7, 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 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 tax (expense) benefit.
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 2039, the Company established a $5.3 million collateral account, which is reflected in the restricted cash balance as of December 31, 2019, based on criteria established in2021 and 2020.
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Internal Control - Integrated Framework
(2013) issued
Etsy, Inc.
Notes to Consolidated Financial Statements
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.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leasesconvertible debt in 2019.
2021.
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'sManagement’s Report on Internal Control OverControls over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial 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.
Managementmanagement has excluded Reverb Holdings, Inc.Elo7 Serviços de Informática S.A. (“Elo7”) and Depop Limited (“Depop”) from its assessment of internal control over financial reporting as of December 31, 20192021 because it wasElo7 and Depop were acquired by the Company in a purchase business combinationcombinations during 2019.2021. We have also excluded Reverb Holdings, Inc.Elo7 and Depop from our audit of internal control over financial reporting. Reverb Holdings, Inc. is aElo7 and Depop are wholly-owned subsidiarysubsidiaries whose combined total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2%1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.2021.
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.
Valuation of Customer Relationships and Trademark Intangible Assets Acquired in the Reverb Holdings Inc.Depop Acquisition
As described in Notes 1 and 5 to the consolidated financial statements, the Companyon July 12, 2021, Etsy acquired all of the outstandingissued share capital stock of Reverb Holdings, Inc. for total cashDepop pursuant to a share purchase. The fair value of consideration transferred was $1.493 billion. The acquisition of $270.4 million, net of cash acquired, whichDepop resulted in $172.9the recording of $148.5 million of customer relationships and $249.8 million of trademark intangible assets being recorded. Determiningassets. The fair value of customer relationships was estimated using a multi-period excess earnings valuation method and the fair value of the trademark was estimated using a relief from royalty valuation method. As disclosed by management, determining the fair value of the assets acquired and liabilities assumed requiresrequired management to use significant judgment and estimates, including estimates of future revenue, adjusted earnings before interestattrition rate, net available cash flows, discount rates, and tax, and discount rates.royalty rate.
The principal considerations for our determination that performing procedures relating to the valuation of customer relationships and trademark intangible assets acquired in the Reverb Holdings, Inc.Depop acquisition is a critical audit matter are that there was(i) the significant judgment by management when developingdetermining the fair value estimates of the customer relationships and trademark intangible assets. This in turn led toassets; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluateand evaluating management’s cash flow projections and significant assumptions includingrelated to estimates of future revenue.revenue, the attrition rate, and the discount rate used in the valuation of the customer relationships and estimates of future revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset; 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 acquisition accounting, including controls over management’s valuation of the customer relationships and trademark intangible assets and controls over the development of management’s cash flow projections and assumptions related to the valuation of these intangible assets, including estimates of future revenue.revenue, the attrition rate, the royalty rate, and the discount rates. These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for developingdetermining the fair value estimates of the customer relationships and trademark intangible assets, and (iii)assets. Testing management’s process included evaluating the appropriateness of the discounted cash flow models,multi-period excess earnings and relief from royalty valuation methods, testing the completeness and accuracy of underlying data provided by management, and evaluating the reasonableness of the significant assumptions related to estimates of future revenue, the attrition rate, and the discount rate used in the models,valuation of the customer relationships and evaluating the significant assumptions used by management, including the estimates of future revenue.revenue, the royalty rate, and the discount rate used in the valuation of the trademark intangible asset. Evaluating the reasonableness of the estimates of future revenue used in the valuation of the customer relationships and the trademark intangible assets involved considering the past performance of the acquired business, the past performance of the Company, and relevantthe consistency with industry data.
Evaluating the reasonableness of the attrition rate used in the valuation of the customer relationships intangible asset involved considering the past performance of the acquired business and the past performance of the Company. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s multi-period excess earnings and relief from royalty valuation methods and in the evaluation of the reasonableness of the discount rate used in the valuation of the customer relationships and the discount rate and royalty rate used in the valuation of the trademark intangible asset.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 202024, 2022
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, |
| 2021 | | 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | |
Short-term investments | 204,416 | | | 425,119 | |
Accounts receivable, net | 27,266 | | | 22,605 | |
Prepaid and other current assets | 109,417 | | | 56,152 | |
| | | |
| | | |
Funds receivable and seller accounts | 220,206 | | | 146,806 | |
Total current assets | 1,341,501 | | | 1,894,781 | |
Restricted cash | 5,341 | | | 5,341 | |
Property and equipment, net | 275,062 | | | 112,495 | |
Goodwill | 1,371,064 | | | 140,810 | |
Intangible assets, net | 607,170 | | | 187,449 | |
Deferred tax assets | 95,863 | | | 115 | |
Long-term investments | 85,034 | | | 39,094 | |
Other assets | 50,774 | | | 24,404 | |
Total assets | $ | 3,831,809 | | | $ | 2,404,489 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 28,007 | | | $ | 40,883 | |
Accrued expenses | 328,118 | | | 232,352 | |
Finance lease obligations—current | 2,418 | | | 8,537 | |
Funds payable and amounts due to sellers | 220,206 | | | 146,806 | |
Deferred revenue | 12,339 | | | 11,264 | |
Other current liabilities | 24,500 | | | 14,822 | |
Total current liabilities | 615,588 | | | 454,664 | |
Finance lease obligations—net of current portion | 110,283 | | | 44,979 | |
| | | |
Deferred tax liabilities | 79,484 | | | 58,481 | |
| | | |
Long-term debt, net | 2,275,418 | | | 1,062,299 | |
Other liabilities | 122,417 | | | 41,642 | |
Total liabilities | 3,203,190 | | | 1,662,065 | |
Commitments and contingencies (Note 13) | 0 | | 0 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Stockholders’ equity: | | | |
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2021 and 2020; 127,022,118 and 125,835,931 shares issued and outstanding as of December 31, 2021 and 2020, respectively) | 127 | | | 126 | |
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2021 and 2020) | — | | | — | |
Additional paid-in capital | 631,762 | | | 883,166 | |
Retained earnings (accumulated deficit) | 71,744 | | | (146,819) | |
Accumulated other comprehensive (loss) income | (75,014) | | | 5,951 | |
Total stockholders’ equity | 628,619 | | | 742,424 | |
Total liabilities and stockholders’ equity | $ | 3,831,809 | | | $ | 2,404,489 | |
|
| | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 443,293 |
| | $ | 366,985 |
|
Short-term investments | 373,959 |
| | 257,302 |
|
Accounts receivable, net | 15,386 |
| | 12,244 |
|
Prepaid and other current assets | 38,614 |
| | 22,686 |
|
Funds receivable and seller accounts | 49,786 |
| | 21,072 |
|
Total current assets | 921,038 |
| | 680,289 |
|
Restricted cash | 5,341 |
| | 5,341 |
|
Property and equipment, net | 144,864 |
| | 120,179 |
|
Goodwill | 138,731 |
| | 37,482 |
|
Intangible assets, net | 199,236 |
| | 34,589 |
|
Deferred tax assets | 14,257 |
| | 23,464 |
|
Long-term investments | 89,343 |
| | — |
|
Other assets | 29,542 |
| | 507 |
|
Total assets | $ | 1,542,352 |
| | $ | 901,851 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 26,324 |
| | $ | 26,545 |
|
Accrued expenses | 88,345 |
| | 49,158 |
|
Finance lease obligations—current | 8,275 |
| | 3,884 |
|
Funds payable and amounts due to sellers | 49,786 |
| | 21,072 |
|
Deferred revenue | 7,617 |
| | 7,478 |
|
Other current liabilities | 8,181 |
| | 3,925 |
|
Total current liabilities | 188,528 |
| | 112,062 |
|
Finance lease obligations—net of current portion | 53,611 |
| | 2,095 |
|
Deferred tax liabilities | 64,497 |
| | 30,455 |
|
Facility financing obligation | — |
| | 59,991 |
|
Long-term debt, net | 785,126 |
| | 276,486 |
|
Other liabilities | 43,956 |
| | 19,864 |
|
Total liabilities | 1,135,718 |
| | 500,953 |
|
Commitments and contingencies (Note 14) |
|
| |
|
|
Stockholders’ equity: | | | |
Common stock ($0.001 par value, 1,400,000,000 shares authorized as of December 31, 2019 and 2018; 118,342,772 and 119,771,702 shares issued and outstanding as of December 31, 2019 and 2018, respectively) | 119 |
| | 120 |
|
Preferred stock ($0.001 par value, 25,000,000 shares authorized as of December 31, 2019 and 2018) | — |
| | — |
|
Additional paid-in capital | 642,628 |
| | 562,033 |
|
Accumulated deficit | (227,414 | ) | | (153,442 | ) |
Accumulated other comprehensive loss | (8,699 | ) | | (7,813 | ) |
Total stockholders’ equity | 406,634 |
| | 400,898 |
|
Total liabilities and stockholders’ equity | $ | 1,542,352 |
| | $ | 901,851 |
|
The accompanying notes are an integral part of these Consolidated Financial Statementsconsolidated financial statements.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | | Year Ended December 31, | | Year Ended December 31, |
| 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 |
Revenue | $ | 818,379 |
| | $ | 603,693 |
| | $ | 441,231 |
| Revenue | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
Cost of revenue | 271,036 |
| | 190,762 |
| | 150,986 |
| Cost of revenue | 654,512 | | | 464,745 | | | 271,036 | |
Gross profit | 547,343 |
| | 412,931 |
| | 290,245 |
| Gross profit | 1,674,602 | | | 1,260,880 | | | 547,343 | |
Operating expenses: | | | | | | Operating expenses: | |
Marketing | 215,570 |
| | 158,013 |
| | 109,085 |
| Marketing | 654,804 | | | 500,756 | | | 215,570 | |
Product development | 121,878 |
| | 97,249 |
| | 74,616 |
| Product development | 271,535 | | | 180,080 | | | 121,878 | |
General and administrative | 121,134 |
| | 82,883 |
| | 91,486 |
| General and administrative | 282,531 | | | 156,035 | | | 121,134 | |
Asset impairment charges | — |
| | — |
| | 3,162 |
| |
| Total operating expenses | 458,582 |
| | 338,145 |
| | 278,349 |
| Total operating expenses | 1,208,870 | | | 836,871 | | | 458,582 | |
Income from operations | 88,761 |
| | 74,786 |
| | 11,896 |
| Income from operations | 465,732 | | | 424,009 | | | 88,761 | |
Other (expense) income: | | | | | | |
Other income (expense): | | Other income (expense): | |
Loss on extinguishment of debt | | Loss on extinguishment of debt | — | | | (16,855) | | | — | |
Interest expense | (24,320 | ) | | (22,178 | ) | | (11,130 | ) | Interest expense | (9,885) | | | (42,025) | | | (24,320) | |
Interest and other income | 13,199 |
| | 8,957 |
| | 2,394 |
| Interest and other income | 2,137 | | | 7,102 | | | 13,199 | |
| Foreign exchange gain (loss) | 3,006 |
| | (6,487 | ) | | 29,105 |
| Foreign exchange gain (loss) | 13,670 | | | (6,522) | | | 3,006 | |
Total other (expense) income | (8,115 | ) | | (19,708 | ) | | 20,369 |
| |
Total other income (expense) | | Total other income (expense) | 5,922 | | | (58,300) | | | (8,115) | |
Income before income taxes | 80,646 |
| | 55,078 |
| | 32,265 |
| Income before income taxes | 471,654 | | | 365,709 | | | 80,646 | |
Benefit for income taxes | 15,248 |
| | 22,413 |
| | 49,535 |
| |
Benefit (provision) for income taxes | | Benefit (provision) for income taxes | 21,853 | | | (16,463) | | | 15,248 | |
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
| Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Net income per share attributable to common stockholders: | | | | | | Net income per share attributable to common stockholders: | | | | | |
Basic | $ | 0.80 |
| | $ | 0.64 |
| | $ | 0.69 |
| Basic | $ | 3.88 | | | $ | 2.88 | | | $ | 0.80 | |
Diluted | $ | 0.76 |
| | $ | 0.61 |
| | $ | 0.68 |
| Diluted | $ | 3.40 | | | $ | 2.69 | | | $ | 0.76 | |
Weighted average common shares outstanding: | | | | | | Weighted average common shares outstanding: | | | | | |
Basic | 119,665,248 |
| | 120,146,076 |
| | 118,538,687 |
| Basic | 127,224,974 | | | 121,251,588 | | | 119,665,248 | |
Diluted | 125,720,073 |
| | 127,084,785 |
| | 122,267,673 |
| Diluted | 146,683,324 | | | 136,414,592 | | | 125,720,073 | |
The accompanying notes are an integral part of these Consolidated Financial Statementsconsolidated financial statements.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Other comprehensive (loss) income: | | | | | |
Cumulative translation adjustment | (80,203) | | | 14,468 | | | (1,078) | |
Unrealized (losses) gains on marketable securities, net of tax (benefit) expense of $(240), $73, and $65, respectively | (762) | | | 182 | | | 192 | |
Total other comprehensive (loss) income | (80,965) | | | 14,650 | | | (886) | |
Comprehensive income | $ | 412,542 | | | $ | 363,896 | | | $ | 95,008 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
Other comprehensive (loss) income: | | | | | |
Cumulative translation adjustment | (1,078 | ) | | (1,399 | ) | | (24,898 | ) |
Unrealized gains (losses) on marketable securities, net of tax expense (benefit) of $65, $0, and ($15), respectively | 192 |
| | (35 | ) | | 47 |
|
Total other comprehensive loss | (886 | ) | | (1,434 | ) | | (24,851 | ) |
Comprehensive income | $ | 95,008 |
| | $ | 76,057 |
| | $ | 56,949 |
|
The accompanying notes are an integral part of these Consolidated Financial Statementsconsolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts) | | | | | | | | | | | | | | | | Common Stock | | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | 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) Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
| | | Shares | | Amount | |
| Shares | | Amount | |
Balance as of December 31, 2016 | 115,973,039 |
| | $ | 116 |
| | $ | 442,510 |
| | $ | (116,341 | ) | | $ | 18,472 |
| | $ | 344,757 |
| |
Cumulative effect adjustment related to the adoption of ASU 2016-16 | — |
| | — |
| | 85 |
| | (51,449 | ) | | — |
| | (51,364 | ) | |
Stock-based compensation | — |
| | — |
| | 26,594 |
| | — |
| | — |
| | 26,594 |
| |
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 | ) | |
Conversion of liability-classified restricted shares upon vesting | — |
| | — |
| | 2,838 |
| | — |
| | — |
| | 2,838 |
| |
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 |
| |
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 |
| 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 |
| Cumulative effect adjustment related to the adoption of the leasing standard | | — | | | — | | | | — | | | 7,116 | | | — | | | 7,116 | |
Stock-based compensation | — |
| | — |
| | 45,697 |
| | — |
| | — |
| | 45,697 |
| Stock-based compensation | | — | | | — | | | | 45,697 | | | — | | | — | | | 45,697 | |
Exercise of vested options | 840,835 |
| | 1 |
| | 9,790 |
| | — |
| | — |
| | 9,791 |
| 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 |
| 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 | ) | 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 | ) | 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 | ) | Stock repurchase | | (3,102,407) | | | (3) | | | | — | | | (176,982) | | | — | | | (176,985) | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (886 | ) | | (886 | ) | Other comprehensive loss | | — | | | — | | | | — | | | — | | | (886) | | | (886) | |
Net income | — |
| | — |
| | — |
| | 95,894 |
| | — |
| | 95,894 |
| Net income | | — | | | — | | | | — | | | 95,894 | | | — | | | 95,894 | |
Balance as of December 31, 2019 | 118,342,772 |
| | $ | 119 |
| | $ | 642,628 |
| | $ | (227,414 | ) | | $ | (8,699 | ) | | $ | 406,634 |
| 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 | |
Cumulative effect of adoption of accounting standard changes | | Cumulative effect of adoption of accounting standard changes | | — | | | — | | | | (228,738) | | | 27,828 | | | — | | | (200,910) | |
Stock-based compensation | | Stock-based compensation | | — | | | — | | | | 139,280 | | | — | | | — | | | 139,280 | |
Exercise of vested options | | Exercise of vested options | | 994,456 | | | 1 | | | | 22,705 | | | — | | | — | | | 22,706 | |
| Purchase of capped calls, net of taxes | | Purchase of capped calls, net of taxes | | — | | | — | | | | (64,673) | | | — | | | — | | | (64,673) | |
Settlement of convertible senior notes, net of taxes | | Settlement of convertible senior notes, net of taxes | | 985,522 | | | 1 | | | | (424) | | | — | | | — | | | (423) | |
Vesting of restricted stock units, net of shares withheld | | Vesting of restricted stock units, net of shares withheld | | 818,442 | | | 1 | | | | (119,554) | | | — | | | — | | | (119,553) | |
Stock repurchase | | Stock repurchase | | (1,612,233) | | | (2) | | | | — | | | (302,772) | | | — | | | (302,774) | |
Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | | — | | | — | | | (80,965) | | | (80,965) | |
Net income | | Net income | | — | | | — | | | | — | | | $ | 493,507 | | | — | | | 493,507 | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | | 127,022,118 | | | $ | 127 | | | | $ | 631,762 | | | $ | 71,744 | | | $ | (75,014) | | | $ | 628,619 | |
The accompanying notes are an integral part of these Consolidated Financial Statementsconsolidated financial statements.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Cash flows from operating activities | | | | | |
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Stock-based compensation expense | 44,395 |
| | 38,231 |
| | 26,559 |
|
Depreciation and amortization expense | 48,031 |
| | 26,742 |
| | 27,197 |
|
Bad debt expense | 10,963 |
| | 4,124 |
| | 2,497 |
|
Foreign exchange (gain) loss | (5,708 | ) | | 5,997 |
| | (27,424 | ) |
Amortization of debt issuance costs | 2,006 |
| | 1,191 |
| | 463 |
|
Non-cash interest expense | 19,108 |
| | 10,968 |
| | 3,117 |
|
Interest (income) expense on marketable securities | (4,182 | ) | | (2,887 | ) | | 426 |
|
Loss on disposal of assets | 1,667 |
| | 136 |
| | 520 |
|
Asset impairment charges | — |
| | — |
| | 3,162 |
|
Deferred income taxes | (15,248 | ) | | (22,414 | ) | | (49,535 | ) |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (12,656 | ) | | 17,215 |
| | (8,826 | ) |
Funds receivable and seller accounts | (23,177 | ) | | 23,436 |
| | (13,477 | ) |
Prepaid expenses and other current assets | (14,156 | ) | | (4,785 | ) | | 3,024 |
|
Other assets | 4,045 |
| | 43 |
| | (28 | ) |
Accounts payable | (953 | ) | | 13,364 |
| | 2,837 |
|
Accrued and other current liabilities | 37,410 |
| | 23,079 |
| | (2,659 | ) |
Funds payable and amounts due to sellers | 23,177 |
| | (23,436 | ) | | 13,477 |
|
Deferred revenue | 191 |
| | 1,331 |
| | 434 |
|
Other liabilities | (3,887 | ) | | 9,099 |
| | 5,537 |
|
Net cash provided by operating activities | 206,920 |
| | 198,925 |
| | 69,101 |
|
Cash flows from investing activities | | | | | |
Cash paid for asset acquisition and intangible assets | (1,963 | ) | | (35,494 | ) | | — |
|
Acquisition of businesses, net of cash acquired | (270,409 | ) | | — |
| | — |
|
Purchases of property and equipment | (7,528 | ) | | (1,019 | ) | | (3,948 | ) |
Development of internal-use software | (7,750 | ) | | (19,537 | ) | | (9,208 | ) |
Purchases of marketable securities | (661,821 | ) | | (514,286 | ) | | (62,348 | ) |
Sales of marketable securities | 461,098 |
| | 284,943 |
| | 137,340 |
|
Net cash (used in) provided by investing activities | (488,373 | ) | | (285,393 | ) | | 61,836 |
|
Cash flows from financing activities | | | | | |
Payment of tax obligations on vested equity awards | (32,547 | ) | | (24,065 | ) | | (6,417 | ) |
Repurchase of stock | (176,985 | ) | | (134,647 | ) | | (10,301 | ) |
Proceeds from exercise of stock options | 9,791 |
| | 18,253 |
| | 33,838 |
|
Proceeds from issuance of convertible senior notes | 650,000 |
| | 345,000 |
| | — |
|
Payment of debt issuance costs | (11,904 | ) | | (9,962 | ) | | — |
|
Purchase of capped call | (76,180 | ) | | (34,224 | ) | | — |
|
Payments on finance lease obligations | (10,833 | ) | | (6,057 | ) | | (7,798 | ) |
Payments on facility financing obligation | — |
| | (10,164 | ) | | (5,883 | ) |
Other financing, net | 8,265 |
| | (128 | ) | | 3,116 |
|
Net cash provided by financing activities | 359,607 |
| | 144,006 |
| | 6,555 |
|
Effect of exchange rate changes on cash | (1,846 | ) | | (5,995 | ) | | (3,642 | ) |
Net increase in cash, cash equivalents, and restricted cash | 76,308 |
| | 51,543 |
| | 133,850 |
|
Cash, cash equivalents, and restricted cash at beginning of period | 372,326 |
| | 320,783 |
| | 186,933 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 448,634 |
| | $ | 372,326 |
| | $ | 320,783 |
|
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cash flows from operating activities | | | | | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Stock-based compensation expense | 139,910 | | | 65,114 | | | 44,395 | |
| | | | | |
Depreciation and amortization expense | 74,267 | | | 58,189 | | | 48,031 | |
Provision for expected credit losses | 16,031 | | | 15,033 | | | 10,963 | |
Foreign exchange (gain) loss | (14,071) | | | 7,349 | | | (5,708) | |
Amortization of debt issuance costs | 3,719 | | | 2,751 | | | 2,006 | |
Non-cash interest expense | 578 | | | 36,086 | | | 19,108 | |
Interest expense (income) on marketable securities | 3,154 | | | 2,729 | | | (4,182) | |
| | | | | |
| | | | | |
| | | | | |
Deferred (benefit) provision for income taxes | (88,952) | | | 2,202 | | | (15,248) | |
Loss on extinguishment of debt | — | | | 16,855 | | | — | |
Other non-cash (income) expense, net | (475) | | | (795) | | | 1,667 | |
| | | | | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (19,256) | | | (22,540) | | | (12,656) | |
Funds receivable and seller accounts | (83,941) | | | (90,141) | | | (23,177) | |
Prepaid expenses and other current assets | (44,186) | | | (16,963) | | | (14,156) | |
Other assets | (25,159) | | | 4,816 | | | 4,045 | |
Accounts payable | (14,169) | | | 14,550 | | | (953) | |
Accrued and other current liabilities | 84,789 | | | 146,634 | | | 37,410 | |
Funds payable and amounts due to sellers | 83,941 | | | 90,141 | | | 23,177 | |
Deferred revenue | 1,441 | | | 3,312 | | | 191 | |
Other liabilities | 40,423 | | | (5,612) | | | (3,887) | |
Net cash provided by operating activities | 651,551 | | | 678,956 | | | 206,920 | |
Cash flows from investing activities | | | | | |
Acquisition of businesses, net of cash acquired | (1,699,974) | | | — | | | (270,409) | |
Cash paid for asset acquisition and intangible assets | (1,937) | | | (880) | | | (1,963) | |
| | | | | |
Purchases of property and equipment | (11,248) | | | (1,445) | | | (7,528) | |
Development of internal-use software | (16,922) | | | (5,665) | | | (7,750) | |
Purchases of marketable securities | (418,518) | | | (499,237) | | | (661,821) | |
Sales and maturities of marketable securities | 590,630 | | | 495,848 | | | 461,098 | |
| | | | | |
Net cash used in investing activities | (1,557,969) | | | (11,379) | | | (488,373) | |
Cash flows from financing activities | | | | | |
| | | | | |
| | | | | |
Payment of tax obligations on vested equity awards | (118,167) | | | (47,716) | | | (32,547) | |
Repurchase of stock | (302,774) | | | (268,653) | | | (176,985) | |
Proceeds from exercise of stock options | 22,706 | | | 25,319 | | | 9,791 | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from issuance of convertible senior notes | 1,000,000 | | | 650,000 | | | 650,000 | |
Payment of debt issuance costs | (13,300) | | | (10,531) | | | (11,904) | |
Purchase of capped calls | (85,000) | | | (74,685) | | | (76,180) | |
Settlement of convertible senior notes | (43,900) | | | (137,168) | | | — | |
Payments on finance lease obligations | (8,864) | | | (9,211) | | | (10,833) | |
| | | | | |
| | | | | |
| | | | | |
Other financing, net | 2,048 | | | (8,073) | | | 8,265 | |
Net cash provided by financing activities | 452,749 | | | 119,282 | | | 359,607 | |
Effect of exchange rate changes on cash | (10,234) | | | 13,947 | | | (1,846) | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (463,903) | | | 800,806 | | | 76,308 | |
Cash, cash equivalents, and restricted cash at beginning of period | 1,249,440 | | | 448,634 | | | 372,326 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Supplemental cash flow disclosures: | | | | | |
Cash paid for interest | $ | 3,206 |
| | $ | 10,002 |
| | $ | 7,555 |
|
Cash paid for income taxes | $ | 2,084 |
| | $ | 966 |
| | $ | 1,003 |
|
Supplemental non-cash disclosures: | | | | | |
Stock-based compensation capitalized in development of capitalized software | $ | 1,302 |
| | $ | 2,252 |
| | $ | 807 |
|
Additions to development of internal-use software and property and equipment included in accounts payable and accrued expenses | $ | 1,148 |
| | $ | 1,211 |
| | $ | 956 |
|
Right-of-assets obtained in exchange for new lease liabilities: | | | | | |
Finance Leases | $ | 849 |
| | $ | 2,122 |
| | $ | 5,586 |
|
Consolidated Statements of Cash Flows(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Supplemental cash flow disclosures: | | | | | |
Cash paid for interest | $ | 6,054 | | | $ | 3,405 | | | $ | 3,206 | |
Cash paid for income taxes, net of refunds | $ | 94,160 | | | $ | 8,535 | | | $ | 2,084 | |
Supplemental non-cash disclosures: | | | | | |
Replacement share-based awards issued in conjunction with acquisitions | $ | 5,686 | | | $ | — | | | $ | — | |
Stock-based compensation capitalized in development of capitalized software and asset additions in exchange for liabilities | $ | 7,297 | | | $ | 2,852 | | | $ | 2,450 | |
| | | | | |
| | | | | |
Lease assets obtained in exchange for new lease liabilities | $ | 68,023 | | | $ | 3,183 | | | $ | 849 | |
| | | | | |
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 12—Debt” 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, |
| 2021 | | 2020 | | 2019 |
Beginning 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 | |
| | | | | |
Ending balance: | | | | | |
Cash and cash equivalents | $ | 780,196 | | | $ | 1,244,099 | | | $ | 443,293 | |
Restricted cash | 5,341 | | | 5,341 | | | 5,341 | |
Total cash and cash equivalents, and restricted cash | $ | 785,537 | | | $ | 1,249,440 | | | $ | 448,634 | |
|
| | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 |
Beginning 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 |
|
| | | | | |
Ending balance: | | | | | |
Cash and cash equivalents | $ | 443,293 |
| | $ | 366,985 |
| | $ | 315,442 |
|
Restricted cash | 5,341 |
| | 5,341 |
| | 5,341 |
|
Total cash, cash equivalents, and restricted cash | $ | 448,634 |
| | $ | 372,326 |
| | $ | 320,783 |
|
The accompanying notes are an integral part of these Consolidated Financial Statementsconsolidated 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 around the world. These marketplaces - which collectively create a “House of Brands” - share the Company’s mission, common levers for growth, similar business models, and a strong commitment to use the power of business and technology to strengthen communities and empower people. The Company’s primary marketplace, Etsy.com, is the global marketplacedestination for unique and creative goods. The Company generates revenue primarily from marketplace activities, including transaction, and listing, fees,and payments processing fees, and fees for optional seller services, which include on-site advertising services, and shipping label sales.services.
Basis of Consolidation
The Consolidated Financial Statementsconsolidated financial statements include the accounts of Etsy, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. On July 12, 2021, Etsy acquired all of the issued share capital of Depop Limited (“Depop”) pursuant to a share purchase; on July 2, 2021, Etsy acquired all the outstanding shares of Elo7 Serviços de Informática S.A. (“Elo7”) by means of a merger; and on August 15, 2019, Etsy acquired all of the issued and outstanding capital stock of Reverb Holdings, Inc. (“Reverb”). The financial results of Depop, Elo7, and Reverb have been included in Etsy’s Consolidated Financial Statementsconsolidated financial statements from the datedates of acquisition. See “Note 5—Business Combinations.”
Reclassifications
Certain items in the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation reflected in the Consolidated Financial Statements. Specifically, the Company reclassified $4.0 million and $3.3 million previously included in Other revenue to Marketplace revenue (see “Note 2—Revenue”) for the years ended December 31, 2018 and 2017, respectively, to conform to the current year presentation.
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 managementthe Company 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, liabilities,accompanying 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.judgments. The accounting estimates that require management’s most difficult and subjective judgments include: leases, including determiningstock-based compensation; income taxes; the incremental borrowing rate; income taxes, including the accounting for uncertain tax positions;valuation of acquired intangible assets, developed technology, and goodwill as part of purchase price allocations for business combinations,combinations; valuation of the acquired intangibles purchased in a business combination; valuation of goodwill and intangible assets; stock-based compensation;goodwill; leases; and fair value of convertible senior notes. As of December 31, 2021, the effects of the ongoing COVID-19 pandemic on the Company’s business, results of operations, and financial instruments. The Company evaluates itscondition continue to evolve. As a result, many of the Company’s estimates and judgments on an ongoing basisrequire increased judgment and revises them when necessary. Actual resultscarry a higher degree of variability and volatility. As additional information becomes available, the Company’s estimates may differ from the original or revised estimates.change materially in future periods.
Revenue Recognition
The Company’s revenue is diversified; generated from a mix of marketplace activities and other optional services the Company provides to sellers to help sellers tothem 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, theThe Company’s revenues are recognized on a gross basis, with the primary exception being shipping label revenue, which is recorded on a net basis. Sales and usage-based taxes are excluded from revenues.
Etsy Marketplace revenue: As members of the EtsyEtsy.com 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 marketplace 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 includeand the 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and Etsy Payments fees for processing payments, including foreign currency payments. On July 16, 2018, the Company increased the seller transaction fee from 3.5% to 5% of each completed transaction,
Etsy, Inc.
Notes to Consolidated Financial Statements
and now applies it to the cost of shipping in addition to the cost of the item. Etsy Payments processing fees vary between 3.0% 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. The Company earns additional fees on transactions in which currency conversions are performed.
The listing fee is recognized ratably over a four-month listing period, unless the item is sold or the seller re-lists it, at which time any remaining listing fee is recognized. The transaction fee and Etsy Payments fees are recognized when the corresponding transaction is consummated. Listing fees are nonrefundable whilenonrefundable. Variable fees include transaction fees and payments processing fees. Etsy Payments fees are recorded net of refunds.
Marketplace revenue also includes revenue generated through our commercial partnerships, which was recorded in its own Other revenue line prior to the fourth quarter of 2019.
Reverb Marketplace revenue: The Reverb sellermarketplace sellers pay a 5% transaction fee is a variable fee, which is 3.5% offor each completed transaction, including bothinclusive of shipping fees charged. In May 2020, the costEtsy marketplace started charging sellers for Offsite Ads, whereby sellers pay a transaction fee of 12% or 15% of the item andvalue of a sale based on the shipping. There are no Reverb listing fees. Variable fees also include payments fees for processing payments, including foreign currency payments.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 marketplace sellers pay Etsy Payments processing fees, which typically vary between 2.5% - 2.7%3.0% and 4.5% of an item’s total sale price, including shipping, plus a flat fee per order dependingthat depends on the currencycountry in which a listingseller’s bank account is denominated.located, plus an additional transaction fee for
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Etsy, Inc.
Notes to Consolidated Financial Statements
foreign currency payments. The transaction fee, Offsite Ads transaction fee, and Etsy Payments processing fees are recognized when the corresponding transaction is consummated, and are recorded net of refunds.
Reverb, Depop, and Elo7 marketplace revenue is comprised of seller transaction fees and payments processing fees, which are recognized when the transaction is consummated, and are recorded net of refunds. Reverb sellers, Elo7 sellers, and Depop sellers pay a 5%, 7%, and 10% transaction fee, respectively, for each completed transaction, inclusive of shipping fees charged.
Services revenue: Services revenue is derived from optional services offered to Etsy sellers, which primarily include on-site advertising services and Etsy Shipping Labels.
shipping labels. Each service below represents an individual obligation that the Company must perform when an Etsya seller chooses to use the service.
Revenue from Promoted Listings, Etsy.com’s on-siteOn-site advertising service, consistsservices consist of cost-per-click fees an Etsy seller pays for prominent placement of the seller’sher listings in search results in the Etsy.com 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 ListingThese fees are nonrefundable and are charged to a seller’s Etsy bill when the Promoted Listinglisting is clicked, at which time revenue is recognized. InOn-site advertising services, beginning in the second quarter of 2020 are referred to as “Etsy Ads,” and prior to the third quarter of 2019 were referred to as “Promoted Listings.” From the third quarter of 2019 to the beginning of the second quarter of 2020, Etsy offered a combined “Etsy Ads” offering. Under this offering, Etsy streamlined Promoted Listings and Google Shopping, an off-site marketing tool for Etsy sellers, into 1 unified ad platform, called Etsy Ads, wherein which Etsy sellers cancould set a budget which allowsthat allowed Etsy to allocate that budget between channels, targeting optimal return on seller spend. Due to this new offering, Etsy no longer offered its Promoted Listings service as a standalone advertising service after September 30, 2019. Revenue from Etsy Ads consiststhis unified ad platform consisted of cost-per-click fees, which arewere nonrefundable and arewere charged to a seller’s Etsy bill when the ad is clicked, at which time revenue is recognized.was clicked. The revenue that the Company recognizesrecognized related to Etsy Ads isthe unified ad platform was recorded on a gross basis in Services revenue with an offsetting expense recorded in cost of revenue. During the second quarter of 2020, Etsy transitioned from the combined “Etsy Ads” on-site and offsite advertising offering to 2 separate advertising offerings: on-site advertising services referred to as “Etsy Ads” as described above (and formerly referred to as “Promoted Listings”) and reported in Services revenue, and Offsite Ads as reported in Marketplace revenue and referred to above in Marketplace revenue.
Revenue from Etsy Shipping Labelsshipping 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 Labelshipping label revenue when an Etsy seller purchases a shipping label. The Company recognizes Etsy Shipping Label revenue on a net basis as it is an agent in this arrangement and does not take control of shipping labels prior to transferring the labels to the Etsy Seller. Etsy Shipping Label revenue is recorded net of refunds.
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 we incur in purchasing those shipping labels. 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 ReverbEtsy seller. ShippingEtsy shipping label revenue is recorded net of refunds.
The Reverb and Elo7 marketplaces offer on-site advertising services. They, as well as the Depop marketplace, also offer shipping labels services. Each service represents an individual obligation that the Company must perform when a seller chooses to use the service. Advertising revenue is nonrefundable, while shipping label revenue is recorded net of refunds.
Etsy, Inc.
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 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 and its data centers,platforms, including employee-related costs,employee compensation-related expenses, hosting and bandwidth costs, and depreciation and amortization. With the shift to Etsy Ads inthe 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 OtherServices revenue, arewere 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 expenses, which largely includes digital marketing and indirect employee-relatedtelevision ad and digital video expenses. Marketing expenses also include employee compensation-related expenses to support ourthe Company’s marketing initiatives. Direct marketing includes digital marketing, brand marketing, televisioninitiatives and video, public relations and communications, market research, marketing partnerships, andamortization expense related to acquired customer relationship management. 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, affiliate programs, display advertising, and social channels, which are focused on buyer acquisition and retargeting.trademark intangible assets. 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
expenses on the Consolidated Statements of Operations, were $175.2$559.3 million, $129.1$442.2 million, and $78.4$175.2 million in the years ended December 31, 2021, 2020, and 2019, 2018, and 2017, respectively.
Product Development
Product development expenses consist primarily of employee-relatedemployee compensation-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 ourthe Company’s existing technology.
Stock-Based Compensation
The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718—Compensation—Stock Compensation (“ASC 718”). StockService-based stock options and restricted stock units (“RSUs”) are awarded to employees and members of the Company’s Board of Directors and performance-based restricted stock units (“PBRSUs”) are awarded to employees. All such awards are measured at fair value at each grant date.
The PBRSUs include financial performance-based restricted stock units (“Financial PBRSUs”) and total shareholder return performance-based restricted stock units (“TSR PBRSUs”), both of which have performance and service vesting requirements. The Company recognizes forfeitures as they occur.
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, 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. Expected volatilities areStarting in the second quarter of 2021, the Company updated certain assumptions used to determine the fair value of its stock options under the Black-Scholes option-pricing model, including the expected volatility and expected term assumptions. Given the Company’s sufficient trading history as of the second quarter of 2021, the Company calculates expected volatility based solely on implied volatilities from market comparisonsthe historical volatility of Etsy’s stock price observations over a period equivalent to the expected term of the stock option grants. Prior to the second quarter of 2021, the Company estimated expected volatility by taking the average historical price volatility for Etsy and certain publicly traded companies, and other factors. Theindustry peers. Further, given that the Company has sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of its stock options, beginning in the second quarter of 2021, the Company estimates its expected term using historical option exercise behavior and expected post-vest cancellation data, averaged with an assumption that recently granted has been determined usingoptions will be exercised ratably from vesting to the expiration of the stock option. Prior to the second quarter of 2021, the Company used the simplified method which usesto calculate the midpoint betweenexpected term for awards issued to employees or members of the vesting date and the contractual term.Company’s Board of Directors. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq on the grant date. Additionally, the fair value of the Financial PBRSUs is determined using a probability assessment and the fair value of the TSR PBRSUs with market conditions is determined using a Monte-Carlo simulation model.
The requisite service period for stock options and RSUs is generally four years from the date of grant. Thegrant date. For PBRSUs, the Company recognizes forfeitures as they occur.
The Company accounted for stock-based compensation arrangements related toexpenses on a straight-line basis over the A Little Market (“ALM”) acquisition in restricted shares, subject to a put option that allows the holderlonger of the shares to putderived, explicit, or implicit service period. As of interim and annual reporting periods, 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 StatementFinancial PBRSUs stock-based compensation expense is adjusted based on expected achievement of Operations. Compensationperformance targets, while TSR PBRSUs stock-based 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
not adjusted.
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 StatementStatements 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
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 incomerecords tax expense 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 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 (Loss) 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 shares of common sharesstock 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. Net income inPotentially dilutive shares, which are based on the dilutedweighted-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 calculationof common stock attributable to common stockholders when their effect is adjusted for income or loss from fair value adjustments on instruments accounted for as liabilities, but which may be settled in shares. The dilutive effect of outstanding options and stock-based compensation awards is reflected in diluted net income per share by application of the treasury stock and if-converted methods. Since the Company expects to settle in cash the principal outstanding under the 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”) (see “Note 13—Debt”), it uses the treasury stock method when calculating the potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The Company uses the if-converted method when calculating the dilutive effect of the 0% Convertible Senior Notes due 2023 (the “2018 Notes”) for the reporting periods starting in the third quarter of 2019, and used the treasury stock method for previous reporting periods.dilutive.
Etsy, Inc.
Notes to Consolidated Financial Statements
The calculation of diluted net income (loss) per share excludes all anti-dilutive shares of 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.
stock.
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 makerChief Operating Decision Maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The Company defines the term “chief operating decision maker” to beCompany’s CODM is its chief executive officer.Chief Executive Officer. The Company has determined it has 24 operating segments, Etsy, Reverb, Depop, and Reverb,Elo7, 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 corporate bonds, commercial paper, and certificates of deposit 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 corporate bonds and U.S. Government and agency securities corporate bonds, and certificates of deposit with original maturities of greater than twelve months but less than 37 months when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated income tax provisions or benefits.(expense) benefit.
Restricted Cash
The following table providesCompany classifies any cash andbalances that are legally restricted as to withdrawal or usage as restricted cash equivalents, and short- and long-term investments withinon the Consolidated Balance SheetsSheets. In connection with the Company’s noncancellable Brooklyn lease agreement, which expires in 2039, the Company established a $5.3 million collateral account, which is reflected in the restricted cash balance as of the dates indicated (in thousands):December 31, 2021 and 2020.
|
| | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
Cash and cash equivalents | $ | 443,293 |
| | $ | 366,985 |
|
Short-term investments | 373,959 |
| | 257,302 |
|
Long-term investments | 89,343 |
| | — |
|
Total cash, cash equivalents, and short- and long-term investments | $ | 906,595 |
| | $ | 624,287 |
|
104
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Etsy, Inc.
Notes to Consolidated Financial Statements
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 accountsamounts due to sellers approximates carrying value due to the immediate or short-term maturity associated with these instruments.instruments or the Company’s ability to liquidate these instruments at short notice with minimal penalties.
InPrior to the adoption of ASU 2020-06 in the first quarter of 2021, 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 0.25% Convertible Senior notes due 2028 (the “2021 Notes”), the 2020 Notes, and the 2019 Notes, the “Notes”), and the extinguishment of the 2018 Notes, discussed in “Note 13—12—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.
Etsy, Inc.
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. Following the adoption of ASU 2020-06, there is no bifurcation of the liability and equity components of the Notes. Subsequent to their issuance, the Notes are not measured at fair value in the Consolidated Financial Statements
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 additional information.
Accounts Receivable and AllowanceProvision for Doubtful AccountsExpected 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 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 sellers. Receivables are written off once they are deemed uncollectible. Estimates of uncollectible accounts receivable are recorded to general and administrative expense. See “Note 2—Revenue” for additional information on
Payment terms: On the first day of every month, Etsy sellers receive a statement outlining the previous month’s charges. Payment is due within 15 days of the date of the monthly statement. The payment terms related to the Company’s accounts receivable balances.for Reverb, Depop, and Elo7 are also short-term in nature.
The following table summarizesprovides a rollforward of the allowance activity duringfor credit losses that is deducted from the periods indicatedamortized cost basis of accounts receivable to present the net amount expected to be collected (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Balance as of the beginning of period | $ | 9,757 | | | $ | 5,033 | | | $ | 4,720 | |
| | | | | |
Provision for expected credit losses | 16,031 | | | 15,033 | | | 10,963 | |
Amounts written off, net of recoveries | (18,058) | | | (10,309) | | | (10,650) | |
Balance as of the end of period | $ | 7,730 | | | $ | 9,757 | | | $ | 5,033 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Balance as of the beginning of period | $ | 4,720 |
| | $ | 2,687 |
| | $ | 1,999 |
|
Bad debt expense | 10,963 |
| | 4,124 |
| | 2,497 |
|
Write-offs, net of recoveries and other adjustments | (10,650 | ) | | (2,091 | ) | | (1,809 | ) |
Balance as of the end of period | $ | 5,033 |
| | $ | 4,720 |
| | $ | 2,687 |
|
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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 cashThe receivable amount recorded to funds receivable and related receivable represent the total amount due to sellers, and as such a liability forseller accounts is the same amount is recorded to the funds payable and amounts due to sellers, the latter of which represents the total amount due to sellers.
For the Depop marketplace only, the amounts received from buyers which is owed to the sellers is paid to the sellers at point of sale, and therefore no funds receivable and seller accounts and no funds payable and amounts due to sellers are recorded related to the Depop marketplace.
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 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 sheetConsolidated Balance Sheet and the resulting gain or loss is reflected in the Consolidated StatementsStatement 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 Adopted 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, capitalizationCapitalization 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. 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
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 ourits 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. NaN impairment of capitalized website development and internal-use software assets was recorded during the years ended December 31, 2019 and 2018. The Company 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, net within the Consolidated Balance Sheets.
Business Combinations
In accordance with the guidance for business combinations, we determine whether a transaction is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. The Company accounts for business combinations using the acquisition method of accounting. If the assets acquired are not a business, we accountthe Company accounts for the transaction as an asset acquisition. Under both methods, the purchase price is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the 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.
Determining the fair value of assets acquired and liabilities assumed requires 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 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. Our estimates associated with the accounting for business combinations may change as additional information becomes available regarding the assets acquired and liabilities assumed. Any change in facts and circumstances that existed as of the acquisition date and impacts our preliminary estimates is recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of fair value of assets and liabilities whichever is earlier the adjustments will affect our earnings.
Acquisition-related expenses represent expenses incurred by the Company into effect a business combination, including expenses such as finder’s fees and advisory, legal, accounting, valuation, and other professional or consulting fees, and 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.incurred or the services are rendered.
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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 the Company has 2 operating segments, which qualify for aggregation as 1 reportable segment, for purposes of allocating resources and evaluating financial performance. As a result, the Company has determined it has 2 reporting units. The Company 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. Management has determined that the Company has 4 operating segments, Etsy, Reverb, Depop, and Elo7, which qualify for aggregation as 1 reportable segment, for purposes of allocating resources and evaluating financial performance, and each operating segment is determined to be a 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. 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
The Company completed a qualitative analysis for the Etsy reporting unit and a quantitative analysis for the Reverb reporting unit during the fourth quarter of 2019. NaN impairment of goodwill was recorded during the three years ended December 31, 2019, 2018, and 2017.
Intangible Assets
Finite intangible assets are amortized using the straight-line method over the estimated useful life of the asset. The estimated useful life of acquired technology is three years. The estimated useful lives of acquired customer relationships and trademarks are fifteen 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. NaN impairment of intangible assets was recorded during the years ended December 31, 2019, 2018, and 2017.
Leases
The Company’s lease arrangements generally include real estate and computer equipment assets. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. At lease commencement, the Company evaluates 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 SheetSheets 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.Sheets. Lease obligations and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The components of a lease should be split into three categories: lease components, including land, building, or other similar components; non-lease components, including common area maintenance, maintenance, consumables, or other similar components; and non-components, including property taxes, insurance, or other similar components. However, the Company has elected to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis.
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.
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Etsy, Inc.
Notes to Consolidated Financial Statements
Recently Issued Accounting Pronouncements
In June 2016,October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13Accounting Standards Update (“ASU”) 2021-08——Financial Instruments—Credit LossesBusiness Combinations (Topic 326)805)—Measurement of Credit Losses on Financial InstrumentsAccounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, which requirecontract liabilities acquired in 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 expectedbusiness combination to be collected.recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification Topic 606—Revenue from Contracts with Customers (“ASC 606”). Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. This ASU will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC 606. The amendments in this ASU do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with ASC 606, such as refund liabilities, or in a business combination, such as customer-related intangible assets and contract-based intangible assets. The new guidance is effective for annual and interim periods beginning after December 15, 2019,2022. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. This update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact that this new guidance may have on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In November 2021, the FASB issued ASU 2021-10—Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to make annual disclosures about transactions with a government. This could include various forms of government assistance, but excludes transactions in the scope of specific US GAAP, such as tax incentives accounted for under Accounting Standards Codification Topic 740, Income Taxes. For transactions in the scope of the new standard, business entities will need to provide information about the nature of the transaction, including the entity’s related accounting policy, the financial statement line items affected and earlythe amounts reflected in the current period financial statements, as well as any significant terms and conditions. The new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021. Early adoption is permitted. This update can be applied prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those transactions. The Company will adoptearly adopted this standard in the firstfourth quarter of 2020, and2021. The effect of this standard was not material to the adoption is not expected to have a significant impact on itsCompany’s Consolidated Financial Statements.
Etsy, Inc.
Notes to Consolidated Financial Statements
In August 2018,2020, the FASB issued ASU 2018-152020-06——Intangibles—GoodwillDebt—Debt with Conversion and Other—Internal-Use SoftwareOther Options (Subtopic 350-40)470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Customer’s Accounting for Implementation Costs IncurredFor Convertible Instruments and Contracts in a Cloud Computing Arrangement That Is a Service Contract,an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models previously required under 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. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which alignswill permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the requirements for capitalizing implementation costs incurreddiluted net income per share calculation in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2019,2021, 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 adopt this standard in the first quarter of 2020. Upon adoption of the standard, the Company’s Consolidated Financial Statements will be impacted by the timing of amortization of the integration costs related to cloud computing arrangements.
In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard will be effective for the Company in the first quarter of 2021, although early adoption is permitted. The Company is currently considering the date it will adopt this standard, and the adoption is not expected to have a significant impact on its Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02—Leases (Topic 842), and additional changes, modifications, clarifications, or interpretations related to this guidance thereafter, which require a reporting entity to recognize ROU assets and lease liabilities on the balance sheet for operating leasesto increase the transparency and comparability. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted this standard, in the first quarter of 2019, effective as of January 1, 2019, using the2021, on a modified retrospective approach utilizing transition guidance introduced in ASU 2018-11—Leases: Targeted Improvements, and elected the ‘package of practical expedients’ permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease identification, classification, and initial direct costs. The Company did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The Company also elected to continue to recognize lease payments related to short-term leases as an expense on a straight-line basis over the lease term. Upon adoption, the Company recognized new ROU assets and lease obligations on the Consolidated Balance Sheet for its operating leases of $25.4 million and $27.8 million, respectively. Additionally, upon adoption the Company renamed its capital lease obligations, current and capital lease obligations, net of current to finance lease obligations, current and finance lease obligations, net of current portion, respectively, in the Consolidated Balance Sheets.
In 2014 the Company applied build-to-suit accounting treatment to its headquarters lease in Brooklyn, New York, as the Company was deemed the accounting owner of the construction project because of the Company’s involvement in the build-out of the space. Upon transition, the Company derecognized the facility financing obligation and related building assets recorded as a result of the failed sale and leaseback transactions and recorded any difference as a cumulative-effect adjustment to accumulated deficit.basis. The adoption of this standard had a material impacteffect on the Company’s financial position but did notConsolidated Financial Statements. The most significant effects related to the Notes, and is not expected to significantly affectincluded derecognition of the unamortized debt discount, which was 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 issuance date of the Notes outstanding, resulting in a reduction in additional paid-in capital of approximately $229 million, net of taxes; derecognition of deferred tax liabilities of approximately $63 million; and reversal of the cumulative debt discount recognized as interest expense in the Company’s resultsConsolidated Statements of operations. The Company has derecognizedOperations since the existing facility financing obligation and existing building asset for sale-leaseback transactions that currently do not qualify for sale accountingdate of $60.0 million and $51.1 million, respectively, and $22.1 million was reclassified from building to leasehold improvements and will be amortized over the remaining termissuance of each of the lease. The Company recognizedNotes to the period ending December 31, 2020, resulting in a gaindecrease of $9.3 million, offset by a tax impact of $2.2 million associated with this change through accumulated deficit as of January 1, 2019, with a net decrease to accumulated deficit of $7.1approximately $28 million, net of taxes. The Company also had a reduction in interest expense due to the adoption of ASU 2020-06 as the debt discount has been derecognized and, recognized a new ROU asseteffective January 1, 2021, there is no amortization of $66.7 million and a lease liability in the same amount ondebt discount. The Company did not incur any impact to liquidity or cash flows. When calculating net income per share of common stock attributable to common stockholders, the Consolidated Balance Sheets forCompany uses the associated lease, which is accounted forif-converted method as a financing lease.
required under ASU 2020-06 to determine the dilutive effect of the Notes.
Etsy, Inc.
Notes to Consolidated Financial Statements
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, |
| 2021 | | 2020 | | 2019 |
Marketplace revenue | $ | 1,745,824 | | | $ | 1,303,126 | | | $ | 593,646 | |
Services revenue | 583,290 | | | 422,499 | | | 224,733 | |
Revenue | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Marketplace revenue (1) | $ | 593,646 |
| | $ | 444,765 |
| | $ | 329,362 |
|
Services revenue | 224,733 |
| | 158,928 |
| | 111,869 |
|
Revenue | $ | 818,379 |
| | $ | 603,693 |
| | $ | 441,231 |
|
| |
(1) | Other revenue for the years ended December 31, 2019, 2018, and 2017 has been reclassified and presented within Marketplace revenue. Comparative periods have been reclassified to conform to current period presentation. |
See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies —RevenuePolicies—Revenue Recognition” for additional information on revenue recognition.
Payment terms
Etsy
As See “Note 1—Basis of November 13, 2018,Presentation and Summary of Significant Accounting Policies—Accounts Receivable and Provision for Etsy sellers using Etsy Payments, all charges, including listing fees, transaction 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 electronicallyExpected Credit Losses” for additional information 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.terms.
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
For most transactions, Reverb buyers use a credit card to pay for the merchandise or 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.
Contract balances
Deferred revenues
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, 2019 that was included in the deferred balance at the beginning of the period was $7.5 million.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 3—Income Taxes
The following are the domestic and foreign components of the Company’s income before income taxes (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Domestic | $ | 14,544 |
| | $ | 36,157 |
| | $ | (16,583 | ) |
Foreign | 66,102 |
| | 18,921 |
| | 48,848 |
|
Income before income taxes | $ | 80,646 |
| | $ | 55,078 |
| | $ | 32,265 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
United States | $ | 274,354 | | | $ | 206,481 | | | $ | 14,544 | |
International | 197,300 | | | 159,228 | | | 66,102 | |
Income before income taxes | $ | 471,654 | | | $ | 365,709 | | | $ | 80,646 | |
The income tax benefit(benefit) provision is comprised of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Current: | | | | | |
Federal | $ | (3,967 | ) | | $ | 709 |
| | $ | (6,397 | ) |
State | 1,053 |
| | (578 | ) | | 79 |
|
Foreign | 352 |
| | 600 |
| | 476 |
|
Total current | (2,562 | ) | | 731 |
| | (5,842 | ) |
Deferred: | | | | | |
Federal | (19,734 | ) | | (3,343 | ) | | (34,948 | ) |
State | (1,564 | ) | | 3,496 |
| | (8,778 | ) |
Foreign | 8,612 |
| | (23,297 | ) | | 33 |
|
Total deferred | (12,686 | ) | | (23,144 | ) | | (43,693 | ) |
Total income tax benefit | $ | (15,248 | ) | | $ | (22,413 | ) | | $ | (49,535 | ) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current: | | | | | |
U.S. Federal | $ | 23,118 | | | $ | 4,854 | | | $ | (3,967) | |
U.S. State | 12,754 | | | 3,953 | | | 1,053 | |
International | 31,227 | | | 5,455 | | | 352 | |
Total current | 67,099 | | | 14,262 | | | (2,562) | |
Deferred: | | | | | |
U.S. Federal | (53,328) | | | (7,684) | | | (19,734) | |
U.S. State | (14,843) | | | (4,543) | | | (1,564) | |
International | (20,781) | | | 14,428 | | | 8,612 | |
Total deferred | (88,952) | | | 2,201 | | | (12,686) | |
Total income tax (benefit) provision | $ | (21,853) | | | $ | 16,463 | | | $ | (15,248) | |
For the years ended December 31, 2019, 20182021, 2020 and 2017,2019, the Company recorded a benefit foran income taxestax (benefit) provision of $15.2$(21.9) million, $22.4$16.5 million, and $49.5$(15.2) million or an effective tax rate of (18.9)(4.6)%, (40.7)%4.5%, and (153.5)(18.9)%, respectively.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the income tax benefit(benefit) provision at the U.S. federal statutory income tax rate to the Company’s total income tax benefit(benefit) provision is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Income tax provision at the federal statutory rate (a) | $ | 16,936 |
| | $ | 11,566 |
| | $ | 11,308 |
|
State and local income taxes net of federal benefit | 973 |
| | 3,839 |
| | (691 | ) |
Foreign income tax rate differential | (5,454 | ) | | (298 | ) | | (11,878 | ) |
Stock-based compensation | (16,281 | ) | | (11,717 | ) | | (12,584 | ) |
Research and development credit | (9,864 | ) | | (4,115 | ) | | (1,098 | ) |
U.S. tax reform (b) | (4,197 | ) | | 3,897 |
| | (31,063 | ) |
Non-deductible expenses | 1,784 |
| | (329 | ) | | 168 |
|
Uncertain tax positions | 380 |
| | 382 |
| | 789 |
|
Change in valuation allowance (c) | — |
| | (28,733 | ) | | (4,673 | ) |
Return to provision adjustment | 500 |
| | 3,293 |
| | 167 |
|
Other | (25 | ) | | (198 | ) | | 20 |
|
Total income tax benefit | $ | (15,248 | ) | | $ | (22,413 | ) | | $ | (49,535 | ) |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Income tax provision at the federal statutory rate | $ | 99,047 | | | $ | 76,799 | | | $ | 16,936 | |
State and local income taxes net of federal benefit | 11,134 | | | 7,693 | | | 973 | |
Foreign income tax rate differential | (26,215) | | | (13,193) | | | (5,454) | |
Stock-based compensation | (83,207) | | | (45,391) | | | (16,281) | |
Research and development credit | (23,396) | | | (15,156) | | | (9,864) | |
U.S. tax reform (1) | (5,155) | | | 3,923 | | | (4,197) | |
Non-deductible expenses | 833 | | | 1,719 | | | 1,784 | |
| | | | | |
Non-deductible acquisition costs (2) | 5,643 | | | — | | | 274 | |
Other (2) | (537) | | | 69 | | | 581 | |
Total income tax (benefit) provision | $ | (21,853) | | | $ | 16,463 | | | $ | (15,248) | |
(a) The income tax provision at the U.S. federal statutory rate is computed using 21% in 2019 and 2018 and 35% in 2017. Refer to footnote (b) below.
Etsy, Inc.
Notes to Consolidated Financial Statements
(b) On December 22, 2017, the U.S. government enacted the TCJA, as described above,Tax Cuts and Jobs Act (“TCJA”) 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) Global Intangible Low-Taxed Income (“GILTI”),(b) GILTI, a new tax on worldwide income, and (3)(c) Foreign Derived Intangible Income (“FDII”), a deduction provided with respect to certain foreign earned income. Effective January 1, 2018, the Company isbecame subject to several provisions of the TCJA including computations under GILTI and FDII.
For the year ended December 31, 2017, primarily as a result of the permanent change in U.S. corporate income tax rate, the Company recognized a net income tax benefit of $31.1 million associated with the TCJA.
For theall years ended December 31, 2019 and 2018,presented, the Company has accounted for the impact of the new TCJA provisions, as well as any adjustments with respect to the re-measurement of its deferred taxes if applicable, as part of its income tax benefit using the currently available regulations and technical guidance on the interpretations of the TCJA. The Company has elected to account for GILTI as a period cost. The Company is not currently subject to the 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 Internal Revenue Service (“IRS”).
(2)Certain prior year amounts, which are not material, have been reclassified to conform to current year presentation.
(c) For the year ended December 31, 2018, the Company released valuation allowance recorded against deferred tax assets in certain foreign jurisdictions as it had achieved three years
Table of cumulative pre-tax income.Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
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, |
| 2019 | | 2018 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 19,599 |
| | $ | 13,347 |
|
Research and development credit carryforwards | 13,133 |
| | 7,567 |
|
Lease liability (a) | 18,666 |
| | — |
|
Stock-based compensation expense | 7,642 |
| | 6,623 |
|
Excess tax basis in intangible assets | 3,572 |
| | 12,109 |
|
Accrued bonus | 4,065 |
| | 1,049 |
|
Deferred rent (a) | — |
| | 529 |
|
Other deferred tax assets | 3,944 |
| | 1,858 |
|
Total deferred tax assets | 70,621 |
| | 43,082 |
|
Less: valuation allowance | 883 |
| | 1,673 |
|
Total net deferred tax asset | 69,738 |
| | 41,409 |
|
| | | |
Deferred tax liabilities: | | | |
Excess book basis in intangible assets | (39,500 | ) | | (362 | ) |
Restructuring liability | (29,635 | ) | | (33,730 | ) |
Convertible debt | (22,839 | ) | | (7,283 | ) |
Right-of-use asset (a) | (17,596 | ) | | — |
|
Depreciation (a) | (10,328 | ) | | (6,933 | ) |
Other deferred tax liabilities | (80 | ) | | (92 | ) |
Total deferred tax liabilities | (119,978 | ) | | (48,400 | ) |
Net deferred tax liabilities | $ | (50,240 | ) | | $ | (6,991 | ) |
(a) As part of the Company’s adoption of ASC 842 beginning in 2019, the Company recorded adjustments to the GAAP basis of certain assets and liabilities and established other assets and liabilities (i.e., right-of-use asset and lease liability). The net adjustment was recorded as a retrospective adjustment to retained earnings. The adoption of ASC 842 does not change the Company’s tax basis in these assets and liabilities. However, as a result of the adoption, an adjustment was recorded to the historic deferred taxes,
Etsy, Inc.
Notes to Consolidated Financial Statements
through retained earnings, to account for the change in GAAP basis as well as establishing deferred taxes on the newly established right-of-use assets and lease liabilities.
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 48,689 | | | $ | 3,087 | |
Research and development credit carryforwards | 367 | | | 10,925 | |
Convertible debt | 47,142 | | | — | |
Depreciation | 47,055 | | | — | |
Lease liability | 35,871 | | | 17,259 | |
Stock-based compensation expense | 19,319 | | | 9,616 | |
Accrued bonus | 11,850 | | | 8,592 | |
Excess tax basis in intangible assets | 1,585 | | | 1,223 | |
Other deferred tax assets | 14,651 | | | 4,645 | |
Total deferred tax assets | 226,529 | | | 55,347 | |
Less: valuation allowance | 1,834 | | | 1,398 | |
Total net deferred tax asset | 224,695 | | | 53,949 | |
| | | |
Deferred tax liabilities: | | | |
Excess book basis in intangible assets | (173,097) | | | (37,155) | |
Right-of-use asset | (34,612) | | | (16,092) | |
Restructuring liability | — | | | (23,985) | |
Convertible debt | — | | | (30,632) | |
Depreciation | — | | | (4,210) | |
Other deferred tax liabilities | (607) | | | (241) | |
Total deferred tax liabilities | (208,316) | | | (112,315) | |
Net deferred tax assets (liabilities) | $ | 16,379 | | | $ | (58,366) | |
The Company has not recorded deferred income taxes and withholding taxes with respect to undistributed earnings from itscertain non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. The amount of undistributed earnings of non-U.S. subsidiaries considered to be indefinitely reinvested amounted to approximately $0.2 billion at December 31, 2019, as well as2021. The estimate of the related deferred incomeunrecognized tax liabilities, if any, is not material.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2019,2021, the Company had the following operating loss and tax credit carryforwards available to offset taxable income in future years:years (in thousands):
|
| | | | | |
| December 31, 2019 | | Expiration Period |
U.S. Federal net operating loss carryforwards | $ | 30,403 |
| | 2035-Unlimited |
U.S. Federal credit carryforwards | 13,054 |
| | 2035-2039 |
U.S. State net operating loss carryforwards | 21,150 |
| | 2027-2039 |
U.S. State credit carryforwards | 184 |
| | 2020-2024 |
Non-U.S. net operating loss carryforwards | 91,440 |
| | Unlimited |
| | | | | | | | | | | |
| December 31, 2021 | | Expiration Period |
U.S. Federal credit carryforwards | $ | 133 | | | 2038-2041 |
U.S. State net operating loss carryforwards | 2,300 | | | 2034-Unlimited |
U.S. State credit carryforwards | 681 | | | 2022-2031 |
Non-U.S. net operating loss carryforwards | 190,161 | | | Unlimited |
Utilization of the net operating losses (“NOLs”) is dependent on generating sufficient taxable income from ourthe Company’s operations in each of the respective jurisdictions to which the NOLs relate, while taking into account tax filing methodologies and limitations and/or restrictions on ourthe Company’s ability to use them. TheA significant component of the Company’s U.S. federalNon-U.S. NOLs were acquired as part of the acquisition of Reverb and are subject toDepop. Certain U.K. tax laws impose limitations as promulgated under Section 382on the utilization of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 of the Code limits the amount ofthese NOLs that we can use on an annual basis to offset consolidated U.S. taxable income. Theby any other entity. All NOLs are also subject to review by relevant tax authorities in the 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.
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, the Company achieved three years of cumulative pre-tax income in certain of its foreign jurisdictions, management determined that sufficient positive evidence existed as of December 31, 2018, to conclude that was more likely than not that deferred tax assets of $23.4 million will be utilized in those jurisdictions.
The following table summarizes the valuation allowance activity for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Balance as of the beginning of period | $ | 1,398 | | | $ | 883 | | | $ | 1,673 | |
Additions charged to expense | 580 | | | 506 | | | 504 | |
Deletions credited to expense | (112) | | | (101) | | | (4) | |
Currency translation and other balance sheet activity | (32) | | | 110 | | | (1,290) | |
Balance as of the end of period | $ | 1,834 | | | $ | 1,398 | | | $ | 883 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Balance as of the beginning of period | $ | 1,673 |
| | $ | 32,455 |
| | $ | 13,839 |
|
Additions charged to expense | 504 |
| | — |
| | 16,743 |
|
Deletions credited to expense | (4 | ) | | (28,733 | ) | | — |
|
Currency translation and other balance sheet activity | (1,290 | ) | | (2,049 | ) | | 1,873 |
|
Balance as of the end of period | $ | 883 |
| | $ | 1,673 |
| | $ | 32,455 |
|
112
Etsy, Inc.
Notes to Consolidated Financial Statements
Unrecognized tax benefits
The following table summarizes the unrecognized tax benefit activity for the periods indicated (in thousands):
|
| | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 |
Balance as of the beginning of period | $ | 18,819 |
| | $ | 17,013 |
| | $ | 23,574 |
|
Additions based on tax positions related to the current year | 1,847 |
| | 921 |
| | 732 |
|
Additions for tax positions of prior years | 3,620 |
| | 946 |
| | 118 |
|
Reductions for tax provisions of prior years | (2,423 | ) | | (61 | ) | | (7,411 | ) |
Lapse of Statute of Limitation | (184 | ) | | — |
| | — |
|
Additions recorded through goodwill as part of business combination | 1,334 |
| | — |
| | — |
|
Settlements | (3,080 | ) | | — |
| | — |
|
Balance as of the end of period | $ | 19,933 |
| | $ | 18,819 |
| | $ | 17,013 |
|
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 | | 2019 |
Balance as of the beginning of period | $ | 23,738 | | | $ | 19,933 | | | $ | 18,819 | |
Additions based on tax positions related to the current year | 5,024 | | | 2,507 | | | 1,847 | |
Additions for tax positions of prior years | 122 | | | 1,576 | | | 3,620 | |
Reductions for tax provisions of prior years | — | | | (278) | | | (2,423) | |
Lapse of statute of limitation | — | | | — | | | (184) | |
Additions recorded through goodwill as part of business combination | — | | | — | | | 1,334 | |
Settlements | — | | | — | | | (3,080) | |
Currency translation | (42) | | | — | | | — | |
Balance as of the end of period | $ | 28,842 | | | $ | 23,738 | | | $ | 19,933 | |
The amount of unrecognized tax benefits included on the Consolidated Balance Sheets as of December 31, 2021, 2020, and 2019 2018, and 2017 are $19.9$28.8 million, $18.8$23.7 million, and $17.0$19.9 million, respectively. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $19.4$27.9 million at December 31, 2019.
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. For the years ended 2019 and 2018, $(0.1) million and $0.3 million, respectively, was included in income tax (benefit)/expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2019 and 2018 was approximately $0.2 million and $0.5 million, respectively.
2021.
The total amount of unrecognized tax benefits relating to the Company'sCompany’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. The outcomes and timing of such events are highly uncertain and auncertain. However, the Company’s reasonable estimate of the range of gross unrecognized tax benefits, excluding interest and penalties, that could potentially be reduced during the next 12 months cannot be made.is $2.6 million.
The Company is subject to taxation in the United States, New York, and various other states and foreign jurisdictions. As of December 31, 2019,2021, 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.through 2016. 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.
114
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 4—Net Income Per Share
The following table presents the method used when calculating the impact of the Company’s Notes on earnings per share for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
2021 Notes | If-Converted | | N/A | | N/A |
2020 Notes | If-Converted | | Treasury Stock | | N/A |
2019 Notes | If-Converted | | If-Converted | | Treasury Stock |
2018 Notes | If-Converted | | If-Converted | | If-Converted |
The Notes were dilutive for the year ended December 31, 2021.
The following table presents the calculation of basic and diluted net income per share for periods presented (in thousands, except share and per share amounts):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Numerator: | | | | | |
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
Net income allocated to participating securities under the two-class method | — |
| | (37 | ) | | (80 | ) |
Net income attributable to common stockholders—basic | 95,894 |
| | 77,454 |
| | 81,720 |
|
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 attributable to common stockholders—diluted | $ | 95,894 |
| | $ | 77,491 |
| | $ | 82,571 |
|
| | | | | |
| | | | | |
Denominator: | | | | | |
Weighted average common shares outstanding—basic (1) | 119,665,248 |
| | 120,146,076 |
| | 118,538,687 |
|
Dilutive effect of assumed conversion of options to purchase common stock | 4,516,413 |
| | 4,238,622 |
| | 2,498,448 |
|
Dilutive effect of assumed conversion of restricted stock units | 1,521,719 |
| | 1,721,658 |
| | 1,177,799 |
|
Dilutive effect of assumed conversion of convertible debt (2) | — |
| | 900,580 |
| | — |
|
Diluted effective of assumed conversion of restricted stock from acquisition | 16,693 |
| | 77,849 |
| | 52,739 |
|
Weighted average common shares outstanding—diluted | 125,720,073 |
| | 127,084,785 |
| | 122,267,673 |
|
| | | | | |
Net income per share attributable to common stockholders—basic | $ | 0.80 |
| | $ | 0.64 |
| | $ | 0.69 |
|
Net income per share attributable to common stockholders—diluted | $ | 0.76 |
| | $ | 0.61 |
| | $ | 0.68 |
|
| |
(1) | 57,482, and 114,963 shares of unvested stock are considered participating securities and are excluded from basic shares outstanding for the year ended December 31, 2018 and 2017, respectively. |
| |
(2) | Since the Company expects to settle in cash the principal outstanding under the 2019 Notes (see “Note 13—Debt”), it uses the treasury stock method when calculating the potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The Company uses the if-converted method when calculating the dilutive effect of the 2018 Notes for the year ended December 31, 2019 and used the treasury stock method for the year ended December 31, 2018. |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income | $ | 493,507 | | | $ | 349,246 | | | $ | 95,894 | |
| | | | | |
| | | | | |
Add back interest expense, net of tax attributable to assumed conversion of convertible senior notes | 4,900 | | | 17,880 | | | — | |
| | | | | |
| | | | | |
Net income attributable to common stockholders—diluted | $ | 498,407 | | | $ | 367,126 | | | $ | 95,894 | |
| | | | | |
| | | | | |
Denominator: | | | | | |
Weighted average common shares outstanding—basic | 127,224,974 | | | 121,251,588 | | | 119,665,248 | |
Dilutive effect of assumed conversion of options to purchase common stock | 4,149,248 | | | 4,492,550 | | | 4,516,413 | |
Dilutive effect of assumed conversion of restricted stock units | 1,995,336 | | | 2,046,981 | | | 1,521,719 | |
Dilutive effect of assumed conversion of convertible senior notes | 13,313,766 | | | 8,623,473 | | | — | |
Diluted effective of assumed conversion of restricted stock from acquisition | — | | | — | | | 16,693 | |
Weighted average common shares outstanding—diluted | 146,683,324 | | | 136,414,592 | | | 125,720,073 | |
| | | | | |
Net income per share attributable to common stockholders—basic | $ | 3.88 | | | $ | 2.88 | | | $ | 0.80 | |
Net income per share attributable to common stockholders—diluted | $ | 3.40 | | | $ | 2.69 | | | $ | 0.76 | |
The following potential shares of common sharesstock were excluded from the calculation of diluted net income per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Stock options | 149,683 | | | 3,711 | | | 317,401 | |
Restricted stock units | 584,033 | | | 71 | | | 706,234 | |
| | | | | |
Convertible senior notes | — | | | 8,625,771 | | | 9,511,993 | |
Total anti-dilutive securities | 733,716 | | | 8,629,553 | | | 10,535,628 | |
|
| | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Stock options | 317,401 |
| | 475,238 |
| | 4,902,664 |
|
Restricted stock units | 706,234 |
| | 136,998 |
| | 435,358 |
|
Convertible senior notes | 9,511,993 |
| | — |
| | — |
|
Total anti-dilutive securities | 10,535,628 |
| | 612,236 |
| | 5,338,022 |
|
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 5—Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The purchase price is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of acquisition. The fair value of customer relationships is estimated using a multi-period excess earnings valuation method, the fair value of trademarks is estimated using a relief from royalty valuation method, and the fair value of developed technology is estimated using a replacement cost method.
Depop Acquisition
On July 12, 2021, the Company acquired all of the issued share capital of Depop, an online global peer-to-peer fashion resale marketplace. The Company believes Depop extends its market opportunity in the high frequency apparel sector, specifically in the fast-growing resale space, and deepens the Company’s reach into the Gen Z consumer. The fair value of consideration transferred of $1.493 billion consisted of: (1) cash consideration paid of $1.489 billion, net of cash acquired and (2) non-cash consideration of $4.8 million representing the portion of the replacement equity awards issued in connection with the acquisition that was associated with services rendered through the date of the acquisition. The portion of the replacement equity awards associated with services rendered post-acquisition will be recorded as post-combination expense on a straight-line basis over the remaining vesting period of the awards. Additionally, deferred consideration awards will be issued to certain Depop executives, which will also be recorded as post-combination expense on a straight-line basis over the mandatory service period associated with the deferred consideration. Neither of these awards was included in the fair value of the consideration transferred. See Note 15—Stock-based Compensation for more information on these awards.
Goodwill consists largely of assembled workforce, expanded market opportunities, and value creation across the Company’s businesses. 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 Depop as of December 31, 2021.
Depop Purchase Price Allocation
The following table summarizes the allocation of the purchase price (at fair value) to the assets acquired and liabilities of Depop assumed as of July 12, 2021 (the date of acquisition) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Preliminary Purchase Price Allocation (1) | | Measurement Period Adjustments (2) | | Final Purchase Price Allocation as Adjusted | | Estimated Useful Life (in years) |
| | | | | | | |
Current assets | $ | 4,249 | | | $ | 39 | | | $ | 4,288 | | | |
| | | | | | | |
Property and equipment other | 1,299 | | | — | | | 1,299 | | | 2-5 |
Developed technology | 84,661 | | | 11,103 | | | 95,764 | | | 5 |
Trademark | 245,657 | | | 4,163 | | | 249,820 | | | 20 |
Customer relationships | 147,116 | | | 1,388 | | | 148,504 | | | 13 |
Goodwill | 1,131,099 | | | (12,244) | | | 1,118,855 | | | Indefinite |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Current liabilities | (18,878) | | | — | | | (18,878) | | | |
Non-current liabilities (3) | (28,097) | | | 140 | | | (27,957) | | | |
Deferred tax liability, net | (74,283) | | | (4,589) | | | (78,872) | | | |
Total purchase price | $ | 1,492,823 | | | $ | — | | | $ | 1,492,823 | | | |
(1)As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021. This was the quarter in which the business combination was closed.
(2)The Company recorded measurement period adjustments in the fourth quarter of fiscal 2021 as a result of the finalization of the third-party valuation report in the period.
(3)Non-current liabilities are primarily related to non-income tax related contingency reserves.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
Elo7 Acquisition
On July 2, 2021, the Company acquired all the outstanding shares of Elo7 (including Elo7, Ltd. and related subsidiaries entities), by means of a merger, an e-commerce marketplace in Brazil focused on unique, handmade items. The Company sees significant potential in Brazil's e-commerce sector, which is still in early stages of development and fueled by one of the largest economies in the world. The Company believes having a well-known local brand will help Etsy to better capitalize on this opportunity. The fair value of consideration transferred of $212.1 million consisted of: (1) cash consideration paid of $211.3 million, net of cash acquired, and (2) non-cash consideration of $0.8 million representing the portion of the replacement equity awards issued in connection with the acquisition that was associated with services rendered through the date of the acquisition. The portion of the replacement equity awards associated with services rendered post-acquisition will be recorded as post-combination expense on a straight-line basis over the remaining vesting period of the awards, and were therefore not included in the fair value of the consideration transferred. See Note 15—Stock-based Compensation for more information on these awards.
Goodwill consists largely of assembled workforce, expanded market opportunities, and value creation across the Company’s businesses. 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 Elo7 as of December 31, 2021.
Elo7 Purchase Price Allocation
The following table summarizes the allocation of the purchase price (at fair value) to the assets acquired and liabilities assumed of Elo7 as of July 2, 2021 (the date of acquisition) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preliminary Purchase Price Allocation (1) | | Measurement Period Adjustments | | Final Purchase Price Allocation as Adjusted | | | | | | Estimated Useful Life (in years) |
| | | | | | | | | | | |
Current assets | $ | 2,721 | | | $ | — | | | $ | 2,721 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Developed technology | 12,084 | | | — | | | 12,084 | | | | | | | 5 |
Trademark | 22,187 | | | — | | | 22,187 | | | | | | | 15 |
Customer relationships | 44,374 | | | — | | | 44,374 | | | | | | | 15 |
Goodwill | 159,009 | | | (1,822) | | | 157,187 | | | | | | | Indefinite |
Non-current assets | 590 | | | 1,822 | | | 2,412 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Current liabilities | (3,406) | | | — | | | (3,406) | | | | | | | |
Non-current liabilities | (2,691) | | | — | | | (2,691) | | | | | | | |
Deferred tax liability, net | (22,727) | | | — | | | (22,727) | | | | | | | |
Total purchase price | $ | 212,141 | | | $ | — | | | $ | 212,141 | | | | | | | |
(1)As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021. This was the quarter in which the business combination was closed.
Revenue and Earnings
Revenue and net loss were $36.7 million and $59.1 million, respectively, for Depop and Elo7, in the aggregate, from their respective dates of acquisition through December 31, 2021. Acquisition-related expenses are expensed as incurred. They were recorded in general and administrative expenses and were $36.7 million for the year ended December 31, 2021. They primarily related to advisory, legal, valuation and other professional fees.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
Reverb Acquisition
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, whichGoodwill consists largely of synergies and acquisition of workforce. The resulting goodwill is not expected to be deductible for tax purposes.
The Company has finalized the valuation of assets acquired and liabilities assumed for the acquisition of Reverb. The Company recognized certain measurement period adjustments as disclosed below during the three months ended December 31, 2019. The measurement period is closedReverb as of December 31, 2019.
Reverb 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 Purchase Price Allocation as Adjusted | | Estimated Useful Life (in years) |
Short-term investments | | | | | $ | 1,028 | | | |
Other current assets (1) | | | | | 2,902 | | | |
Funds receivable and seller accounts | | | | | 5,578 | | | |
Property and equipment other | | | | | 1,543 | | | 2 - 5 |
Developed technology | | | | | 30,300 | | | 3 |
Trademark | | | | | 79,400 | | | 15 |
Customer relationships | | | | | 93,500 | | | 15 |
Goodwill | | | | | 101,703 | | | Indefinite |
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 | | | |
|
| | | | | | | | | | | | |
| Initial Fair Value Estimate (1) | | Measurement Period Adjustments (2) | | Final Fair Value as Adjusted |
Short-term investments | $ | 1,028 |
| | $ | — |
| | $ | 1,028 |
|
Other current assets (3) | 6,442 |
| | (3,540 | ) | | 2,902 |
|
Funds receivable and seller accounts | 5,578 |
| | — |
| | 5,578 |
|
Property and equipment other | 1,543 |
| | — |
| | 1,543 |
|
Developed technology | 30,300 |
| | — |
| | 30,300 |
|
Trademark | 79,400 |
| | — |
| | 79,400 |
|
Customer relationships | 93,500 |
| | — |
| | 93,500 |
|
Goodwill | 102,039 |
| | (336 | ) | | 101,703 |
|
Other assets (3) | 3,225 |
| | 3,518 |
| | 6,743 |
|
Other net working capital | (208 | ) | | — |
| | (208 | ) |
Funds payable and amounts due to sellers | (5,578 | ) | | — |
| | (5,578 | ) |
Other current liabilities (3) | (8,520 | ) | | 4,836 |
| | (3,684 | ) |
Other liabilities (3) | (2,497 | ) | | (4,836 | ) | | (7,333 | ) |
Deferred tax liability, net | (34,898 | ) | | (587 | ) | | (35,485 | ) |
Total purchase price | $ | 271,354 |
| | $ | (945 | ) | | $ | 270,409 |
|
| |
(1) | As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. This was the quarter in which the business combination was completed. |
| |
(2) | The Company recorded measurement period adjustments in the fourth quarter of fiscal 2019 due to the final working capital adjustment as well as new facts and circumstances related to assets and liabilities which existed at the acquisition date. The adjustments included an increase in deferred tax liability of $0.6 million and a decrease in goodwill of $0.3 million. Other adjustments are related to the classification of certain assets and liabilities within the balance sheet. |
| |
(3) | Other current liabilities and other liabilities are primarily related to non-income tax related contingency reserves, which are wholly offset by an indemnification asset and a deferred tax asset. |
(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. Theyincurred and were recorded in general and administrative expenses in 2020 and 2019. 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. They2019, and they primarily related to advisory, legal, valuation and other professional fees.
Etsy, Inc.
Notes to Consolidated Financial Statements
Unaudited Supplemental Pro Forma Information
The following unaudited pro forma summary presents consolidated information of the Company, including Depop and Elo7, as if the business combinations had occurred on January 1, 2020, and Reverb, as if the business combination had occurred on January 1, 2018 (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Revenue | $ | 847,154 |
| | $ | 639,743 |
|
Net income | 88,595 |
| | 53,587 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenue | $ | 2,373,592 | | | $ | 1,801,690 | | | $ | 847,154 | |
Net income | 492,732 | | | 319,669 | | | 88,595 | |
The pro forma financial information includes adjustments that are directly attributable to the business combinationcombinations and are factually supportable. The pro forma adjustments include incremental amortization of intangible and developed technology assets, based on final valuesand remove non-recurring transaction costs directly associated with the acquisitions, such as legal and other professional service fees, and the pro forma tax impact for such adjustments. Cost savings or operating synergies expected to result from the acquisitions are not included in the pro forma results. For the year ended December 31, 2021, the pro forma financial information excludes $60.1 million of each asset andnon-recurring acquisition-related expenses related to the Depop and are tax-effected.Elo7 acquisitions. For the year ended December 31, 2020, the pro forma financial information includes $2.4 million of non-recurring acquisition-related expenses incurred post effective dates of the Depop and Elo7 business combinations. For the year ended December 31, 2019, the pro forma financial information excludes $6.1 million of non-recurring acquisition-related expenses. Forexpenses related to the year ended December 31, 2018, the pro forma financial information includes $2.0 million of non-recurring acquisition-related expenses.Reverb acquisition. These pro forma results are illustrative only and not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.
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, |
| 2021 | | 2020 |
Balance as of the beginning of the period | $ | 140,810 | | | $ | 138,731 | |
Business combinations | 1,276,042 | | | — | |
Foreign currency translation adjustments | (45,788) | | | 2,079 | |
Balance as of the end of the period | $ | 1,371,064 | | | $ | 140,810 | |
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Balance as of the beginning of the period | $ | 37,482 |
| | $ | 38,541 |
|
Business combination | 101,703 |
| | — |
|
Foreign currency translation adjustments | (454 | ) | | (1,059 | ) |
Balance as of the end of the period | $ | 138,731 |
| | $ | 37,482 |
|
TheAs of the annual impairment testing date in 2021, the Company has determined it has 2 operating segments,completed a qualitative analysis for both the Etsy and Reverb, which qualify for aggregation as 1 reportable segment, for purposes of allocating resources and evaluating financial performance. As a result, the Company has determined it has 2Reverb reporting units, and completed a quantitative analysis for both the Depop and Elo7 reporting units. The quantitative analysis assumed that the purchase consideration for the Depop and Elo7 acquisitions approximated fair value of each of the reporting units given the proximity to test for goodwill impairment during the fourth quarter.respective acquisition dates. The Company did 0tnot recognize any goodwill impairments during the years ended December 31, 2019, 2018,2021, 2020, and 2017.
2019.
At December 31, 20192021 and 2018,2020, the gross book value and accumulated amortization of intangible assets were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Gross book value | | Accumulated amortization | | | | Net book value | | Weighted-Average Remaining Life (in years) |
Trademark | $ | 342,753 | | | $ | (18,817) | | | | | $ | 323,936 | | | 17.8 |
Customer relationships | 278,311 | | | (21,243) | | | | | 257,068 | | | 12.9 |
Referral agreement | 36,109 | | | (12,677) | | | | | 23,432 | | | 6.5 |
| | | | | | | | | |
Patent licenses | 3,149 | | | (415) | | | | | 2,734 | | | 5.6 |
Intangible assets | $ | 660,322 | | | $ | (53,152) | | | | | $ | 607,170 | | | 15.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 | | As of December 31, 2018 |
| Gross book value | | Accumulated amortization | | Foreign currency translation | | Net book value | | Gross book value | | Accumulated amortization | | Foreign currency translation | | Net book value |
Customer relationships | $ | 93,500 |
| | $ | (2,338 | ) | | $ | — |
| | $ | 91,162 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Trademark | 79,400 |
| | (1,985 | ) | | — |
| | 77,415 |
| | — |
| | — |
| | — |
| | — |
|
Referral agreement | 37,127 |
| | (5,417 | ) | | (1,356 | ) | | 30,354 |
| | 35,323 |
| | (1,890 | ) | | (712 | ) | | 32,721 |
|
Technology | 7,200 |
| | (7,200 | ) | | — |
| | — |
| | 7,200 |
| | (5,500 | ) | | — |
| | 1,700 |
|
Patent licenses | 332 |
| | (27 | ) | | — |
| | 305 |
| | 172 |
| | (4 | ) | | — |
| | 168 |
|
Intangible assets, net | $ | 217,559 |
| | $ | (16,967 | ) | | $ | (1,356 | ) | | $ | 199,236 |
| | $ | 42,695 |
| | $ | (7,394 | ) | | $ | (712 | ) | | $ | 34,589 |
|
The Company acquired intangible assets valued at $172.9 million in the Reverb acquisition on August 15, 2019. 118
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Gross book value | | Accumulated amortization | | | | Net book value | | Weighted-Average Remaining Life (in years) |
Trademark | $ | 79,400 | | | $ | (7,278) | | | | | $ | 72,122 | | | 13.6 |
Customer relationships | 93,500 | | | (8,571) | | | | | 84,929 | | | 13.6 |
Referral agreement | 39,042 | | | (9,784) | | | | | 29,258 | | | 7.5 |
| | | | | | | | | |
Patent licenses | 1,212 | | | (72) | | | | | 1,140 | | | 8.3 |
Intangible assets | $ | 213,154 | | | $ | (25,705) | | | | | $ | 187,449 | | | 12.6 |
As part of the acquisition,acquisitions of Depop, Elo7, and Reverb, 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.
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 is amortized on a straight-line basis over a period of 10 years.acquisitions.
Amortization expense of intangible assets for the years ended December 31, 2021, 2020, and 2019 2018, and 2017 was $9.6$28.4 million, $4.3$15.2 million, and $3.4$9.6 million, respectively.
The Company did 0tnot recognize any intangible asset impairment losses in the years ended December 31, 2019, 2018,2021, 2020, and 2017.2019.
Based on amounts recorded at December 31, 2019,2021, the Company estimates intangible assetfuture amortization expense in each of the years ending December 31intangible assets as follows (in thousands):
|
| | | |
2020 | $ | 15,148 |
|
2021 | 15,148 |
|
2022 | 15,148 |
|
2023 | 15,148 |
|
2024 | 15,148 |
|
Thereafter | 123,496 |
|
Total amortization expense | $ | 199,236 |
|
| | | | | |
2022 | $ | 43,006 | |
2023 | 43,006 | |
2024 | 43,006 | |
2025 | 43,006 | |
2026 | 42,684 | |
Thereafter | 392,462 | |
Total amortization expense | $ | 607,170 | |
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 7—Segment and Geographic Information
The Company has determined it has 24 operating segments, Etsy, Reverb, Depop, and Reverb,Elo7, which qualify for aggregation as 1 reportable segment for purposes of allocating resources and evaluating financial performance.
Revenue by country is based on the billing address of the seller. The following table summarizes revenue (loss) income before income taxes and net income by geographic area (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
United States | $ | 1,393,637 | | | $ | 1,150,725 | | | $ | 550,257 | |
United Kingdom | 329,203 | | | 195,827 | | | 72,471 | |
Other non-U.S. | 606,274 | | | 379,073 | | | 195,651 | |
Revenue | $ | 2,329,114 | | | $ | 1,725,625 | | | $ | 818,379 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
United States | $ | 550,257 |
| | $ | 422,523 |
| | $ | 317,755 |
|
International | 268,122 |
| | 181,170 |
| | 123,476 |
|
Revenue | $ | 818,379 |
| | $ | 603,693 |
| | $ | 441,231 |
|
| | | | | |
United States (1)(2) | $ | (23,702 | ) | | $ | 7,460 |
| | $ | (43,014 | ) |
International | 104,348 |
| | 47,618 |
| | 75,279 |
|
(Loss) income before income taxes | $ | 80,646 |
| | $ | 55,078 |
| | $ | 32,265 |
|
| | | | | |
United States | $ | 510 |
| | $ | 7,175 |
| | $ | 7,029 |
|
International | 95,384 |
| | 70,316 |
| | 74,771 |
|
Net income | $ | 95,894 |
| | $ | 77,491 |
| | $ | 81,800 |
|
| |
(1) | The United States loss before income taxes in the year ended December 31, 2019 was primarily driven by a majority of operating expenses being incurred in the United States. |
| |
(2) | 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 10—Property and Equipment” for additional information on restructuring and other exit costs and asset impairment charges, respectively. |
NoWith the exception of the United Kingdom, no individual internationalnon-U.S. 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 Sheets are categorized based on the inputs to valuation techniques as follows:
Level 1—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—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—3 These are financial instruments where values are derived from techniques in which one or more significant inputs are unobservable.
The following are the major categories of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):
|
| | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Asset | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | — |
| | $ | 5,794 |
| | $ | — |
| | $ | 5,794 |
|
Certificate of deposit | — |
| | 2,959 |
| | — |
| | 2,959 |
|
Money market funds | 228,859 |
| | — |
| | — |
| | 228,859 |
|
| 228,859 |
| | 8,753 |
| | — |
| | 237,612 |
|
Short-term investments: | | | | | | | |
Commercial paper | — |
| | 29,320 |
| | — |
| | 29,320 |
|
Certificate of deposit | — |
| | 26,132 |
| | — |
| | 26,132 |
|
Corporate bonds | — |
| | 114,202 |
| | — |
| | 114,202 |
|
U.S. Government and agency securities | 204,305 |
| | — |
| | — |
| | 204,305 |
|
| 204,305 |
| | 169,654 |
| | — |
| | 373,959 |
|
Funds receivable and seller accounts: | | | | | | | |
Money market funds | 18,168 |
| | — |
| | — |
| | 18,168 |
|
| 18,168 |
| | — |
| | — |
| | 18,168 |
|
Long-term investments: | | | | | | | |
Certificate of deposit | — |
| | 4,729 |
| | — |
| | 4,729 |
|
Corporate bonds | — |
| | 38,563 |
| | — |
| | 38,563 |
|
U.S. Government and agency securities | 46,051 |
| | — |
| | — |
| | 46,051 |
|
| 46,051 |
| | 43,292 |
| | — |
| | 89,343 |
|
| $ | 497,383 |
| | $ | 221,699 |
| | $ | — |
| | $ | 719,082 |
|
Etsy, Inc.
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | |
| As of December 31, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Asset | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | — |
| | $ | 7,775 |
| | $ | — |
| | $ | 7,775 |
|
Money market funds | 244,856 |
| | — |
| | — |
| | 244,856 |
|
| 244,856 |
| | 7,775 |
| | — |
| | 252,631 |
|
Short-term investments: | | | | | | | |
Commercial paper | — |
| | 147,860 |
| | — |
| | 147,860 |
|
Corporate bonds | — |
| | 46,801 |
| | — |
| | 46,801 |
|
U.S. Government and agency securities | 62,641 |
| | — |
| | — |
| | 62,641 |
|
| 62,641 |
| | 194,661 |
| | — |
| | 257,302 |
|
Funds receivable and seller accounts: | | | | | | | |
Money market funds | 9,229 |
| | — |
| | — |
| | 9,229 |
|
| 9,229 |
| | — |
| | — |
| | 9,229 |
|
| $ | 316,726 |
| | $ | 202,436 |
| | $ | — |
| | $ | 519,162 |
|
Level 1 instruments include investments in debt securities including money market funds and U.S. Government and agency securities, which are valued based on inputs including quotes from broker-dealers or recently executed transactions in the same or similar securities.
Level 2 instruments include investments in debt securities, including fixed-income funds consisting of investments in commercial paper, corporate bonds, and certificates of deposit, which are valued based on quoted market prices in markets that are not active or model derived valuations in which all significant inputs are observable in active markets.
The Company did not have any Level 3 instruments as of December 31, 20192021 and December 31, 2018.2020.
See “Note 9—Marketable Securities” for additional information onShort- and long-term investments and certain cash equivalents consist of investments in debt securities that are available-for-sale. The following table sets forth the cost, gross unrealized losses, gross unrealized gains, and fair values of the Company’s investments as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Gross Unrealized Holding Loss | | Gross Unrealized Holding Gain | | Fair Value | | Cash and Cash Equivalents | | Short-term Investments | | Long-term Investments | |
December 31, 2021 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cash | $ | 214,771 | | | $ | — | | | $ | — | | | $ | 214,771 | | | $ | 214,771 | | | $ | — | | | $ | — | | |
Level 1 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Money market funds | 556,427 | | | — | | | — | | | 556,427 | | | 556,427 | | | — | | | — | | |
U.S. Government and agency securities | 60,311 | | | (55) | | | 11 | | | 60,267 | | | — | | | 52,632 | | | 7,635 | | |
| 616,738 | | | (55) | | | 11 | | | 616,694 | | | 556,427 | | | 52,632 | | | 7,635 | | |
Level 2 | | | | | | | | | | | | | | |
Certificate of deposit | 20,709 | | | (7) | | | 1 | | | 20,703 | | | — | | | 20,703 | | | — | | |
Commercial paper | 25,235 | | | (14) | | | 1 | | | 25,222 | | | 8,998 | | | 16,224 | | | — | | |
Corporate bonds | 192,727 | | | (481) | | | 10 | | | 192,256 | | | — | | | 114,857 | | | 77,399 | | |
| 238,671 | | | (502) | | | 12 | | | 238,181 | | | 8,998 | | | 151,784 | | | 77,399 | | |
| $ | 1,070,180 | | | $ | (557) | | | $ | 23 | | | $ | 1,069,646 | | | $ | 780,196 | | | $ | 204,416 | | | $ | 85,034 | | |
December 31, 2020 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cash | $ | 346,136 | | | $ | — | | | $ | — | | | $ | 346,136 | | | $ | 346,136 | | | $ | — | | | $ | — | | |
Level 1 | | | | | | | | | | | | | | |
Money market funds (1) | 920,643 | | | — | | | — | | | 920,643 | | | 881,465 | | | — | | | — | | |
U.S. Government and agency securities | 410,371 | | | (3) | | | 358 | | | 410,726 | | | — | | | 376,089 | | | 34,637 | | |
| 1,331,014 | | | (3) | | | 358 | | | 1,331,369 | | | 881,465 | | | 376,089 | | | 34,637 | | |
Level 2 | | | | | | | | | | | | | | |
Certificate of deposit | 12,746 | | | — | | | 5 | | | 12,751 | | | 6,000 | | | 6,751 | | | — | | |
Commercial paper | 14,494 | | | — | | | 4 | | | 14,498 | | | 10,498 | | | 4,000 | | | — | | |
Corporate bonds | 42,632 | | | (7) | | | 111 | | | 42,736 | | | — | | | 38,279 | | | 4,457 | | |
| 69,872 | | | (7) | | | 120 | | | 69,985 | | | 16,498 | | | 49,030 | | | 4,457 | | |
| $ | 1,747,022 | | | $ | (10) | | | $ | 478 | | | $ | 1,747,490 | | | $ | 1,244,099 | | | $ | 425,119 | | | $ | 39,094 | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(1) $39.2 million of money market funds were classified as funds receivable and seller accounts as of December 31, 2020.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
The Company evaluates fair value for each individual security in the investment portfolio. All investments in an unrealized loss position have been in an unrealized loss position for less than 12 months as of December 31, 2021.
The Company typically invests in short- and long-term instruments, including fixed-income funds and U.S. Government and agency securities aligned with the Company’s investment strategy. The maturities of the Company’s non-current marketable debt securities measured at fair value.generally range from greater than 12 and up to 37 months.
Disclosure of Fair Values
The Company’s financial instruments that are not remeasured at fair value in the Consolidated Balance Sheets include the 2018 Notes and the 2019 Notes (seeNotes. See “Note 13—12—Debt”). for additional information. The Company estimates the fair value of the 2018 Notes and 2019 Notes through consideration of quotedinputs that are observable in the market prices of similar instruments, classified as Level 2 as described above. The following table presents the carrying value and estimated fair value of the Notes as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2020 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
2021 Notes | $ | 987,729 | | | $ | 1,165,519 | | | $ | — | | | $ | — | |
2020 Notes (1) | 643,237 | | | 862,774 | | | 511,733 | | | $ | 536,126 | |
2019 Notes (1) | 644,390 | | | 1,644,869 | | | 514,035 | | | 566,399 | |
2018 Notes (1) | 62 | | | 375 | | | 39,166 | | | 42,157 | |
| $ | 2,275,418 | | | $ | 3,673,537 | | | $ | 1,064,934 | | | $ | 1,144,682 | |
(1)Upon adoption of ASU 2020-06 as of January 1, 2021, the carrying value of the Notes increased due to the derecognition of the unamortized debt discount, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.” The increase in the carrying value of the 2018 Notes was $310.3offset by the conversion of $43.9 million and $279.1 million as of the 2018 Notes in the year ended December 31, 2019 and December 31, 2018, respectively. The estimated fair value of the 2019 Notes was $522.2 million as of December 31, 2019.2021. See “Note 12—Debt” for additional information.
The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, funds receivable and seller accounts, accounts payable, 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- 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, 2019 | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | 5,794 |
| | $ | — |
| | $ | — |
| | $ | 5,794 |
|
Certificate of deposit | 2,958 |
| | — |
| | 1 |
| | 2,959 |
|
| 8,752 |
| | — |
| | 1 |
| | 8,753 |
|
Short-term investments: | | | | | | | |
Commercial paper | 29,319 |
| | (1 | ) | | 2 |
| | 29,320 |
|
Certificate of deposit | 26,129 |
| | (3 | ) | | 6 |
| | 26,132 |
|
Corporate bonds | 114,068 |
| | (22 | ) | | 156 |
| | 114,202 |
|
U.S. Government and agency securities | 204,246 |
| | (8 | ) | | 67 |
| | 204,305 |
|
| 373,762 |
| | (34 | ) | | 231 |
| | 373,959 |
|
Long-term investments: | | | | | | | |
Certificate of deposit | 4,727 |
| | — |
| | 2 |
| | 4,729 |
|
Corporate bonds | 38,582 |
| | (35 | ) | | 16 |
| | 38,563 |
|
U.S. Government and agency securities | 46,017 |
| | (2 | ) | | 36 |
| | 46,051 |
|
| 89,326 |
| | (37 | ) | | 54 |
| | 89,343 |
|
| $ | 471,840 |
| | $ | (71 | ) | | $ | 286 |
| | $ | 472,055 |
|
December 31, 2018 | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | 7,775 |
| | $ | — |
| | $ | — |
| | $ | 7,775 |
|
| 7,775 |
|
| — |
|
| — |
|
| 7,775 |
|
Short-term investments: | | | | | | | |
Commercial paper | 147,860 |
| | — |
| | — |
| | 147,860 |
|
Corporate bonds | 46,836 |
| | (35 | ) | | — |
| | 46,801 |
|
U.S. Government and agency securities | 62,638 |
| | (9 | ) | | 12 |
| | 62,641 |
|
| 257,334 |
| | (44 | ) | | 12 |
| | 257,302 |
|
| $ | 265,109 |
| | $ | (44 | ) | | $ | 12 |
| | $ | 265,077 |
|
The Company’s investments in marketable securities consist primarily of investments in commercial paper, certificates of deposit, and debt securities, including U.S. Government and agency securities and fixed-income funds. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability, and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. The Company evaluates fair values for each individual security in the investment portfolio.
See “Note 8—Fair Value Measurements” for additional information on the Company’s marketable securities measured at fair value.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 10—Property and Equipment
Property and equipment consisted of the following as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| Estimated useful lives | | 2021 | | 2020 |
Computer equipment | 3 years | | $ | 8,037 | | | $ | 32,686 | |
Furniture and equipment | 2 - 4 years | | 7,170 | | | 7,468 | |
| | | | | |
Leasehold improvements | Shorter of life of asset or lease term | | 48,145 | | | 50,765 | |
Construction in progress | Not applicable | | 10,835 | | | 633 | |
Building | Lease term | | 133,063 | | | 66,650 | |
Website development and internal-use software | 3 - 5 years | | 224,855 | | | 113,064 | |
| | | 432,105 | | | 271,266 | |
| | | | | |
Less: Accumulated depreciation and amortization | | | 157,043 | | | 158,771 | |
| | | $ | 275,062 | | | $ | 112,495 | |
|
| | | | | | | | | |
| | | As of December 31, |
| Estimated useful lives | | 2019 | | 2018 |
Computer equipment (1) | 3 years | | $ | 35,190 |
| | $ | 36,670 |
|
Furniture and equipment | 2 - 4 years | | 7,999 |
| | 6,574 |
|
Leasehold improvements (2) | Shorter of life of asset or lease term | | 48,688 |
| | 10,731 |
|
Construction in progress | Not applicable | | 206 |
| | 551 |
|
Building (2) | 25 years | | 66,650 |
| | 81,892 |
|
Website development and internal-use software (3) | 3 - 5 years | | 106,215 |
| | 69,201 |
|
| | | 264,948 |
| | 205,619 |
|
| | | | | |
Less: Accumulated depreciation and amortization | | | 120,084 |
| | 85,440 |
|
| | | $ | 144,864 |
| | $ | 120,179 |
|
| |
(1) | Computer equipment includes leased equipment which are accounted for as finance leases since the adoption of ASU 2016-02—Leases in the first quarter of 2019. These leases were previously accounted for as capital leases.
|
| |
(2) | In 2014 the Company applied build-to-suit accounting treatment to its headquarters lease in Brooklyn, New York. Upon adoption of ASU 2016-02—Leases in the first quarter of 2019, the Company derecognized the existing facility financing obligation and existing building asset for sale-leaseback transactions that currently do not qualify for sale accounting of $60.0 million and $51.1 million, respectively, and $22.1 million was reclassified from building to leasehold improvements and the Company recognized a new ROU asset of $66.7 million for the associated lease. For more information on the adoption of ASU 2016-02—Leases see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies.”
|
| |
(3) | On August 15, 2019, the Company acquired Reverb in a business combination, including the developed technology which was recognized at fair value. This amount is included in website development and internal-use software and is amortized on a straight-line basis over a period of 3 years. |
Depreciation and amortization expense on property and equipment was $45.8 million, $43.0 million, and $38.4 million, $22.4 million, and $23.8 million for the years ended December 31, 2019, 2018, and 2017, respectively, which includes amortization expense for equipment acquired under finance leases of $4.3 million for the year ended December 31, 2019 and under capital leases of $5.9 million and $7.7 million for the years ended December 31, 2018 and 2017, respectively. The gross balance of leased equipment as of December 31, 2019 and 2018 was $30.4 million and $29.7 million, respectively. The related accumulated amortization of equipment under finance leases was $28.5 million at December 31, 2019and under capital leases was $24.4 million at December 31, 2018.
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes capitalized website development and internal-use software activities during the periods indicated (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Balance as of the beginning of the period | $ | 69,201 |
| | $ | 48,333 |
|
Additions to website development | 8,687 |
| | 22,068 |
|
Acquisition of developed technology | 30,300 |
| | — |
|
Less: Retirements | 1,973 |
| | 1,200 |
|
| 106,215 |
| | 69,201 |
|
Less: | | | |
Accumulated amortization balance as of the beginning of the period | 38,418 |
| | 29,991 |
|
Amortization Expense | 18,737 |
| | 9,519 |
|
Less: Retirements | 340 |
| | 1,092 |
|
Accumulated amortization balance as of the end of the period | 56,815 |
| | 38,418 |
|
| $ | 49,400 |
| | $ | 30,783 |
|
For the years ended December 31, 2019, 2018, and 2017, the Company recordedincluded amortization expense relating to capitalized website development and internal-use software of $30.0 million, $22.6 million, and $18.7 million, $9.5 million, and $8.2 million, respectively. The loss on write-off for capitalized website development and internal-use software assets that were retired during the years ended December 31, 2019, 2018,2021, 2020, and 2017 was $1.6 million, $0.1 million, and $0.3 million,2019, respectively.
On August 15, 2019,
Note 10—Leases
For the Company acquired Reverb in a business combination, including the developed technology which was recognized at fair value. As of December 31, 2019, the gross book value and accumulated amortization of the acquired developed technology classified in property and equipment, net was $30.3 million and $3.8 million, respectively. The developed technology is amortized on a straight-line basis over a period of 3 years. Amortization expense from the developed technology of Reverb was $3.8 million for the periodyears ended December 31, 2021, 2020, and 2019, and was recorded in cost of revenue.
The Company recognized a $3.2 million impairment loss related to capitalized website development and internal-use software during the year ended December 31, 2017, included in asset impairment charges. During the fourth quarter of 2017, the Company made the decision to discontinue certain product offerings, including Etsy Studio and Etsy Manufacturing, which was an indicator that the carrying amount of certain capitalized website development and internal-use software assets may not be recoverable. The Company prepared an undiscounted 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 value of projected undiscounted cash flows.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 11—Leases
As the lessee, the Company currently leases 225,135 square feet of real estate space for its corporate headquarters located in Brooklyn, New York, under a noncancelable lease that expires in 2026. The Company uses these facilities for its principal administration, technology and development, and engineering activities. The Company also leases office space for its offices in San Francisco, Hudson (New York), Chicago, Dublin, and London. Additionally, the Company has short-term leases in other locations around the world that meet short-term lease criteria and are not recognized on the Consolidated Balance Sheets. Most leases include one or more options to renew, and the exercise of these options is at the Company’s sole discretion. The Company determined that its options to break or renew would not be reasonably certain in determining the expected lease term, and therefore are not included as part of its ROU assets and lease liabilities.
The Company entered into financing lease agreements with Dell Financial Services, LLC. (“DFS”) and ePlus Group, Inc. (“ePlus”)for hosting and computer equipment leases. The leases through DFS have a 36-month term, 0 interest, and are payable in equal monthly installments with a buy-out option of $1 at the end of the lease term. The leases through ePlus have a 36-month term, interest rate of 3.71%-6.94%, and are payable in equal monthly installments with a fair market value or a $1 buy-out option at the end of the lease term depending on the equipment.
In calculating the present value of the lease payments, the Company has elected to utilize its estimated incremental borrowing rate based on the remaining lease term and not the original lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
The elements of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Operating lease cost | $ | 6,320 | | | $ | 5,847 | | | $ | 5,405 | |
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 9,139 | | | 10,190 | | | 13,124 | |
Interest on lease liabilities | 3,044 | | | 2,576 | | | 3,205 | |
Total finance lease cost | 12,183 | | | 12,766 | | | 16,329 | |
Other lease cost, net (1) | 1,193 | | | 1,322 | | | 1,149 | |
Total lease cost | $ | 19,696 | | | $ | 19,935 | | | $ | 22,883 | |
(1)Other lease cost, net includes short-term sublease income, short-term lease costs, and variable lease costs.
|
| | | |
| Year Ended December 31, 2019 |
Operating lease cost | $ | 5,405 |
|
Finance lease cost: | |
Amortization of right-of-use assets | 13,124 |
|
Interest on lease liabilities | 3,205 |
|
Total finance lease cost | 16,329 |
|
Other lease cost, net (1) | 1,149 |
|
Total lease cost | $ | 22,883 |
|
Table of Contents
| |
(1) | Other lease cost, net includes short-term sublease income, short-term lease costs, and variable lease costs, which are immaterial. |
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table presents the lease-related assets and liabilities recorded on the Consolidated Balance SheetSheets (in thousands):
|
| | | |
| As of December 31, 2019 |
Operating leases: | |
Other assets | $ | 24,362 |
|
Other current liabilities | $ | 4,134 |
|
Other liabilities | 22,322 |
|
Total operating lease liabilities | $ | 26,456 |
|
| |
Finance leases: | |
Property and equipment, net | $ | 59,696 |
|
Finance lease obligations—current | $ | 8,275 |
|
Finance lease obligations—net of current portion | 53,611 |
|
Total finance lease liabilities | $ | 61,886 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2021 (1) | | 2020 |
Operating leases: | | | |
Other assets | $ | 45,951 | | | $ | 19,563 | |
Other current liabilities | $ | 4,018 | | | $ | 4,516 | |
Other liabilities | 43,746 | | | 17,202 | |
Total operating lease liabilities | $ | 47,764 | | | $ | 21,718 | |
| | | |
Finance leases: | | | |
| | | |
| | | |
Property and equipment, net | $ | 109,131 | | | $ | 50,261 | |
Finance lease obligations—current | $ | 2,418 | | | $ | 8,537 | |
Finance lease obligations—net of current portion | 110,283 | | | 44,979 | |
Total finance lease liabilities | $ | 112,701 | | | $ | 53,516 | |
Etsy, Inc.
Noteswhich is accounted for as a finance lease and a portion as an operating lease. The First Amendment extended the expiration of the term of the current lease from July 31, 2026 to Consolidated Financial Statements
July 31, 2039 and resulted in increases to the Company’s ROU assets, property and equipment, net, and the lease liabilities related to the Company's operating and finance leases.
The following table summarizes the weighted average remaining lease term and weighted average discount rate as of December 31, 2019:2021 and 2020:
|
| | |
| As of December 31, 2019 |
Weighted average remaining lease term: | |
Operating leases | 5.94 years |
|
Finance leases | 6.37 years |
|
Weighted average discount rate: | |
Operating leases | 4.26 | % |
Finance leases | 4.31 | % |
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
Weighted average remaining lease term: | | | |
Operating leases | 14.67 years | | 4.85 years |
Finance leases | 17.41 years | | 5.47 years |
Weighted average discount rate: | | | |
Operating leases | 4.46 | % | | 4.26 | % |
Finance leases | 4.72 | % | | 4.26 | % |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows used in operating leases | $ | (6,442) | | | $ | (5,519) | | | $ | (4,889) | |
Operating cash flows used in finance leases | (3,025) | | | (2,551) | | | (3,181) | |
Finance cash flows used in finance leases | (8,864) | | | (9,211) | | | (10,833) | |
|
| | | |
| Year Ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows used in operating leases | $ | (4,889 | ) |
Operating cash flows used in finance leases | (3,181 | ) |
Finance cash flows used in finance leases | (10,833 | ) |
Future minimum lease payments under non-cancelable leases for the years ending December 31, 2020, 2021, 2022, 2023, 2024 and thereafter are as follows (in thousands):
|
| | | | | | | |
| Operating Leases | | Finance Leases |
2020 | $ | 5,152 |
| | $ | 10,805 |
|
2021 | 4,928 |
| | 11,152 |
|
2022 | 4,942 |
| | 10,677 |
|
2023 | 4,981 |
| | 10,599 |
|
2024 | 4,298 |
| | 10,678 |
|
Thereafter | 5,688 |
| | 17,037 |
|
Total future minimum lease payments | 29,989 |
| | 70,948 |
|
Less imputed interest | 3,533 |
| | 9,062 |
|
Total | $ | 26,456 |
| | $ | 61,886 |
|
The following table represents the Company’s commitments under its previous presentation of its capital, operating, and build-to-suit lease agreements as of December 31, 2018 (in thousands):123
|
| | | | | | | | | | | |
| Capital Lease Obligations | | Operating Leases | | Build-to-Suit Lease |
Periods ending | | | | | |
2019 | $ | 4,392 |
| | $ | 4,904 |
| | $ | 9,451 |
|
2020 | 1,754 |
| | 4,783 |
| | 9,522 |
|
2021 | 481 |
| | 4,185 |
| | 10,354 |
|
2022 | — |
| | 4,180 |
| | 10,520 |
|
2023 | — |
| | 4,205 |
| | 10,599 |
|
Thereafter | — |
| | 9,760 |
| | 27,715 |
|
Total minimum payments required | $ | 6,627 |
| | $ | 32,017 |
| | $ | 78,161 |
|
Amounts representing interest | 648 |
| | | | |
Present value of net minimum payments | 5,979 |
| | | | |
Current maturities | 3,884 |
| | | | |
Long-term payment obligations | $ | 2,095 |
| | | | |
Etsy, Inc.
Notes to Consolidated Financial Statements
Future minimum lease payments under non-cancelable leases as of December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 | $ | 5,723 | | | $ | 6,917 | |
2023 | 6,792 | | | 9,815 | |
2024 | 5,806 | | | 10,897 | |
2025 | 6,173 | | | 10,759 | |
2026 | 1,297 | | | 100 | |
Thereafter | 41,837 | | | 135,879 | |
Total future minimum lease payments (1) | 67,628 | | | 174,367 | |
Less: | | | |
Imputed interest | 19,864 | | | 61,666 | |
| | | |
Total | $ | 47,764 | | | $ | 112,701 | |
(1)The First Amendment includes a tenant allowance, a portion of which becomes available beginning in April 2022, rent concessions that become available beginning in 2026, and escalating commitments each contract year between 2028 and 2038, which are reflected in the future minimum lease payments.
Note 12—11—Accrued Expenses
Accrued expenses consisted of the following as of the dates indicated (in thousands):
|
| | | | | | | |
| As of December 31, |
| 2019 | | 2018 |
Sales and use tax payable | $ | 39,250 |
| | $ | 12,242 |
|
Vendor accruals | 25,760 |
| | 17,817 |
|
Accrued bonus | 19,561 |
| | 12,906 |
|
Payroll-related liabilities | 3,172 |
| | 2,406 |
|
Accrued vacation | 602 |
| | 3,787 |
|
Total accrued expenses | $ | 88,345 |
| | $ | 49,158 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
Pass-through marketplace tax collection obligation | $ | 136,360 | | | $ | 109,662 | |
Vendor accruals | 115,593 | | | 73,437 | |
Employee compensation-related liabilities | 66,477 | | | 43,879 | |
Taxes payable | 9,688 | | | 5,374 | |
| | | |
| | | |
| | | |
Total accrued expenses | $ | 328,118 | | | $ | 232,352 | |
Note 12—Debt
Note 13—Debt
20192021 Convertible Debt
In September 2019,June 2021, the Company issued $650.0 million$1.0 billion aggregate principal amount of 0.125% Convertible Seniorthe 2021 Notes due 2026 (the “2019 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the 2021 Notes were approximately $986.7 million after deducting the initial purchasers’ discount and offering expenses and before the 2021 Capped Call Transactions, as described below, and the repurchase of stock, as described in “Note 14—Stockholders’ Equity.”
The 2021 Notes are convertible into shares of the Company’s common stock based upon an initial conversion rate of 4.0518 shares of the Company’s common stock per $1,000 principal amount of 2021 Notes (equivalent to an initial conversion price of approximately $246.80 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 2021 Notes will mature on June 15, 2028, unless earlier converted, redeemed, or repurchased. Prior to the close of business on the business day immediately preceding February 15, 2028, holders may convert all or a portion of their 2021 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2021 (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 2021 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; (3) if the Company calls the 2021 Notes for redemption at any time prior to the close of business on the
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Etsy, Inc.
Notes to Consolidated Financial Statements
second scheduled trading day immediately preceding the redemption date, but only with respect to the 2021 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events. On and after February 15, 2028 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2021 Notes at any time, regardless of the foregoing circumstances.
The Company may redeem all or any portion of the 2021 Notes, at the Company’s option, subject to partial redemption limitations, on or after June 20, 2025, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2021 Notes for cash at a price equal to 100% of the principal amount of the 2021 Notes to be repurchased. Holders of 2021 Notes who convert their 2021 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 2021 Notes. As of December 31, 2021, none of the conditions permitting the holders of the 2021 Notes to early convert have been met.
During any calendar quarter preceding February 15, 2028 in which the closing price of the Company’s common stock exceeds 130% of the applicable conversion price of the 2021 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 2021 Notes. Based on the daily closing prices of the Company’s stock during the quarter ended December 31, 2021, holders of the 2021 Notes are not eligible to convert their 2021 Notes during the first quarter of 2022. Based on the terms of the 2021 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 2021 Notes in cash and, therefore, the 2021 Notes are classified as long-term debt as of December 31, 2021.
2021 Capped Call Transactions
The Company used $85.0 million of the net proceeds from the 2021 Notes to enter into privately negotiated capped call instruments (“2021 Capped Call Transactions”) with certain financial institutions. The 2021 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 2021 Notes upon conversion of the 2021 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the 2021 Capped Call Transactions with such reduction and/or offset subject to a cap. The 2021 Capped Call Transactions have an initial cap price of $340.42 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 June 8, 2021, and is subject to certain adjustments under the terms of the 2021 Capped Call Transactions. Collectively, the 2021 Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2021 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2021 Notes.
The 2021 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 2021 Capped Call Transactions have been included as a net reduction to additional paid-in capital within stockholders’ equity.
2020 Convertible Debt
In August 2020, the Company issued $650.0 million aggregate principal amount of the 2020 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under 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
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Etsy, Inc.
Notes to Consolidated Financial Statements
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.
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, 2021, 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, 2021, holders of the 2020 Notes are not eligible to convert their 2020 Notes during the first quarter of 2022. 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, 2021.
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 Company will settle any conversions of the 2019 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 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 (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;
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Etsy, Inc.
Notes to Consolidated Financial Statements
and (3) with respect to any or all of the 2019 Notes called for redemption by the Company prior to the close of business on the business day immediately preceding June 1, 2026, holders may convert all or any portion of their 2019 Notes at any time prior to the close of business on the second scheduled trading day prior to the redemption date, even if the 2019 Notes are not otherwise convertible at such time; and (4) 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. As of December 31, 2019, the if-converted value of the 2019 Notes was approximately $321.6 million lower than the aggregate principal amount, or $328.4 million.
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. As
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, 2019, none of the conditions permitting the2021, holders of the 2019 Notes are eligible to early convert have been met.
Thetheir 2019 Notes are general unsecured obligationsduring the first quarter of 2022. Based on 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 0% Convertible Senior Notes due 2023 (the “2018
Etsy, Inc.
Notes to Consolidated Financial Statements
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.
In accounting for the issuanceterms of the 2019 Notes, when a conversion notice is received, the Company separatedhas 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 into liabilityin cash 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 oftherefore, the 2019 Notes and the liability component represents theare classified as long-term 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.
The Company capitalized $10.5 million of debt issuance costs in connection with the 2019 Notes. Non-cash interest expense, including amortization of debt issuance costs, related to the 2019 Notes for the year ended December 31, 2019 was $5.6 million. Total unamortized debt issuance costs were $7.8 million as of December 31, 2019.
The estimated fair value of the 2019 Notes was $522.2 million as of December 31, 2019. The estimated fair value of the 2019 Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in “Note 8—Fair Value Measurements.”2021.
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 transactionsinstruments (“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 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 the 2018 Notes, $345.0 million aggregate principal amount of 0% Convertible Seniorthe 2018 Notes, due 2023, 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 2018 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
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 2018 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 2018 Notes at any time prior to the close of business on the second scheduled trading day prior to the redemption date, even if the 2018 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 2018 Notes for cash at a price equal to 100% of the principal amount of the 2018 Notes to be repurchased. Holders of 2018
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Notes to Consolidated Financial Statements
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 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. This transaction was accounted for as an extinguishment of debt and recorded in accordance with the applicable accounting standard in the year ended December 31, 2020. As a result, 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 the year ended December 31, 2021, the Company paid $43.9 million in cash and issued approximately 1.0 million shares of Etsy’s common stock to settle conversion notices of $43.9 million aggregate principal amount of the outstanding 2018 Notes. The debt conversion transactions were accounted for in accordance with ASU 2020-06, which was adopted in the first quarter of 2021. See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” for additional information.
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, 2019,2021, holders of the remaining 2018 Notes are not eligible to convert their 2018 Notes during the first quarter of 2020. When2022. Based on the terms of the 2018 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, the Company cannot be required to settle the remaining 2018 Notes in cash and, therefore, the remaining 2018 Notes outstanding are classified as long-term debt as of December 31, 2019. As of December 31, 2019, the if-converted value of the 2018 Notes was approximately $76.4 million higher than the aggregate principal amount, or $421.4 million.
The 2018 Notes are general unsecured obligations of the Company. The 2018 Notes rank senior in right of payment to all of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment with all of our liabilities that are not so subordinated, including our 2019 Notes; are effectively junior to any of the Company’s secured indebtedness; and are structurally junior to all indebtedness and liabilities (including trade payables) of the Company’s subsidiaries.
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 Sheets 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 of approximately $72.8 million is included in 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. 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 Sheets 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
The Company capitalized $10.0 million of debt issuance costs in connection with the 2018 Notes. Non-cash interest expense, including amortization of debt issuance costs, related to the 2018 Notes for the year ended December 31, 2019 and 2018 was $15.2 million and $12.2 million, respectively. Total unamortized debt issuance costs related to the 2018 Notes were $5.2 million and $6.7 million as of December 31, 2019 and 2018, respectively.
The estimated fair value of the 2018 Notes was $310.3 million and $279.1 million as of December 31, 2019 and 2018, respectively. The estimated fair value of the 2018 Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in “Note 8—Fair Value Measurements.”2021.
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.
Table of Contents
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):
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| As of December 31, 2021 |
| 2021 Notes | | 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
Principal | $ | 1,000,000 | | | $ | 650,000 | | | $ | 649,958 | | | $ | 62 | | | $ | 2,300,020 | |
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Unamortized debt issuance costs | 12,271 | | | 6,763 | | | 5,568 | | | — | | | 24,602 | |
Net carrying value (1) | $ | 987,729 | | | $ | 643,237 | | | $ | 644,390 | | | $ | 62 | | | $ | 2,275,418 | |
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| As of December 31, 2020 |
| 2021 Notes | | 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
Principal | $ | — | | | $ | 650,000 | | | $ | 650,000 | | | $ | 43,915 | | | $ | 1,343,915 | |
Unamortized debt discount (1) | — | | | 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 | |
(1) Upon adoption of ASU 2020-06 as of January 1, 2021, the unamortized debt discount balance was derecognized, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.”
The annual effective interest rate for the 2021 Notes, 2020 Notes, and 2019 Notes was approximately 0.4%, 0.3%, and 0.3%, respectively. Interest expense related to each of the Notes for the periods presented below was as follows (in thousands):
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| Year Ended December 31, 2021 |
| 2021 Notes | | 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
Total interest expense (1) | $ | 2,411 | | | $ | 2,006 | | | $ | 1,985 | | | $ | 44 | | | $ | 6,446 | |
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| Year Ended December 31, 2020 |
| 2021 Notes | | 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
Coupon interest and amortization of debt issuance costs | $ | — | | | $ | 660 | | | $ | 1,843 | | | $ | 1,070 | | | $ | 3,573 | |
Amortization of debt discount | — | | | 6,081 | | | 19,598 | | | 9,917 | | | 35,596 | |
Total interest expense | $ | — | | | $ | 6,741 | | | $ | 21,441 | | | $ | 10,987 | | | $ | 39,169 | |
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| Year Ended December 31, 2019 |
| 2021 Notes | | 2020 Notes | | 2019 Notes | | 2018 Notes | | Total |
Coupon interest and amortization of debt issuance costs | $ | — | | | $ | — | | | $ | 489 | | | $ | 1,484 | | | $ | 1,973 | |
Amortization of debt discount | — | | | — | | | 5,142 | | | 13,747 | | | 18,889 | |
Total interest expense | $ | — | | | $ | — | | | $ | 5,631 | | | $ | 15,231 | | | $ | 20,862 | |
(1)Total interest expense for the year ended December 31, 2021 consisted of coupon interest and amortization of debt issuance costs, as there is no amortization of the debt discount in the current year due to the adoption of ASU 2020-06 as of January 1, 2021, as described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements.”
In accounting for the issuance of the 2020 Notes, 2019 Notes, and 2018 Notes, the Company separated the liability and equity components. Following the adoption of ASU 2020-06 in the first quarter of 2021, the Company derecognized the unamortized debt discount, which was recorded as a direct deduction from the Notes, and derecognized the equity component of the Notes, resulting in an increase in long-term debt, net. In accounting for the issuance of the 2021 Notes, the Company recorded the 2021 Notes as a liability at face value. Transaction costs attributable to the liabilities were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheets and are amortized to interest expense over the terms of the respective Notes.
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.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
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 the Company’s 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.
2019 Credit Agreement
On February 25, 2019, the Company entered into a $200.0 million senior secured revolving credit facility pursuant to a Credit Agreement (the “2019 Credit Agreement”) with lenders party thereto from time to time, and Citibank N.A., as administrative Agent. The 2019 Credit Agreement will mature in February 2024. The 2019 Credit Agreement includes a letter of credit sublimit of $30.0 million and a swingline loan sublimit of $10.0 million.
Borrowings under the 2019 Credit Agreement (other than swingline loans) bear interest, at the Company’s option, at (i) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR rate for a one-month interest period plus 1.00%, in each case plus a margin ranging from 0.25% to 0.875% or (ii) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.875%. Swingline loans under the 2019 Credit Agreement bear interest at the same base rate (plus the margin applicable to borrowings bearing interest at the base rate). These margins are determined based on the senior secured net leverage ratio (defined as secured funded debt, net of unrestricted cash up to $100 million, to EBITDA) for the preceding four fiscal quarter period.periods. The 2019 Credit Agreement contains customary provisions for the replacement of the adjusted LIBOR rate with an alternate benchmark rate when the adjusted LIBOR rate is phased out in the lending market. The Company does not anticipate that replacement of the benchmark rate, as provided in the 2019 Credit Agreement, will materially impact its liquidity or financial position. 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.
Etsy, Inc.
Notes to Consolidated Financial Statements
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 $0.6 million and $0.9 million as of December 31, 2021 and December 31, 2020, respectively. Non-cash interest expense related to debt issuance costs on the 2019 Credit Agreement for each of the yearyears ended December 31, 2021, 2020, and 2019 was $0.3 million. Total unamortized debt issuance costs related to the 2019 Credit Agreement were $1.1 million as of December 31, 2019.
At December 31, 2019,2021 and December 31, 2020, the Company did 0tnot have any borrowings under the 2019 Credit Agreement and was in compliance with all financial covenants.
Note 14—Commitments and Contingencies
Lease Commitments130
Finance Leases
The Company adopted ASU 2016-02—Leases (Topic 842) in the first quarter of 2019. Prior to the adoption of this standard, the Company applied build-to-suit accounting treatment to its headquarters lease in Brooklyn, New York and accounted for leased computer equipment as capital leases. The Company now accounts for these as finance leases under the requirements of the standard. For more information on the adoption of ASU 2016-02—Leases see “Note 1—Basis of Presentation and Summary of Significant Accounting Policies.”
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. For the year ended December 31, 2019, approximately 172,000 rentable square feet was accounted for as a finance lease and approximately 53,000 rentable square feet located in an adjacent building was 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 Sheets.
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 was reduced to $6.0 million in 2019. The DFS Line allows the Company to lease hosting equipment from DFS. The leases have a 36-month term, 0 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, 2019, the Company has lease obligations of approximately $0.8 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 3.71-6.94% 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, 2019, the Company has lease obligations of approximately $2.0 million related to leased computer equipment using the ePlus Line.
For the years ended December 31, 2019, 2018, and 2017, the accompanying Consolidated Statement of Operations includes charges of approximately $0.5 million, $1.0 million, and $1.6 million for interest expense, respectively, related to the equipment leased using the DFS and ePlus Lines.
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 13—Commitments and Contingencies
Operating Leases
The Company did not enter into any material operating leases or extensions in 2019, 2018, or 2017. 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, 2019, 2018, and 2017 was $5.4 million, $3.8 million, and $4.1 million, respectively.
Purchase Obligations
The Company has $97.7$487.7 million of non-cancelable contractual commitments as of December 31, 2019,2021, primarily related to cloud computing, as well as other support services. These commitments are due within fourfive years. For those agreements with variable terms, the Company does not estimate what the total obligation may be beyond any minimum quantities and/or pricing. The following table represents the Company’s commitments under its purchase obligations as of December 31, 20192021 (in thousands):
| | | | | Purchase Obligations |
Periods ending | | Periods ending | | |
2022 | | 2022 | | $ | 79,567 | |
2023 | | 2023 | | 97,178 | |
2024 | | 2024 | | 111,000 | |
2025 | | 2025 | | 130,000 | |
2026 | | 2026 | | 70,000 | |
Thereafter | | Thereafter | | — | |
Total purchase obligations | | Total purchase obligations | | $ | 487,745 | |
| | | Purchase Obligations | |
Periods ending | | |
2020 | $ | 34,153 |
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2021 | 30,735 |
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2022 | 32,122 |
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2023 | 700 |
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2024 | — |
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Thereafter | — |
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Total purchase obligations | $ | 97,710 |
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Long-Term Debt
In September 2019, the Company issued the 2019 Notes in a private placement to qualified institutional buyers pursuant to the Securities Act. The 2019 Notes will mature on October 1, 2026, unless earlier converted or repurchased. In March 2018, the Company issued the 2018 Notes in a private placement to qualified institutional buyers pursuant to the Securities Act. The 2018 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 2019 and 2018 Notes, see “Note 13—Debt.”
Non-Income Tax Contingencies
The Company had reserves of $7.2$38.8 million and $0.9$8.0 million at December 31, 20192021 and 2018,2020, respectively, for certain non-income tax obligations, representing management’s best estimate of its potential liability. The 2019 reserve includes $4.8reserves as of December 31, 2021 and 2020 include $2.8 million and $4.5 million, respectively, due to the acquisition of Reverb, which isare wholly offset by an indemnification asset of $3.7$2.2 million and $3.4 million and a deferred tax asset of $1.1$0.6 million. and $1.1 million, respectively. The Company recorded additional non-income tax reserves of $29.5 million, which is partially offset by an indemnification asset of $1.7 million, as part of the acquisitions of Depop and Elo7 it completed in 2021. These amounts were primarily recorded as part of purchase accounting. 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
From time to time in the normal course of business, various other claims and litigation have been asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages. Any claims or litigation regardless of their success, could have an adverse effect on the Company’s 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 ourits business.
132
Etsy, Inc.
Notes to Consolidated Financial Statements
Note 15—14—Stockholders’ Equity
Common Stock
At December 31, 20192021 and 2018,2020, the authorized capital stock of the Company included 1,400,000,000 shares of common stock. At December 31, 20192021 and 20182020 there were 25,000,000 shares of preferred stock authorized.
Common Stock
At December 31, 2019127,022,118 and 2018 there were 118,342,772 and 119,771,702125,835,931 shares of common stock issued and outstanding, respectively. The common stock has a $0.001 par value. Holders of common stock are entitled to 1 vote per share. Holders of common stock are not entitled to receive dividends unless declared by the Board of Directors. NaNNo dividends have been declared through December 31, 2019. The common stock has a $0.001 par value.2021.
Convertible Preferred Stock
UponAt December 31, 2021 and 2020 the closingauthorized capital stock of the IPO on April 21, 2015, all outstandingCompany included 25,000,000 shares of convertible preferred stock were converted into 53,448,243 shares of common stock. As of December 31, 2019, 2018,2021, 2020, and 2017,2019, there was 0 convertibleno preferred stock outstanding.
ShareStock Repurchases
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 2,094,196 shares of its common stock. This authorization was only applicable concurrent with the issuance of the 2019 Notes and, therefore, there are 0 further purchases authorized under this approval.
On November 1, 2018,December 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. As of December 31, 2021, the remaining amount available to be repurchased under the approved plan was $127.2 million.
In November 2017,2018, the Board of Directors approved a stock repurchase program that enabled the Company to repurchase up to $100$200 million of its common stock. The program was completed in the secondfourth quarter of 2018.2020.
The following table summarizes the Company’s stock repurchase activity related to the programs noted above:
| | | | | | | | | | | | | | | |
| Shares Repurchased | | Average Price Paid per Share (1) | | | | |
Repurchases of common stock for the year ended December 31, 2021 | 554,718 | | | $ | 221.33 | | | | | |
Repurchases of common stock for the year ended December 31, 2020 | 1,161,947 | | | 88.20 | | | | | |
Repurchases of common stock for the year ended December 31, 2019 | 1,008,211 | | | 52.06 | | | | | |
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(1)Average price paid per share excludes broker commissions. Value of shares repurchased includes broker commissions.
All repurchases were made using cash resources, and all repurchased shares of common stock have been retired.
Under the stock repurchase 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 wouldmay 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.
Additionally, in June 2021, the Company repurchased approximately 1.1 million shares of its common stock for approximately $180 million concurrently with the issuance of the 2021 Notes. See “Note 12—Debt” for more information. This repurchase was separate from the stock repurchase program approved by the Board of Directors in December 2020.
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 12—Debt” for additional information. This repurchase was separate from the stock repurchase program approved by the Board of Directors in November 2018.
In September 2019, the Company repurchased approximately 2.1 million shares of its common stock for approximately $124.5 million concurrently with the issuance of the 2019 Notes. This repurchase was separate from the stock repurchase program approved by the Board of Directors in November 2018.
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 and excluding the concurrent stock repurchase with the pricing of the 2019 Notes (in thousands, except share and per share amounts):
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| Shares Repurchased | | Average Price Paid per Share (1) | | Value of Shares Repurchased (1) | | Remaining Amount Authorized |
New Authorization on November 17, 2017 of $100 million | — |
| | $ | — |
| | $ | — |
| | $ | 100,000 |
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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 |
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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 | — |
| | — |
| | — |
| | — |
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New Authorization on November 1, 2018 of $200 million | — |
| | — |
| | — |
| | 200,000 |
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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 |
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Repurchases of common stock for the three months ended: | | | | | | | |
March 31, 2019 | 532,412 |
| | 51.64 |
| | 27,500 |
| | (27,500 | ) |
June 30, 2019 | — |
| | — |
| | — |
| | — |
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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 |
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(1) Average price paid per share excludes broker commissions. Value of shares repurchased includes broker commissions.
All repurchases were made using cash resources and all repurchased shares of common stock have been retired.
Note 16—15—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”),RSUs, PBRSUs, and performance cash awards to employees directors, and consultants.directors. 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 Board of Directors. The Board of Directors approved an increase of 5,917,139, 2,395,434,6,351,106, 6,291,797, and 6,088,4615,917,139, shares available for issuance under the 2015 Plan as of January 2, 2020,3, 2022, January 2, 2019,4, 2021, and January 2, 2018,2020, respectively. Any awards issued under the 2015 Plan that are forfeited 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
Etsy, Inc.
Notes to Consolidated Financial Statements
reserved for issuance or subject to outstanding awards under the 2006 Stock Plan. At December 31, 2019, 31,831,8082021, 44,040,744 shares were authorized under the 2015 Plan and 20,494,36929,705,320 shares were available for future grant.
In the year ended December 31, 2019,2021, the Company granted nonqualified stock options and RSUs, including Financial PBRSUs and TSR PBRSUs, to eligible participants.participants under its 2015 Plan. The Company recognizes forfeitures as they occur. Options were generally granted for a term of 10 years. For both options and RSUs, vesting is typically over a four-year period 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 JulyI 2018, inn 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 following the date of grant. Beginning in March 2018, Iinn 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.
For Financial PBRSUs, the number of RSUs received will depend on the achievement of financial metrics relative to the approved performance targets. Depending on the actual financial metrics achieved relative to the target financial metrics, throughout the defined performance period of the award, the number of PBRSUs that vest could range from 0% to 200% of the target amount, and are subject to the Compensation Committee’s approval of the level of achievement against the approved performance targets. For the TSR PBRSUs, the number of RSUs received will depend on the Company’s total shareholder return relative to that of the Nasdaq Composite Index over a three-year measurement period.
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. 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.model. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq (rounded toon the nearest hundredth) forgrant date. Additionally, the 30 trading days immediately prior tofair value of the Financial PBRSUs is determined using a probability assessment and including the datefair value of grant. the TSR PBRSUs with market conditions is determined using a Monte-Carlo simulation model. For PBRSUs, the Company recognizes stock-based compensation expenses on a straight-line basis over the longest of the derived, explicit, or implicit service period. As of interim and annual reporting periods, the Financial PBRSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PBRSUs stock-based compensation expense is not adjusted.
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, |
| 2021 | | 2020 | | 2019 |
Volatility | 43.4% - 57.4% | | 38.9% - 41.7% | | 39.1% - 39.5% |
Risk-free interest rate | 0.8% - 1.2% | | 0.3% - 1.7% | | 1.6% - 2.5% |
Expected term (in years) | 4.6 - 6.2 | | 5.5 - 6.2 | | 5.5 - 6.2 |
| | | | | |
|
| | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Volatility | 39.1% - 39.5% | | 38.6% - 47.8% | | 41.7% - 44.2% |
Risk-free interest rate | 1.6% - 2.5% | | 2.6% - 2.9% | | 1.9% - 2.2% |
Expected term (in years) | 5.5 - 6.2 | | 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 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding at December 31, 2018 | 6,890,994 | | | $ | 12.91 | | | 7.94 | | $ | 239,177 | |
Granted | 462,563 | | | 64.29 | | | | | |
Exercised | (840,835) | | | 11.64 | | | | | |
Forfeited/Canceled | (217,803) | | | 30.11 | | | | | |
Outstanding at December 31, 2019 | 6,294,919 | | | 16.26 | | | 7.24 | | 185,900 | |
Granted | 654,296 | | | 46.38 | | | | | |
Exercised | (1,834,773) | | | 13.80 | | | | | |
Forfeited/Canceled | (14,490) | | | 32.15 | | | | | |
Outstanding at December 31, 2020 | 5,099,952 | | | 20.97 | | | 6.81 | | 800,453 | |
Granted | 198,193 | | | 218.93 | | | | | |
Exercised | (994,456) | | | 22.83 | | | | | |
Forfeited/Canceled | (29,964) | | | 47.86 | | | | | |
Outstanding at December 31, 2021 | 4,273,725 | | | 29.52 | | | 5.99 | | 810,321 | |
Total exercisable at December 31, 2021 | 3,497,104 | | | 16.72 | | | 5.52 | | 707,278 | |
| | | | | | | |
|
| | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contract Term (in years) | | Aggregate Intrinsic Value |
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 |
|
Granted | 797,201 |
| | 29.87 |
| | | | |
Exercised | (1,588,779 | ) | | 11.49 |
| | | | |
Forfeited/Canceled | (265,367 | ) | | 15.68 |
| | | | |
Outstanding at December 31, 2018 | 6,890,994 |
| | 12.91 |
| | 7.94 | | 239,177 |
|
Granted | 462,563 |
| | 64.29 |
| | | | |
Exercised | (840,835 | ) | | 11.64 |
| | | | |
Forfeited/Canceled | (217,803 | ) | | 30.11 |
| | | | |
Outstanding at December 31, 2019 | 6,294,919 |
| | 16.26 |
| | 7.24 | | 185,900 |
|
Total exercisable at December 31, 2019 | 3,835,279 |
| | 12.30 |
| | 6.88 | | 123,671 |
|
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, |
| 2019 | | 2018 | | 2017 |
Weighted average grant date fair value of options granted | $ | 26.75 |
| | $ | 13.33 |
| | $ | 4.85 |
|
Intrinsic value of options exercised | 42,758 |
| | 34,268 |
| | 52,693 |
|
Fair value of awards vested | 41,997 |
| | 32,717 |
| | 19,826 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Weighted average grant date fair value of options granted | $ | 95.00 | | | $ | 18.18 | | | $ | 26.75 | |
Intrinsic value of options exercised | 206,709 | | | 151,785 | | | 42,758 | |
Fair value of awards vested | 96,592 | | | 60,622 | | | 41,997 | |
The total unrecognized compensation expense at December 31, 20192021 related to the Company’s options was $22.6$24.9 million, which will be recognized over aan estimated weighted-average amortization period of 2.472.65 years.
In connection with the acquisitions of Depop and Elo7 in July 2021, outstanding, unvested options held by continuing employees of each acquired entity as of the respective acquisition dates were replaced with Etsy RSU awards with the same aggregate fair value, with a total dollar value of $78.8 million, $5.6 million of which relates to pre-combination service and was included as a component of the purchase price. These RSUs generally follow the original vesting schedule of the replaced options, which provided that they will vest 25% on the first anniversary of their original vesting commencement date with the remaining 75% vesting ratably each month thereafter until the fourth anniversary of their original vesting commencement date.
Table of Contents
Etsy, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the activity for the Company’s unvested RSUs:RSUs, which includes Financial PBRSUs and TSR PBRSUs:
| | | | | | | | | | | |
| Shares | | Weighted-Average Fair Value |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Unvested at December 31, 2018 | 3,480,368 | | | $ | 22.87 | |
Granted | 1,464,785 | | | 61.92 | |
Vested | (1,392,295) | | | 22.67 | |
Forfeited/Canceled | (592,445) | | | 31.25 | |
Unvested at December 31, 2019 | 2,960,413 | | | 40.61 | |
Granted | 1,712,587 | | | 54.19 | |
Vested | (1,369,271) | | | 35.36 | |
Forfeited/Canceled | (217,742) | | | 43.27 | |
Unvested at December 31, 2020 | 3,085,987 | | | 50.28 | |
Granted (1) | 2,136,685 | | | 208.84 |
Vested | (1,400,241) | | | 59.80 |
Forfeited/Canceled | (315,710) | | | 108.22 |
Unvested at December 31, 2021 | 3,506,721 | | | 137.87 |
|
| | | | | | |
| Shares | | Weighted-Average Fair Value |
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 |
|
Granted | 2,448,169 |
| | 28.22 |
|
Vested | (1,496,906 | ) | | 13.80 |
|
Forfeited/Canceled | (545,142 | ) | | 18.47 |
|
Unvested at December 31, 2018 | 3,480,368 |
| | 22.87 |
|
Granted | 1,464,785 |
| | 61.92 |
|
Vested | (1,392,295 | ) | | 22.67 |
|
Forfeited/Canceled | (592,445 | ) | | 31.25 |
|
Unvested at December 31, 2019 | 2,960,413 |
| | 40.61 |
|
(1)Includes RSU awards issued to Depop and Elo7 employees in connection with the acquisitions in the third quarter of 2021.The total unrecognized compensation expense at December 31, 20192021 related to the Company’s unvested RSUs, including the Financial PBRSUs and TSR PBRSUs, was $107.4$427.3 million, which will be recognized over an estimated weighted-average amortization period of 2.97 years.
In connection with the acquisition of Depop, certain Depop executives are eligible to receive deferred consideration of $44.0 million in shares of Etsy common stock over the three years following the acquisition date, subject to certain service-based vesting conditions during the vesting period. These awards will be settled by issuing shares of Etsy common stock on or shortly following the applicable vesting date, with the number of shares to be determined based on the Company’s stock price on, or leading up to, the applicable vesting date. These awards will be recognized as post-combination service stock-based compensation expense over a vesting period equal to the mandatory service period associated with the award, with a corresponding liability included within Other liabilities on the Company’s Consolidated Balance Sheets until the service-based vesting criteria are met and the awards are settled in shares of Etsy common stock. The unrecognized compensation expense at December 31, 2021 related to these awards was $33.9 million, which will be recognized over a weighted-average periodremaining term of 2.982.53 years. These amounts are excluded from the unrecognized compensation expense associated with the Company’s unvested RSUs noted above.
Etsy, Inc.
Notes to Consolidated Financial Statements
Total stock-basedStock-based compensation expense included in the Consolidated Statements of Operations is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cost of revenue | $ | 13,085 | | | $ | 7,731 | | | $ | 5,787 | |
Marketing | 11,339 | | | 5,184 | | | 3,774 | |
Product development | 58,900 | | | 33,030 | | | 21,085 | |
General and administrative | 56,586 | | | 19,169 | | | 13,749 | |
Stock-based compensation expense | $ | 139,910 | | | $ | 65,114 | | | $ | 44,395 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Cost of revenue | $ | 5,787 |
| | $ | 3,357 |
| | $ | 1,739 |
|
Marketing | 3,774 |
| | 2,507 |
| | 1,933 |
|
Product development | 21,085 |
| | 21,234 |
| | 8,274 |
|
General and administrative | 13,749 |
| | 11,133 |
| | 14,613 |
|
Total stock-based compensation expense | $ | 44,395 |
| | $ | 38,231 |
| | $ | 26,559 |
|
The total stock-based compensation expense in the years ended December 31, 2019, 2018, and 2017 includes $1.3 million, $3.8 million, and $3.9 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 two 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, 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% of the total workforce as of December 31, 2016, closing ALM, a marketplace in France, and closing or consolidating certain international offices.
In connection with the Actions, the Company incurred $13.9 million of restructuring and other exit costs in the year ended December 31, 2017, comprised of employee severance, stock compensation modifications, 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.
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, 2019 (in thousands):
|
| | | | | | | | | | | | | | | |
| Severance Charge | | Stock-Based Compensation | | Other Exit Costs | | Total |
Balance, December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total restructuring and other exit costs | 10,204 |
| | 2,701 |
| | 992 |
| | 13,897 |
|
Costs charged against equity/assets | — |
| | (2,701 | ) | | (286 | ) | | (2,987 | ) |
Cash payments | (8,896 | ) | | — |
| | (672 | ) | | (9,568 | ) |
Balance, December 31, 2017 | 1,308 |
| | — |
| | 34 |
| | 1,342 |
|
Total restructuring and other exit income | (244 | ) | | — |
| | (5 | ) | | (249 | ) |
Cash payments | (1,064 | ) | | — |
| | (29 | ) | | (1,093 | ) |
Balance, December 31, 2018 | — |
| | — |
| | — |
| | — |
|
Balance, December 31, 2019 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Etsy, Inc.
Notes to Consolidated Financial Statements
Total restructuring and other exit costs (income) included in the Consolidated Statements of Operations are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
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, 2019.2021. “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, 20192021 at the reasonable assurance level.
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, 20192021 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, 20192021 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Management has excluded Reverb Holdings Inc.Elo7 Serviços de Informática S.A. (“Reverb”Elo7”) and Depop Limited (“Depop”) from its assessment of internal control over financial reporting as of December 31, 20192021 because itElo7 was acquired by the Company on August 15, 2019. Reverb is aJuly 2, 2021 and Depop was acquired on July 12, 2021. Both Elo7 and Depop are wholly-owned subsidiarysubsidiaries whose combined total assets and total revenues represent 2%1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.2021.
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, 2019,2021, which appears in Part II, Item 8 of this Annual Report on Form 10-K.Report.
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, 20192021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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 20202022 Annual Meeting of Stockholders (“Proxy Statement”) to be filed with the SEC within 120 days of the fiscal year ended December 31, 2019.
2021.
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.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 and 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.Report.
(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 | | 2.1 | | 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 | | |
| | | | | | | | | | | X |
| | | 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 | | |
| | | 10-K | | 001-36911 | | 10.3.1 | | 2/28/2019 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | Incorporated by Reference | | Filed Herewith |
Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | 8-K | | 001-36911 | | 2.01 | | 7/22/2019 | | |
| | | 10-Q | | 001-36911 | | 2.1 | | 8/5/2021 | | |
| | | 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 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | Incorporated by Reference | | Filed Herewith |
Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | 8-K | | 001-36911 | | 4.1 | | 6/11/2021 | | |
| | | 8-K | | 001-36911 | | 4.2 | | 6/11/2021 | | |
| | | 8-K | | 001-36911 | | 99.1 | | 6/11/2021 | | |
| | | 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 | | |
| | | 10-K | | 001-36911 | | 10.3.1 | | 2/28/2019 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 5/6/2021 | | |
| | | S-1/A | | 333-202497 | | 10.4 | | 3/31/2015 | | |
| | | S-1 | | 333-202497 | | 10.6 | | 3/4/2015 | | |
| | | | | | | | | | | X |
| | | 10-Q | | 001-36911 | | 10.1 | | 8/7/2017 | | |
| | | 8-K | | 001-36911 | | 10.1 | | 1/20/2021 | | |
| | | 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 | | 10.2 | | 5/6/2021 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 5/9/2019 | | |
|
| | | | | | | | | | | |
| | | 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 | | 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-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 | | |
| | | | | | | | | | | X |
| | | 10-Q | | 001-36911 | | 10.1 | | 5/9/2019 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 10/31/2019 | | |
| | | 8-K | | 001-36911 | | 99.1 | | 9/23/2019 | | |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
139
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | Incorporated by Reference | | Filed Herewith |
Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 10/31/2019 | | |
| | | 10-Q | | 001-36911 | | 10.1 | | 10/29/2020 | | |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
| | | | | | | | | | | X |
101.INS | Inline XBRL Instance Document** | | | | | | | | | | |
101.SCH | Inline XBRL Taxonomy Schema Linkbase Document | | | | | | | | | | X |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | | | | | | | | | | X |
101.LAB | Inline XBRL Taxonomy Labels Linkbase Document | | | | | | | | | | X |
101.PRE | Inline 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, 2021, 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 instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. *** The cover page interactive data file is embedded within the inline XBRL document and included in Exhibit 101. | | | | | | | | | | | 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, 2019, 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.
143
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 26, 202024, 2022 | /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 (Principal Executive Officer) | February 26, 202024, 2022 |
/s/ Rachel Glaser Rachel Glaser | Chief Financial Officer (Principal Financial andOfficer) | February 24, 2022 |
/s/ Merilee Buckley Merilee Buckley | Chief Accounting Officer (Principal Accounting Officer) | February 26, 202024, 2022 |
/s/ Fred Wilson Fred Wilson | Chair | February 26, 202024, 2022 |
/s/ Andrew Ballard Andrew Ballard | Director | February 24, 2022 |
/s/ Marla Blow Marla Blow | Director | February 24, 2022 |
/s/ Gary Briggs Gary Briggs | Director | February 26, 202024, 2022 |
/s/ M. Michele Burns M. Michele Burns | Director | February 26, 2020 |
/s/ Edith Cooper
Edith Cooper
| Director | February 26, 202024, 2022 |
/s/ Jonathan D. Klein Jonathan D. Klein | Director | February 26, 202024, 2022 |
/s/ Melissa Reiff Melissa Reiff | Director | February 26, 202024, 2022 |
/s/ Margaret M. Smyth Margaret M. Smyth | Director | February 26, 202024, 2022 |