ETSY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with the audited consolidated financial statements included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onFebruary 27, 2020 (the "Annual Report"). This discussion, particularly information with respect to our outlook, 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 Quarterly Report, particularly in the "Risk Factors" section. For more information regarding key factors affecting our performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Factors Affecting our Performance" in our Annual Report, which we incorporate by reference. Overview Business Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Our mission is to "Keep Commerce Human," and we're committed to using the power of business and technology to strengthen communities and empower people around the world. Our primary marketplace, Etsy.com, is the global destination for unique and creative goods. The Etsy marketplace connects creative entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflect their sense of style, or represent a meaningful occasion. Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. We have a seller-aligned business model: we make money when our sellers make money. We offer Etsy sellers a marketplace with millions of buyers along with a range of seller tools and services that are specifically designed to help our creative entrepreneurs generate more sales and scale their businesses. We are focused on attracting potential buyers to the Etsy marketplace for those "special" purchase occasions 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 everyday include handmade or vintage unique clothing, accessories, household items, or furniture that the buyer wants to reflect her sense of style. Special purchase occasions can occur many times throughout the year and include shopping for special occasions that reflects an individual'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. OnAugust 15, 2019 , we acquired all of the outstanding capital stock ofReverb Holdings, Inc. ("Reverb") for$270.4 million , net of cash acquired. The Reverb marketplace is a leading global online marketplace dedicated to buying and selling new, used, and vintage musical instruments, with a vibrant community of buyers and sellers all over the world. Reverb, now a wholly-owned subsidiary ofEtsy, Inc. , is included in all financial and other metrics fromAugust 15, 2019 (the date of acquisition), unless otherwise noted. Our revenue is diversified, generated from a mix of marketplace activities and other optional services we provide to 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 primarily include listing an item for sale; completing transactions between a buyer and a seller, which includes, beginning in the second quarter of 2020, an additional transaction fee related to offsite advertising; and using our payments services to process payments, including foreign currency transactions. Services revenue is comprised of the fees a seller pays us for our optional other services ("Services"). Services primarily include on-site advertising, which allow sellers to pay for prominent placement of their listings in search results; and shipping labels, which allow sellers inthe United States ,Canada ,United Kingdom , andAustralia to purchase discounted shipping labels. Our strategy is focused on growing the Etsy marketplace in our six core geographies and building a sustainable competitive advantage around four elements of our business that we believe differentiate us from our competitors, or what we call our "Right to Win." The foundation of Etsy's competitive advantage is our collection of our sellers' unique items, which, we believe, when combined with best-in-class search and discovery, human connections, and a trusted brand, will enable us to continue to stand out among other e-commerce platforms and marketplaces. Our investments in product, marketing, and talent will be focused on capitalizing on these four elements of our business. Ultimately, the goal of our long-term strategy is to drive 27
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more new buyers to the website, give existing buyers reasons to come back more often, encourage buyers to spend more per order, and fuel success for our sellers. We see a number of similarities between the levers of growth for the Etsy and Reverb marketplaces, including improving search and discovery, making selling and buying easier, and building a global brand and user community. While current macroeconomic conditions have had a dramatic effect on the global economy and on our business, our experience thus far has reaffirmed the appropriateness of our long-term strategy and has only strengthened our commitment to it. Second Quarter 2020 Financial Highlights As ofJune 30, 2020 , our marketplaces connected 3.1 million active sellers and 60.3 million active buyers in nearly every country in the world. In the three and six months endedJune 30, 2020 , sellers generated GMS of$2.7 billion and$4.0 billion , respectively, of which approximately 61% and 60%, respectively, came from purchases made on mobile devices. We are a global company and approximately 32% and 33% of our GMS in the three and six months endedJune 30, 2020 , respectively, came from transactions where either a seller or a buyer was located outside ofthe United States . Total revenue was$428.7 million and$656.8 million in the three and six months endedJune 30, 2020 , respectively, driven by strong growth in both Marketplace and Services revenue. In the three and six months endedJune 30, 2020 , we recorded net income of$96.4 million and$108.9 million , respectively, and non-GAAP Adjusted EBITDA of$150.6 million and$205.7 million , respectively. 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, cash equivalents, and short-term investments were$1.0 billion as ofJune 30, 2020 . Etsy has$345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 and$650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2026. Additionally, Etsy has the ability to draw down on its$200.0 million senior secured revolving credit facility. In the six months endedJune 30, 2020 , Etsy had positive operating cash flows of$250.1 million . Quarterly Operating Highlights The impacts of the ongoing COVID-19 pandemic on the global economy and on our business continue to evolve. Etsy's performance in the second quarter was extremely strong, with GMS growth of 145.6% and revenue growth of 136.7%. Factors contributing to this performance included our quick and successful transition to remote work; guarding the health and safety of our team; our agility in supporting our global seller community; and our investments in our brand and marketplace - all of which mitigated risk and maximized our financial performance. In addition, Etsy benefited from several tailwinds including the shift from off-line to online shopping, specific competitive dynamics, retail business closures, new buyer cohorts, pent-up demand, emerging categories such as face masks, gifting trends, and stimulus checks. To capitalize on our unique and defensible "Right to Win," we continued to invest in product development, making key improvements to the customer experience during the second quarter. Given the strong business trends, we've prioritized our product portfolio for 2020 both to invest in near term product improvements and allocate more resources to longer-term initiatives such as frequency and customer engagement. Highlights of our second quarter are outlined below: • We experienced broad-based demand across the Etsy marketplace, including
significant demand for face masks. Mask GMS was approximately
and non-mask GMS increased by 93% year-over-year, or by approximately
billion. Our team mobilized quickly to address the surge in face mask
demand by scaling inventory with a call to action for sellers, retraining
our search algorithms, creating on-site banners and automated filters, and
managing delivery expectations.
• We continued to adjust our marketing strategies and spend for the Etsy
marketplace during the second quarter to respond quickly to changing
macroeconomic dynamics and continue to build top of mind awareness for
Etsy. We launched several new advertising campaigns, including a focus on
supporting small businesses, an 'always open' message, and Etsy as a place
for everyday needs. We developed a thoughtful and powerful strategy to
define what "everyday" means for Etsy and bring it to life in our
marketing and product experiences for buyers. We expanded our investment
in performance marketing as return on investment remains strong across all
channels, and we leveraged our new customer relationship management tools
to optimize data in real-time and more effectively target buyers through
Etsy's owned and paid channels.
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• In the second quarter of 2020, we completed the migration of seller
listings to our new Offsite Ads, an iteration on our advertising
offerings, to help sellers more effectively drive traffic to their
listings. Etsy will pay the upfront costs to promote Etsy sellers'
listings on multiple internet platforms without any upfront costs for
sellers.
• To strengthen the buyer experience, we made improvements to mobile web: we
enhanced search and discovery by improving our query-listing matching and
continuing to iterate on ranking algorithms to deliver more relevant
recommendations further along in the purchase funnel; we added a more
prominent "In Stock" indicator to increase buyer confidence that an item
is not mass-produced; we highlighted recent positive seller reviews todrive repeat purchases and spend per buyer; and unveiled a new augmented
reality feature which helps buyers visualize the items they're interested
in purchasing in their own homes.
• We continued to deepen the human connections and trust in our marketplace
through product development efforts focused on the core buying experience,
including improving shipping, fulfillment, and post-purchase experiences,
and making our Etsy app more engaging and habit-driving.
• During the second quarter the Etsy marketplace saw an influx of 18.7million new and reactivated buyers; the latter being those who hadn't
purchased in a year or more. Given the significant amount of new buyers on
the platform, our focus on buyer frequency became even more urgent,
specifically engaging first-time buyers to bring them back to Etsy to make
their second purchase. We are focused on increasing the 30 day repeat
purchase rate for new buyers by using strategies such as targeting buyers
on and off site with personalized and consistent messaging across many
channels.
• Reverb benefited from similar macroeconomic ecommerce tailwinds to Etsyduring the second quarter, as well as a strong increase in new buyers and
novice musicians. We continued to execute on product and marketing
initiatives to bolster Reverb's two-sided marketplace. Beginning on August
4, 2020, Reverb increased its seller transaction fee for the first time
from 3.5% to 5%. Reverb plans to increase investments in marketing, expand
its global customer engagement team, and grow the capacity of its team
that creates and enhances seller tools and services.
Quarterly Impact Highlights
We continued to make progress on our impact strategy, reflecting the positive economic, social, and ecological impact we want to have on the world while advancing and complementing our business strategy. Highlights during the second quarter are outlined below: • In living up to our mission to "Keep Commerce Human," when the pandemic
began impacting our seller community, we continued our seller support
initiatives in the second quarter, including waiving certain seller fees,
providing sellers a one-month grace period to pay their bills, and
providing listing credits for mask sellers. The combination of one-time
investments to support our sellers totaled approximately $12 million in
the second quarter of 2020.
• Etsy stands for the human connections made on our platform and the lives
behind them. Black Lives Matter is the civil rights movement of our time,
addressing a fundamental inequality in our society: that Black lives aretoo often undervalued. In support of this movement, in the second quarter
of 2020 Etsy made
and Borealis Philanthropy's
donations.
• We deepened our commitment to carbon-offset shipping by offsetting 100% of
Reverb's emissions from shipping beginning in April of 2020. Now, as with
the Etsy marketplace, for every item purchased on Reverb, we will invest
in environmental projects to offset the impact from shipping.
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Key Operating and Financial Metrics
We collect and analyze operating and financial data to evaluate the health and
performance of our business and allocate our resources (such as capital, people,
and technology investments). The unaudited non-GAAP financial measures and key
operating and financial metrics we use are:
Three Months Ended % Growth Six Months Ended % Growth
June 30, (Decline) June 30, (Decline)
2020 2019 Y/Y 2020 2019 Y/Y
(in thousands, except percentages)
GMS (1) $ 2,688,783 $ 1,094,829 145.6 % $ 4,042,074 $ 2,118,857 90.8 %
Revenue $ 428,737 $ 181,095 136.7 % $ 656,792 $ 350,434 87.4 %
Marketplace revenue $ 332,031 $ 135,199 145.6 % $ 487,952 $ 262,367 86.0 %
Services revenue $ 96,706 $ 45,896 110.7 % $ 168,840 $ 88,067 91.7 %
Net income $ 96,425 $ 18,223 429.1 % $ 108,947 $ 49,802 118.8 %
Adjusted EBITDA (Non-GAAP) $ 150,628 $ 39,701 279.4 % $ 205,684 $ 89,568 129.6 %
Active sellers 3,140 2,333 34.6 % 3,140 2,333 34.6 %
Active buyers 60,274 42,742 41.0 % 60,274 42,742 41.0 %
Percent mobile GMS 61 % 58 % 300 bps 60 % 58 % 200 bps
Percent international GMS 32 % 38 % (600 ) bps 33 % 38 % (500 ) bps
(1) GMS for the three and six months ended
of
three and six months ended
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 $1.6 billion , or 145.6%, to $2.7 billion and increased $1.9
billion , or 90.8%, to $4.0 billion in the three and six months ended June 30,
2020 , respectively, compared to the three and six months ended June 30, 2019 ,
respectively. GMS for the three and six months ended June 30, 2020 , included
$227.0 million and $395.3 million , respectively, related to the results of
Reverb. On a currency-neutral basis GMS growth for the three and six months
ended June 30, 2020 would have been 146.7% and 91.6%, respectively, or
approximately 110 basis points higher than the reported 145.6% growth and 80
basis points higher than the reported 90.8% growth, respectively. Supporting
this growth in GMS, both active sellers and active buyers had strong
year-over-year growth. Active sellers increased 34.6% to 3.1 million, and active
buyers increased 41.0% to 60.3 million at June 30, 2020 compared to June 30,
2019 . In the three and six months ended June 30, 2020 , GMS from new buyers grew
162% and 94%, respectively, year-over-year and represented approximately 18% and
17% of overall GMS, respectively, a slight increase in the three months ended
June 30, 2020 and flat in the six months ended June 30, 2020 compared to last
year. In the three and six months ended June 30, 2020 , GMS from existing buyers
grew 142% and 90%, respectively, year-over-year and represented approximately
82% and 83% of overall GMS, respectively, a slight decrease in the three months
ended June 30, 2020 and flat in the six months ended June 30, 2020 compared to
last year.
Adjusted EBITDA
Adjusted EBITDA represents our net income adjusted to exclude: interest and
other non-operating expense, net; provision (benefit) for income taxes;
depreciation and amortization; stock-based compensation expense; foreign
exchange (gain) loss; and acquisition-related expenses. See "Non-GAAP Financial
Measures" for more information regarding our use of Adjusted EBITDA, including
its limitations as a financial measure, and for a reconciliation of Adjusted
EBITDA to net income, the most directly comparable financial measure calculated
in accordance with GAAP.
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Active Sellers An active seller is a seller who has incurred at least one charge from us in the last 12 months. Charges include Marketplace and Services revenue fees, discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview-Business." 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. We succeed when sellers succeed, so we view the number of active sellers as a key indicator of the awareness of our brand, the reach of our platform, the potential for growth in GMS and revenue, and the health of our business. Active Buyers An active buyer is 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, awareness of our brand, 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. During the three and six months endedJune 30, 2020 , mobile GMS increased as a percentage of total GMS to approximately 61% and 60%, respectively, up from approximately 58% for both the three and six months endedJune 30, 2019 . International GMS International GMS is GMS from transactions where either the billing address for the seller or the shipping address for the buyer at the time of sale is outside ofthe United States . When calculating percent international GMS, we do not take into account refunds associated with canceled transactions. We believe that international GMS shows the level of engagement of our community outsidethe United States and demonstrates our ability to grow GMS and revenue. For the three and six months endedJune 30, 2020 , international GMS decreased as a percentage of total GMS to approximately 32% and 33%, respectively, down from approximately 38% for both the three and six months endedJune 30, 2019 , driven by strong growth inU.S. domestic GMS, which is GMS generated between anU.S. buyer and anU.S. seller, and the acquisition of Reverb, which primarily hasU.S. domestic GMS. International GMS increased approximately 111% and 70%, respectively, in the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 , respectively, driven by our fastest growing international trade route, international domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country, and by GMS betweenU.S. buyers and international sellers. International domestic GMS grew approximately 191% and 117%, respectively in the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 , respectively. 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 growth for the three and six months endedJune 30, 2020 would have been 114% and 72%, respectively. 31
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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 intoU.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 sinceAugust 15, 2019 (the date of acquisition): Quarter-to-Date Period Ended Year-to-Date Period Ended As Reported Currency-Neutral FX Impact As Reported Currency-Neutral FX Impact June 30, 2020 145.6 % 146.7 % (1.1 )% 90.8 % 91.6 % (0.8 )% March 31, 2020 32.2 % 32.6 % (0.4 )% 32.2 % 32.6 % (0.4 )% December 31, 2019 32.8 % 33.0 % (0.2 )% 26.5 % 27.5 % (1.0 )% September 30, 2019 30.1 % 31.1 % (1.0 )% 23.6 % 26.1 % (2.5 )% June 30, 2019 21.4 % 22.8 % (1.4 )% 20.2 % 21.7 % (1.5 )% 32
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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. Our results reflect the operations of Reverb sinceAugust 15, 2019 (the date of acquisition). The period-to-period comparison of financial results is not necessarily indicative of future results. For more information regarding the components of our results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Components of Our Results of Operations" in the Annual Report, which we incorporate by reference. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Revenue: Marketplace$ 332,031 $ 135,199 $ 487,952 $ 262,367 Services 96,706 45,896 168,840 88,067 Total revenue 428,737 181,095 656,792 350,434 Cost of revenue 111,381 58,605 193,797 111,263 Gross profit 317,356 122,490 462,995 239,171 Operating expenses: Marketing 114,707 45,994 163,212 81,438 Product development 45,233 28,765 83,015 53,712 General and administrative 38,276 29,883 72,263 54,530 Total operating expenses 198,216 104,642 318,490 189,680 Income from operations 119,140 17,848 144,505 49,491 Other expense, net (6,824 ) (1,479 ) (22,496 ) (1,685 ) Income before income taxes 112,316 16,369 122,009 47,806 (Provision) benefit for income taxes (15,891 ) 1,854 (13,062 ) 1,996 Net income$ 96,425 $ 18,223 $ 108,947 $ 49,802 Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue: Marketplace 77.4 % 74.7 % 74.3 % 74.9 % Services 22.6 25.3 25.7 25.1 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue 26.0 32.4 29.5 31.8 Gross profit 74.0 67.6 70.5 68.2 Operating expenses: Marketing 26.8 25.4 24.8 23.2 Product development 10.6 15.9 12.6 15.3 General and administrative 8.9 16.5 11.0 15.6 Total operating expenses 46.2 57.8 48.5 54.1 Income from operations 27.8 9.9 22.0 14.1 Other expense, net (1.6 ) (0.8 ) (3.4 ) (0.5 ) Income before income taxes 26.2 9.0 18.6 13.6 (Provision) benefit for income taxes (3.7 ) 1.0 (2.0 ) 0.6 Net income 22.5 % 10.1 % 16.6 % 14.2 % 33
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Comparison of Three Months EndedJune 30, 2020 and 2019 Revenue Three Months Ended June 30, Change 2020 2019 $ % (in thousands, except percentages) Revenue: Marketplace$ 332,031 $ 135,199 $ 196,832 145.6 %
Percentage of total revenue 77.4 % 74.7 % Services
$ 96,706 $ 45,896 $ 50,810 110.7 %
Percentage of total revenue 22.6 % 25.3 % Total revenue
$ 428,737 $ 181,095 $ 247,642 136.7 % Revenue increased$247.6 million , or 136.7%, to$428.7 million in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , of which 77.4% consisted of Marketplace revenue and 22.6% consisted of Services revenue. During the three months endedJune 30, 2020 , Etsy transitioned from its combined "Etsy Ads" on-site and offsite advertising to two separate advertising offerings: Offsite Ads, with 12% or 15% transaction fees reported in Marketplace revenue, and Etsy Ads, the new name for our on-site product (formerly Promoted Listings), with advertising fees reported in Services revenue. Marketplace revenue increased$196.8 million , or 145.6%, to$332.0 million in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . This growth was substantially all due to an increase in the volume of GMS on our marketplaces for the three months endedJune 30, 2020 to a total of$2.7 billion , and the balance was due to pricing related to the introduction of our new Offsite Ads fee. A significant majority of the growth in volume of GMS was driven by the Etsy marketplace. The balance was due to our acquisition of Reverb, whose revenue consisted principally of Marketplace revenue. Within the increase in volume of GMS, transaction fee revenue increased 132.1%, payments revenue grew 149.4%, and listing fee revenue increased 78.8% year-over-year. The share of Etsy.com GMS processed through our Etsy Payments platform was 92% in the three months endedJune 30, 2020 , up from 87% in the three months endedJune 30, 2019 . Services revenue increased$50.8 million , or 110.7%, to$96.7 million in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The growth in Services revenue was primarily driven by an increase of 102.3% in on-site advertising revenue (through our renamed Etsy Ads product), which represented a significant majority of the overall Services revenue increase, and, to a lesser extent, an increase in shipping label revenue of 206.9% from the prior year quarter. The increase in advertising revenue was primarily due to higher click volume. The increase in shipping label revenue was primarily driven by an increase in label volume. 34
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Cost of Revenue
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Cost of revenue $ 111,381 $ 58,605 $ 52,776 90.1 %
Percentage of total revenue 26.0 % 32.4 %
Cost of revenue increased $52.8 million , or 90.1%, to $111.4 million in the
three months ended June 30, 2020 compared to the three months ended June 30,
2019 . The increase was primarily driven by increased costs related to overall
volume increases on our marketplaces. The increase in cost of revenue was also
driven by the cost of revenue associated with the Reverb.com marketplace, which
includes amortization expense for developed technology and employee
compensation-related expenses. Additionally, there was an increase in
cloud-related hosting and bandwidth costs.
Operating Expenses
We had 1,292 total employees on June 30, 2020 , of which 190 were Reverb
employees, compared with 950 total employees on June 30, 2019 and 1,240 on
December 31, 2019 .
Marketing
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Marketing $ 114,707 $ 45,994 $ 68,713 149.4 %
Percentage of total revenue 26.8 % 25.4 %
Marketing expenses increased $68.7 million , or 149.4%, to $114.7 million in the
three months ended June 30, 2020 compared to the three months ended June 30,
2019 . The increase was primarily a result of increased spend in digital
marketing, and, to a lesser extent, television ad campaigns, both related to
buyer acquisition. Paid GMS was 21% of overall GMS in the three months ended
June 30, 2020 , compared to 15% in the three months ended June 30, 2019 , which is
a result of the launch of Offsite Ads and higher return on ad spend due to
favorable competitive dynamics during the second quarter of 2020. Marketing
expense also increased due to the acquisition of Reverb, which includes
amortization expense for customer relationships and trademark.
Product development
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Product development $ 45,233 $ 28,765 $ 16,468 57.3 %
Percentage of total revenue 10.6 % 15.9 %
Product development expenses increased $16.5 million , or 57.3%, to $45.2 million
in the three months ended June 30, 2020 compared to the three months ended June
30, 2019 . The increase was primarily a result of an increase in employee
compensation-related expenses, including stock-based compensation and the
acquisition of Reverb, mainly driven by an increase in average headcount.
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General and administrative
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
General and administrative $ 38,276 $ 29,883 $ 8,393 28.1 %
Percentage of total revenue 8.9 % 16.5 %
General and administrative expenses increased $8.4 million , or 28.1%, to $38.3
million in the three months ended June 30, 2020 compared to the three months
ended June 30, 2019 . The increase was primarily due to increased employee
compensation-related expenses, including stock-based compensation, which were
mainly the result of an increase in average headcount, and due to general and
administrative expenses associated with the Reverb.com marketplace.
Other Expense, net
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Other expense, net:
Interest expense $ (10,026 ) $ (4,678 ) $ (5,348 ) 114.3 %
Percentage of total revenue (2.3 )% (2.6 )%
Interest and other income $ 1,732 $ 3,391 $ (1,659 ) (48.9 )%
Percentage of total revenue 0.4 % 1.9 %
Foreign exchange gain (loss) $ 1,470 $ (192 ) $ 1,662 (865.6 )%
Percentage of total revenue 0.3 % (0.1 )%
Other expense, net $ (6,824 ) $ (1,479 ) $ (5,345 ) 361.4 %
Percentage of total revenue (1.6 )% (0.8 )%
Other expense, net was $6.8 million in the three months ended June 30, 2020 ,
which increased $5.3 million from $1.5 million in the three months ended June
30, 2019 . The increase in expense was primarily driven by interest expense
related to our convertible debt issued in the third quarter of 2019.
(Provision) Benefit for Income Taxes
Three Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
(Provision) benefit for income taxes
(957.1 )% Percentage of total revenue (3.7 )% 1.0 % Our income tax provision and benefit for the three months endedJune 30, 2020 and 2019 was$15.9 million and$1.9 million , respectively. The primary driver of our income tax provision for the three months endedJune 30, 2020 was tax expense of$20.0 million on income before income taxes, partially offset by excess tax benefits from employee stock-based compensation of$5.9 million . The primary driver of our income tax benefit for the three months endedJune 30, 2019 was excess tax benefit from employee stock-based compensation of$5.2 million partially offset by tax expense of$3.1 million on income before income taxes. 36
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Comparison of Six Months EndedJune 30, 2020 and 2019 Revenue Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except percentages) Revenue: Marketplace$ 487,952 $ 262,367 $ 225,585 86.0 %
Percentage of total revenue 74.3 % 74.9 % Services
$ 168,840 $ 88,067 $ 80,773 91.7 %
Percentage of total revenue 25.7 % 25.1 % Total revenue
$ 656,792 $ 350,434 $ 306,358 87.4 % Revenue increased$306.4 million , or 87.4%, to$656.8 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , of which 74.3% consisted of Marketplace revenue and 25.7% consisted of Services revenue. Marketplace revenue increased$225.6 million , or 86.0%, to$488.0 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . This growth was substantially all due to an increase in the volume of GMS on our marketplaces for the six months endedJune 30, 2020 to a total of$4.0 billion , and the balance was due to pricing related to the introduction of our new Offsite Ads fee. A significant majority of the growth in volume of GMS was driven by the Etsy marketplace. The balance was due to our acquisition of Reverb, whose revenue consisted principally of Marketplace revenue. Within the increase in volume of GMS, transaction fee revenue increased 77.8%, payments revenue increased 92.9%, and listing fee revenue increased 46.0% year-over-year. The share of Etsy.com GMS processed through our Etsy Payments platform was 91% in the six months endedJune 30, 2020 , up from 86% in the six months endedJune 30, 2019 . Services revenue increased$80.8 million , or 91.7%, to$168.8 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The growth in Services revenue was primarily driven by an increase of 87.0% in advertising revenue, which represented a significant majority of the overall Services revenue increase, and, to a lesser extent, an increase in shipping label revenue of 153.7% from the prior year. The increase in advertising revenue was primarily due to higher click volume on Etsy Ads (formerly Promoted Listings), and to a lesser extent, due to revenue from Google Shopping until the launch of Offsite Ads. Prior toSeptember 2019 , Google Shopping was recorded net in Services revenue, and thus, there was no corresponding revenue amount in the six months endedJune 30, 2019 . The increase in shipping label revenue was primarily driven by an increase in label volume. Cost of Revenue Six Months Ended June 30, Change 2020 2019 $ % (in thousands, except percentages) Cost of revenue$ 193,797 $ 111,263 $ 82,534 74.2 % Percentage of total revenue 29.5 % 31.8 % Cost of revenue increased$82.5 million , or 74.2%, to$193.8 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , primarily driven by increased costs related to overall volume increases on our marketplaces. Additionally, the six months endedJune 30, 2020 includes costs related to Google Shopping under our former combined "Etsy Ads" on-site and offsite advertising offering. The increase in cost of revenue was also driven by the cost of revenue associated with theReverb.com marketplace, which includes amortization expense for developed technology and employee compensation-related expenses. Cloud-related hosting and bandwidth costs also contributed to the overall increase. 37
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Operating Expenses
Marketing
Six Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Marketing $ 163,212 $ 81,438 $ 81,774 100.4 %
Percentage of total revenue 24.8 % 23.2 %
Marketing expenses increased $81.8 million , or 100.4%, to $163.2 million in the
six months ended June 30, 2020 compared to the six months ended June 30, 2019 ,
primarily as a result of increased spend in digital marketing, and, to a lesser
extent, television ad campaigns, both related to buyer acquisition. Paid GMS was
19% of overall GMS in the six months ended June 30, 2020 , up from paid GMS of
15% in the six months ended June 30, 2019 , which is a result of the launch of
Offsite Ads and higher return on ad spend due to favorable competitive dynamics
during the second quarter of 2020. Marketing expenses also increased due to
expenses associated with the Reverb.com marketplace, which include amortization
expense for customer relationships and trademark. Additionally, the increase in
marketing expenses was driven by increased employee compensation-related
expenses, including stock-based compensation, mainly the result of an increase
in average headcount.
Product development
Six Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Product development $ 83,015 $ 53,712 $ 29,303 54.6 %
Percentage of total revenue 12.6 % 15.3 %
Product development expenses increased $29.3 million , or 54.6%, to $83.0 million
in the six months ended June 30, 2020 compared to the six months ended June 30,
2019 , primarily as a result of an increase in employee compensation-related
expenses, including stock-based compensation and the acquisition of Reverb,
mainly driven by an increase in average headcount. This increase was also
driven, to a lesser extent, by a decrease in the amount of employee-related
costs capitalized as a result of several larger project launches in 2019, mainly
related to cloud migration.
General and administrative
Six Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
General and administrative
General and administrative expenses increased$17.7 million , or 32.5%, to$72.3 million in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , primarily due to increased employee compensation-related expenses, including stock-based compensation, which were mainly the result of an increase in average headcount, and due to general and administrative expenses associated with theReverb.com marketplace. 38
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Other Expense, net
Six Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
Other expense, net:
Interest expense $ (19,993 ) $ (9,331 ) $ (10,662 ) 114.3 %
Percentage of total revenue (3.0 )% (2.7 )%
Interest and other income $ 5,345 $ 6,776 $ (1,431 ) (21.1 )%
Percentage of total revenue 0.8 % 1.9 %
Foreign exchange (loss) gain $ (7,848 ) $ 870 $ (8,718 ) (1,002.1 )%
Percentage of total revenue (1.2 )% 0.2 %
Other expense, net $ (22,496 ) $ (1,685 ) $ (20,811 ) 1,235.1 %
Percentage of total revenue (3.4 )% (0.5 )%
Other expense, net was $22.5 million in the six months ended June 30, 2020 ,
which increased $20.8 million from $1.7 million in the six months ended June 30,
2019 . The increase in expense was primarily driven by interest expense related
to our convertible debt issued in the third quarter of 2019 and the change in
U.S. Dollar, Euro, and Pound Sterling exchange rates on our intercompany and
other non-functional currency cash balances. In the first quarter of 2020, due
to macroeconomic trends, we held more foreign currencies than usual to ensure
the timeliness of paying our sellers in their local currency.
(Provision) Benefit for Income Taxes
Six Months Ended
June 30, Change
2020 2019 $ %
(in thousands, except percentages)
(Provision) benefit for income taxes
(754.4 )% Percentage of total revenue (2.0 )% 0.6 % Our income tax provision and benefit for the six months endedJune 30, 2020 and 2019 was$13.1 million and$2.0 million , respectively. The primary driver of our income tax provision for the six months endedJune 30, 2020 was tax expense of$21.3 million on income before income taxes, partially offset by excess tax benefits from employee stock-based compensation of$10.3 million . The primary driver of our income tax benefit for the six months endedJune 30, 2019 was excess tax benefit from employee stock-based compensation of$11.9 million , partially offset by tax expense of$8.1 million on income before income taxes and tax expense onU.S. Tax Reform items of$1.6 million . 39
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Table of Contents Non-GAAP Financial Measures Adjusted EBITDA In this Quarterly 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; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange (gain) loss; and acquisition-related expenses. 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; and
• other companies, including companies in our industry, may calculate Adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results.
The following table reflects the reconciliation of net income to Adjusted EBITDA for each of the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Net income $ 96,425 $ 18,223 $ 108,947 $ 49,802
Excluding:
Interest and other non-operating 8,294 1,287 14,648 2,555
expense, net (1)
Provision (benefit) for income taxes 15,891 (1,854 ) 13,062 (1,996 )
(2)
Depreciation and amortization (3) 14,171 9,810 29,334 19,952
Stock-based compensation expense (4) 16,725 10,837 30,536 18,919
Foreign exchange (gain) loss (5) (1,470 ) 192 7,848 (870 )
Acquisition-related expenses (6) 592 1,206 1,309 1,206
Adjusted EBITDA $ 150,628 $ 39,701 $ 205,684 $ 89,568 (1) Included in interest and other non-operating expense, net is interest
expense, including amortization of debt issuance costs, related to our
convertible debt offerings, which were entered into in March 2018 and
September 2019 .
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(2) See "Results of Operations-(Provision) Benefit for Income Taxes" for more
information on the fluctuation in provision (benefit) for income taxes in the
three and six months ended
(3) Included in depreciation and amortization is depreciation expense related to
our headquarters lease, which is accounted for as a finance lease.
Additionally, the three and six months ended
amortization expense related to acquired intangible assets and developed
technology related to the acquisition of Reverb in the third quarter of 2019.
(4) Stock-based compensation expense included in the Consolidated Statements of
Operations is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 1,907 $ 1,456 $ 3,527 $ 2,555
Marketing 1,357 723 2,581 1,354
Product development 8,472 5,294 15,273 8,813
General and administrative 4,989 3,364 9,155 6,197
Stock-based compensation expense
(5) Foreign exchange (gain) loss is primarily driven by the change in
Dollar, Euro, and Pound Sterling exchange rates on our intercompany and other
non-functional currency cash balances.
(6) 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.
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Liquidity and Capital Resources Cash, cash equivalents, and short-term investments were$1.0 billion as ofJune 30, 2020 . Additionally, we have$73.1 million in long-term investments that we can liquidate at short notice and with minimal penalties if needed. We also have the ability to draw down on our$200.0 million senior secured revolving credit facility. In the six months endedJune 30, 2020 , we had positive operating cash flows of$250.1 million and we expect to generate additional cash flow from operations in the remainder of 2020. We believe that this capital resource structure, as well as the nature and the framework of our business will allow us to meet our operating cash needs for at least the next 12 months, meet all debt covenants, and be able to react to changing macroeconomic conditions. In light of the macroeconomic situation related to COVID-19, our Board of Directors decided to temporarily pause share repurchases in the second quarter of 2020. The following table shows our cash and cash equivalents, and short- and long-term investments, and our accounts receivable, net and net working capital as of the date indicated: As of June 30, 2020 (in thousands) Cash and cash equivalents$ 677,524 Short-term investments 365,659 Long-term investments 73,143 Total cash and cash equivalents, and short- and long-term investments$ 1,116,326 Accounts receivable, net$ 16,527 Net working capital 914,756 As ofJune 30, 2020 , our cash and cash equivalents, a majority of which were held in cash deposits and money market funds, were held inthe United States for future investments, working capital funding, and general corporate purposes. We invest in short- and long-term instruments, including fixed-income funds andU.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 InSeptember 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 (the "Securities Act"). The initial conversion price of the 2019 Notes represented a premium of approximately 47.5% over the price of Etsy's common stock. The net proceeds from the sale of the 2019 Notes were$639.5 million after deducting initial purchasers' discount and offering expenses. Based on the terms of the 2019 Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when we receive a conversion notice. Accordingly, we cannot be required to settle the 2019 Notes in cash and, therefore, the 2019 Notes are classified as long-term debt as ofJune 30, 2020 . For more information on the 2019 Notes, see "Note 9-Debt" in the Notes to Consolidated Financial Statements. InMarch 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. The initial conversion price of the 2018 Notes represented a premium of approximately 37.5% over the price of Etsy's common stock. The net proceeds from the sale of the 2018 Notes were$335.0 million after deducting initial purchasers' discount and offering expenses. Based on the daily closing prices of the Company's stock during the quarter endedJune 30, 2020 , holders of the 2018 Notes are eligible to convert their 2018 Notes during the third quarter of 2020. Based on the terms of the 2018 Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. Accordingly, we cannot be required to settle the 2018 Notes in cash and, therefore, the 2018 Notes are classified as long-term debt as ofJune 30, 2020 . For more information on the 2018 Notes, see "Note 9-Debt" in the Notes to Consolidated Financial Statements. 42
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OnFebruary 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 inFebruary 2024 . The 2019 Credit Agreement includes a letter of credit sublimit of$30.0 million and a swingline loan sublimit of$10.0 million . AtJune 30, 2020 , the Company did not have any borrowings under the 2019 Credit Agreement. For more information on the 2019 Credit Agreement, see "Note 9-Debt" in the Notes to Consolidated Financial Statements. We believe that our existing cash and cash equivalents and short- and long-term investments, together with cash generated from operations, will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. While this belief is based on our current expectations and assumptions in light of current macroeconomic conditions, our future capital requirements and the adequacy of available funds will depend on many factors, including those described in our "Risk Factors" in this report. The majority of our cash and cash equivalents and short- and long-term investments are held inthe United States . We fund our international operations from our funds held inthe United States on an as-needed basis. Historical Cash Flows Six Months Ended June 30, 2020 2019 (in thousands) Cash provided by (used in): Operating activities$ 250,095 $ 81,294 Investing activities 22,732 (47,955 ) Financing activities (38,503 ) (40,604 ) Net Cash Provided by Operating Activities Our cash flows from operations are largely dependent on the amount of revenue generated on our platform, as well as associated cost of revenue and other operating expenses. Our primary source of cash from operating activities is cash collections from our customers. Net cash provided by operating activities in each period presented has been influenced by changes in working capital. Net cash provided by operating activities was$250.1 million in the six months endedJune 30, 2020 , primarily driven by cash net income of$211.4 million as a result of revenue generated on our platform and changes in our operating assets and liabilities that provided$38.7 million in cash, driven by payment timing of payables in the period. Net cash provided by operating activities was$81.3 million in the six months endedJune 30, 2019 , primarily driven by cash net income of$95.9 million , as a result of revenue generated on our platform offset by changes in our operating assets and liabilities that used$14.6 million in cash, driven by payment timing of payables and prepayments in the period. Net Cash Provided by (Used in) Investing Activities Our primary investing activities consist of sales and purchases of short- and long-term marketable securities 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 provided by investing activities was$22.7 million in the six months endedJune 30, 2020 . This was primarily attributable to net sales of marketable securities of$25.0 million . This was partially offset by$2.3 million in capital expenditures, including$2.0 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to the Etsy platform and focused on growth investments. Net cash used in investing activities was$48.0 million in the six months endedJune 30, 2019 . This was primarily attributable to net purchases of marketable securities of$39.5 million and$8.4 million in capital expenditures, including$4.7 million for website development and internal-use software. 43
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Net Cash Used in Financing Activities Our primary financing activities include repurchases of common stock under share repurchase programs, payment of tax obligations on vested equity awards, proceeds from exercise of stock options, and payments on finance lease obligations. Net cash used in financing activities was$38.5 million in the six months endedJune 30, 2020 . This was primarily attributable to theJanuary 2020 stock repurchases of$25.0 million , payment of tax obligations on vested equity awards of$10.6 million , and payments on finance lease obligations of$4.9 million , partially offset by proceeds from the exercise of stock options of$12.2 million . Net cash used in financing activities was$40.6 million in the six months endedJune 30, 2019 . This was primarily attributable to stock repurchases under the share repurchase program of$27.5 million , payment of tax obligations on vested equity awards of$16.2 million , and payments on finance lease obligations of$5.5 million , partially offset by proceeds from the exercise of stock options of$7.8 million . Off Balance Sheet Arrangements As ofJune 30, 2020 , we did not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations As ofJune 30, 2020 , there were no material changes in commitments under contractual obligations, compared to the contractual obligations disclosed in our Annual Report. Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated 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. The future effects of the ongoing COVID-19 pandemic on the Company's results of operations, cash flows, and financial position are unclear; however the Company believes it has used reasonable estimates and assumptions in preparing the consolidated financial statements. Our actual results could differ from these estimates. Except for changes resulting from the adoption of new accounting standards during the first quarter of 2020, see "Note 1-Basis of Presentation and Summary of Significant Accounting Policies," there have been no significant changes to our critical accounting policies and estimates included in the Company's Annual Report. With respect to our valuation of goodwill, as of the date of the last annual goodwill impairment test during the fourth quarter of 2019, we determined that the estimated fair value of the Reverb reporting unit was not substantially in excess of its carrying value, due to the proximity of the acquisition date. Recent Accounting Pronouncements For information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements, please refer to "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. 44
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