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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Etsy, Inc.    ETSY

ETSY, INC.

(ETSY)
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ETSY : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

10/29/2020 | 10:21am EST
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 the Securities
and Exchange Commission ("SEC") on February 27, 2020 (the "Annual 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 Quarterly Report, particularly in Part II,
Item 1A, "Risk Factors." 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.
On August 15, 2019, we acquired all of the outstanding capital stock of Reverb
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 of
Etsy, Inc., is included in all financial and other metrics from August 15, 2019
(the date of acquisition), unless otherwise noted.
Our revenue is diversified, generated from a mix of marketplace activities and
other optional services we provide to 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 in the United States, Canada,
United Kingdom, and Australia 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
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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 strengthened our commitment to
it.
Third Quarter 2020 Financial Highlights
As of September 30, 2020, our marketplaces connected 3.7 million active sellers
and 69.6 million active buyers in nearly every country in the world. In the
three and nine months ended September 30, 2020, sellers generated GMS of $2.6
billion and $6.7 billion, respectively, of which approximately 62% and 61%,
respectively, came from purchases made on mobile devices. We are a global
company and approximately 35% and 34% of our GMS in the three and nine months
ended September 30, 2020, respectively, came from transactions where either a
seller or a buyer was located outside of the United States.
Total revenue was $451.5 million and $1.1 billion in the three and nine months
ended September 30, 2020, respectively, driven by strong growth in both
Marketplace and Services revenue. In the three and nine months ended
September 30, 2020, we recorded net income of $91.8 million and $200.7 million,
respectively, and non-GAAP Adjusted EBITDA of $151.4 million and $357.1 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 $1.5 billion as of
September 30, 2020. Etsy has $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 $43.9 million aggregate principal amount
of 0% Convertible Senior Notes due 2023 (the "2018 Notes"). Additionally, Etsy
has the ability to draw down on its $200.0 million senior secured revolving
credit facility. In the nine months ended September 30, 2020, Etsy had positive
operating cash flows of $435.3 million.
Convertible Debt
In August 2020, the Company issued the 2020 Notes in a private placement to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933 (the "Securities Act"). The initial conversion price of the 2020 Notes
represented a premium of approximately 52.5% over the price of our common stock.
The net proceeds from the sale of the 2020 Notes were $639.5 million after
deducting the offering expenses. The 2020 Notes will mature on September 1,
2027, unless earlier converted or repurchased.
We used $74.7 million of the net proceeds from the 2020 Notes offering to enter
into separate capped call instruments ("2020 Capped Call Transactions") with the
initial purchasers and/or their respective affiliates. The 2020 Capped Call
Transactions effectively limit the premium for conversion of the 2020 Notes to
150% and are generally expected to reduce potential dilution to our common stock
upon any conversion of the 2020 Notes and/or offset any payments we make upon
conversion.
In addition, we paid $137.2 million in cash and issued approximately 7.3 million
shares of Etsy's common stock to repurchase $301.1 million aggregate principal
amount of the outstanding 2018 Notes through privately negotiated transactions.
Etsy intends to use the remainder of the net proceeds from the 2020 Notes for
general corporate purposes. For more information on the 2020 Notes, 2020 Capped
Call Transactions, and the 2018 Notes, see "Note 9-Debt" in the Notes to
Consolidated Financial Statements.
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 third quarter was
extremely strong, with GMS growth of 119.4% and revenue growth of 128.1%. We are
focused on capitalizing on our unique and defensible "Right to Win," which we
have conviction continues to be key for our long-term success. We have continued
to invest in product development, making key improvements to the customer
experience during the third quarter. Highlights of our third quarter are
outlined below:
•Of the 138 million all time buyers on the Etsy marketplace, approximately 50%
have now purchased at least once in the last year, with approximately 69 million
active buyers in the third quarter. In addition, the Etsy marketplace saw an
influx of 14.8 million new buyers and reactivated buyers during the third
quarter - the latter being those who haven't
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purchased in a year or more. We have implemented various strategies to engage
and target new and existing buyers on and off-site, with personalized and
consistent messaging across many channels, driving repeat visitation.
•The majority of Etsy's GMS is driven by existing buyers, and we have
experienced a significant change in buyer cohorts in terms of the frequency with
which they shop and the amount they are spending on Etsy. In terms of third
quarter 2020 GMS per buyer, when using data for our 2018 buyer cohort as a proxy
for how our historical cohorts have performed, existing buyers have increased
their GMS per buyer by more than 50% in the third quarter of 2020 when compared
to the third quarter of 2019, even when excluding face mask purchases.
•We have also seen an increase in the value of our recent new buyer cohorts when
measured by GMS per buyer. For example, a buyer in the second quarter of 2020,
whose first purchase was not a face mask, spent 50% more in their subsequent
purchases in the first 90 days on Etsy than a new buyer in the second quarter of
2019. New buyers in the second quarter of 2020 whose first purchase on Etsy was
a face mask are similarly valuable in GMS per buyer in terms of subsequent
90-day purchases, although they are primarily returning to Etsy to buy more face
masks.
•We made additional progress in search and discovery by relieving friction in
the search journey to make the site more browseable, increasing site
performance, and improving the relevance and engagement of recommendations. We
removed guided search icons, which had a neutral impact as we've made
improvements to organic search, and launched Single Page App pagination to
create faster, more responsive search pages. In addition, we began to
incorporate buyer characteristics into our ranking algorithm for in-cart
recommendations, which drove incremental GMS in the third quarter.
•We leveraged reviews to help buyers make more informed purchase decisions on
items they are searching for. By incorporating machine learning we are now able
to prioritize the most helpful reviews which are those that have substantial
text, images, and are similar to the target listing.
•We deepened the human connections in our marketplace by launching listing
videos, which help sellers showcase their products to buyers in ways they
previously could not with photos, showing their expertise in making and bringing
their products to life. As of September 30, 2020, approximately 1.5 million
sellers videos were uploaded.
•Through our product development efforts we built trust in our marketplace by
focusing on the core buying experience, improving shipping transparency and
post-purchase experiences. We are helping buyers better understand when they
should expect an item to arrive by expanding listing coverage of expected
delivery dates. We launched a tool to help sellers adjust their processing
times, a key input for expected delivery dates, based on their historical
performance for time to ship.
•We added enhancements to our Etsy Ads (formerly Promoted Listings) service,
improving the relevance of ads in search and the speed of incorporating changes
in a seller's budget. We also made our Etsy Ads infrastructure more efficient,
providing better search results while simultaneously using fewer cloud
resources. To add to the seller experience, we launched performance graphs in
the ads dashboard, helping to make advertising on Etsy as easy as possible for
our sellers. These efforts contributed to the 91.4% year-over-year growth of
on-site advertising revenue in the third quarter.
•We significantly increased our investments in marketing, and our optimization
of spend across our marketing channels, with a particular focus on increasing
the percentage of spend to mid and upper funnel channels. Upper funnel marketing
spend, including television and digital video, was 18.1% of our overall
marketing spend, or approximately $23 million, in the third quarter of 2020.
During the quarter, the teams also worked to finalize our holiday plans, which
include a sales hub, earlier visibility of holiday onsite, and gift guides.
•We're also investing to drive frequency and buyer engagement. During the
quarter, we launched a new buyer offer to target buyers through a series of
emails after their initial purchase. We leveraged our customer relationship
management capabilities and machine learning to incentivize buyers to return to
the site for a subsequent purchase.
•Reverb launched a new feature that enables sellers to offer more competitive
shipping rates to buyers that purchase multiple qualifying items. Reverb also
made investments in customer support that are shortening response times for
buyers and sellers.
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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 GAAP and non-GAAP financial measures
and key operating and financial metrics we use are:

                                              Three Months Ended                     % Growth                    Nine Months Ended                      % Growth
                                                 September 30,                      (Decline)                       September 30,                      (Decline)
                                           2020                 2019                   Y/Y                    2020                 2019                   Y/Y

                                                                                    (in thousands, except percentages)
GMS (1)                               $ 2,633,927$ 1,200,371                 119.4     %       $ 6,676,001$ 3,319,228                 101.1     %
Revenue                               $   451,478$   197,947                 128.1     %       $ 1,108,270$   548,381                 102.1     %
Marketplace revenue                   $   341,623$   141,628                 141.2     %       $   829,575$   403,995                 105.3     %
Services revenue                      $   109,855$    56,319                  95.1     %       $   278,695$   144,386                  93.0     %
Net income                            $    91,761$    14,801                 520.0     %       $   200,708$    64,603                 210.7     %
Adjusted EBITDA (Non-GAAP)            $   151,443$    42,076                 259.9     %       $   357,127$   131,644                 171.3     %

Active sellers                              3,681                2,592                  42.0     %             3,681                2,592                  42.0     %
Active buyers                              69,649               44,807                  55.4     %            69,649               44,807                  55.4     %

Percent mobile GMS                             62  %                59  %                300   bps                61  %                59  %                200   bps
Percent international GMS                      35  %                36  %               (100)  bps                34  %                38  %            

(400) bps



(1)GMS for the three months ended September 30, 2020 and 2019 includes Reverb's
GMS of $205.1 million and $76.9 million, respectively. Etsy.com GMS for the
three months ended September 30, 2020 and 2019 was $2.4 billion and $1.1
billion, respectively. GMS for the nine months ended September 30, 2020 and 2019
includes Reverb's GMS of $600.4 million and $76.9 million, respectively.
Etsy.com GMS for the nine months ended September 30, 2020 and 2019 was $6.1
billion and $3.2 billion, 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 $1.4 billion, or 119.4%, to $2.6 billion and increased $3.4
billion, or 101.1%, to $6.7 billion in the three and nine months ended
September 30, 2020, respectively, compared to the three and nine months ended
September 30, 2019, respectively. GMS for the three months ended September 30,
2020 and 2019, included $205.1 million and $76.9 million, respectively, related
to the results of Reverb. GMS for the nine months ended September 30, 2020 and
2019, included $600.4 million and $76.9 million, respectively, related to the
results of Reverb. On a currency-neutral basis GMS growth for the three and nine
months ended September 30, 2020 would have been 117.4% and 100.9%, respectively,
or approximately 200 basis points lower than the reported 119.4% growth and 20
basis points lower than the reported 101.1% growth, respectively. Supporting
this growth in GMS, both active sellers and active buyers had strong
year-over-year growth. Active sellers increased 42.0% to 3.7 million, and active
buyers increased 55.4% to 69.6 million at September 30, 2020 compared to
September 30, 2019. In the three and nine months ended September 30, 2020, GMS
from new buyers grew 117% and 102%, respectively, year-over-year and represented
approximately 16% and 17% of overall GMS, respectively, flat in the three months
ended September 30, 2020 and a slight increase in the nine months ended
September 30, 2020 compared to last year. In the three and nine months ended
September 30, 2020, GMS from existing buyers grew 120% and 101%, respectively,
year-over-year and represented approximately 84% and 83% of overall GMS,
respectively, flat in the three months ended September 30, 2020 and a slight
decrease in the nine months ended September 30, 2020 compared to last year. We
experienced sequential deceleration in GMS growth in the third quarter of 2020
compared to the second quarter of 2020 primarily driven by the contraction in
mask sales and deceleration of new buyer growth. We currently expect the
contraction of mask sales to continue as masks become more widely available and
the deceleration of new buyer growth to continue as businesses return to on-site
operations and as mask sales contract.
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Adjusted EBITDA
Adjusted EBITDA 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 loss; acquisition-related expenses; non-ordinary course disputes; and
loss on extinguishment of debt. 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.
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 nine months ended September 30, 2020, mobile GMS increased
as a percentage of total GMS to approximately 62% and 61%, respectively, up from
approximately 59% for both the three and nine months ended September 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
of the United States. When calculating percent international GMS, we do not take
into account refunds associated with canceled transactions. We believe that
international GMS shows the level of engagement of our community outside the
United States and demonstrates our ability to grow GMS and revenue.
For the three and nine months ended September 30, 2020, international GMS
decreased as a percentage of total GMS to approximately 35% and 34%,
respectively, down from approximately 36% and 38% for the three and nine months
ended September 30, 2019, respectively, driven by strong growth in U.S. domestic
GMS, which is GMS generated between an U.S. buyer and an U.S. seller.
International GMS increased approximately 112% and 85%, respectively, in the
three and nine months ended September 30, 2020 compared to the three and nine
months ended September 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 between U.S. buyers and international sellers. International domestic GMS
grew approximately 201% and 146%, respectively in the three and nine months
ended September 30, 2020 compared with the three and nine months ended
September 30, 2019, respectively. The increase in international GMS included
increases related to changes in foreign currency rates year-over-year. On a
currency-neutral basis international GMS growth for the three and nine months
ended September 30, 2020 would have been 106% and 78%, respectively.
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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 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):
                                                          Quarter-to-Date Period Ended                                                       Year-to-Date Period Ended
                                       As Reported                Currency-Neutral               FX Impact              As Reported               Currency-Neutral               FX Impact
September 30, 2020                             119.4  %                       117.4  %                  2.0  %                 101.1  %                       100.9  %                  0.2  %
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) %


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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 since August 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               Nine Months Ended
                                               September 30,                   September 30,
                                           2020            2019            2020             2019

                                                              (in thousands)
Revenue:
Marketplace                            $ 341,623$ 141,628$  829,575$ 403,995
Services                                 109,855          56,319          278,695         144,386
Total revenue                            451,478         197,947        1,108,270         548,381
Cost of revenue                          120,168          68,949          313,965         180,212
Gross profit                             331,310         128,998          794,305         368,169
Operating expenses:
Marketing                                126,779          50,098          289,991         131,536
Product development                       45,908          32,465          128,923          86,177
General and administrative                40,454          32,203          112,717          86,733
Total operating expenses                 213,141         114,766          531,631         304,446
Income from operations                   118,169          14,232          262,674          63,723
Other expense, net                       (27,776)         (4,143)         (50,272)         (5,828)
Income before income taxes                90,393          10,089          212,402          57,895
Benefit (provision) for income taxes       1,368           4,712          (11,694)          6,708
Net income                             $  91,761$  14,801$  200,708$  64,603

                                           Three Months Ended               Nine Months Ended
                                               September 30,                   September 30,
                                           2020            2019            2020             2019
Revenue:
Marketplace                                 75.7  %         71.5  %          74.9  %         73.7  %
Services                                    24.3            28.5             25.1            26.3
Total revenue                              100.0           100.0            100.0           100.0
Cost of revenue                             26.6            34.8             28.3            32.9
Gross profit                                73.4            65.2             71.7            67.1
Operating expenses:
Marketing                                   28.1            25.3             26.2            24.0
Product development                         10.2            16.4             11.6            15.7
General and administrative                   9.0            16.3             10.2            15.8
Total operating expenses                    47.2            58.0             48.0            55.5
Income from operations                      26.2             7.2             23.7            11.6
Other expense, net                          (6.2)           (2.1)            (4.5)           (1.1)
Income before income taxes                  20.0             5.1             19.2            10.6
Benefit (provision) for income taxes         0.3             2.4             (1.1)            1.2
Net income                                  20.3  %          7.5  %          18.1  %         11.8  %


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Comparison of Three Months Ended September 30, 2020 and 2019
Revenue

                                    Three Months Ended
                                        September 30,                      Change
                                    2020              2019             $             %

                                           (in thousands, except percentages)
Revenue:
Marketplace                   $    341,623$ 141,628$ 199,995       141.2  %
Percentage of total revenue           75.7   %         71.5  %
Services                      $    109,855$  56,319$  53,536        95.1  %
Percentage of total revenue           24.3   %         28.5  %
Total revenue                 $    451,478$ 197,947$ 253,531       128.1  %


Revenue increased $253.5 million, or 128.1%, to $451.5 million in the three
months ended September 30, 2020 compared to the three months ended September 30,
2019, of which 75.7% consisted of Marketplace revenue and 24.3% consisted of
Services revenue.
Marketplace revenue increased $200.0 million, or 141.2%, to $341.6 million in
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019. This growth was substantially all due to an increase in the
volume of GMS on our marketplaces for the three months ended September 30, 2020
to a total of $2.6 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 in the third quarter of 2019, whose revenue consisted
principally of Marketplace revenue.
Within the increase in volume of GMS, transaction fee revenue increased 121.4%,
payments revenue grew 135.0%, and listing fee revenue increased 77.2%
year-over-year. The share of Etsy.com GMS processed through our Etsy Payments
platform was 92% in the three months ended September 30, 2020, up from 88% in
the three months ended September 30, 2019.
Services revenue increased $53.5 million, or 95.1%, to $109.9 million in the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The growth in Services revenue was primarily driven by an
increase of 91.4% in on-site advertising revenue (primarily 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 179.8% from the prior year quarter. The increase in on-site
advertising revenue was primarily due to higher click volume. The increase in
shipping label revenue was primarily driven by an increase in label volume.
Cost of Revenue
                                       Three Months Ended
                                          September 30,                        Change
                                    2020                   2019            $             %

                                             (in thousands, except percentages)
Cost of revenue               $    120,168$ 68,949$ 51,219        74.3  %
Percentage of total revenue           26.6   %              34.8  %


Cost of revenue increased $51.2 million, or 74.3%, to $120.2 million in the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The increase was primarily driven by increased costs related
to overall volume increases on our marketplaces, including payments fees and
cloud-related hosting and bandwidth costs. We gained leverage as cost of revenue
did not increase as fast as revenue.
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Operating Expenses


We had 1,374 total employees on September 30, 2020, compared with 1,209 total
employees on September 30, 2019 and 1,240 on December 31, 2019.
Marketing
                                       Three Months Ended
                                          September 30,                        Change
                                    2020                   2019            $             %

                                             (in thousands, except percentages)
Marketing                     $    126,779$ 50,098$ 76,681       153.1  %
Percentage of total revenue           28.1   %              25.3  %


Marketing expenses increased $76.7 million, or 153.1%, to $126.8 million in the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The increase was primarily a result of increased spend in
digital marketing, and, to a lesser extent, television ad campaigns. The
increase in digital marketing was largely due to the shift to our Offsite Ads
offering beginning in the second quarter of 2020 and increased site traffic.
Paid GMS was 19% of overall GMS in the three months ended September 30, 2020,
compared to 14% in the three months ended September 30, 2019, which is a result
of the launch of Offsite Ads and higher return on ad spend due to favorable
competitive dynamics.
Product development

                                       Three Months Ended
                                          September 30,                        Change
                                    2020                   2019            $             %

                                             (in thousands, except percentages)
Product development           $     45,908$ 32,465$ 13,443        41.4  %
Percentage of total revenue           10.2   %              16.4  %


Product development expenses increased $13.4 million, or 41.4%, to $45.9 million
in the three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The increase was primarily a result of increased employee
compensation-related expenses, including stock-based compensation, mainly driven
by an increase in average headcount at Etsy and the acquisition of Reverb.
Additionally, we gained leverage as product development expenses did not
increase as fast as revenue.
General and administrative

                                       Three Months Ended
                                           September 30,                        Change
                                    2020                    2019            $            %

                                             (in thousands, except percentages)
General and administrative    $     40,454$ 32,203$ 8,251        25.6  %
Percentage of total revenue            9.0   %               16.3  %


General and administrative expenses increased $8.3 million, or 25.6%, to $40.5
million in the three months ended September 30, 2020 compared to the three
months ended September 30, 2019. The increase was primarily due to increased
employee compensation-related expenses, including stock-based compensation,
mainly driven by an increase in average headcount as a result of the acquisition
of Reverb. Additionally, we gained leverage as general and administrative
expenses did not increase as fast as revenue.
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Other Expense, net

                                         Three Months Ended
                                             September 30,                        Change
                                       2020                  2019             $             %

                                                (in thousands, except percentages)
Other expense, net:
Loss on extinguishment of debt   $    (16,855)            $      -       $ (16,855)            NM
Percentage of total revenue              (3.7)  %                -  %
Interest expense                 $    (10,615)$ (5,077)$  (5,538)      109.1  %
Percentage of total revenue              (2.4)  %             (2.6) %
Interest and other income        $      1,158$  2,883$  (1,725)      (59.8) %
Percentage of total revenue               0.3   %              1.5  %

Foreign exchange loss            $     (1,464)$ (1,949)$     485       (24.9) %
Percentage of total revenue              (0.3)  %             (1.0) %
Other expense, net               $    (27,776)$ (4,143)$ (23,633)      570.4  %
Percentage of total revenue              (6.2)  %             (2.1) %


Other expense, net was $27.8 million in the three months ended September 30,
2020, which increased $23.6 million from $4.1 million in the three months ended
September 30, 2019. The increase in expense was primarily driven by a non-cash
loss on extinguishment of debt of $16.9 million related to the partial
repurchase of the 2018 Notes. Additionally, there was an increase in primarily
non-cash interest expense driven by our 2019 Notes, issued in September 2019.
Benefit for Income Taxes

                                       Three Months Ended
                                          September 30,                        Change
                                    2020                    2019           $             %

                                             (in thousands, except percentages)
Benefit for income taxes      $       1,368$ 4,712$ (3,344)      (71.0) %
Percentage of total revenue             0.3   %              2.4  %


Our income tax benefit for the three months ended September 30, 2020 and 2019
was $1.4 million and $4.7 million, respectively.
The primary drivers of our income tax benefit for the three months ended
September 30, 2020 were excess tax benefits from employee stock-based
compensation of $13.4 million and a benefit related to research and development
tax credit of $7.5 million, partially offset by tax expense of $15.7 million on
income before income taxes and U.S. taxes on foreign earnings of $2.8 million.
The primary drivers of our income tax benefit for the three months ended
September 30, 2019 were excess tax benefits from employee stock-based
compensation of $3.4 million and a benefit related to research and development
tax credit of $4.3 million, partially offset by tax expense on pre-tax book
income of $1.4 million and the adverse impact of certain tax provisions
introduced by The Tax Cuts and Jobs Act ("the TCJA") of $0.9 million.
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Comparison of Nine Months Ended September 30, 2020 and 2019
Revenue

                                     Nine Months Ended
                                        September 30,                      Change
                                    2020              2019             $             %

                                           (in thousands, except percentages)
Revenue:
Marketplace                   $     829,575$ 403,995$ 425,580       105.3  %
Percentage of total revenue            74.9  %         73.7  %
Services                      $     278,695$ 144,386$ 134,309        93.0  %
Percentage of total revenue            25.1  %         26.3  %
Total revenue                 $   1,108,270$ 548,381$ 559,889       102.1  %


Revenue increased $559.9 million, or 102.1%, to $1.1 billion in the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019,
of which 74.9% consisted of Marketplace revenue and 25.1% consisted of Services
revenue.
During the second quarter of 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 $425.6 million, or 105.3%, to $829.6 million in
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019. This growth was substantially all due to an increase in the
volume of GMS on our marketplaces for the nine months ended September 30, 2020
to a total of $6.7 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 in the third quarter of 2019, whose revenue consisted
principally of Marketplace revenue.
Within the increase in volume of GMS, transaction fee revenue increased 93.0%,
payments revenue increased 107.9%, and listing fee revenue increased 56.7%
year-over-year. The share of Etsy.com GMS processed through our Etsy Payments
platform was 92% in the nine months ended September 30, 2020, up from 87% in the
nine months ended September 30, 2019.
Services revenue increased $134.3 million, or 93.0%, to $278.7 million in the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2019. The growth in Services revenue was primarily driven by an increase of
88.7% in on-site 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 163.0% from the prior year. The increase in
advertising revenue was primarily due to higher click volume on Etsy Ads
(formerly Promoted Listings). The increase in shipping label revenue was
primarily driven by an increase in label volume.

Cost of Revenue

                                     Nine Months Ended
                                        September 30,                      Change
                                    2020              2019             $             %

                                           (in thousands, except percentages)
Cost of revenue               $    313,965$ 180,212$ 133,753        74.2  %
Percentage of total revenue           28.3   %         32.9  %


Cost of revenue increased $133.8 million, or 74.2%, to $314.0 million in the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2019, primarily driven by increased costs related to overall volume
increases on our marketplaces, including payments fees and cloud-related hosting
and bandwidth costs. We gained leverage as cost of revenue did not increase as
fast as revenue. Additionally, the nine months ended September 30, 2020 includes
cost of revenue associated with the Reverb.com marketplace, which includes
amortization expense for developed technology and employee compensation-related
expenses. The increase in cost of revenue was also driven by costs related to
Google Shopping under our former combined "Etsy Ads" on-site and offsite
advertising offering.
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Operating Expenses
Marketing

                                     Nine Months Ended
                                        September 30,                      Change
                                    2020              2019             $             %

                                           (in thousands, except percentages)
Marketing                     $    289,991$ 131,536$ 158,455       120.5  %
Percentage of total revenue           26.2   %         24.0  %


Marketing expenses increased $158.5 million, or 120.5%, to $290.0 million in the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2019, primarily as a result of increased spend in digital marketing, and, to
a lesser extent, television ad campaigns. The increase in digital marketing was
largely due to the shift to our Offsite Ads offering beginning in the second
quarter of 2020 and increased site traffic. Paid GMS was 19% of overall GMS in
the nine months ended September 30, 2020, up from paid GMS of 15% in the nine
months ended September 30, 2019, which is a result of the launch of Offsite Ads
and higher return on ad spend due to favorable competitive dynamics. Marketing
expenses also increased due to amortization expense of acquired customer
relationships and trademark assets related to the acquisition of Reverb in the
third quarter of 2019.
Product development

                                       Nine Months Ended
                                          September 30,                        Change
                                    2020                   2019            $             %

                                             (in thousands, except percentages)
Product development           $    128,923$ 86,177$ 42,746        49.6  %
Percentage of total revenue           11.6   %              15.7  %


Product development expenses increased $42.7 million, or 49.6%, to $128.9
million in the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019, primarily as a result of increased employee
compensation-related expenses, including stock-based compensation, mainly driven
by an increase in average headcount at Etsy and the acquisition of Reverb.
Additionally, we gained leverage as product development expenses did not
increase as fast as revenue.
General and administrative

                                       Nine Months Ended
                                          September 30,                        Change
                                    2020                   2019            $             %

                                             (in thousands, except percentages)
General and administrative    $    112,717$ 86,733$ 25,984        30.0  %
Percentage of total revenue           10.2   %              15.8  %


General and administrative expenses increased $26.0 million, or 30.0%, to $112.7
million in the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019, primarily due to increased employee
compensation-related expenses, including stock-based compensation, mainly driven
by an increase in average headcount as a result of the acquisition of Reverb.
Additionally, we gained leverage as general and administrative expenses did not
increase as fast as revenue.
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Other Expense, net

                                        Nine Months Ended
                                           September 30,                      Change
                                       2020              2019             $             %

                                              (in thousands, except percentages)

Other expense, net: Loss on extinguishment of debt $ (16,855) $ - $ (16,855)

            NM
Percentage of total revenue              (1.5)  %            -  %
Interest expense                 $    (30,608)$ (14,408)$ (16,200)      112.4  %
Percentage of total revenue              (2.8)  %         (2.6) %

Interest and other income $ 6,503$ 9,659$ (3,156) (32.7) % Percentage of total revenue

               0.6   %          1.8  %

Foreign exchange loss            $     (9,312)$  (1,079)$  (8,233)      763.0  %
Percentage of total revenue              (0.8)  %         (0.2) %
Other expense, net               $    (50,272)$  (5,828)$ (44,444)      762.6  %
Percentage of total revenue              (4.5)  %         (1.1) %


Other expense, net was $50.3 million in the nine months ended September 30,
2020, which increased $44.4 million from $5.8 million in the nine months ended
September 30, 2019. The increase in expense was primarily driven by both a
non-cash loss on extinguishment of debt of $16.9 million related to the partial
repurchase of the 2018 Notes, and an increase in primarily non-cash interest
expense driven by our 2019 Notes, issued in September 2019. Additionally, there
was an increase in foreign exchange loss due to 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

                                                            Nine Months Ended
                                                               September 30,                                 Change
                                                        2020                     2019                $                   %

                                                                        (in thousands, except percentages)
(Provision) benefit for income taxes              $    (11,694)$  6,708$ (18,402)              (274.3) %
Percentage of total revenue                               (1.1)  %          

1.2 %



Our income tax provision and benefit for the nine months ended September 30,
2020 and 2019 was $11.7 million and $6.7 million, respectively.
The primary driver of our income tax provision for the nine months ended
September 30, 2020 was tax expense of $37.0 million on income before income
taxes, partially offset by excess tax benefits from employee stock-based
compensation of $23.7 million.
The primary drivers of our income tax benefit for the nine months ended
September 30, 2019 were excess tax benefits from employee stock-based
compensation of $15.3 million and a benefit related to research and development
tax credit of $5.4 million, partially offset by tax expense on income before
income taxes of $10.0 million and the adverse impact of certain tax provision
introduced by the TCJA of $2.4 million.
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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; (benefit) provision for income taxes; depreciation
and amortization; stock-based compensation expense; foreign exchange loss;
acquisition-related expenses; non-ordinary course disputes; and loss on
extinguishment of debt. Below is a reconciliation of Adjusted EBITDA to net
income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA because it is a key measure used by our
management and Board of Directors to evaluate our operating performance and
trends, allocate internal resources, prepare and approve our annual budget,
develop short- and long-term operating plans, determine incentive compensation,
and assess the health of our business. As our Adjusted EBITDA increases, we are
able to invest more in our platform.
We believe that Adjusted EBITDA can provide a useful measure for
period-to-period comparisons of our business as it removes the impact of certain
non-cash items and certain variable charges.
Adjusted EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect other non-operating expenses, net of other
non-operating income, including net interest expense;
•Adjusted EBITDA does not reflect tax payments that may represent a reduction in
cash available to us;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect cash capital expenditure requirements for such
replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not consider the impact of stock-based compensation
expense;
•Adjusted EBITDA does not consider the impact of foreign exchange loss;
•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 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.
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The following table reflects the reconciliation of net income to Adjusted EBITDA for each of the periods indicated:

                                                                Three Months Ended                     Nine Months Ended
                                                                    September 30,                         September 30,
                                                               2020               2019               2020               2019

                                                                                      (in thousands)
Net income                                                $    91,761$ 14,801$ 200,708$  64,603
Excluding:
Interest and other non-operating expense, net (1)               9,457             2,194             24,105              4,749
(Benefit) provision for income taxes (2)                       (1,368)           (4,712)            11,694             (6,708)
Depreciation and amortization (3)                              15,754            12,808             45,088             32,760
Stock-based compensation expense (4)                           17,128            12,137             47,664             31,056

Foreign exchange loss (5)                                       1,464             1,949              9,312              1,079
Acquisition-related expenses (6)                                  392             1,735              1,701              2,941
Non-ordinary course disputes                                        -             1,164                  -              1,164
Loss on extinguishment of debt (7)                             16,855                 -             16,855                  -
Adjusted EBITDA                                           $   151,443$ 42,076$ 357,127$ 131,644


(1)Included in interest and other non-operating expense, net is primarily
non-cash interest expense, including amortization of debt issuance costs,
related to our convertible debt offerings, which were entered into in March
2018, September 2019, and August 2020.
(2)See "Results of Operations-(Provision) Benefit for Income Taxes" for more
information on the fluctuation in (benefit) provision for income taxes in the
three and nine months ended September 30, 2020 and 2019.
(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 nine months ended September 30, 2020 and 2019 include amortization
expense of acquired intangible assets and developed technology related to the
acquisition of Reverb in the third quarter of 2019.
(4)See "Note 12-Stock-Based Compensation" in the Notes to Consolidated Financial
Statements for disclosure of stock-based compensation expense included in the
Consolidated Statements of Operations by financial statement line item
classification.
(5)The foreign exchange loss is primarily driven by the change in U.S. 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.
(7)During the third quarter of 2020, the Company repurchased $301.1 million
aggregate principal amount of its outstanding 2018 Notes. The Company recognized
a non-cash loss on extinguishment of debt of $16.9 million as a result. For more
information see "Note 9-Debt" in the Notes to Consolidated Financial Statements.
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Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments were $1.5 billion as of
September 30, 2020. Additionally, we have $36.7 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 nine months ended September 30, 2020, we had
positive operating cash flows of $435.3 million and we expect to generate
additional cash flow from operations in the remainder of 2020. We believe that
this capital structure, as well as the nature and framework of our business will
allow us to meet all debt covenants, sustain our business operations, and be
able to react to changing macroeconomic conditions. In the third quarter of
2020, our Board of Directors decided to re-initiate purchases under the stock
repurchase program beginning in the fourth quarter of 2020, after temporarily
pausing share repurchases in the second quarter of 2020 in light of the
macroeconomic situation related to COVID-19.
The following table shows our cash and cash equivalents, and short- and
long-term investments, and net working capital as of the date indicated:
                                                                               As of September 30,
                                                                                      2020
                                                                                 (in thousands)
Cash and cash equivalents                                                      $      1,144,974
Short-term investments                                                                  379,586
Long-term investments                                                                    36,679

Total cash and cash equivalents, and short- and long-term investments

   $      1,561,239

Net working capital                                                            $      1,356,889


As of September 30, 2020, a majority of our cash and cash equivalents, which
were primarily held in cash deposits and money market funds, were held in the
United States for future investments, working capital funding, and general
corporate purposes. We fund our international operations from our funds held in
the United States on an as-needed basis.
We invest in short- 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
In August 2020, we issued the 2020 Notes in a private placement to qualified
institutional buyers pursuant to the Securities Act. The initial conversion
price of the 2020 Notes represented a premium of approximately 52.5% over the
price of our common stock. The net proceeds from the sale of the 2020 Notes were
$639.5 million after deducting the offering expenses. Based on the terms of the
2020 Notes, we have the option to pay or deliver cash, shares of our common
stock, or a combination thereof, when a conversion notice is received.
Accordingly, we cannot be required to settle the 2020 Notes in cash and,
therefore, the 2020 Notes are classified as long-term debt as of September 30,
2020. For more information on the 2020 Notes, see "Note 9-Debt" in the Notes to
Consolidated Financial Statements.
In September 2019, we issued the 2019 Notes in a private placement to qualified
institutional buyers pursuant to the Securities Act. The initial conversion
price of the 2019 Notes represented a premium of approximately 47.5% over the
price of Etsy's common stock. The net proceeds from the sale of the 2019 Notes
were $639.5 million after deducting initial purchasers' discount and offering
expenses. Based on the daily closing prices of the Company's stock during the
quarter ended September 30, 2020, holders of the 2019 Notes are not eligible to
convert their 2019 Notes during the fourth quarter of 2020. 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 of September 30,
2020. For more information on the 2019 Notes, see "Note 9-Debt" in the Notes to
Consolidated Financial Statements.
In March 2018, we issued 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 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
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Notes in cash and, therefore, the 2018 Notes are classified as long-term debt as
of September 30, 2020. 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. As
of September 30, 2020, $43.9 million aggregate principal of the 2018 Notes
remained outstanding. Based on the daily closing prices of the Company's stock
during the quarter ended September 30, 2020, holders of the remaining 2018 Notes
are eligible to convert their 2018 Notes during the fourth quarter of 2020. For
more information on the 2018 Notes, see "Note 9-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. At September 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 Part II, Item 1A, "Risk Factors" in this Quarterly Report.
Historical Cash Flows
                                  Nine Months Ended
                                     September 30,
                                 2020           2019

                                    (in thousands)
Cash provided by (used in):
Operating activities          $ 435,289$ 128,339
Investing activities             41,643       (208,255)
Financing activities            220,574        388,188



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 $435.3 million in the nine months
ended September 30, 2020, primarily driven by cash net income of $363.8 million
as a result of revenue generated on our platform and changes in our operating
assets and liabilities that provided $71.5 million in cash, primarily driven by
payment timing of payables in the period.
Net cash provided by operating activities was $128.3 million in the nine months
ended September 30, 2019, primarily driven by cash net income of $139.0 million,
as a result of revenue generated on our platform offset by changes in our
operating assets and liabilities that used $10.7 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 cash paid in the acquisition of
Reverb, 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 $41.6 million in the nine months
ended September 30, 2020. This was primarily attributable to net sales of
marketable securities of $45.7 million. This was partially offset by $4.1
million in capital expenditures, including $3.7 million for website development
and internal-use software as we continued to invest in projects adding new
features and functionality to the Etsy platform.

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Net cash used in investing activities was $208.3 million in the nine months
ended September 30, 2019. This was primarily attributable to $271.4 million in
cash paid to acquire Reverb and $12.1 million in capital expenditures, including
$6.2 million for website development and internal-use software. These were
partially offset by net sales of marketable securities of $77.1 million.
Net Cash Provided by Financing Activities
Our primary financing activities include proceeds from the issuance of
convertible notes, repurchases of common stock, settlement of convertible senior
notes, payments related to capped call transactions, payment of tax obligations
on vested equity awards, proceeds from exercise of stock options, payments of
debt issuance costs, and payments on finance lease obligations.
Net cash provided by financing activities was $220.6 million in the nine months
ended September 30, 2020. This was primarily attributable to proceeds from
issuance of the 2020 Notes of $650.0 million and proceeds from the exercise of
stock options of $18.5 million, partially offset by stock repurchases of $191.2
million, partial repurchase of the 2018 Notes of $137.2 million, payments of
$74.7 million for the 2020 Capped Call Transactions, and payment of tax
obligations on vested equity awards of $19.8 million.
Net cash provided by financing activities was $388.2 million in the nine months
ended September 30, 2019. This was primarily attributable to proceeds from
issuance of the 2019 Notes of $650.0 million and proceeds from the exercise of
stock options of $8.9 million, partially offset by stock repurchases of $154.8
million, payments of $76.2 million for the 2019 Capped Call Transactions,
payment of tax obligations on vested equity awards of $23.6 million, payment of
debt issuance costs of $11.1 million, and payments on finance lease obligations
of $8.2 million.
Off Balance Sheet Arrangements
As of September 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 of September 30, 2020, there were no material changes in commitments under
contractual obligations, compared to the contractual obligations disclosed in
our Annual Report, except for debt activity. For more information, see "Note
9-Debt" in the Notes to Consolidated Financial Statements.
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.
                                       48

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