ETSY INC (ETSY) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this 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 Annual Report, particularly in Part I, Item 1A, “Risk Factors.” We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

Business

Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers around the world. These marketplaces - which collectively create a “House of Brands” - share our mission, common levers for growth, similar business models, and a strong commitment to use business and technology to strengthen communities and empower people.

Our primary marketplace, Etsy.com, is the global destination for unique and creative goods made by independent sellers. The Etsy marketplace connects creative artisans and entrepreneurs with thoughtful consumers looking for items that are a joyful expression of their taste and values. Our sellers are the heart and soul of Etsy, and our technology platform allows our sellers to turn their creative passions into economic opportunity. We have a seller-aligned business model: we make money when our sellers make money. We offer Etsy.com sellers a marketplace with tens of millions of buyers along with a range of seller tools and services that are specifically designed to help our creative entrepreneurs generate more sales and scale their businesses.

In addition to our core Etsy marketplace, our “House of Brands” consists of Reverb Holdings, Inc. (“Reverb”), our musical instrument marketplace, Depop Limited (“Depop”), our fashion resale marketplace, and Elo7 Serviços de Informática S.A. (“Elo7”), our Brazil-based marketplace for handmade and unique items. Each of our marketplaces operates independently, while benefiting from shared expertise in product, marketing, technology, and customer support. The results of Reverb, Elo7, and Depop, acquired on August 15, 2019, July 2, 2021, and July 12, 2021, respectively, are included in all financial and other metrics discussed in this report, unless otherwise noted, from their respective dates of acquisition.

We generate revenue primarily from marketplace activities, including transaction, listing, and payments processing fees, and optional seller services, which include on-site advertising and shipping labels.

Our strategy is focused around:

•Building a sustainable competitive advantage - our “Right to Win;”

•Growing the Etsy marketplace in our seven core geographies; and

•Leveraging our marketplace expertise and playbook across our “House of Brands.”

Our investments in technology infrastructure, product development, marketing, trust and safety, member support, and sellers tools and education, and other areas support our strategy, which you can read more about in Part 1, Item 1, “Business—Primary Business Drivers.” In 2021, our first two strategies contributed to growth of the Etsy marketplace compared to 2020 by driving more new buyers to our marketplace, giving existing buyers reasons to come back more often, and encouraging buyers to spend more per order thereby fueling success for our sellers.

Annual Highlights

As of December 31, 2021, our marketplaces connected 7.5 million active sellers and 96.3 million active buyers in nearly every country in the world. In the year ended December 31, 2021, sellers generated GMS of $13.5 billion, approximately 64% of which came from purchases made on mobile devices. We are a global company and approximately 42% of our GMS in the year ended December 31, 2021 came from transactions in which either a seller or a buyer was located outside of the United States. Total revenue was $2.3 billion in the year ended December 31, 2021, driven by strong growth in both Marketplace and Services revenue. In the year ended December 31, 2021, we recorded net income of $493.5 million, and non-GAAP Adjusted EBITDA of $716.6 million. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated in accordance with GAAP.

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Cash and cash equivalents and short-term investments were $984.6 million as of December 31, 2021. As of December 31, 2021, we had outstanding $1.0 billion aggregate principal amount of 0.25% Convertible Senior Notes due 2028 (the “2021 Notes”), $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2027 (the “2020 Notes”), $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2026 (the “2019 Notes” and together with the 2021 Notes, 2020 Notes, and 0% Convertible Senior Notes due 2023 (the “2018 Notes”), the “Notes”). Additionally, we have the ability to draw down on our $200.0 million senior secured revolving credit facility. In the year ended December 31, 2021, we had positive operating cash flows of $651.6 million.

Acquisitions

On July 2, 2021, we completed our acquisition of Elo7, a marketplace in Brazil focused on unique, handmade items, for consideration having a fair value of approximately $212.1 million, net of cash acquired, after giving effect to purchase price adjustments.

On July 12, 2021, we completed our acquisition of Depop, an online global peer-to-peer fashion resale marketplace for consideration having a fair value of approximately $1.493 billion, net of cash acquired, after giving effect to purchase price adjustments.

Convertible Debt

In June 2021, we issued the 2021 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The initial conversion price of the 2021 Notes represented a premium of approximately 45% over the closing price of our common stock on June 8, 2021, the date the 2021 Notes offering was priced. The net proceeds from the sale of the 2021 Notes were $986.7 million after deducting the offering expenses. The 2021 Notes will mature on June 15, 2028, unless earlier converted, redeemed, or repurchased.

We used $85.0 million of the net proceeds from the 2021 Notes offering to enter into separate capped call instruments (“2021 Capped Call Transactions”) with certain financial institutions. The 2021 Capped Call Transactions effectively limit the premium for conversion of the 2021 Notes to 100% and are generally expected to reduce potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any payments we make upon conversion.

In addition, we repurchased approximately 1.1 million shares of our common stock for approximately $180.0 million concurrently with the issuance of the 2021 Notes.

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for more information on the 2021 Notes and 2021 Capped Call Transactions, as well as the Notes issued in previous years.

Etsy Marketplace Transaction Fee Increase

We are increasing our seller transaction fee from 5% to 6.5%, effective April 11, 2022. Our plan is to invest even more in making Etsy the best place to run a creative business. We expect to invest most of the incremental revenue from this fee increase in marketing, seller tools, and creating world-class customer experiences.

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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 financial results of Depop, Elo7, and Reverb have been included in our consolidated financial results (“Consolidated”) from July 12, 2021, July 2, 2021, and August 15, 2019 (the dates of acquisition), respectively. We are providing Etsy.com standalone information in certain instances where particularly relevant. The key operating and financial metrics we use are:

(1)Unaudited.

(2)Consolidated GMS for the year ended December 31, 2021 includes Etsy.com GMS of $12.2 billion, Reverb GMS of $948.0 million, Depop GMS of $294.4 million, and Elo7 GMS of $32.0 million.

(3)Consolidated active sellers and active buyers includes Etsy.com active sellers and active buyers of 5.3 million and 90.1 million, respectively, as of December 31, 2021.

(4)Percent non-U.S. GMS was formerly referred to as percent international GMS. Percent non-U.S. GMS for Etsy.com for the year ended December 31, 2021 was 43%. For further details, refer to “Non-U.S. GMS” definition below.

GMS

Gross merchandise sales (“GMS”) is the dollar value of items sold in our marketplaces within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions. GMS does not represent revenue earned by us. GMS is largely driven by transactions in our marketplaces and is not directly impacted by Services activity. However, because our revenue and cost of revenue depend significantly on the dollar value of items sold in our marketplace, we believe that GMS is an indicator of the success of our sellers, the satisfaction of our buyers, and the health, scale, and growth of our business. We track “Paid GMS” for the Etsy marketplace and define it as Etsy.com GMS that is attributable to our performance marketing efforts, which excludes most of our marketing investments focused on brand awareness like TV and digital video.

GMS increased $3.2 billion to $13.5 billion in the year ended December 31, 2021 compared to the year ended December 31, 2020. Driving this growth in GMS, were increases as compared to December 31, 2020 in active sellers, primarily due to strong growth in U.S. sellers on the Etsy.com marketplace, in active buyers on the Etsy.com marketplace, and in GMS per active buyer on a trailing twelve month (“TTM”) basis, as well as the acquisitions of Depop and Elo7 in the third quarter of 2021. As of December 31, 2021, habitual buyers, or Etsy.com buyers who have spent $200 or more and made purchases on six or more days in the previous 12 months, grew to 8.1 million, an increase of 26% compared to December 31, 2020. Additionally, we experienced the following growth in both new buyer and existing buyer GMS in the periods presented:

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Uncertainty caused by the ongoing COVID-19 pandemic may continue to impact our business in 2022. While our growth continued in 2021, our rate of growth decelerated as compared to the rapid growth we experienced in 2020, which was driven at least in part by the pandemic-related shift to online purchasing. Our growth rate may continue to be impacted by macroeconomic factors beyond our control such as inflation, retail businesses reopening, increased consumer spending on travel and other discretionary items, and the absence of new U.S. and other government economic stimulus programs, among other things, as well as an anticipated deceleration in our rate of acquisition of new buyers, the effects of which may be offset to some extent by incremental GMS from our recent acquisitions.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents our net income adjusted to exclude: interest and other non-operating expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange (gain) loss; acquisition-related expenses; non-ordinary course disputes; and loss on extinguishment of debt. Adjusted EBITDA margin is Adjusted EBITDA divided by revenue. See “Non-GAAP Financial Measures” for more information regarding our use of Adjusted EBITDA and Adjusted EBITDA margin, including their limitations as a financial measure, and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

Active Sellers

An active seller is a seller who has had a charge or sale in the last 12 months. Charges include Marketplace and Services revenue fees, discussed in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Revenue Recognition” in the Notes to Consolidated Financial Statements. A seller is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple seller accounts and can count as a distinct active seller in each of our marketplaces. As part of our commitment to integrity and transparency, we continuously monitor the criteria for disqualifying a seller as an active seller. Commencing in the first quarter of 2021, we expanded our disqualifying criteria, but we did not apply such criteria to prior periods as the impact of such criteria was immaterial to such periods. Additionally, commencing in the third quarter of 2021, as part of our integration of the Depop and Elo7 marketplaces into our “House of Brands,” we expanded our definition of active sellers to include any seller who has had a sale in the last 12 months, even if no charge was incurred in connection with the sale. This update did not result in any change to prior period disclosures. We succeed when sellers succeed, so we view the number of active sellers as a key indicator of consumer awareness of our brands, the reach of our platforms, the potential for growth in GMS and revenue, and the health of our business.

Active Buyers

An active buyer is a buyer who has made at least one purchase in the last 12 months. A buyer is separately identified in each of our marketplaces by a unique e-mail address; a single person can have multiple buyer accounts and can count as a distinct active buyer in each of our marketplaces. We generate revenue when buyers order items from sellers, so we view the number of active buyers as a key indicator of our potential for growth in GMS and revenue, the reach of our platforms, consumer awareness of our brands, the engagement and loyalty of buyers, and the health of our business.

Mobile GMS

Mobile GMS is GMS that results from a transaction completed on a mobile device, such as a tablet or a smartphone. Mobile GMS excludes orders initiated on mobile devices but ultimately completed on a desktop. When calculating the percentage of mobile GMS, we do not take into account refunds associated with canceled transactions. We believe that mobile GMS indicates our success in converting mobile activity into mobile purchases and demonstrates our ability to grow GMS and revenue.

During the year ended December 31, 2021, mobile GMS increased as a percentage of total GMS to approximately 64%, up from approximately 61% for the year ended December 31, 2020. Mobile GMS growth during the year ended December 31, 2021 was approximately 39%, with mobile GMS growing faster than desktop GMS during the year.

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Non-U.S. GMS

Non-U.S. GMS (formerly referred to as international GMS) is GMS from transactions in which either the billing address for the seller or the shipping address for the buyer at the time of sale is outside of the United States. When calculating percent non-U.S. GMS, we do not take into account refunds associated with canceled transactions. We believe that non-U.S. GMS shows the level of engagement of our community outside the United States and demonstrates our ability to grow GMS and revenue.

For the year ended December 31, 2021, non-U.S. GMS increased as a percentage of total GMS to approximately 42%, up from approximately 36% for the year ended December 31, 2020. Non-U.S. GMS increased approximately 54% in the year ended December 31, 2021 compared to the year ended December 31, 2020, or 49% on a currency-neutral basis, driven by our fastest growing non-U.S. trade route, non-U.S. domestic, which is GMS generated between a non-U.S. buyer and a non-U.S. seller both in the same country. Non-U.S. domestic GMS grew approximately 77% in 2021 compared to 2020, driven primarily by growth in the Etsy.com marketplace, and, to a lesser extent, our acquisitions of Depop and Elo7 in the third quarter of 2021.

Currency-Neutral GMS Growth

We calculate currency-neutral GMS growth by translating current period GMS for goods sold that were listed in non-U.S. dollar currencies into U.S. dollars using prior year foreign currency exchange rates.

As reported and currency-neutral GMS growth for the periods presented below are as follows:

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Key Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us, including those discussed in Part I, Item 1, “Business,” but also pose risks and challenges, including those discussed in Part I, Item 1A, “Risk Factors.”

Components of Our Results of Operations

Revenue

Our revenue is diversified and 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: Etsy.com marketplace revenue is comprised of the fees an Etsy seller pays for marketplace activities, including:

•The $0.20 listing fee for each item listed (for up to four months);

•The 5% transaction fee that an Etsy seller pays for each completed transaction, inclusive of shipping fees charged, and where applicable, an additional transaction fee of 12% or 15% related to offsite advertising (“Offsite Ads”);

•A fee for Etsy Payments, our payment processing product, which typically varies between 3.0% and 4.5% of an item’s total sale price, including shipping, plus a flat fee per order, that depends on the country in which a seller’s bank account is located. We earn additional fees on transactions in which currency conversions are performed.

Reverb fees include the 5.0% transaction fee that a Reverb seller pays for each completed transaction, inclusive of shipping fees charged, and a fee for payment processing. Similarly, Depop and Elo7 sellers pay a 10% and 7% transaction fee, respectively, for each completed transaction, and also pay a fee for payment processing. None of these other marketplaces charge listing fees.

Services Revenue: Services revenue is comprised of the fees an Etsy seller pays us for our optional services (“Services”), including:

•On-site advertising services (“Etsy Ads”), which allow Etsy sellers to pay for prominent placement of their listings in search results; and

•Shipping labels, which allows Etsy sellers in the United States, Canada, United Kingdom, Australia, and India to purchase discounted shipping labels.

Across our other marketplaces, Reverb and Elo7 offer on-site advertising services, and all of our other marketplaces offer shipping labels services.

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for a discussion of our revenue recognition policies.

Cost of Revenue

Cost of revenue primarily consists of the cost of interchange and other fees for credit card processing services, credit card verification service fees, credit card chargebacks to support payments revenue, and costs of refunds made to buyers that we are not able to collect from sellers. Cost of revenue also includes expenses associated with the usage of cloud infrastructure, including employee compensation-related expenses, hosting and bandwidth costs, and depreciation and amortization. Our cost of revenue as a percentage of revenue may change over time as our revenue mix changes; for example, to the extent that payments revenue increases as a percentage of revenue, there may be a dampening effect on our gross margin, as our payments services are lower margin products compared to our other offerings.

Operating Expenses

Operating expenses consist of marketing, product development, and general and administrative expenses. Employee compensation-related expenses are the most significant component of the product development and general and administrative expense categories. We include stock-based compensation expense in the applicable operating expense category based on the respective equity award recipient’s function.

Marketing: Marketing expenses primarily consist of direct marketing expenses, which largely includes digital marketing and television ad and digital video expenses. Digital marketing, also referred to as performance marketing, primarily consists of targeted promotional campaigns through electronic channels, such as product listing ads, search engine marketing, social channels, and affiliate programs, which are focused on buyer acquisition and retargeting. To a lesser extent, direct marketing expenses also include brand marketing, public relations and communications, marketing partnerships, and customer relationship

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management. Marketing expenses also include employee compensation-related expenses to support our marketing initiatives and amortization expense related to acquired customer relationships and trademark intangible assets.

Product development: Product development expenses consist primarily of employee compensation-related expenses for our engineering, product management, product design, and product research activities. Additional expenses include consulting costs related to the development, quality assurance, and testing of new technology and enhancement of our existing technology.

General and administrative: General and administrative expenses consist primarily of employee compensation-related expenses for our general corporate functions. General and administrative expenses also include costs associated with the use of facilities and equipment, including depreciation and amortization and office overhead, bad debt expense, digital service tax, and certain professional services expenses.

Other Expense, net

Other expense, net consists of interest expense, interest and other income, foreign exchange gain (loss), and in 2020, also loss on extinguishment of debt which relates to the partial repurchase of our 2018 Notes in 2020. Interest expense consists primarily of non-cash amortization of the debt discount, amortization of debt issuance costs, and coupon interest expense related to our Notes. With the adoption of Accounting Standards Update (“ASU”) 2020-06 in the first quarter of 2021, non-cash interest expense related to the Notes decreased as there is no further amortization of the debt discount due to its derecognition. Interest expense also includes interest associated with the portion of our Brooklyn headquarters lease which is accounted for as a finance lease. Interest and other income is primarily comprised of interest income from our investment accounts.

Benefit (Provision) for Income Taxes

Our effective tax rate and the (provision) benefit for income taxes is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, taxable income and loss in each jurisdiction, changes in our stock price, audit-related developments, acquisitions, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, the effective tax rate can be more or less volatile based on the magnitude of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on the effective tax rate is greater when pre-tax income is lower.

Although management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statutes of limitations. To the extent that the results differ from our original or adjusted estimates, the effect will be recorded in (provision) benefit for income taxes.

The (provision) benefit for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income and deductions, and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. Any adjustments as a result of any examination may result in additional taxes or penalties against us. If the ultimate result of these audits differ from original or adjusted estimates, they could have a material impact on our tax provision and results of operations.

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Results of Operations

The following tables show our results of operations for the periods presented and express the relationship of line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

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Comparison of Years Ended December 31, 2021 and 2020

Revenue

Revenue increased $603.5 million to $2.3 billion in the year ended December 31, 2021 compared to the year ended December 31, 2020, of which 75.0% consisted of Marketplace revenue and 25.0% consisted of Services revenue.

Marketplace revenue increased $442.7 million to $1.7 billion in the year ended December 31, 2021 compared to the year ended December 31, 2020. This growth was substantially all due to an increase in the volume of GMS on our marketplaces for the year ended December 31, 2021 to a total of $13.5 billion, and the balance was due to pricing related to our Offsite Ads transaction fee, which was introduced in May 2020. A significant majority of the growth in volume of GMS was driven by the Etsy marketplace. The balance was primarily due to the acquisitions of Depop and Elo7 in the third quarter of 2021. Marketplace revenue also increased due to Reverb, whose revenue consisted principally of Marketplace revenue.

Within the increase in volume of GMS, transaction fee revenue increased 35.5%, payments revenue increased 31.4%, and listing fee revenue grew 23.8% year-over-year. The share of Etsy.com GMS processed through our Etsy Payments platform was 92% for the years ended December 31, 2021 and 2020.

Services revenue increased $160.8 million to $583.3 million in the year ended December 31, 2021 compared to the year ended December 31, 2020. The growth in Services revenue was primarily driven by an increase of 42.8% in on-site advertising revenue, which represented a significant majority of the overall Services revenue growth, and, to a lesser extent, an increase in shipping label revenue of 11.4% from the prior year. The increase in advertising revenue was primarily due to higher click volume on Etsy Ads. The increase in shipping label revenue was primarily driven by an increase in label volume, the majority of which is driven by the increase in GMS. Additionally, services revenue increased due to the acquisitions of Depop and Elo7 in the third quarter of 2021.

On February 24, 2022, we announced that we are increasing our Etsy.com seller transaction fee starting April 11, 2022, from 5% to 6.5%. The updated fee structure is intended to support increased investments in the growth and health of the Etsy.com marketplace. We expect our new pricing model will have a positive effect on revenue.

Cost of Revenue

Cost of revenue increased $189.8 million to $654.5 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by increased costs related to overall volume increases on our Etsy and Reverb marketplaces, including payments processing fees and cloud-related hosting and bandwidth costs. The increase was also due to the cost of revenue associated with the Depop and Elo7 acquisitions, including employee compensation-related expenses and the amortization of developed technology. Cost of revenue increased to a lesser extent due to increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount at Etsy.com and Reverb. Additionally, outsourced customer support expenses increased.

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Operating Expenses

There were a total of 2,402 employees worldwide on December 31, 2021, inclusive of Reverb, which had 245 employees, Depop, which had 390 employees, and Elo7, which had 184 employees, compared with 1,414 employees worldwide on December 31, 2020.

Marketing

Marketing expenses increased $154.0 million to $654.8 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily as a result of increased spend in digital marketing, and, to a lesser extent, television ad campaigns. The increase in digital marketing expense was largely due to the shift to our Offsite Ads offering beginning in May 2020 and increased site traffic. Paid GMS was 19% of overall GMS in the year ended December 31, 2021, down slightly from paid GMS of 20% in the year ended December 31, 2020. Etsy.com began charging sellers an offsite advertising transaction fee on May 4, 2020; 9% of Etsy GMS was subject to an Offsite Ads transaction fee in 2021, in line with 9% in the second half of 2020. The acquisitions of Depop and Elo7, including the amortization of acquired intangible assets and employee compensation-related expenses, also contributed to the increase in marketing expenses.

Product development

Product development expenses increased $91.5 million to $271.5 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily as a result of increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount, including an increase in headcount from the acquisitions of Depop and Elo7. The increase was also due to an increase in expenses for third-party contractors and consultants, offset in part by higher capitalized website development and internal-use software costs.

General and administrative

General and administrative expenses increased $126.5 million to $282.5 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount, including an increase in headcount from the acquisitions of Depop and Elo7, and performance based restricted stock units, which were granted for the first time in 2021. Additionally, general and administrative expenses increased due to acquisition-related expenses associated with the Depop and Elo7 acquisitions, which closed in July 2021. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5—Business Combinations” for more information on acquisition-related expenses. General and administrative expenses increased to a lesser extent due to increased digital service tax expenses, primarily driven by business growth.

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Other Income (Expense), net

Other income, net was $5.9 million in the year ended December 31, 2021, which increased $64.2 million from other expense, net of $58.3 million in the year ended December 31, 2020. The increase was primarily driven by a decrease in interest expense as a result of the adoption of ASU 2020-06 in the first quarter of 2021 as there was no further amortization of the debt discount related to the Notes due to its derecognition and by a non-cash loss on extinguishment of debt of $16.9 million related to the partial repurchase of the 2018 Notes in 2020, which will not recur as there is no loss on extinguishment of debt under ASU 2020-06. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” for more information on the adoption of ASU 2020-06. In addition, the increase was driven by both favorable changes in U.S. dollar, Euro, Pound Sterling, and Canadian dollar exchange rates in the current year versus unfavorable changes in the exchange rates for the same currencies in the prior year which impact our intercompany and other non-functional currency cash balances, resulting in a foreign exchange gain in the current year versus a foreign exchange loss in the prior year.

Benefit (Provision) for Income Taxes

Our income tax benefit and provision for the years ended December 31, 2021 and 2020 was $21.9 million and $16.5 million, respectively.

The primary drivers of our income tax benefit for the year ended December 31, 2021 were tax benefits from employee stock-based compensation of $83.2 million and a benefit related to research and development tax credits of $23.4 million, partially offset by tax expense of $72.8 million on income before income taxes and state tax expense of $11.1 million.

The primary drivers of our income tax provision for the year ended December 31, 2020 was tax expense of $63.6 million on income before income taxes, partially offset by tax benefits from employee stock-based compensation of $45.4 million.

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Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

In this Annual Report, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income adjusted to exclude: interest and other non-operating expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange (gain) loss; acquisition-related expenses; non-ordinary course disputes; and loss on extinguishment of debt. We also provide Adjusted EBITDA margin, a non-GAAP financial measure that presents Adjusted EBITDA divided by revenue. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA and Adjusted EBITDA margin because they are key measures used by our management and Board of Directors to evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans, determine incentive compensation, and assess the health of our business. As our Adjusted EBITDA increases, we are able to invest more in our platforms.

We believe that Adjusted EBITDA and Adjusted EBITDA margin can provide useful measures for period-to-period comparisons of our business as they remove the impact of certain non-cash items and certain variable charges.

Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense;

•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•Adjusted EBITDA does not consider the impact of stock-based compensation expense;

•Adjusted EBITDA does not consider the impact of foreign exchange (gain) loss;

•Adjusted EBITDA does not reflect acquisition-related expenses;

•Adjusted EBITDA does not consider the impact of non-ordinary course disputes;

•Adjusted EBITDA does not consider the impact of 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 and Adjusted EBITDA margin alongside other financial performance measures, including net income, revenue, and our other GAAP results.

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The following table reflects the reconciliation of net income to Adjusted EBITDA and the calculation of Adjusted EBITDA margin for each of the periods indicated:

(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, August 2020, and June 2021. The adoption of ASU 2020-06 in the first quarter of 2021 resulted in a decrease in non-cash interest expense related to the Notes as there was no amortization of the debt discount due to its derecognition. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” for more information on the adoption of ASU 2020-06.

(2) See “Results of Operations—Benefit (Provision) for Income Taxes” for more information on the fluctuation in (benefit) provision for income taxes in the years ended December 31, 2021 and 2020.

(3) Included in depreciation and amortization is amortization expense of acquired intangible and developed technology assets related to the acquisitions of Depop and Elo7 in the third quarter of 2021 and the acquisition of Reverb in the third quarter of 2019.

(4) See Part II, Item 8, “Financial Statements and Supplementary Data—Note 15—Stock-based Compensation” for disclosure of stock-based compensation expense included in the Consolidated Statements of Operations by financial statement line item classification.

(5) See “Results of Operations—Other Income (Expense), net” for more information on the fluctuation in foreign exchange (gain) loss in the years ended December 31, 2021 and 2020.

(6) Acquisition-related expenses for the year ended December 31, 2021 are related to our acquisitions of Depop and Elo7. Acquisition-related expenses for the years ended December 31, 2020 and December 31, 2019 are related to our acquisition of Reverb. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5—Business Combinations” for further information.

(7) During the third quarter of 2020, we repurchased $301.1 million aggregate principal amount of our outstanding 2018 Notes. We recognized a non-cash loss on extinguishment of debt of $16.9 million as a result. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for more information.

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Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were $984.6 million as of December 31, 2021. Additionally, we have $85.0 million in long-term investments that we can liquidate at short notice and with minimal penalties if needed. We also have the ability to draw down on our $200.0 million senior secured revolving credit facility. In the year ended December 31, 2021, we had positive operating cash flows of $651.6 million. We believe that this capital structure, as well as the nature and framework of our business will allow us to meet all debt covenants, sustain our business operations, and be able to react to changing macroeconomic conditions.

The following table shows our cash and cash equivalents, short-term investments, long-term investments, and net working capital as of the dates indicated:

As of December 31, 2021, 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 non-U.S. operations from our funds held in the United States on an as-needed basis.

We invest in short- and long-term instruments, including fixed-income funds and U.S. Government and agency securities aligned with our investment strategy. These investments are intended to allow us to preserve our principal, maintain the ability to meet our liquidity needs, deliver positive yields across a balanced portfolio, and continue to provide us with direct fiduciary control. In accordance with our investment policy, all investments have maturities no longer than 37 months, with the average maturity of these investments maintained at 12 months or less.

Sources of Liquidity

We expect to continue to generate net positive operating cash flow, and the cash we generate from our core operations enables us to fund ongoing operations and our investments which are outlined in Part 1, Item 1, “Business—Primary Business Drivers.”

In June 2021, we issued the 2021 Notes, the net proceeds of which were $986.7 million after deducting the offering expenses. We used $85.0 million of the net proceeds from the 2021 Notes offering to enter into the 2021 Capped Call Transactions with certain financial institutions. In addition, we repurchased approximately 1.1 million shares of our common stock for approximately $180.0 million concurrently with the issuance of the 2021 Notes. As of December 31, 2021, the 2021 Notes are outstanding along with the 2020 Notes, 2019 Notes and 2018 Notes, and collectively the net carrying value is $2.3 billion. Based on the terms of the Notes, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. Based on the daily closing prices of our stock during the year ended December 31, 2021, holders of the 2019 Notes and 2018 Notes are eligible to convert their Notes during the first quarter of 2022 and holders of the 2021 Notes and 2020 Notes are not eligible to convert their Notes during the first quarter of 2022.

During 2021 we paid $43.9 million in cash and issued approximately 1.0 million shares of Etsy’s common stock to settle conversion notices of $43.9 million aggregate principal amount of the outstanding 2018 Notes.

We also have the ability to draw down on a $200.0 million senior secured revolving credit facility (the “2019 Credit Agreement”). At December 31, 2021, we did not have any borrowings under the 2019 Credit Agreement.

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” for more information on the Notes and the 2019 Credit Agreement.

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Material Cash Requirements

Our cash commitments as of December 31, 2021 were as follows:

Finance lease obligations consist of obligations under finance leases, primarily the portion of our headquarters in Brooklyn, New York that is accounted for as a finance lease, and include imputed interest and tenant improvement allowances.

Operating lease obligations consist of obligations under non-cancelable operating leases, including for a portion of our headquarters in Brooklyn, New York and for a majority of our other office locations, and include imputed interest and tenant improvement allowances.

In the fourth quarter of 2021, we entered into a First Amendment to Lease (the "First Amendment") related to our headquarters, which extends the expiration of the term of the current lease from July 31, 2026 to July 31, 2039 and increases the future minimum payment obligation for payments under both our finance and operating lease commitments.

Debt obligations consist of the 2021 Notes, 2020 Notes, 2019 Notes, and 2018 Notes, which will mature on June 15, 2028, September 1, 2027, October 1, 2026, and March 1, 2023, respectively, unless earlier converted or repurchased.

Interest payments consist of interest due in connection with our 2021 Notes, 2020 Notes, and 2019 Notes.

Purchase obligations consist of commitments related to cloud computing and other support services. For those agreements with variable terms, we do not estimate what the total obligation may be beyond any minimum quantities and/or pricing.

In addition, we have uncertain tax positions of $28.8 million and non-income tax related contingency reserves of $38.8 million, which amounts are not reflected in the table as the ultimate resolution and timing are uncertain. These non-income tax contingency reserves include $2.8 million due to the acquisition of Reverb, which is wholly offset by an indemnification asset of $2.2 million, and a deferred tax asset of $0.6 million. We recorded additional non-income tax reserves of $29.5 million as part of the acquisitions of Depop and Elo7 we completed in 2021, which is partially offset by an indemnification asset of $1.7 million related to Elo7.

In December 2020, our Board of Directors approved a stock repurchase program that enables us to repurchase up to $250 million of our common stock. As of December 31, 2021, the remaining amount available to be repurchased under the approved plan was $127.2 million.

We believe that our existing cash and cash equivalents and short- and long-term investments, together with cash generated from operations, will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. 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 I, Item 1A, “Risk Factors” in this Annual Report.

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Historical Cash Flows

Net Cash Provided by Operating Activities

Our cash flows from operations are largely dependent on the amount of revenue generated on our platforms, as well as associated cost of revenue and other operating expenses. Our primary source of cash from operating activities is cash collections from our customers. Net cash provided by operating activities in each period presented has been influenced by changes in working capital.

Net cash provided by operating activities was $651.6 million in the year ended December 31, 2021, primarily driven by cash net income of $627.7 million as a result of revenue generated on our platforms, and changes in our operating assets and liabilities that provided $23.9 million in cash, primarily driven by timing of payment of accrued expenses in the period.

Net cash provided by operating activities was $679.0 million in the year ended December 31, 2020, primarily driven by cash net income of $554.8 million as a result of increased revenue generated on our platforms, and changes in our operating assets and liabilities that provided $124.2 million in cash, primarily driven by volume and timing of payment of accrued expenses in the period.

Net Cash Used in Investing Activities

Our primary investing activities consist of cash paid for acquisitions, 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 used in investing activities was $1.6 billion in the year ended December 31, 2021. This was primarily attributable to $1.7 billion in cash paid to acquire Depop and Elo7. In addition, investing activities included $28.2 million in capital expenditures, including $16.9 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to our platforms. This was partially offset by net sales and maturities of marketable securities of $172.1 million.

Net cash used in investing activities was $11.4 million in the year ended December 31, 2020. This was primarily attributable to $7.1 million in capital expenditures, including $5.7 million for website development and internal-use software.

Net Cash Provided by Financing Activities

Our primary financing activities include proceeds from the issuance of convertible senior notes, settlement of convertible senior notes, repurchases of common stock, 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 $452.7 million in the year ended December 31, 2021. This was primarily attributable to proceeds from the issuance of the 2021 Notes of $1.0 billion and proceeds from the exercise of stock options of $22.7 million, partially offset by stock repurchases of $302.8 million ($180.0 million in conjunction with the issuance of the 2021 Notes and $122.8 million as part of our stock repurchase program), payments of $85.0 million for the 2021 Capped Call Transactions, payment of tax obligations on vested equity awards of $118.2 million, $43.9 million primarily related to the conversion of the 2018 Notes, and payment of debt issuance costs of $13.3 million.

Net cash provided by financing activities was $119.3 million in the year ended December 31, 2020. This was primarily attributable to proceeds from the issuance of the 2020 Notes of $650.0 million and proceeds from the exercise of stock options of $25.3 million, partially offset by stock repurchases of $268.7 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 $47.7 million.

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Critical Accounting Estimates and Policies

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 our results of operations, cash flows, and financial position are uncertain; however we believe we have used reasonable estimates and assumptions in preparing the consolidated financial statements. Our actual results could differ from these estimates.

We believe that certain assumptions and estimates associated with stock-based compensation; income taxes; the valuation of acquired intangible assets, developed technology, and goodwill as part of purchase price allocations for business combinations; valuation of goodwill; leases; and fair value of convertible senior notes are material in nature due to the subjectivity associated with them and have the greatest potential impact on our consolidated financial statements. Therefore, we consider the assumptions and estimates associated with these (as further detailed below) to be our critical accounting estimates. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for further information on our critical accounting policies related to revenue recognition, stock-based compensation, income taxes, business combinations, goodwill, leases, and fair value of financial instruments.

Stock-Based Compensation

Service-based stock options and service-based restricted stock units (“RSUs”) are awarded to employees and members of our Board of Directors and performance-based restricted stock units (“PBRSUs”) are awarded to employees. All such awards are measured at fair value at each grant date. Stock-based compensation cost for stock options is measured on the grant date, based on the estimated fair value of the award using a Black-Scholes pricing model, and recognized as an expense over the employee’s or director’s requisite service period on a straight-line basis. Our Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected volatility of the price of our common stock and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and these assumptions either increase or decrease, our stock-based compensation expense could materially differ in the future.

•Expected Volatility: Given our sufficient trading history as of the second quarter of 2021, we calculate expected volatility based solely on the historical volatility of Etsy’s stock price observations over a period equivalent to the expected term of the stock option grants. Prior to the second quarter of 2021, we estimated expected volatility by taking the average historical price volatility for Etsy and certain industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants.

•Expected Term: The expected term represents the period that our stock-based awards are expected to be outstanding. Given that we have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of our stock options, beginning in the second quarter of 2021, we estimate our expected term using historical option exercise behavior and expected post-vest cancellation data, averaged with an assumption that recently granted options will be exercised ratably from vesting to the expiration of the stock option. Prior to the second quarter of 2021, we used the simplified method, which represented the average period from vesting to the expiration of the stock option, to calculate the expected term for awards issued to employees or members of our Board of Directors.

For these assumptions, the weighted-average used in the Black-Scholes option-pricing model in order to determine the fair value of stock options granted in the periods indicated were as follows:

We expect to continue to grant RSUs and PBRSUs in the future, and, to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

Income Taxes

We account for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement. The tax positions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statutes of limitations. While we believe our tax positions are fully supportable, they may be challenged by various tax

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authorities. If actual results were to be materially different than estimated, it could result in a material impact on our consolidated financial statements in future periods.

Business Combinations

Determining the fair value of the assets acquired and liabilities assumed requires management to use significant judgment and estimates, including estimates of future revenue, attrition rate, net available cash flows, discount rates, royalty rate, and estimated replacement costs. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.

Valuation of Goodwill

Goodwill recorded represents the excess of the aggregate fair value of the consideration transferred for a business combination over the fair value of the assets acquired, net of liabilities assumed. It is subject to an annual impairment test, and if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we are required to perform a quantitative assessment for impairment. A quantitative assessment for impairment requires management to use significant judgment and estimates, including estimates of future revenue, net available cash flows, and a discount rate. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.

As of the annual impairment testing date in 2021, we completed a qualitative analysis for both the Etsy and the Reverb reporting units, and completed a quantitative analysis for both the Depop and Elo7 reporting units. The quantitative analysis assumed that the purchase consideration for the Depop and Elo7 acquisitions approximated fair value of each of the reporting units given the proximity to the respective acquisition dates. If actual results are materially lower than originally estimated, it could result in a material impact on our consolidated financial statements in future periods.

As of the annual impairment testing date in 2020, we completed a qualitative analysis for both the Etsy and the Reverb reporting units.

As of the annual impairment testing date in 2019, we completed a qualitative analysis for the Etsy reporting unit and we determined that the estimated fair value of the Reverb reporting unit was not substantially in excess of its carrying value, due to the proximity of the acquisition date to the impairment testing date. Accordingly, we prepared a quantitative assessment for the Reverb reporting unit, in which determining the fair value requires management to use significant judgment and estimates, including estimates of future revenue and net available cash flows and the discount rate.

We did not recognize any goodwill impairment during the three years ended December 31, 2021, 2020, and 2019.

Leases

Leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use (“ROU”) assets, lease obligations and, if applicable, long-term lease obligations. Lease obligations and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Additionally, the estimates of the present value of lease payments over the expected lease term along with the estimated fair value of the real estate properties or other assets leased by us affect the recognition of a lease transaction either as an operating or finance lease, which impacts the classification in our consolidated financial statements.

Fair Value of Convertible Senior Notes

In accounting for the issuance of the Notes prior to 2021 and the partial extinguishment of the 2018 Notes in 2020, we used estimates and assumptions to calculate the carrying amounts of the liability and equity components by measuring the fair value of similar securities. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. To measure the fair value of a similar liability that does not have an associated convertible feature, we discounted the contractual cash flows of each of the Notes at an estimated interest rate for a comparable liability. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to our own stock, was determined by deducting the fair value of the liability component from the par value of each of the Notes. Following the adoption of ASU 2020-06 in the first quarter of 2021, we no longer consider this a critical estimate as under this standard there is no bifurcation of the liability and equity components of the Notes. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 12—Debt” in the Notes to Consolidated Financial Statements for additional information.

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Recent Accounting Pronouncements

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 1—Basis of Presentation and Summary of Significant Accounting Policies” for information regarding our recently issued accounting pronouncements and recently adopted accounting pronouncements.