ETSY INC (ETSY) FY 2022 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 2020 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, 2021.

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, although some of our key operational functions such as finance, legal, and human resources, for example, support all four marketplaces to some extent. Our goal is that all four marketplaces benefit 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.”

Annual Key Metrics and Financial Highlights

As of December 31, 2022, our marketplaces connected 7.5 million active sellers and 95.1 million active buyers in nearly every country in the world. In the year ended December 31, 2022, sellers generated GMS of $13.3 billion, approximately 67% of which came from purchases made on mobile devices. We are a global company and approximately 44% of our GMS in the year ended December 31, 2022 came from transactions in which either a seller or a buyer was located outside of the United States.

Total revenue was $2.6 billion in the year ended December 31, 2022, driven by solid growth in both Marketplace and Services revenue. In the year ended December 31, 2022, we recorded a net loss of $694.3 million, and non-GAAP Adjusted EBITDA of $716.9 million. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated in accordance with GAAP. The net loss included goodwill impairment expense of $1.0 billion related to the full impairment of the goodwill of Depop and Elo7. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 6—Goodwill and Intangible Assets” for further information.

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Cash and cash equivalents and short-term investments were $1.2 billion as of December 31, 2022. As of December 31, 2022, 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”), $649.9 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, 2022, we had positive operating cash flows of $683.6 million.

Etsy Marketplace Transaction Fee Increase

Effective April 11, 2022, we increased our seller transaction fee from 5% to 6.5%. As part of our long standing principle to provide a “fair exchange of value” for the fee Etsy earns on marketplace transactions, we reinvested most of the incremental revenue generated from the transaction fee increase into marketing, seller tools, and creating world-class customer experiences.

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 and Elo7 have been included in our consolidated financial results (“Consolidated”) from July 12, 2021 and July 2, 2021 (the respective dates of acquisition), respectively. We are providing Etsy marketplace standalone information in certain instances where particularly relevant. The unaudited GAAP and non-GAAP financial measures and key operating metrics we use are:

(1)Unaudited.

(2)Consolidated GMS for the year ended December 31, 2022 includes Etsy.com GMS of $11.8 billion, Reverb GMS of $942.5 million, Depop GMS of $552.1 million, and Elo7 GMS of $69.7 million.

(3)Net (loss) income margin is net (loss) income divided by revenue.

(4)Consolidated active sellers and active buyers includes Etsy.com active sellers and active buyers of 5.4 million and 89.4 million, respectively, as of December 31, 2022.

(5)Percent GMS ex-U.S. Domestic for Etsy.com for the year ended December 31, 2022 was 45%.

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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.

As outlined on page 6 in Part I, Item 1, “Business” above, Etsy’s 2022 performance reflects the impact of reopening and other headwinds following significant growth over the prior two year pandemic period. GMS decreased $173.4 million to $13.3 billion in the year ended December 31, 2022 compared to the year ended December 31, 2021. The 1% decline in GMS compared to December 31, 2021 was primarily driven by a decrease in GMS for the Etsy marketplace, partially offset by our acquisitions of Depop and Elo7 in the third quarter of 2021. Etsy marketplace GMS was impacted by macro headwinds including reopening, pressures on consumer discretionary spending, foreign exchange rate volatility, and ongoing geopolitical events. As of December 31, 2022, 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, decreased to 7.4 million, a decrease of 9% compared to December 31, 2021.

Additionally, on a consolidated basis we experienced the following (decline)/growth in both new buyer and existing buyer GMS in the periods presented:

(1)While new buyer GMS was down 12% year-over-year in the year ended December 31, 2022, the number of Etsy marketplace new buyers we acquired in the year ended December 31, 2022 remains meaningfully elevated when compared to pre-pandemic levels (years ended December 31, 2019 and prior).

Our business may continue to be impacted in 2023 by macroeconomic factors beyond our control.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents our net (loss) income adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition-related expenses; goodwill impairment; 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 (loss) 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.

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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, 2022, mobile GMS increased as a percentage of total GMS to approximately 67%, up from approximately 64% for the year ended December 31, 2021.

GMS ex-U.S. Domestic

GMS ex-U.S. domestic (formerly referred to as Non-U.S. GMS and 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. GMS ex-U.S. domestic represents all GMS other than GMS from transactions in which the billing address for the seller and the shipping address for the buyer at the time of sale are both in the United States, which we refer to as U.S. Domestic GMS. When calculating the percent of GMS ex-U.S. domestic, we do not take into account refunds associated with canceled transactions. We believe that GMS ex-U.S. domestic 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, 2022, GMS ex-U.S. domestic as a percentage of total GMS was approximately 44%, compared to approximately 42% for the year ended December 31, 2021. Additionally, we experienced the following growth/(decline) in our GMS ex-U.S. domestic and non-U.S. domestic GMS on an as reported and currency-neutral basis for the period presented below, which includes the acquisitions of Depop and Elo7, which occurred in the third quarter of 2021:

(1)Non-U.S. domestic GMS is GMS generated between a non-U.S. buyer and a non-U.S. seller in the same country.

The growth in as reported GMS ex-U.S. domestic in the year ended December 31, 2022 compared to the year ended December 31, 2021, was substantially driven by our acquisitions of Depop and Elo7 which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period, and was partially offset by a slight decline in the Etsy marketplace. The slight decline in as reported non-U.S. domestic GMS in the year ended December 31, 2022 compared to the year ended December 31, 2021, was primarily driven by the Etsy marketplace, and largely offset by our acquisitions of Depop and Elo7. Both GMS ex-U.S. domestic and non-U.S. domestic GMS were negatively impacted by unfavorable exchange rates.

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 marketplace seller pays for marketplace activities, including:

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

•The transaction fee that an Etsy marketplace seller pays for each completed transaction, inclusive of shipping fees charged, which increased from 5% to 6.5% effective April 11, 2022, 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 and Depop sellers pay a 5.0% and 10% transaction fee, respectively for each completed transaction, inclusive of shipping fees charged, and a fee for payment processing. Similarly, Elo7 sellers pay a 7% transaction fee for each completed transaction, and a fee for payment processing. None of these other marketplaces charge listing fees.

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

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

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

Our other marketplaces also offer on-site advertising services (Depop beginning the end of the third quarter of 2022), and 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 payments processing services, and expenses associated with the usage of cloud infrastructure, including hosting and bandwidth costs. Cost of revenue also includes chargebacks to support payments revenue, costs of refunds made to buyers that we either are not able to collect from sellers or are otherwise covered by us, and seller verification fees. Additionally, cost of revenue includes certain employee compensation-related expenses, depreciation and amortization, and third-party customer support services. 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, general and administrative expenses, and goodwill impairment. 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.

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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 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.

Goodwill impairment: Goodwill impairment expense consists of non-cash charges related to the impairment of the goodwill of Depop and Elo7.

Other Income (Expense), net

Other income (expense), net consists of interest expense, interest and other income, foreign exchange (loss) gain, 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.

(Provision) Benefit for Income Taxes

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

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

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

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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, 2022 and 2021

Revenue

Revenue increased $237.0 million to $2.6 billion in the year ended December 31, 2022 compared to the year ended December 31, 2021, of which 74.5% consisted of Marketplace revenue and 25.5% consisted of Services revenue.

Marketplace revenue increased $165.1 million to $1.9 billion in the year ended December 31, 2022 compared to the year ended December 31, 2021. The growth in marketplace revenue was primarily due to the impact of the pricing update to increase our seller transaction fee for the Etsy marketplace from 5% to 6.5% beginning on April 11, 2022. This increase was partially offset by a $173.4 million decrease in the volume of GMS on our marketplaces for the year ended December 31, 2022 compared to the year ended December 31, 2021. There was a decline in GMS for the Etsy marketplace, partially offset by the acquisitions of Depop and Elo7, which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period. These drivers impacted transaction fee revenue, which increased by 16.2%. Despite the decrease in volume of GMS, payments revenue increased 3.1% year-over-year primarily driven by the net impact of the acquisition of Depop and Elo7 which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period. The share of Etsy marketplace GMS processed through our Etsy Payments platform was 93% and 92% for the years ended December 31, 2022 and 2021, respectively.

Services revenue increased $71.9 million to $655.2 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. The growth in Services revenue was primarily driven by an increase of 15.4% in on-site advertising revenue, which represented a significant majority of the overall Services revenue growth. The increase in on-site advertising revenue was primarily due to higher click volume and an increase in average price per click on Etsy Ads.

Cost of Revenue

Cost of revenue increased $90.1 million to $744.6 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by cloud-related hosting and bandwidth costs, employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount, and payments processing fees. Payments processing fees vary with revenue and increased as a result of the net impact of the acquisitions of Depop and Elo7 which are reflected in the year ended December 31, 2022 and only beginning in July of the prior year period. Additionally, cost of revenue expenses increased due to costs of refunds made to buyers covered by us given the launch of the Etsy Purchase Protection program, the amortization of acquired developed technology, and increased customer support services supporting our investments to make Etsy more reliable.

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Operating Expenses

There were approximately 2,790 total employees worldwide on December 31, 2022, inclusive of Reverb, Depop, and Elo7 which had approximately 270 employees, 390 employees, and 220 employees, respectively, compared with approximately 2,400 total employees worldwide on December 31, 2021. We expect an increase in employee compensation-related expenses, including stock-based compensation, in future periods driven by headcount growth and increased issuance of equity awards, which we generally expense over four years, over the past couple of years.

Marketing

Marketing expenses increased $55.6 million to $710.4 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by increased direct marketing costs related to the net impact of the acquisition of Depop and Elo7 which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period and Etsy marketplace non-digital marketing costs, due to an increase in marketing spend on TV ads in North America and the United Kingdom. Additionally, marketing expenses increased due to increased employee compensation-related expenses, including stock-based compensation, driven by an increase in average headcount and from the acquisitions of Depop and Elo7, and to a lesser extent due to amortization of acquired Depop and Elo7 intangible assets. Paid GMS was 20% of overall GMS in the year ended December 31, 2022, up slightly from paid GMS of 19% in the year ended December 31, 2021.

Product development

Product development expenses increased $140.9 million to $412.4 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount, the issuance of equity awards as part of our compensation strategy, and the net impact of the acquisition of Depop and Elo7 which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period.

General and administrative

General and administrative expenses increased $29.7 million to $312.3 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount and the net impact of the acquisition of Depop and Elo7 which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period. Additionally, general and administrative expenses increased due to indirect taxes as well as office overhead expenses and IT expenses associated with our headcount growth, the net impact of the acquisition of Depop and Elo7, which are reflected in the twelve months ended December 31, 2022 and only beginning in July of the prior year period, and our return to office in 2022. These increases were partially offset by a decrease in acquisition-related expenses associated with the net impact of 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.

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Goodwill impairment

Goodwill impairment expense was $1.0 billion in the year ended December 31, 2022, related to the impairment of the goodwill of Depop and Elo7. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 6—Goodwill and Intangible Assets” for more information. There was no goodwill impairment expense in the years ended December 31, 2021 and December 31, 2020.

Other (Expense) Income, net

Other expense, net was $3.4 million in the year ended December 31, 2022, which decreased $9.3 million from Other income, net of $5.9 million in the year ended December 31, 2021. This decrease was primarily driven by unfavorable changes in U.S. dollar, Euro, Pound Sterling, and Canadian dollar exchange rates in the current year as compared to the prior year, which impact our intercompany and other non-functional currency cash balances. This decrease was also driven by an increase in interest expense. These decreases were partially offset by an increase in interest and other income primarily due to the increase in the federal interest rate.

(Provision) Benefit for Income Taxes

Our income tax provision and benefit for the years ended December 31, 2022 and 2021 was $32.3 million and $21.9 million, respectively.

The primary drivers of our income tax provision for the year ended December 31, 2022 were tax expense on income before income taxes, excluding the non-deductible goodwill impairment expense, and state and local income taxes, partially offset by tax benefits from stock-based compensation and a benefit related to research and development tax credits.

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

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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 (loss) income adjusted to exclude: interest and other non-operating expense, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition-related expenses; goodwill impairment; 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 (loss) 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 loss (gain);

•Adjusted EBITDA does not reflect acquisition-related expenses;

•Adjusted EBITDA does not consider the impact of goodwill impairment;

•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 (loss) income, revenue, and our other GAAP results.

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

(1) Included in the increase in depreciation and amortization is amortization expense of acquired intangible and developed technology assets related to the acquisitions of Depop and Elo7 which occurred in July 2021.

(2) The increase in stock-based compensation expense is primarily driven by headcount growth and the issuance of equity awards as part of our compensation strategy. 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.

(3) Acquisition-related expenses for the years ended December 31, 2022 and December 31, 2021 are related to our acquisitions of Depop and Elo7 which occurred in July 2021. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5—Business Combinations” for further information.

(4)    Goodwill impairment expense for the year ended December 31, 2022 relates to the impairment of all of the goodwill of Depop and Elo7. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 6—Goodwill and Intangible Assets” for further information.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were $1.2 billion as of December 31, 2022. Additionally, we have $29.1 million in long-term investments that we can liquidate at short notice and with minimal penalties if needed. We also have the ability to draw down on our $200.0 million senior secured revolving credit facility. In the year ended December 31, 2022, we had positive operating cash flows of $683.6 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, 2022, 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.

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We invest in short- and long-term instruments, including fixed-income funds and U.S. Government 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, other than investments made through our Impact portfolio, have maturities no longer than 37 months, with the average maturity of these investments maintained at 12 months or less. In 2022, we authorized creation of an Impact portfolio through which we expect to deploy approximately $30 million in investments intended to further our Impact strategy and goals beginning in early 2023. The criteria for investments included in the Impact portfolio may differ from those made under our general investment policy.

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.”

As of December 31, 2022, we had four outstanding series of convertible senior notes, which collectively had a net carrying value of $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, 2022, holders of the 2019 Notes and 2018 Notes are eligible to convert their Notes during the first quarter of 2023 and holders of the 2021 Notes and 2020 Notes are not eligible to convert their Notes during the first quarter of 2023.

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, 2022, 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.

Material Cash Requirements

Our cash commitments as of December 31, 2022 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.

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. Based on the terms of each series of Notes, when a conversion notice is received, we have the option to pay or deliver cash, shares of our common stock, or a combination thereof.

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

Purchase obligations primarily consist of commitments related to cloud computing. 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 $35.2 million and non-income tax related contingency reserves of $43.2 million, which amounts are not reflected in the table as the ultimate resolution and timing are uncertain. These non-income tax contingency reserves include $30.4 million due to the acquisitions of Reverb, Depop and Elo7, some of which are offset by an indemnification asset of $3.0 million.

Effective May 3, 2022, the Board of Directors approved a new stock repurchase program that authorizes us to repurchase up to an additional $600 million of our common stock. As of December 31, 2022, the remaining amount available to be repurchased under the approved plan was $301.4 million. Subject to our stock price, we anticipate receiving settlement of amounts due on the 2018 Capped Call Transactions in shares which may reduce the number of shares we elect to repurchase (and associated use of cash) in 2023.

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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. We believe we will meet longer-term expected future cash requirements and obligations through a combination of existing cash and cash equivalent balances, cash flows from operations, and amounts available for borrowing from our senior secured revolving credit facility or other financings. While these beliefs are 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.

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 $683.6 million in the year ended December 31, 2022, primarily driven by cash net income of $643.1 million as a result of revenue generated on our platforms, and changes in our operating assets and liabilities that provided $40.5 million in cash, primarily driven by timing of payment of prepaid expenses and other current assets and other liabilities in the period.

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 Used in Investing Activities

Our primary investing activities consist of cash paid for the acquisitions of Depop and Elo7, 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 $30.0 million in the year ended December 31, 2022. This was primarily attributable to $30.7 million in capital expenditures, including $20.5 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to our platforms.

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. This was partially offset by net sales of marketable securities of $172.1 million.

Net Cash (Used in) Provided by Financing Activities

Our primary financing activities include proceeds from the issuance of convertible senior notes, repurchases of common stock, payment of tax obligations on vested equity awards, settlement of convertible senior notes, proceeds from exercise of stock options, payments of debt issuance costs, and payments on finance lease obligations.

Net cash used in financing activities was $506.5 million in the year ended December 31, 2022. This was primarily attributable to stock repurchases of $425.7 million and payment of tax obligations on vested equity awards of $79.2 million, partially offset by proceeds from the exercise of stock options of $15.0 million.

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.

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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. We continue to monitor the effects of global macroeconomic and geopolitical uncertainty, including COVID-19 pandemic related factors and general market, political, and economic conditions, on our results of operations, cash flows, and financial position. 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:

For the year ended December 31, 2022, the assumptions related to stock options were no longer considered a critical accounting estimate as the number of options awarded was not material.

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.

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The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement. The tax positions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretation of tax laws, developments in case law and closing of statutes of limitations. While we believe our tax positions are fully supportable, they may be challenged by various tax authorities. If actual results were to be materially different than estimated, it could result in a material impact on our consolidated financial statements in future periods.

Business Combinations

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

Valuation of Goodwill

Goodwill recorded represents the excess of the aggregate fair value of the consideration transferred for a business combination over the fair value of the assets acquired, net of liabilities assumed. It is subject to an annual impairment test, and if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we are required to perform a quantitative assessment for impairment. Under the quantitative goodwill impairment test, if a reporting unit’s carrying amount exceeds its fair value, we record an impairment charge based on that difference, not exceeding the carrying amount of goodwill. To determine reporting unit fair value, we use the income approach, which requires management to use significant judgment and estimates, including estimates of future revenue, net available cash flows, the long-term growth rates, and discount rates. 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 June 30, 2022, due to then current adverse macroeconomic conditions, including reopening, inflationary pressures on consumer discretionary spending, foreign exchange rate volatility, and ongoing geopolitical events, and related headwinds on business performances, we concluded it was more likely than not that the fair values of the Depop and Elo7 reporting units were less than their carrying amounts. As a result, we performed impairment assessments of each of their goodwill, finite-lived intangible assets, and other long-lived assets. The quantitative impairment tests as of June 30, 2022 did not indicate an impairment.

During the quarter ended September 30, 2022, the trend of adverse macroeconomic conditions continued; there were executive management changes at Depop and Elo7; and we made downward revisions to our business forecasts. Therefore, we concluded a triggering event had occurred for the Depop and Elo7 reporting units and conducted an impairment test of each of their goodwill, finite-lived intangible assets, and other long-lived assets as of September 30, 2022. The September 30, 2022 quantitative goodwill impairment tests indicated a decline in the fair values of the Depop and Elo7 reporting units. As a result of this test, we recorded non-cash impairment charges of $897.9 million and $147.1 million to write-off goodwill in full for the Depop and Elo7 reporting units, respectively. As of September 30, 2022, after the recognition of such impairment charges, there were no remaining balances of goodwill from our acquisitions of Depop and Elo7, on July 12, 2021 and July 2, 2021, respectively. We did not record any non-cash impairment charges to the finite-lived intangible assets or other long-lived assets of Depop and Elo7 for the quarter ended September 30, 2022.

For the September 30, 2022 quantitative analysis, as compared to our June 30, 2022 analysis, we reduced our projected future cash flows based on current information and market assumptions, including revenues, to reflect our best estimates at this time. We also updated certain significant inputs into the valuation models, including the discount rates which increased due to higher interest rates, market volatility, and other current market participant assumptions. As a result, the discount rates increased by 380 and 160 basis points as compared to the discount rates in our purchase price allocations at the time of the Depop and Elo7 acquisitions, and by 300 and 100 basis points as compared to the discount rates used in our quantitative analysis on June 30, 2022, respectively. The updates to the discount rates and estimated future cash flows each had a significant impact on the estimated fair values of Depop and Elo7 reporting units compared to our June 30, 2022 analysis. Management believes the revised projections, corresponding risk-adjusted discount rates, and the concluded fair value estimates to be reflective of market participant expectations for the reporting units.

As of the annual impairment testing date in the fourth quarter of 2022, two of our four reporting units had goodwill; Etsy and Reverb, as the goodwill was written off in full for the Depop and Elo7 reporting units as of September 30, 2022, and we completed a qualitative analysis for both the Etsy and the Reverb reporting units, which did not indicate any impairment.

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.

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

During the year ended December 31, 2022, we recognized total non-cash impairment charges of $1.0 billion. During the years ended December 31, 2021 and 2020, we did not recognize any goodwill impairment.

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 in 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.