ETSY INC (ETSY) FY 2023 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 2021 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, 2022.

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. By surfacing quality listings at a great value and providing a reliable shopping experience to buyers, we aim to create a virtuous cycle that not only benefits Etsy, but creates economic opportunities for the millions of sellers in our marketplace. Our success is aligned with our sellers; we make money when they do. In addition to bringing them an audience of tens of millions of buyers, we offer a range of features and services designed to help them generate more sales and run their businesses. Similarly, we also make money when we meet our buyers’ expectations. When they find quality listings, at great value, and have a reliable and dependable experience from discovery to delivery, it fuels a virtuous cycle, benefiting our global community of sellers and buyers, as well as Etsy and our broader stakeholders.

In addition to our core Etsy marketplace, our “House of Brands” includes Reverb Holdings, Inc. (“Reverb”), our musical instrument marketplace, and Depop Limited (“Depop”), our fashion resale marketplace. Each of our marketplaces primarily operate independently, although some of our key operational functions such as finance, legal, and human resources, for example, support all of our marketplaces to some extent. Our goal is that our marketplaces benefit from shared expertise in product, marketing, technology, and customer support, and that the sum of the whole, over time, will equal more than its individual parts. The results of Depop, acquired on July 12, 2021, are included in all financial and other metrics discussed in this report, unless otherwise noted, from the date of acquisition. The results of Elo7, acquired on July 2, 2021 and sold on August 10, 2023, are included in all financial and other metrics discussed in this report, unless otherwise noted, from the date of acquisition until August 10, 2023.

We generate revenue primarily from marketplace activities, including transaction (inclusive of offsite advertising), payments processing, and listing fees, as well as from optional seller services, which include on-site advertising and shipping labels.

Our strategy is focused around:

•Building a sustainable competitive advantage for the Etsy marketplace - our “Right to Win;”

•Growing the Etsy marketplace in our six core geographies and globally; and

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

Our investments in technology infrastructure, product development, marketing, trust and safety, member support, and helping sellers grow support our strategy, which you can read more about in Part 1, Item 1, “Business—Primary Business Drivers.”

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Annual Key Metrics and Financial Highlights

As of December 31, 2023, our marketplaces connected 9.0 million active sellers and 96.5 million active buyers in nearly every country in the world. In the year ended December 31, 2023, sellers generated GMS of $13.2 billion, approximately 68% of which came from purchases made on mobile devices. We are a global company and approximately 45% of our GMS in the year ended December 31, 2023 came from transactions in which either a seller or a buyer, or both, were located outside of the United States.

Total revenue was $2.7 billion in the year ended December 31, 2023, driven by growth in both Services and Marketplace revenue. In the year ended December 31, 2023, we recorded net income of $307.6 million, reflecting an impairment charge of the property and equipment and intangible assets of Elo7 for $68.1 million, offset in part by a related tax benefit of $15.0 million, and including restructuring and other exit costs of $26.6 million. Additionally, there was a $55.9 million tax benefit related to Elo7. In the year ended December 31, 2023, we recorded non-GAAP Adjusted EBITDA of $754.3 million. See “Non-GAAP Financial Measures” for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Cash and cash equivalents and short-term investments were $1.2 billion as of December 31, 2023. As of December 31, 2023, 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 and 2020 Notes, the “Notes”). Additionally, we have the ability to draw down on our $400.0 million senior secured revolving credit facility. For further details, refer to 2023 Credit Agreement below. In the year ended December 31, 2023, we had positive operating cash flows of $705.5 million.

Restructuring Plan

On December 12, 2023, our Board of Directors approved a restructuring plan designed to increase Etsy’s operational efficiencies, reduce operating costs, and better align Etsy’s workforce and cost structure with current business needs, top strategic priorities and key growth opportunities (the “Restructuring Plan”).

The Restructuring Plan included an approximately 11% reduction of the Etsy marketplace workforce, which is approximately 225 employees. Charges of $26.6 million related to restructuring and other exit costs were incurred in the fourth quarter of 2023, and the execution of the Restructuring Plan is expected to be substantially complete by the end of the first quarter of 2024. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 17—Restructuring and Other Exit Costs” for more information regarding the Restructuring Plan.

Sale of Elo7

On August 10, 2023, we closed the sale of the parent holding company of Elo7 to Enjoei S.A., a corporation in Brazil. We recognized a net loss on the sale of Elo7 of $2.6 million. Our consolidated financial results and related disclosures for the year ended December 31, 2023 include the results of Elo7 until August 10, 2023.

2023 Credit Agreement

On March 24, 2023, we entered into a $400.0 million senior secured revolving credit facility pursuant to an Amended and Restated Credit Agreement (the “2023 Credit Agreement”) among us, as borrower, certain subsidiaries of Etsy as guarantors, the lenders, and JPMorgan Chase Bank N.A., as administrative Agent. The 2023 Credit Agreement will mature in March 2028 and includes a letter of credit sublimit of $60.0 million and a swingline loan sublimit of $20.0 million.

The 2023 Credit Agreement amends and restates in its entirety the Credit Agreement dated as of February 25, 2019, between us, as borrower, the lenders party thereto from time to time, and Citibank N.A., as administrative Agent.

2018 Capped Call Transactions

The 2018 capped call transactions matured on March 1, 2023, and in accordance with the settlement terms, we received 1,194,006 shares of our common stock from the counterparties to the capped call instruments. These shares were retired upon receipt.

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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 have been included in our consolidated financial results (“Consolidated”) from July 12, 2021 (the date of acquisition). The financial results of Elo7 have been included in our consolidated financial results from July 2, 2021 (the date of acquisition) until August 10, 2023 (the date of sale). 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, 2023 includes Etsy.com GMS of $11.6 billion, Reverb GMS of $942.1 million, Depop GMS of $599.6 million, and Elo7 GMS of $42.1 million (from January 1, 2023 until the date of sale on August 10, 2023).

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

(4)Consolidated active sellers and active buyers includes Etsy.com active sellers and active buyers of 7.0 million and 92.0 million, respectively, as of December 31, 2023 and excludes Elo7 active sellers and buyers for the year ended December 31, 2023.

(5)Beginning January 1, 2024, mobile GMS will no longer be reported as a key operating metric as it has largely stabilized and is not considered a key indicator of our performance.

(6)Percent GMS ex-U.S. Domestic for Etsy.com for the year ended December 31, 2023 was 47%.

GMS

Gross merchandise sales (“GMS”) is the dollar value of items sold in our marketplaces, excluding shipping fees and net of refunds, within the applicable period. To provide consistency with our calculation of GMS, beginning in the first quarter of 2023, we are also reporting our mobile GMS and GMS ex-U.S. domestic as a percentage of GMS net of refunds. We did not retroactively apply this change to prior periods as the impact was immaterial to such periods. 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 marketplace 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.

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As outlined starting on page 5 in Part I, Item 1, “Business” above, Etsy’s 2023 performance reflects the impact of macroeconomic headwinds. GMS decreased $157.2 million to $13.2 billion in the year ended December 31, 2023 compared to the year ended December 31, 2022. The approximately 1% decline in GMS compared to December 31, 2022 was primarily driven by a decrease in Etsy marketplace GMS, partially offset by an increase in GMS for the Depop marketplace. Etsy marketplace GMS was impacted by significant pressure on consumer discretionary product spending, Etsy marketplace category mix, high inflation, elevated interest and mortgage rates, splurges on experiential spending, declining consumer savings balances, and a highly promotional and competitive retail environment. The Etsy marketplace GMS per active buyer on a trailing twelve month basis declined 4% year-over-year to $126. This decline was partially offset by year-over-year growth in active buyers on the Etsy marketplace, which reached a new all-time high of 92.0 million as of December 31, 2023. As of December 31, 2023, 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 7.1 million, a decrease of 4% compared to December 31, 2022.

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

(1)New buyer GMS represents the total GMS from each new buyer’s first purchase day in each of our marketplaces. It does not include GMS from each new buyer’s subsequent purchase days, if any, in the periods presented. A new buyer for a given marketplace is a buyer who has made a purchase with a new e-mail address for the first time in the relevant marketplace.

(2)While new buyer GMS was down 7% year-over-year in the year ended December 31, 2023, the number of Etsy marketplace new buyers we acquired in the year ended December 31, 2023 remains meaningfully elevated when compared to pre-pandemic levels (years ended December 31, 2019 and prior).

We continue to see significant pressure on consumer discretionary product spending, high inflation, elevated interest and mortgage rates, splurges on experiential spending, declining consumer savings balances, and a highly promotional and competitive retail environment, which may impact the performance of our business. See Part I, Item 1A, “Risk Factors” for further detail.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents our net income (loss) adjusted to exclude: interest and other non-operating (income) expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition, divestiture, and corporate structure-related expenses; asset impairment charges; loss on sale of business; and restructuring and other exit costs. 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 (loss), 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, and from time to time adjust, the criteria for disqualifying a seller as an active seller. 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 an order 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. As noted above in our discussion of “GMS,” beginning in the first quarter of 2023, mobile GMS is now calculated net of refunds. 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, 2023, mobile GMS increased as a percentage of total GMS to approximately 68%, up from approximately 67% for the year ended December 31, 2022. Beginning January 1, 2024, mobile GMS will no longer be reported as a key operating metric as it has largely stabilized and is not considered a key indicator of our performance.

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 (1) the billing address for the seller and / or (2) 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. As noted above in “GMS,” beginning in the first quarter of 2023, GMS ex-U.S. domestic is calculated net of refunds. 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, 2023, GMS ex-U.S. domestic as a percentage of total GMS was approximately 45%, compared to approximately 44% for the year ended December 31, 2022. Additionally, GMS ex-U.S. domestic increased 2% from December 31, 2022 to December 31, 2023.

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 (decline) / 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 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; and

•The $0.20 listing fee for each item listed (for up to four months or until the item is sold or relisted, whichever comes sooner).

Reverb and Depop sellers pay a 5% and 10% transaction fee, respectively for each completed transaction, inclusive of shipping fees charged, and a fee for payment processing. These marketplaces do not 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, and Australia 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 and costs of refunds made to buyers that we either are not able to collect from sellers or are otherwise covered by us, which we collectively refer to as cost of refunds, and seller verification fees. Additionally, cost of revenue includes certain employee compensation-related expenses, depreciation and amortization, third-party customer support services, and restructuring and other exit costs as applicable.

Operating Expenses

Operating expenses consist of marketing, product development, general and administrative expenses, and asset impairment charges. Employee compensation-related expenses are the most significant component of the product development and general and administrative expense categories. We include stock-based compensation expense in the applicable operating expense category based on the respective equity award recipient’s function. We also include restructuring and other exit costs in the applicable operating expense category of the impacted 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, professional services expenses, digital services tax, bad debt expense, and non-income tax items.

Asset impairment charges: Asset impairment charges consists of non-cash charges related to the impairment of goodwill, finite-lived intangible assets, and other long-lived assets.

Other (Expense) Income, net

Other (expense) income, net consists of interest and other income, interest expense, foreign exchange (loss) gain, and, in 2023, also loss on sale of business which relates to the sale of Elo7 in 2023. Interest and other income is primarily comprised of interest income from our investment accounts. Interest expense consists primarily of amortization of debt issuance costs and coupon interest expense related to our Notes. Interest expense also includes interest associated with the portion of our Brooklyn headquarters lease which is accounted for as a finance lease.

Benefit (Provision) for Income Taxes

Our effective tax rate and the benefit (provision) 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 benefit (provision) for income taxes.

The benefit (provision) for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which we operate. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, tax authorities periodically review income tax returns filed by us and can raise issues regarding 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, 2023 and 2022

Revenue

Revenue increased $182.3 million to $2.7 billion in the year ended December 31, 2023 compared to the year ended December 31, 2022, of which 72.7% consisted of Marketplace revenue and 27.3% consisted of Services revenue.

Marketplace revenue increased $86.3 million to $2.0 billion in the year ended December 31, 2023 compared to the year ended December 31, 2022. 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 $157.2 million decrease in the volume of GMS on our marketplaces for the year ended December 31, 2023 compared to the year ended December 31, 2022, which was primarily driven by a decline in GMS for the Etsy marketplace, partially offset by an increase in GMS for the Depop marketplace. This led to a year-over-year increase in transaction fee revenue of 5.1%. Additionally, the growth in marketplace revenue was due to an increase in foreign currency payments, which we earn an additional transaction fee on, in the year ended December 31, 2023 compared to the year ended December 31, 2022. Payments revenue increased 4.2% year-over-year. The share of Etsy marketplace GMS processed through our Etsy Payments platform was 94% and 93% for the years ended December 31, 2023 and 2022, respectively.

Services revenue increased $96.0 million to $751.2 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. The growth in Services revenue was primarily driven by an increase of 16.9% in on-site advertising revenue, which represented a significant majority of the overall Services revenue growth. The increase in advertising revenue was primarily due to higher click volume on Etsy Ads.

Cost of Revenue

Cost of revenue increased $84.1 million to $828.7 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to costs of refunds and employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount for the Etsy marketplace throughout the year and due to restructuring and other exit costs associated with our workforce reductions in the fourth quarter of 2023. Additionally, cost of revenue increased due to an increase in cloud-related hosting and bandwidth costs.

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Operating Expenses

After giving effect to employee departures in connection with our Restructuring Plan, we had approximately 2,420 total employees worldwide on December 31, 2023, including approximately 240 Reverb employees and approximately 400 Depop employees. This is compared with approximately 2,790 total employees worldwide on December 31, 2022.

Marketing

Marketing expenses increased $48.8 million to $759.2 million in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased Etsy marketplace digital marketing costs, as we continued to invest in efficient channels and regions with positive return on investment, and to a lesser extent, in non-digital marketing costs, due to an increase in marketing expenses related to increased broadcasting costs across different media channels primarily in North America and the United Kingdom. Paid GMS was 20% of overall GMS for both the years ended December 31, 2023 and 2022. We gained leverage as marketing expenses did not increase as fast as revenue.

Product development

Product development expenses increased $56.9 million to $469.3 million in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased employee compensation-related expenses, including stock-based compensation, mainly driven by an increase in average headcount for the Etsy marketplace throughout the year and the issuance of equity awards as part of our compensation strategy, and partially due to restructuring and other exit costs associated with our workforce reductions in the fourth quarter of 2023. This increase was offset in part by an increase in the amount of employee-related costs capitalized as a result of several new projects in 2023.

General and administrative

General and administrative expenses increased $31.0 million to $343.2 million in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased employee compensation-related expenses, including stock-based compensation. This increase was mainly driven by the issuance of equity awards as part of our compensation strategy and an increase in average headcount for the Etsy marketplace throughout the year, and partially driven by restructuring and other exit costs associated with our workforce reductions in the fourth quarter of 2023. General and administrative expenses also increased to a lesser extent due to increases in bad debt expense, professional services expenses, and digital services tax expense. Digital services tax expense increased as there was an increase in the number of transactions subject to digital services tax. These increases were partially offset by net favorable impacts of non-income tax items.

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Asset impairment charges

Asset impairment charges were $68.1 million in the year ended December 31, 2023, related to the impairment of intangible assets and property and equipment of Elo7. Asset impairment charges were $1.0 billion in the year ended December 31, 2022 related to the impairment of goodwill for Depop and Elo7. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 7—Goodwill and Intangible Assets” and “Note 10—Property and Equipment” for more information. There were no asset impairment charges in the year ended December 31, 2021.

Other Income (Expense), net

Other income, net was $13.0 million in the year ended December 31, 2023, which increased $16.4 million from other expense, net of $3.4 million in the year ended December 31, 2022. This increase was primarily driven by an increase in interest and other income primarily due to the increase in the federal funds rate. This increase was partially offset by less favorable changes in U.S. dollar, Euro, Pound Sterling, and Canadian dollar exchange rates in the current year versus the prior year which impact our intercompany and other non-functional currency cash balances. The increase was also partially offset, to a lesser extent, by a net loss on the sale of Elo7 in the third quarter of 2023.

Benefit (Provision) for Income Taxes

Our income tax benefit and provision for the years ended December 31, 2023 and 2022 was $14.7 million and $32.3 million, respectively.

The primary drivers of our income tax benefit for the year ended December 31, 2023 were a $55.9 million tax benefit related to Elo7 and a benefit related to research and development tax credits, partially offset by tax expense on income before income taxes and tax deficiencies from stock-based compensation.

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.

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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 (loss) adjusted to exclude: interest and other non-operating (income) expense, net; (benefit) provision for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); acquisition, divestiture, and corporate structure-related expenses; asset impairment charges; loss on sale of business; and restructuring and other exit costs. 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 (loss), 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 interest and other non-operating (income) expense, net;

•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, divestiture, and corporate structure-related expenses;

•Adjusted EBITDA does not consider the impact of asset impairment charges;

•Adjusted EBITDA does not consider the impact of the loss on sale of business;

•Adjusted EBITDA does not reflect restructuring and other exit costs; 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 (loss), revenue, and our other GAAP results.

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

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were $1.2 billion as of December 31, 2023. Additionally, we have $86.7 million in long-term investments, a majority of which we can liquidate at short notice and with minimal penalties if needed. We also have the ability to draw down on our $400.0 million senior secured revolving credit facility. In the year ended December 31, 2023, we had positive operating cash flows of $705.5 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, 2023, 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 typically 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 Investment Fund, have maturities no longer than 37 months, with the average maturity of these investments maintained at 12 months or less. In 2022, we set up an Impact Investment Fund and as of December 31, 2023 have deployed approximately $19 million of the $30 million designated for investments intended to further our Impact strategy and goals. The criteria for investments included in the Impact Investment Fund may differ from those made under our general investment policy. For more information on our Impact Investment Fund, see Part I, Item I, “Business—ESG Reporting: Our Impact Goals, Strategy & Progress.”

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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 including those outlined in Part 1, Item 1, “Business—Primary Business Drivers.”

As of December 31, 2023, we had three 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 quarter ended December 31, 2023, holders of the 2021 Notes, 2020 Notes, and remaining 2019 Notes are not eligible to convert their Notes during the first quarter of 2024.

We also have the ability to draw down on a $400.0 million senior secured revolving credit facility (the “2023 Credit Agreement”). While we had no outstanding borrowings under the 2023 Credit Agreement as of December 31, 2023, one of the lenders has issued a $5.3 million standby letter of credit in favor of the landlord of our corporate headquarters, which can be drawn down from amounts available under the 2023 Credit Agreement.

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 13—Debt” for more information on the Notes and the 2023 Credit Agreement.

Material Cash Requirements

Our cash commitments as of December 31, 2023 were as follows:

Finance lease obligations consist of a portion of the lease on our headquarter office located in Brooklyn, New York, and include imputed interest and tenant improvement allowances.

Operating lease obligations consist of obligations under non-cancelable operating leases, including a portion of our headquarter office located 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, and 2019 Notes, which will mature on June 15, 2028, September 1, 2027, and October 1, 2026, 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 $51.7 million and non-income tax related contingency reserves of $26.2 million. These amounts are not reflected in the table as the ultimate resolution and timing are uncertain.

Effective June 14, 2023, the Board of Directors approved a stock repurchase program that authorizes us to repurchase up to an additional $1 billion of our common stock. As of December 31, 2023, the remaining amount available to be repurchased under the approved plan was $724.4 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. 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.

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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 $705.5 million in the year ended December 31, 2023, primarily driven by cash net income of $729.2 million as a result of revenue generated on our platforms, and changes in our operating assets and liabilities that used $23.7 million in cash, primarily driven by timing of the payment of prepaid expenses and other current assets, partially offset by the timing of payment of accrued expenses in the period.

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 Used in Investing Activities

Our primary investing activities consist of cash paid for the acquisitions of Depop and Elo7, purchases and sales and maturities of short- and long-term investments, 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 $73.3 million in the year ended December 31, 2023. This was primarily attributable to $39.9 million in capital expenditures, including $27.0 million for website development and internal-use software as we continued to invest in projects adding new features and functionality to our platforms, and net purchases of investments of $33.4 million.

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.

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, purchase of capped calls, 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 $656.5 million in the year ended December 31, 2023. This was primarily attributable to stock repurchases of $577.0 million and, to a lesser extent, payment of tax obligations on vested equity awards of $83.4 million.

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.

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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 factors 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; business combinations; valuation of goodwill; and leases 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, and leases.

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 years ended December 31, 2023 and 2022, the assumptions related to stock options were no longer considered a critical accounting estimate as the number of options awarded was not material.

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Income Taxes

We account for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities.

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

Business Combinations

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

Valuation of Goodwill

Goodwill is tested for impairment at the reporting unit level annually, or more frequently if triggering events occur. The Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. The qualitative assessment includes certain significant judgments including assessments of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit, and other relevant considerations impacting the reporting unit. If we elect to bypass the qualitative assessment, or if the qualitative assessment indicates 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 a reporting unit’s fair value, we apply the income approach, which uses management’s forecasts to estimate future net available cash flows. Significant judgments inherent in this analysis include, but are not limited to, estimates of future revenue, operating margins, 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, or if we experience significant, adverse changes to long-term growth rate or discount rate assumptions, it could result in a material impact on our consolidated financial statements in future periods.

As of the annual impairment testing date in the fourth quarter of 2023, we completed a qualitative analysis for the Etsy reporting unit, which indicated no impairment; and a quantitative analysis for the Reverb reporting unit, which concluded that the fair value of the reporting unit was sufficiently in excess of its carrying value. As such, no indication of impairment was identified.

During the third quarter of 2022, the carrying values of the Depop and Elo7 reporting units were determined to be in excess of their fair values such that non-cash impairment charges were recorded of $897.9 million and $147.1 million, representative of the full value of goodwill allocated to the Depop and Elo7 reporting units, respectively. The impairment charges were the result of continued adverse macroeconomic conditions, including reopening, inflationary pressures on consumer discretionary spending, foreign exchange rate volatility, ongoing geopolitical events, and related headwinds on business performances; along with executive management changes at Depop and Elo7, all of which resulted in downward revisions to the projected future cash flows negatively impacting the reporting units’ fair values. In addition to these adverse changes to projected cash flows; for Depop and Elo7, respectively, 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 interim quantitative analysis for Depop and Elo7 as of 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, which ultimately resulted in impairments of their goodwill balances in the third quarter of 2022. No further impairment charges were recorded within our Etsy or Reverb reporting units as of our annual impairment test in the fourth quarter of 2022.

During the years ended December 31, 2023 and 2021, we did not recognize any goodwill impairment. During the year ended December 31, 2022, we recognized total non-cash impairment charges of $1.0 billion.

See Part II, Item 8, “Financial Statements and Supplementary Data—Note 7—Goodwill and Intangible Assets” for further discussion and presentation of these amounts.

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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.

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 recently issued accounting pronouncements.