What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 186 added, 214 removed, 288 unchanged (58% of the section changed)

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We operate the world’s largest work marketplace that connects businesses with independent talent from across the globe, as measured by GSV.

GSV represents the total amount that clients spend on both our marketplace offerings and our managed services offering as well as additional fees we charge to talent for other services.

GSV represents the total amount that clients spend on our offerings as well as additional fees we charge to talent and clients for other services.

Talent includes independent professionals and agencies of varying sizes.

The clients on our work marketplace range in size, including small businesses to Fortune 100 companies.

With users in over 180 countries, our work marketplace enabled $4.1 billion of GSV for the year ended December 31, 2022.

Clients on our work marketplace range in size, from independent professionals and small businesses to Fortune 100 companies.

With customers in over 180 countries, our work marketplace enabled $4.1 billion of GSV for the year ended December 31, 2023.

For purposes of determining countries where we enable GSV, we include both the countries in which the clients that paid for the applicable services are located, as well as the countries in which talent that provided those services are located.

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talent, which was our largest talent geography in each of 2023, 2022, and 2021, as measured by GSV, while talent in India and the Philippines remained our next largest talent geographies in all three years.

Of the $3.5 billion and $2.5 billion of GSV enabled on our work marketplace in 2021 and 2020, respectively, approximately 25% was generated from talent in the United States in each year.

Of the $4.1 billion and $3.5 billion of GSV enabled on our work marketplace in 2022 and 2021, respectively, approximately 26% and 25% was generated from talent in the United States in each year, respectively.

Approximately 69% of our GSV in 2023 was generated from U.S.

clients, compared to approximately 68% and 66% of GSV in 2022 and 2021, respectively, with clients in no other country representing more than 10% of our GSV in any such year.

In April 2022, we combined our Upwork Basic and Upwork Plus client offerings into our new Client Marketplace offering, which simplifies our pricing model for clients of those offerings.

This model makes available the most popular features of the legacy Upwork Plus offering, while eliminating the monthly client subscription fees and moving to a client marketplace fee of 5% on each transaction—or 3% if paid via ACH for eligible clients.

We generate revenue from both talent and clients.

In 2023, we changed the name of our Upwork Enterprise offering to Enterprise Solutions.

Concurrently, to align with customer needs and internal decision-making, we combined Enterprise Solutions and Managed Services into a suite of Enterprise offerings.

In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate.

We generate revenue from both talent and clients of our Marketplace and Enterprise offerings.

Revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees.

We also generate revenue from fees for premium offerings, including our Upwork Enterprise offering, as well as talent memberships, purchases of Connects, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S.

dollar, and our Upwork Payroll offering.

In addition, we provide a managed services offering where we engage talent to complete projects, directly invoice the client, and assume responsibility for work performed.

We also generate revenue from fees for premium offerings, including our Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S.

Financial Highlights for 2023

Our work marketplace enabled $4.1 billion of GSV in 2022, representing a year-over-year increase of 16%.

We also experienced increases in user acquisition and the number of active clients, which drove marketplace revenue.

I n an effort to continue to acquire large enterprise and other clients, in 2022, we continued our investments in marketing to drive brand awareness, however our year-over-year growth rates were impacted by a number of factors.

In April 2022, we combined our Upwork Basic and Upwork Plus client offerings into our new Client Marketplace offering.

The resulting pricing change drove greater revenue and resulted in a higher marketplace take rate, but also drove a reduction in spend by some clients.

Additionally, our year-over-year growth rates were impacted by the lapping of prior periods during which we experienced accelerated growth, driven by an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic;

challenging macroeconomic conditions that we began to experience in the second half of 2022;

and our decision in March 2022 to suspend our business operations in Russia and Belarus.

For the year ended December 31, 2022, marketplace revenue increased by $104.3 million, or 23%, compared to 2021.

Additionally, we increased our investment in brand marketing, research and development to enhance platform functionality and infrastructure, and, to a lesser extent, sales, by expanding our sales team.

We generated a net

loss of $89.9 million in 2022 compared to a net loss of $56.2 million in 2021.

Our adjusted EBITDA loss was $4.0 million in 2022, as compared to adjusted EBITDA income of $19.1 million in 2021.

Adjusted EBITDA is a financial measure that is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S.

See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA, information regarding our use of adjusted EBITDA, and a reconciliation of net loss to adjusted EBITDA.

In 2023, we implemented a number of initiatives that positively impacted our financial results, including increasing the number of Connects needed by talent to bid on projects, deploying ads products on our work marketplace, introducing a contract initiation fee in April 2023 for clients on our Marketplace offering, and retiring the tiered service fee structure in May 2023 for talent working with clients on our Marketplace offering in favor of a flat fee.

These initiatives, along with others, resulted in an increase to Marketplace revenue of $67.8 million, or 13%, for the year ended December 31, 2023, compared to 2022.

In 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs.

Additionally, in light of the challenging macroeconomic conditions as well as our efforts to reduce spend and streamline operations, we implemented a reduction of our workforce in May 2023 representing approximately 15% of full-time employees, largely in our sales team, and we also reduced a smaller percentage of independent team members.

As a result, we generated net income of $46.9

million in 2023 compared to a net loss of $89.9 million in 2022.

Our adjusted EBITDA was $73.1 million in 2023, as compared to adjusted EBITDA loss of $4.0 million in 2022.

We expect these measures will continue to positively impact net income and adjusted EBITDA in 2024.

Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with generally accepted accounting principles in the United States, which we refer to as U.S.

See “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared under U.S.

Key Financial and Operational Metrics

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As of or for the Year Ended December 31,

(In thousands, except GSV per active client and percentages ) 2022 % Change 2021 % Change 2020 % Change

(In thousands, except GSV per active client and percentages)

2023 % Change 2022 % Change 2021 % Change

GSV $ 4,142,252 1 % $ 4,104,891 16 % $ 3,546,774 41 %

Marketplace revenue (1)

$ 586,099 13 % $ 518,282 21 % $ 427,476 37 %

Marketplace take rate (1)

Net loss $ (89,885) (60) % $ (56,240) (146) % $ (22,867) (37) %

15.4 % 1.6 % 13.8 % 0.6 % 13.2 % (0.4) %

Net income (loss) $ 46,887 * $ (89,885) 60 % $ (56,240) *

Adjusted EBITDA (2)

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GSV per active client $ 4,867 (4) % $ 5,045 10 % $ 4,599 15 %

*Not meaningful

(1) In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate.

(2) Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S.

See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure prepared under U.S.

See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared under U.S.

As discussed below with respect to each key metric, we believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results, and management uses these metrics to track our performance.

We expect our key metrics may fluctuate between periods due to a number of factors, including changing macroeconomic conditions;

the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period;

the lapping of significant launches of new products, pricing changes, and other monetization efforts;

and ongoing efforts to improve processes on our work marketplace, including project proposals and purchases of Connects, among others.

For a discussion of limitations in the measurement of our key financial and operational metrics, see “Risk Factors—We track certain performance metrics with internal tools and do not independently verify such metrics.

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Gross Services Volume (GSV)

GSV includes both client spend and additional fees charged for other services.

Client spend, which we define as the total amount that clients spend on both our marketplace offerings and our managed services offering, is the primary component of GSV.

GSV also includes fees charged to users, such as for transacting payments through our work marketplace, user memberships, and purchases of Connects, and foreign currency exchange.

GSV is an important metric because it represents the amount of business transacted through our work marketplace.

Our marketplace revenue is primarily generated from the service fees paid by talent as a percentage of the total amount talent charges clients for services accessed through our work marketplace.

Therefore, marketplace revenue is correlated to GSV, and we believe that our marketplace revenue will grow as GSV grows, although they could grow at different rates.

For a discussion of how we measure and evaluate the correlation between marketplace revenue and GSV, see “—Marketplace Take Rate” below.

Growth in the number of active clients and GSV per active client are the primary drivers of GSV, and we expect the trends discussed in “—Active Clients and GSV per Active Client,” below, to affect the rate at which GSV grows.

The primary component of GSV is client spend, which we define as the total amount that clients spend on our offerings.

GSV also includes fees charged to talent and clients, such as for transacting payments through our work marketplace, purchases of Connects, talent memberships, and foreign currency exchange.

Growth in the number of active clients and GSV per active client are the primary drivers of GSV.

We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses.

During 2022, in an effort to continue to acquire large enterprise and other clients, we continued our investments in marketing to drive brand awareness.

Our work marketplace enabled $4.1 billion of GSV in 2022, representing a year-over-year increase of 16% primarily due to increased spend from existing clients.

However, the year-over-year GSV growth rate decelerated to 16% for the year ended December 31, 2022 from 41% for 2021 as the changes to client fees as a result of the shift to our new Client Marketplace offering in April 2022 and the challenging macroeconomic conditions that we began to experience in the second half of 2022 both drove reductions in spend by some clients.

Additionally, in March 2022, we made the decision to suspend our business operations in Russia and Belarus, which also resulted in a loss of client spend in the year.

We expect our GSV to fluctuate between periods due to a number of factors, including changing macroeconomic conditions;

number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period;

and the volume of projects that are posted by clients on our work marketplace, the characteristics of those projects, such as size, duration, and pricing, and the availability and qualifications of talent to complete those projects.

Marketplace Revenue

Marketplace revenue, which represents the majority of our revenue, consists of revenue derived from our marketplace offerings.

Marketplace offerings consist of all offerings other than our managed services offering, including our former Upwork Basic and Upwork Plus offerings and our current Client Marketplace and Enterprise offerings.

In April 2022, we combined our Upwork Basic and Upwork Plus client offerings into our new Client Marketplace offering, which simplifies our pricing model for clients of those offerings.

We generate marketplace revenue from both talent and clients.

Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees (and prior to the launch of our Client Marketplace offering, payment processing and administration fees).

Additionally, marketplace revenue includes revenue from our Upwork Enterprise offering, which we refer to as Enterprise Revenue, including all client fees, subscriptions, and talent service fees.

We also generate marketplace revenue from fees for premium offerings, including talent memberships, purchases of Connects, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S.

dollar, and our Upwork Payroll offering.

Marketplace revenue is the primary driver of our business, and we believe it provides comparability to other online marketplaces.

The growth rate of marketplace revenue fluctuates in relation to the growth rate of GSV.

Marketplace revenue represents the majority of our revenue and is derived from our Marketplace offerings, which include all offerings other than our Enterprise offerings—Enterprise Solutions, previously referred to as Upwork Enterprise, and Managed Services.

We generate Marketplace revenue from both talent and clients.

Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees.

We also generate Marketplace revenue from fees for premium offerings, such as our Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S.

Our Marketplace revenue is primarily generated from the service fees paid by talent as a percentage of the total amount talent charges clients for services accessed on our Marketplace offering.

Therefore, Marketplace revenue is correlated to GSV, and we believe that our Marketplace revenue will grow as GSV grows, although they could grow at different rates.

In 2022, we continued evolving our offerings, products, and marketing to better address large enterprise and other clients.

Marketplace revenue was also driven by the changes to client fees as a result of the shift to our new Client Marketplace offering in April 2022, which resulted in increases in client marketplace fees (previously referred to as client payment processing and administrative fees) of 73%, as compared to 2021.

We expect our marketplace revenue growth rates to continue to vary from period to period due to a variety of other factors such as changing macroeconomic conditions;

the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period;

the lapping of significant launches of new products, pricing changes, and other monetization efforts;

the number of active clients and their spend on our work marketplace;

and the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of, and achieve increased spend from, Upwork Enterprise clients, and the timing of those results.

For a discussion of how we measure and evaluate the correlation between Marketplace revenue and Marketplace GSV, see “—Marketplace Take Rate” below.

Marketplace Take Rate

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Marketplace take rate is an important metric because it is the key indicator of how well we monetize spend on our work marketplace from our Marketplace offerings.

More higher value relationships and higher spend per client results in a larger percentage of business activity on our work marketplace being priced at the lower rates of our tiered service fee structure.

During the year ended December 31, 2022, our marketplace take rate increased to 14.0%, as compared to 13.2% during the year ended December 31, 2021.

This trend was primarily a result of client fee changes related to the shift to our new Client Marketplace offering, partially offset by existing clients maturing into higher value clients and continuing to increase their spend with particular talent, which resulted in a higher mix of talent at the lower rates of our tiered service fee structure.

We intend to continue our efforts to better address large enterprise and other clients through our Upwork Enterprise and other premium offerings.

These offerings have take rates that are higher than the rest of our business, which partially offsets the trend of lower rates as relationships and clients mature into higher value clients with increased spend.

Additionally, we are working on a number of initiatives that could also have a positive impact on marketplace take rate, and we will continue to introduce new or modify existing offerings or other services and features.

As a result of these efforts, over the course of 2023, we expect marketplace take rate to continue to increase.

However, we also generally expect our marketplace take rate to vary from period to period as marketplace revenue and GSV vary as a result of a variety of factors, such as the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) i n any given period;

pricing changes;

changing macroeconomic conditions;

the ability of the recent and continued investment in our enterprise sales team to accelerate the acquisition of, and achieve increased spend from, our Upwork Enterprise clients and the timing of those results;

and ongoing efforts to improve processes on our work marketplace, including project proposals and purchases of Connects, among others.

In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue and GSV from our Enterprise Solutions offering in Marketplace take rate.

Active Clients and GSV per Active Client

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The number of active clients is a primary driver of GSV and, in turn, Marketplace revenue.

In 2022, we continued our investments in marketing to acquire large enterprise and other clients and drive brand awareness.

As a result, the number of active clients increased 6% as of December 31, 2022 compared to December 31, 2021.

We believe that the decline in the year-over-year growth rate of active clients is in large part due to the lapping of prior periods during which we experienced an acceleration of active client growth, driven by an acceleration in the shift toward remote work, due in part to the COVID-19 pandemic.

Additionally, we began to experience challenging macroeconomic conditions in the second half of 2022, which impacted our ability to acquire new clients and retain existing clients.

We have seen continued growth of GSV per active client as an increasing number of clients continue to mature into higher-value clients and expand their spend on our work marketplace.

Our GSV per active client increased 10% as of December 31, 2022 compared to December 31, 2021.

We continue to see businesses of all sizes use our work marketplace in a recurring way for larger, more complex projects, and we expect the number of active clients and GSV per active client to increase over time, but these metrics could vary quarter by quarter depending, in part, on macroeconomic conditions and other factors identified in the section titled “Risk Factors” included elsewhere in this Annual Report.

While continued use of our work marketplace by talent is a factor that impacts our ability to attract and retain clients, we currently have a significant surplus of talent in relation to the number of clients actively engaging talent for most categories of services on our work marketplace.

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Marketplace Revenue.

Marketplace revenue, which represents the majority of our revenue, consists of revenue derived from our marketplace offerings.

We generate marketplace revenue from both talent and clients.

For talent working with clients on our former Upwork Basic and Upwork Plus offerings and our current Client Marketplace offering, we have a tiered talent service fee schedule based on cumulative lifetime billings by talent to each client.

Talent typically pays us 20% of the first $500, 10% for the next $9,500, and then 5% for any amount over $10,000 they bill to each client through our work marketplace.

We recognize revenue on Sundays of each week for the majority of our tiered talent service fees as that is the day we have the contractual right to bill talent for the service fees.

To a lesser extent, we also generate revenue from talent through membership fees, purchases of Connects, and withdrawal and other fees.

In addition, we generate marketplace revenue from clients of our Client Marketplace offering.

In April 2022, we combined our Upwork Basic and Upwork Plus client offerings into our new Client Marketplace offering, which

simplifies our pricing model for clients of those offerings.

Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees.

We generate Marketplace revenue from talent of our Marketplace offerings.

Prior to May 2023, we had a tiered talent service fee schedule based on cumulative lifetime billings by talent to each client.

In May 2023, we retired the tiered service fee structure for talent working with clients on our Marketplace offerings—ranging from 5% to 20%—in favor of a simplified flat fee of 10%.

This change took effect for new contracts and existing contracts that would have otherwise been subject to a 20% fee under the former tiered service fee model.

Contracts under the former tiered service fee model that had a 5% fee retained that rate for those contracts through the end of 2023.

We recognize revenue on Sunday of each week for the majority of our talent service fees as that is the day we have the contractual right to bill talent for the service fees.

To a lesser extent, we also generate revenue from talent through purchases of Connects, membership fees, and withdrawal and other fees.

In addition, we generate Marketplace revenue from clients of our Marketplace offerings, whereby we charge a client marketplace fee of 5% on each transaction—or 3% if paid via ACH for eligible clients.

In April 2023, we introduced a contract initiation fee for clients on our Marketplace offerings.

To a lesser extent, we also generate revenue from clients through foreign currency exchange fees when clients choose to pay in currencies other than the U.S.

Our Upwork Enterprise offering, which is designed primarily for larger clients with at least 250 employees, includes access to additional product features, premium access to top talent, professional services, custom reporting, and flexible payment terms.

For our Upwork Enterprise offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on talent services, in addition to a 10% service fee paid by talent.

Additionally, Upwork Enterprise clients can also subscribe to a compliance offering that includes worker classification services for an additional fee and may also choose to use our work marketplace to engage talent that were not originally sourced through our work marketplace for a lower fee percentage.

dollar and from interest earned on funds held on behalf of customers.

One of our premium offerings, Upwork Payroll, is available to clients when talent are classified as employees for engagements on our work marketplace.

The client enters into an Upwork Payroll agreement with us, and we separately contract with unrelated third-party staffing providers that provide employment services to such clients.

In 2022, we continued evolving our offerings, products, and marketing to better address large enterprise and other clients.

We intend to continue to focus on these efforts to attract new clients, as well as talent that meet the criteria sought by such clients.

Managed Services Revenue.

We work with unrelated third-party staffing providers that provide employment services to such clients.

Enterprise Revenue.

Enterprise offers two lines of service—Enterprise Solutions and Managed Services.

Our Enterprise Solutions offering includes access to additional product features, premium access to top talent, professional services, custom reporting, and flexible payment terms.

Revenue from our Enterprise Solutions offering includes all client fees, subscriptions, and talent service fees.

For our Enterprise Solutions offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on talent services, in addition to a 10% service fee paid by talent.

Additionally, clients of our Enterprise Solutions offering can also subscribe to a compliance service that includes worker classification services for an additional fee

and may also choose to use our work marketplace to engage talent that were not originally sourced through our work marketplace for a lower fee percentage.

Through our Managed Services offering, we are responsible for providing services and engaging talent directly or as employees of third-party staffing providers to perform services for clients on our behalf.

The talent providing services in connection with our managed services include independent talent and agencies of varying sizes.

GAAP, we are deemed to be the principal in these managed services arrangements and therefore recognize the entire GSV of managed services projects as managed services revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our marketplace offerings.

Managed services revenue grew at a faster rate than our marketplace revenue in 2022 due to increased spend from existing clients on our managed services offering.

The talent providing services in connection with our Managed Services offering include independent talent and agencies of varying sizes.

GAAP, we are deemed to be the principal in these Managed Services arrangements and therefore recognize the entire GSV of Managed Services projects as Managed Services revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our Marketplace and Enterprise Solutions offerings.

Cost of Revenue and Gross Profit

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We define personnel-related costs as salaries, bonuses, benefits, travel and entertainment, and stock-based compensation costs for employees and the costs related to other service providers we engage.

We expect cost of revenue to increase in absolute dollars in future periods due to higher payment processing fees, personnel-related costs, and third-party hosting fees in order to support growth on our work marketplace.

Amounts paid to talent in connection with our managed services offering are tied to the volume of managed services used by our clients.

The level and timing of all of these items could fluctuate and affect our cost of revenue in the future.

Gross Profit and Gross Margin.

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Such fluctuations may be influenced by our revenue, the mix of payment methods that our clients choose, the timing and amount of investments to expand hosting capacity, our continued investments in our services and support teams, the timing and amounts paid to talent in connection with our Managed Services offering, and the amortization expense associated with capitalized internal-use software and platform development costs.

In addition, gross margin will be impacted by fluctuations in our revenue mix between marketplace revenue and managed services revenue.

In addition, gross margin will be impacted by fluctuations in our revenue mix between Marketplace revenue and Enterprise revenue.

We expect gross profit to increase in absolute dollars in future periods, although gross margin, expressed as a percentage of total revenue, may vary from period to period.

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Research and development costs are expensed as incurred, except to the extent that such costs are associated with internal-use software and platform development that qualifies for capitalization.

In 2022, we made significant investments to enhance platform functionality and infrastructure, build new product features, and increase the size of our research and development workforce, and we believe continued investments in research and development are important to attain our strategic objectives.

As a result, we expect research and development expense to

increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Sales and Marketing.

Sales and marketing expense consists primarily of expenses related to advertising and marketing activities, as well as personnel-related costs, including sales commissions, which we expense as they are incurred.

In 2022, we continued evolving our offerings, products, brand positioning, and marketing to better address large enterprise and other clients, and we made significant investments in marketing to acquire new clients and drive brand awareness.

Additionally, in the fourth quarter of 2021, we began increasing our investment in sales by expanding our sales team, which continued throughout 2022.

We expect to reduce our investments in sales, including slowing our Enterprise sales hiring pace, and marketing in 2023, as compared to 2022, as we become more strategic and efficient around prioritizing investments that will yield better returns.

We expect this expense to increase in absolute dollars in future periods, although this expense expressed as a percentage of total revenue may vary from period to period.

General and Administrative.

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and insurance.

We expect to continue to incur additional general and administrative expenses, including increased stock-based compensation expense related to executive compensation arrangements, legal and accounting costs, insurance premiums, and compliance costs.

Additionally, in 2020 we shifted to a flexible work model for our workforce and are evaluating our current need for office space.

As a result, we may determine to either close or sublease certain of our offices, either of which could result in further impairment charges being recognized in general and administrative expense.

As a result, we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Provision for Transaction Losses.

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Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors.

In 2022, we experienced increased instances of fraud, higher chargeback losses, and bad debt losses related to Upwork Enterprise clients.

As a result, we partnered with an industry-leading third-party fraud detection vendor and enhanced our trust and safety measures.

Due to these efforts, we expect provision for transaction losses to remain elevated throughout the first quarter of 2023 but to gradually decline throughout the remainder of 2023.

However, it could fluctuate as a result of continued instances of fraud and higher chargeback or bad debt losses and our ongoing efforts to reduce this activity on our work marketplace.

Interest Expense

Interest expense consists of interest on our outstanding borrowings.

Other Income (Expense), Net

Other (income) expense, net consists primarily of interest income that we earn from our deposits in money market funds and investments in marketable securities and gains and losses from foreign currency exchange transactions.

Income Tax Benefit (Provision)

Other income (expense), net consists primarily of interest income that we earn from our operating investments, namely our deposits in money market funds and investments in marketable securities, interest expense on our outstanding borrowings, as well as gains and losses from foreign currency exchange transactions.

Income Tax Provision

We account for income taxes in accordance with the asset and liability method.

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Deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect for the years in which those tax assets are expected to be realized or settled.

We regularly assess the likelihood that deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth in the relevant authoritative guidance.

We regularly assess the likelihood that deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the

realization criteria set forth in the relevant authoritative guidance.

To the extent that we believe any amounts are less likely than not to be realized, we record a valuation allowance to reduce our deferred tax assets.

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Marketplace (1)

Managed services 51,695 40,457 35,476

$ 586,099 $ 518,282 $ 427,476

Enterprise (1)

103,037 100,036 75,321

Total revenue 689,136 618,318 502,797

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Loss from operations

Interest expense 4,483 2,180 778

Other income, net (7,758) (279) (469)

Loss before income taxes (89,349) (56,118) (22,717)

(11,260) (92,624) (54,217)

Other income (expense), net 60,137 3,275 (1,901)

Income (loss) before income taxes 48,877 (89,349) (56,118)

Income tax provision (1,990) (536) (122)

Net loss $ (89,885) $ (56,240) $ (22,867)

Net income (loss) $ 46,887 $ (89,885) $ (56,240)

(2) Includes stock-based compensation expense as follows:

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Marketplace (1)

$ 586,099 $ 518,282 67,817 13 %

Percentage of total revenue (1)

Managed services $ 51,695 $ 40,457 11,238 28 %

Enterprise (1)

$ 103,037 $ 100,036 3,001 3 %

Percentage of total revenue (1)

Total revenue $ 689,136 $ 618,318 $ 70,818 11 %

For the year ended December 31, 2023, GSV remained relatively flat at $4.1 billion, as compared to 2022.

The number of active clients increased 5% as of December 31, 2023 compared to December 31, 2022, driven by growth in acquisition of new clients.

As a result, our GSV per active client decreased 4% as of December 31, 2023 compared to December 31, 2022.

For the year ended December 31, 2023, total revenue was $689.1 million, representing an increase of $70.8 million, or 11%, as compared to 2022.

The number of active clients increased 6% as of December 31, 2022 compared to December 31, 2021, and our GSV per active client increased 10% as of December 31, 2022 compared to December 31, 2021, driven by increased spend from existing clients.

The growth in active clients and GSV per active client contributed to the year-over-year growth of GSV and marketplace revenue.

In April 2022, we combined our Upwork Basic and Upwork Plus client offerings into our new Client Marketplace offering, which simplifies our pricing model for clients of those offerings.

This pricing change resulted in greater revenue and a higher marketplace take rate, but also drove a reduction in client spend by some clients.

Additionally, we began to experience challenging macroeconomic conditions in the second half of 2022, which impacted our ability to acquire new clients and retain existing clients.

We also decided, in March 2022, to suspend our business operations in Russia and Belarus.

As a result, the year-over-year GSV growth rate decelerated to 16% for the year ended December 31, 2022 from 41% for 2021.

For the year ended December 31, 2022, marketplace revenue represented 92% of total revenue and increased by $104.3 million, or 23%, compared to 2021.

Marketplace revenue was driven by increased client spend on our marketplace offerings, which for the year ended December 31, 2022, drove an increase in talent service fees of 11%, as compared to the same period in 2021.

Marketplace revenue was also driven by the changes to client fees as a result of the shift to our new Client Marketplace offering in April 2022, which resulted in an increase in client marketplace fees (previously referred to as client payment processing and administrative fees) of 73%, as compared to the same periods in 2021.

Marketplace revenue grew at a faster rate than GSV from our marketplace offerings in 2022, and for the year ended December 31, 2022, our marketplace take rate was 14.0%, as compared to 13.2% for the same period in 2021.

Additionally, during the year ended December 31, 2022, we continued our efforts to better address large enterprise and other clients through our Upwork Enterprise and other premium offerings.

As a result, for the year ended December 31, 2022, Enterprise Revenue increased 39% to $48.3 million, as compared to the same period in 2021, which drove marketplace revenue in 2022.

Managed services revenue represented 8% of total revenue in each of the years ended December 31, 2022 and 2021.

For the year ended December 31, 2022, managed services revenue increased by $11.2 million, or 28%, compared to 2021 due to increased spend from existing clients on our managed services offering.

In 2023, we implemented a number of initiatives that positively impacted Marketplace revenue and Marketplace take rate, including modifying existing offerings and other services and features.

Specifically, we increased the number of Connects needed by talent to bid on projects, deployed ads products on our work marketplace, introduced a contract initiation fee in April 2023 for clients on our Marketplace offering, and in May 2023, retired the tiered service fee structure for talent working with clients on our Marketplace offering—ranging from 5% to 20%—in favor of a flat fee of 10%.

As a result, for the year ended December 31, 2023, Marketplace revenue represented 85% of total revenue and increased by $67.8 million, or 13%, as compared to 2022.

Marketplace revenue growth was primarily driven by increases in revenue from client marketplace fees, Connects, and talent service fees.

Overall, these factors caused Marketplace revenue to grow at a faster rate than GSV from our Marketplace offerings, which caused Marketplace take rate to increase to 15.4%, as compared to 13.8% in 2022.

We expect these factors will cause Marketplace revenue and Marketplace take rate to continue to increase in 2024.

Enterprise revenue represented 15% of total revenue for the year ended December 31, 2023 and increased by $3.0 million, or 3%, as compared to 2022, due to increased revenue from our Enterprise Solutions and Managed Services offerings.

We intend to focus on efforts to attract new clients, as well as talent that meet the criteria sought by such clients.

As a result of these efforts, we expect Enterprise revenue to increase in 2024.

Cost of Revenue and Gross Margin

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Cost of revenue $ 170,450 $ 160,402 $ 10,048 6 %

Components of cost of revenue:

Costs of talent services to deliver managed services 37,749 31,871 5,878 18 %

Other components of cost of revenue 122,653 103,637 19,016 18 %

Total gross margin 75 % 74 %

For the year ended December 31, 2022, cost of revenue increased by $24.9 million, or 18%, compared to 2021.

For the year ended December 31, 2022, cost of revenue increased primarily as a result of increases in payment processing fees of $14.8 million, as compared to the same period in 2021, primarily due to increased client spend, as well as increases in cost of talent services to deliver managed services resulting from increases in managed services revenue for the year ended December 31, 2022, as compared to the same period in 2021.

Additionally, for the year ended December 31, 2022, third-party hosting costs increased $2.2 million, as compared to the same period in 2021.

For the year ended December 31, 2023, cost of revenue increased by $10.0 million, or 6%, as compared to 2022, primarily as a result of increases in payment processing fees of $3.2 million, cost of talent services to deliver Managed Services of $2.6 million primarily driven by new spend from existing clients of our Managed Services offering, amortization expense associated with capitalized internal-use software and platform development costs of $1.9 million, and hosting fees and other software costs of $1.8 million.

We expect cost of revenue to increase in future periods as we continue to support growth on our work marketplace.

Amounts paid to talent in connection with our Managed Services offering are tied to the volume of managed services used by our clients.

The level and timing of these items could fluctuate and affect our cost of revenue in the future.

We expect the pricing changes that we have made over the past twelve months will continue to positively impact gross margin in 2024.

Research and Development

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Percentage of total revenue 26 % 25 %

For the year ended December 31, 2022, research and development expense increased by $35.5 million, or 30%, as compared to 2021.

The increase was primarily due to our significant investments to enhance platform functionality and infrastructure, build new product features, and increase the size of our research and development workforce, which resulted in increases in personnel-related costs of $33.8 million, as compared to the same period in 2021.

Additionally, during the year ended December 31, 2022, we incurred approximately $2.7 million of research and development expense related to our humanitarian response efforts in response to the war in Ukraine, which primarily consisted of special bonuses to our team members in the impacted region and expenses incurred in connection with the relocation of our team members in the impacted region.

These increases were partially offset by $2.4 million incremental internal-use software and platform development costs that we capitalized during the year ended December 31, 2022 as compared to the same period in 2021.

In 2023, we focused our investment in research and development on the quality and adoption of our current offerings and products.

Specifically, we increased the size of our research and development workforce, enhanced platform functionality, and built new product features.

As a result, for the year ended December 31, 2023, research and development expense increased by $22.8 million, or 15%, as compared to 2022, driven by increases in personnel-related costs of $28.4 million and software costs of $3.5 million, as compared to 2022.

These increases were partially offset by $7.2 million of incremental internal-use software and platform development costs that we capitalized during the year ended December 31, 2023, as compared to 2022.

We intend to increase our investment in research and development to further enhance our platform, including the quality of our offerings, and to build new features, in particular, with a focus on machine learning and generative artificial intelligence.

As a result, we expect research and development expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Sales and Marketing

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Percentage of total revenue 32 % 40 %

For the year ended December 31, 2022, sales and marketing expense increased by $63.6 million, or 35%, as compared to 2021.

In 2022, we continued evolving our brand positioning and marketing to better address large enterprise and other clients.

We made significant investments in marketing and, to a lesser extent, our sales team.

These investments resulted in increases in marketing and brand awareness campaigns of $34.9 million, as compared to the same period in 2021, as well as increases in personnel-related costs of $25.3 million.

Additionally, during the year ended December 31, 2022, software costs increased by $1.6 million, as compared to the same period in 2021.

In 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs.

We also reduced our investments in sales, including slowing our Enterprise sales hiring pace, as compared to 2022.

As a result, for the year ended December 31, 2023, sales and marketing expense decreased by $26.2 million, or 11%, as compared to 2022, driven primarily by reductions in marketing and advertising expense of $39.1 million.

This decrease was partially offset by increases in personnel-related costs of $10.4 million, as we continue to invest in opportunities for growth.

We also implemented a reduction of our workforce in May 2023, resulting in employee severance and benefit costs of $2.5 million, largely in our sales team, during the year ended December 31, 2023.

As a result of our reduced investment in brand marketing, the reduction of our workforce, and other cost-saving measures implemented in 2023, we expect sales and marketing expense to decrease in 2024.

General and Administrative

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Percentage of total revenue 17 % 20 %

For the year ended December 31, 2022, general and administrative expense increased by $10.9 million, or 10%, as compared to 2021.

This increase was primarily due to increases in personnel-related costs of $11.9 million, as compared to the same period in 2021, primarily because of increased stock-based compensation expense, as well as $5.5 million related to indirect taxes incurred during the year ended December 31, 2022.

For the year ended December 31, 2023, general and administrative expense decreased by $5.0 million, or 4%, as compared to 2022.

This decrease was primarily due to lower expense related to indirect taxes of $5.8 million, as compared to 2022.

Additionally, in 2022, we incurred approximately $1.3 million of general and administrative expense related to our humanitarian response efforts and charitable donations related to the war in Ukraine.

In 2021, we incurred impairment charges of $8.7 million related to certain of our operating lease assets and associated property and equipment.

These reductions in expense were partially offset by an increase in software costs of $1.4 million during the year ended December 31, 2023, as compared to 2022.

Provision for Transaction Losses

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Percentage of total revenue 2 % 4 %

For the year ended December 31, 2022, provision for transaction losses increased by $19.1 million, or 316%, as compared to 2021, and represented approximately 4% of revenue, as compared to 1%, in the same period in 2021.

Provision for transaction losses increased due to increased instances of fraud, higher chargeback losses, and bad debt losses related to Upwork Enterprise clients.

We continue to closely monitor this activity and have put a number of additional measures in place to decrease transaction losses going forward, including increasing fraud detection efforts and resources, enhancing our trust and safety measures, and integrating with an industry-leading third-party fraud detection vendor.

Interest Expense and Other Income, Net

In 2023, we continued to enhance our trust and safety measures.

As a result, for the year ended December 31, 2023, provision for transaction losses decreased by $12.2 million, or 48%, as compared to 2022, and represented approximately 2% of revenue, as compared to 4% in 2022.

We continue to closely monitor this activity and maintain a number of measures designed to mitigate transaction losses going forward.

Other Income, Net

Year Ended December 31, Change

(In thousands, except percentages) 2023 2022 $ %

Interest expense $ 4,483 $ 2,180 $ 2,303 106 %

Other income, net $ 60,137 $ 3,275 $ 56,862 *

For the year ended December 31, 2022, interest expense increased, as compared to the same period in 2021, due to incurring a full year of interest expense in 2022 as compared to a partial year in 2021 from the Notes that we issued in August 2021.

*Not meaningful

For the year ended December 31, 2023, other income, net increased by $56.9 million, as compared to 2022, primarily driven by a gain on early extinguishment of debt of $38.9 million related to the Note Repurchases, increases in interest income of $16.5 million primarily due to higher interest rates from our marketable securities, and lower interest expense as a result of the Note Repurchases, which lowered our outstanding debt balance in March 2023.

See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information.

For the year ended December 31, 2022, other income, net, increased, as compared to the same period in 2021, primarily due to increases in interest income from our marketable securities of $7.6 million.

Income Tax Provision

Year Ended December 31, Change

(In thousands, except percentages) 2023 2022 $ %

Income tax provision

$ (1,990) $ (536) $ 1,454 *

*Not meaningful

For the year ended December 31, 2023, income tax provision increased by $1.5 million, as compared to the same period in 2022, primarily due to a year-over-year increase in our U.S.

federal taxable income.

Non-GAAP Financial Measures

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Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S.

The following table presents a reconciliation of net loss, the most directly comparable financial measure prepared in accordance with U.S.

The following table presents a reconciliation of net income (loss), the most directly comparable financial measure prepared in accordance with U.S.

GAAP, to adjusted EBITDA for each of the periods indicated:

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(In thousands) 2023 2022 2021

Net loss $ (89,885) $ (56,240) $ (22,867)

Net income (loss) $ 46,887 $ (89,885) $ (56,240)

Add back (deduct):

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Depreciation and amortization 9,449 8,057 10,261

Interest expense 4,483 2,180 778

Other income, net (7,758) (279) (469)

Other (income) expense, net (1)

(60,137) (3,275) 1,901

Income tax provision 1,990 536 122

Tides Foundation common stock warrant expense 750 750 750

Impairment expense — 8,741 —

Humanitarian response efforts (1)

Other (2)(3)(4)

750 5,037 9,491

Adjusted EBITDA $ 73,134 $ (4,029) $ 19,127

(1) Represents (i) $1.4 million of special one-time bonuses to our team members in the region impacted by Russia’s invasion of Ukraine, (ii) $1.5 million of expenses incurred in connection with the relocation of our team members in the impacted region, (iii) $1.1 million of donations made to humanitarian aid organizations to support initiatives related to humanitarian response efforts in the impacted region, primarily to Direct Relief International, a humanitarian aid organization, and (iv) $0.4 million of payments of one-time service award bonuses (and associated taxes) to certain of our team members paid in recognition of contributions made by such team members to our humanitarian response efforts in the impacted region.

(1) During the year ended December 31, 2023, we recognized a gain on early extinguishment of debt of $38.9 million, which is included in other income (expense), net in the consolidated statement of operations and comprehensive income (loss).

See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes.

(2) During each of the years ended December 31, 2023, 2022, and 2021, we incurred $0.8 million of expense related to our Tides Foundation warrant.

(3) During the year ended December 31, 2022, in response to Russia’s invasion of Ukraine, we incurred certain incremental expenses associated with our humanitarian response efforts.

These expenses are not representative of our ongoing operations, and, as a result, we excluded these costs from adjusted EBITDA for the year ended December 31, 2022.

These expenses consisted of (i) $1.4 million of special one-time bonuses to our team members in the region impacted by Russia’s invasion of Ukraine, (ii) $1.5 million of expenses incurred in connection with the relocation of our team members in the impacted region, (iii) $1.1 million of donations made to humanitarian aid organizations to support initiatives related to humanitarian response efforts in the impacted region, primarily to Direct Relief International, a humanitarian aid organization, and (iv) $0.4 million of payments of one-time service award bonuses (and associated taxes) to certain of our team members paid in recognition of contributions made by such team members to our humanitarian response efforts in the impacted region.

(4) During the year ended December 31, 2021, we incurred impairment charges of $8.7 million as a result of the execution of sublease agreements related to two of our operating leases.

See “Note 5—Balance Sheet Components” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes.

We use adjusted EBITDA as a measure of operational efficiency.

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income tax benefit (provision);

and, if applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;

applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;

• our management uses adjusted EBITDA in conjunction with financial measures prepared in accordance with U.S.

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• other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of this measure for comparative purposes.

Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net loss and our other financial results prepared in accordance with U.S.

Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net income (loss) and our other financial results prepared in accordance with U.S.

Liquidity and Capital Resources

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Our cash equivalents and marketable securities primarily consist of money market funds, commercial paper, treasury bills, corporate bonds, U.S.

government securities, asset-backed securities, and other types of fixed income securities.

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk.

and foreign government securities, asset-backed securities, and other types of fixed income securities.

The primary objective of our investment activities from operating investments is to preserve principal while maximizing income without significantly increasing risk.

Since our inception, our business has consisted of the operation of an online work marketplace that connects businesses with independent talent from across the globe, and we do not make investments for trading or speculative purposes.

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We believe our existing cash and cash equivalents, marketable securities, and cash flow from operations (in periods in which we generate cash flow from operations) will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements.

In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from users, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the cost to host our work marketplace, the introduction of new offerings and services, the continuing market adoption of our work marketplace, any acquisitions or investments that we make in complementary businesses, products, and technologies, macroeconomic conditions, and our ability to obtain equity or debt financing.

Our principal commitments consist of obligations under our non-cancellable operating leases for office space and the Notes.

As of December 31, 2022, our future lease commitments were $19.9 million (excluding adjustments for discount to present value), including $6.8 million for 2023.

Assuming the Notes are not converted into our common stock, repurchased or redeemed prior to maturity, (i) annual interest expense relating to the Notes will be $1.4 million in each fiscal year through 2026 and (ii) principal in the amount of $575.0 million will be payable upon the maturity of the Notes on August 15, 2026.

For additional information about our Notes, see the section titled “—Convertible Senior Notes Due 2026.”

We anticipate satisfying our short-term cash requirements with our existing cash and cash equivalents and may satisfy our long-term cash requirements with cash and cash equivalents on hand or with proceeds from a future equity or debt financing.

In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the cost to host our work marketplace, the introduction of new offerings and services, the continuing market adoption of our work marketplace, any acquisitions or investments that we make in complementary businesses, products, and technologies, macroeconomic conditions, the number of shares of our common stock that we repurchase under our Share Repurchase Program, or the aggregate principal amount of our outstanding Notes that we repurchase, and our ability to obtain equity or debt financing.

Our principal commitments consist of the Notes and obligations under our non-cancellable operating leases for office space.

In March 2023, we sold $138.2 million of available-for-sale marketable securities to enable the Note Repurchases.

Assuming the remaining Notes are not converted into our common stock, repurchased or redeemed prior to maturity, (i) annual interest expense relating to the Notes will be $2.7 million in each fiscal year through 2026 and (ii) principal in the

amount of $361.0 million will be payable upon the maturity of the Notes on August 15, 2026.

For additional information about our Notes, see the section below titled “—Convertible Senior Notes Due 2026.” As of December 31, 2023, our future lease commitments were $13.1 million (excluding adjustments for discount to present value), including $5.8 million for 2024.

In November 2023, our board of directors authorized the Share Repurchase Program, under which we may repurchase up to $100.0 million of shares of our outstanding common stock.

Repurchases of our common stock under the Share Repurchase Program may be made from time to time on the open market (including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act), in privately negotiated transactions, or by other methods, at our discretion, and in accordance with applicable securities laws and other restrictions.

The Share Repurchase Program has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason.

The Share Repurchase Program does not obligate us to repurchase any dollar amount or number of shares, and the timing and amount of any repurchases will depend on market and business conditions.

We had no share repurchase activity during the quarter ended December 31, 2023.

On August 16, 2022, the Inflation Reduction Act of 2022, which we refer to as the Act, was signed into law.

Under the Act, share repurchases after December 31, 2022 will be subject to a 1% excise tax.

In addition, as market conditions warrant, we may, from time to time, repurchase additional outstanding Notes in the open market, in privately negotiated transactions, by tender offer, by exchange transaction, or otherwise.

Such repurchases of Notes, if any, will depend on prevailing market conditions, our liquidity, and other factors, and may be commenced or suspended at any time.

The amounts involved and total consideration paid may be material.

To the extent existing cash and cash equivalents, cash from marketable securities, and cash from operations (in periods in which we generate cash flow from operations) are insufficient to fund our working capital and capital expenditure requirements, or should we require additional cash for other purposes, we will need to raise additional funds.

In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements, as we did with the offering of the Notes in the third quarter of 2021.

If we raise additional funds by issuing equity or equity-linked securities, the ownership and economic interests of our existing stockholders will be diluted.

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Escrow Funding Requirements

As a licensed internet escrow agent, we offer escrow services to users of our work marketplace and, as such, we are required to hold our users’ escrowed cash and in-transit cash in trust as an asset and record a corresponding liability for escrow funds held on behalf of talent and clients on our balance sheet.

We expect the balances of our

funds held in escrow, including funds held in transit, and the related liability to grow as GSV grows and may vary from period to period.

As a licensed internet escrow agent, we offer escrow services to customers of our work marketplace and, as such, we are required to hold our customers’ escrowed cash and in-transit cash in trust as an asset and record a corresponding liability for escrow funds held on behalf of talent and clients on our balance sheet.

We expect the balances of our funds held in escrow, including funds held in transit, and the related liability to grow as GSV grows and may vary from period to period.

Escrow regulations require us to fund the trust with our operating cash to cover shortages due to the timing of cash receipts from clients for completed hourly billings.

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As of December 31, 2023 and 2022, funds held in escrow, including funds in transit, were $212.4 million and $161.5 million, respectively.

Term and Revolving Loans

In August 2021, in connection with our issuance of the Notes, we paid off outstanding amounts under, and terminated, our loan and security agreement with Silicon Valley Bank, as amended.

Funds held in escrow are deposited in interest-bearing checking accounts.

Convertible Senior Notes Due 2026

In August 2021, we issued the Notes pursuant to an Indenture between us and Wells Fargo Bank, National Association, as trustee, which we refer to as the Indenture.

The Notes were issued in August 2021, pursuant to and are subject to the terms and conditions of an indenture between us and Computershare Trust Company, National Association (as successor in interest to Wells Fargo Bank, National Association), as trustee, which is referred to as the Indenture.

The Notes are senior, unsecured obligations and bear interest at a rate of 0.25% per year, payable semiannually in arrears, and are due August 15, 2026.

Upon conversion, we have an option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock.

The net proceeds from the issuance of the Notes were approximately $560.1 million, after deducting debt issuance costs.

We used approximately $49.4 million of the net proceeds from the Notes offering to pay the cost of the Capped Calls.

To consummate the Note Repurchases, in March 2023 we entered into separate, privately negotiated repurchase agreements with a limited number of institutional holders of the Notes to repurchase an aggregate of $214.0 million principal amount of the Notes for an aggregate cash payment of $170.8 million.

As of December 31, 2023, $361.0 million aggregate principal amount of the Notes remain outstanding.

We intend to use the remainder of the net proceeds from the offering for general corporate purposes, including marketing, brand awareness and sales, and which may include working capital, capital expenditures, and investments in and acquisitions of other companies, products or technologies that we may identify in the future.

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See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes and the Capped Calls.

The Capped Calls remain in effect notwithstanding the Note Repurchases.

The following table summarizes our cash flows for the years ended December 31, 2023, 2022, and 2021:

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Net cash provided by operating activities $ 27,221 $ 6,559 $ 10,836

Net cash used in investing activities (69,468) (428,980) (4,146)

Net cash provided by financing activities 6,082 537,739 54,641

Net cash provided by (used in) investing activities 88,270 (69,468) (428,980)

Net cash provided by (used in) financing activities (114,304) 6,082 537,739

Net change in cash, cash equivalents, and restricted cash (1)

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Our primary uses of cash from operating activities are for personnel-related expenditures, marketing activities, including advertising, payment processing fees, amounts paid to talent to deliver services for clients under our Managed Services offering, and third-party hosting costs.

In addition, because we are licensed as an internet escrow agent,

our total cash and cash provided by operating activities may be impacted by the timing of the end of our fiscal quarter as discussed in the section titled “—Liquidity and Capital Resources—Escrow Funding Requirements.”

Net cash provided by operating activities during 2022 was $6.6 million, which resulted from non-cash charges of $112.2 million, offset by a net loss of $89.9 million and net cash outflows of $15.7 million from changes in operating assets and liabilities.

The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables.

In addition, because we are licensed as an internet escrow agent, our total cash and cash provided by operating activities may be impacted by the timing of the end of our fiscal quarter as discussed in the section titled “—Liquidity and Capital Resources—Escrow Funding Requirements.”

Net cash provided by operating activities during 2023 was $27.2 million, which resulted from net income of $46.9 million and non-cash charges of $45.1 million, offset by net cash outflows of $64.7 million from changes in operating assets and liabilities.

The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables due to December 31, 2023 falling on a Sunday.

Due to fluctuations in revenue and the number of transactions on our work marketplace, coupled with fluctuations in the timing of cash receipts from clients, our trade and client receivables will likely continue to fluctuate in the future.

assets and liabilities.

The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables.

Net cash provided by operating activities during 2021 was $10.8 million, which resulted from non-cash charges of $83.5 million, offset by a net loss of $56.2 million and net cash outflows of $16.5 million from changes in operating assets and liabilities.

The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables.

Net cash provided by operating activities during 2020 was $22.4 million, which resulted from non-cash charges of $43.0 million and net cash inflows of $2.2 million from changes in operating assets and liabilities, offset by a net loss of $22.9 million.

The change in operating assets and liabilities primarily resulted from changes in trade and client receivables, accrued expenses, and other current and long-term liabilities.

Investing Activities

Net cash provided by investing activities during 2023 was $88.3 million, which was primarily a result of proceeds from maturities of marketable securities of $648.8 million and proceeds from the sale of marketable securities of $165.0 million, including $143.7 million to enable the repurchase of a portion of the Notes, partially offset by investing $709.2 million in various marketable securities, as well as $12.7 million of internal-use software and platform development costs that we paid during the period, and $3.0 million purchase of an intangible asset.

Net cash used in investing activities during 2022 was $69.5 million, which was primarily a result of investing $581.9 million in various marketable securities, as well as $7.5 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $1.2 million, partially offset by proceeds from maturities of marketable securities of $521.2 million.

Net cash used in investing activities during 2021 was $429.0 million, which was primarily a result of investing $525.3 million in various marketable securities, as well as $5.1 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $1.0 million, partially offset by proceeds from maturities of marketable securities of $102.5 million.

Net cash used in investing activities during 2020 was $4.1 million, which was primarily a result of investing $107.3 million in various marketable securities during 2020, as well as $8.0 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $6.3 million primarily for leasehold improvements and furniture related to our office lease in Chicago, Illinois.

These uses of cash were partially offset by proceeds from maturities of marketable securities of $117.5 million.

Financing Activities

Net cash used in financing activities during 2023 was $114.3 million, which was driven by $171.3 million paid to consummate the Note Repurchases, including related fees to effect the Note Repurchases, partially offset by an increase in escrow funds payable of $50.9 million, proceeds received from our employee stock purchase plan of $4.1 million, and cash received from stock option exercises of $2.0 million.

Net cash provided by financing activities during 2022 was $6.1 million, which was primarily a result of proceeds received from our employee stock purchase plan of $3.8 million, cash received from stock option exercises of $1.6 million, and an increase in escrow funds payable of $0.6 million.

Net cash provided by financing activities during 2021 was $537.7 million, which resulted primarily from proceeds from the Notes, net of debt issuance costs of $560.1 million, an increase in escrow funds payable of $25.8 million, cash received from stock option exercises of $7.2 million, and proceeds received from our employee stock purchase plan of $4.8 million, partially offset by purchases of the Capped Calls of $49.4 million and repayments of borrowings on debt of $10.8 million.

Net cash provided by financing activities during 2020 was $54.6 million, which resulted primarily from cash received from stock option exercises of $31.0 million, proceeds from our employee stock purchase program of $4.9 million, and an increase in escrow funds payable of $26.3 million, partially offset by net repayments of debt of $7.6 million.

Critical Accounting Policies and Estimates

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Revenue Recognition

We primarily generate revenue from talent and clients from marketplace and managed service offerings.

We generate revenue from talent and clients from our Marketplace and Enterprise offerings.

We account for revenue in accordance with Topic 606.

Revenue is recognized upon transfer of control of promised services to users in an amount that reflects the consideration we expect to receive in exchange for those services.

Revenue is recognized upon transfer of control of promised services to customers in an amount that reflects the consideration we expect to receive in exchange for those services.

Determining the method and amount of revenue to recognize requires management to make judgments and estimates.

Judgments include determining whether to present revenue gross, as a principal, or net, as an agent, which is based on an evaluation of whether we control the service prior to it being transferred to the client, and certain aspects of applying Topic 606 to our arrangements with talent subject to tiered service fees.

We apply judgement in the application of the portfolio approach practical expedient to our arrangements with talent subject to tiered service fees, which includes estimating the standalone selling price of the material rights and the period of time over which to defer and recognize the consideration allocated to the material rights.

period of time over which to defer and recognize the consideration allocated to the material rights.

Specifically, management applies judgement in assessing the continued appropriateness for the estimates, which include assessing the continued appropriateness of the methodology and relevant data inputs to estimate the likelihood and the period of time over which to defer and recognize the consideration allocated to the material rights.

We utilize historical user transaction data in developing these estimates.

We utilize historical customer transaction data in developing these estimates.

We recognize revenue related to the material rights based on our estimate of when the material rights are exercised, and adjust revenue for changes in estimates in the period of change on a cumulative catch-up basis.

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What changed 10-K

Item 7. Management’s Discussion and Analysis