UPWORK, INC 10-Q

Item 2. 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 the section titled “Risk Factors” and the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that may never materialize or that may be proven incorrect. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors,” and in other parts of this Quarterly Report. Overview Independent talent is an increasingly sought-after, critical, and expanding segment of the global workforce. We operate the world’s largest work marketplace that connects businesses with independent talent from across the globe, as measured by gross services volume, which we refer to as GSV. 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. We define talent as customers that advertise and provide services to clients through our work marketplace, and we define clients as customers that seek and work with talent through our work marketplace. Talent includes independent professionals and agencies of varying sizes. Clients on our work marketplace range in size, from independent professionals and small businesses to Fortune 100 companies. Financial Highlights Over the past several quarters, we implemented a number of initiatives that positively impacted Marketplace revenue and Marketplace take rate, including (i) retiring the tiered service fee structure for talent working with clients on our Marketplace offering in favor of a flat fee, (ii) increasing the number of virtual tokens, which we refer to as Connects, needed by talent to bid on projects, (iii) deploying ads products on our work marketplace, and (iv) introducing new features, with a focus on machine learning and generative artificial intelligence. These initiatives, along with others, resulted in an increase in Marketplace revenue of $24.5 million, or 17%, and $52.1 million, or 19%, for the three and six months ended June 30, 2024, as compared to the same periods in 2023, respectively. Marketplace take rate also benefited from these initiatives, increasing to 18.0% and 17.9% for the three and six months ended June 30, 2024, respectively, as compared to 15.0% and 14.9% in the same periods in 2023, respectively. During the three months ended June 30, 2024, we generated net income of $22.2 million and adjusted EBITDA of $40.8 million, as compared to a net loss of $4.0 million and adjusted EBITDA of $14.4 million during the same period in 2023. During the six months ended June 30, 2024, we generated net income of $40.7 million and adjusted EBITDA of $74.2 million, as compared to net income of $13.2 million and adjusted EBITDA of $11.4 million during the same period in 2023. These improvements were primarily a result of cost-saving measures we implemented in 2023, including reducing our investments in brand marketing and vendor spend. We expect these measures will continue to positively impact net income and adjusted EBITDA in 2024, as compared to 2023. 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. GAAP. See “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA, information regarding our use of adjusted EBITDA, and a reconciliation of adjusted EBITDA to net income, the most directly comparable financial measure prepared under U.S. GAAP. Key Financial and Operational Metrics We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic 19 decisions. As of and for the three and six months ended June 30, 2024 and 2023, our key financial and operating metrics were as follows: Three Months Ended June 30, % Change Six Months Ended June 30, % Change (In thousands, except percentages) 2024 2023 2024 2023 GSV $ 1,008,267 $ 1,036,507 (2.7) % $ 2,017,063 $ 2,039,852 (1.1) % Marketplace revenue (1) $ 166,786 $ 142,308 17 % $ 331,116 $ 278,984 19 % Marketplace take rate (1) 18.0 % 15.0 % 3 % 17.9 % 14.9 % 3 % Net income (loss) $ 22,220 $ (3,991) * $ 40,662 $ 13,176 * Adjusted EBITDA (2) $ 40,835 $ 14,362 * $ 74,160 $ 11,436 * * Not meaningful (1) To conform to the current period presentation as of June 30, 2024, we no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate. See “—Marketplace Revenue” below for additional information. (2) Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA, 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. GAAP. As of June 30, % Change (Active clients are in thousands) 2024 2023 Active clients 868 822 6 % GSV per active client $ 4,745 $ 4,987 (5) % 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. Certain of our performance metrics may not accurately reflect certain details of our business, are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business” in Part II, Item 1A of this Quarterly Report. Gross Services Volume (GSV) GSV represents the amount of business transacted through our work marketplace. 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. Marketplace Revenue Marketplace revenue is the primary driver of our business, and we believe it provides comparability to other online marketplaces. 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. dollar. To conform to the current period presentation as of June 30, 2024, 20 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. 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. 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 Marketplace take rate measures the correlation between Marketplace revenue and Marketplace GSV and is calculated by dividing Marketplace revenue by Marketplace GSV. We define Marketplace GSV as GSV derived from our Marketplace offerings. 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. To conform to the current period presentation as of June 30, 2024, 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. Active Clients and GSV per Active Client We define an active client as a client that has had spend activity on our work marketplace during the 12 months preceding the date of measurement. GSV per active client is calculated by dividing total GSV during the four quarters ended on the date of measurement by the number of active clients on the date of measurement. We believe that the number of active clients and GSV per active client are indicators of the growth and overall health of our business. The number of active clients is a primary driver of GSV and, in turn, Marketplace revenue. Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. GAAP, adjusted EBITDA is a non-GAAP measure that we believe is useful in evaluating our operating performance. We define adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense; depreciation and amortization; other income (expense), net, which includes interest expense; income tax benefit (provision); and, if applicable, certain other gains, losses, benefits, or charges that are non-cash or are significant and the result of isolated events or transactions that have not occurred frequently in the past and are not expected to occur regularly in the future. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. 21 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: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Net income (loss) $ 22,220 $ (3,991) $ 40,662 $ 13,176 Add back (deduct): Stock-based compensation expense 19,238 18,437 36,180 38,337 Depreciation and amortization 3,629 1,854 6,775 3,878 Other income, net (1) (5,620) (3,982) (12,342) (46,982) Income tax provision 1,181 1,857 2,510 2,652 Other (2) 187 187 375 375 Adjusted EBITDA $ 40,835 $ 14,362 $ 74,160 $ 11,436 (1) During the six months ended June 30, 2023, we recognized a gain of $38.9 million on the early extinguishment of a portion of our 0.25% convertible senior notes due 2026, which we refer to as the Notes, which is included in other income, net in the condensed consolidated statement of operations and comprehensive income (loss). (2) During each of the three and six months ended June 30, 2024 and 2023, we incurred $0.2 million and $0.4 million, respectively, of expense related to our Tides Foundation warrant. We use adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons: • adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense; depreciation and amortization; other income (expense), net, which includes interest expense; income tax benefit (provision); and, if applicable, certain other gains, losses, benefits, or charges that are non-cash or are significant and the result of isolated events or transactions that have not occurred frequently in the past and are not expected to occur regularly in the future, all of which 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. GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and • adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our core operating results, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows: • adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; 22 • although depreciation and amortization expense 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 reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may represent a reduction in cash available to us; and • 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 income (loss) and our other financial results prepared in accordance with U.S. GAAP. Components of Our Results of Operations Revenue Marketplace Revenue. Marketplace revenue represents the majority of our revenue and is generated from our Marketplace offerings. Under these Marketplace offerings, we generate revenue from both talent and 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. 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 offering include independent talent and agencies of varying sizes. Under U.S. 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, Gross Profit, and Gross Margin Cost of Revenue. Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to talent to deliver services for clients under our Managed Services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of Amazon Web Services, and the amortization expense associated with capitalized internal-use software and platform development costs. 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. Gross Profit and Gross Margin. Our gross profit and gross margin may fluctuate from period to period. 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 Enterprise revenue. 23 Operating Expenses Research and Development. Research and development expense primarily consists of personnel-related costs. 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. 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. General and Administrative. General and administrative expense consists primarily of personnel-related costs for our executive, finance, legal, human resources, and operations functions; outside consulting, legal, and accounting services; impairment expense; and insurance. Provision for Transaction Losses. Provision for transaction losses consists primarily of losses resulting from fraud and bad debt expense associated with our trade and client receivables balance and transaction losses associated with chargebacks. Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors. Other Income, Net Other income, 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. Under the asset and liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. We currently maintain a full valuation allowance on all deferred tax assets, including net operating loss carryforwards and certain domestic tax credits. We regularly evaluate the need for a valuation allowance based on all available positive and negative evidence. Given our recent current and anticipated future earnings, some portion of our U.S. valuation allowance may be released in the near future. 24 Results of Operations The following table sets forth our condensed consolidated results of operations for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Revenue Marketplace (1) $ 166,786 $ 142,308 $ 331,116 $ 278,984 Enterprise (1) 26,343 26,303 52,950 50,485 Total revenue 193,129 168,611 384,066 329,469 Cost of revenue (2) 43,852 40,882 88,045 81,309 Gross profit 149,277 127,729 296,021 248,160 Operating expenses Research and development (2) 52,465 43,246 105,381 87,727 Sales and marketing (2) 47,333 59,069 95,184 124,069 General and administrative (2) 29,924 28,983 61,925 58,270 Provision for transaction losses 1,774 2,547 2,701 9,248 Total operating expenses 131,496 133,845 265,191 279,314 Income (loss) from operations 17,781 (6,116) 30,830 (31,154) Other income, net 5,620 3,982 12,342 46,982 Income (loss) before income taxes 23,401 (2,134) 43,172 15,828 Income tax provision (1,181) (1,857) (2,510) (2,652) Net income (loss) $ 22,220 $ (3,991) $ 40,662 $ 13,176 (1) To conform to the current period presentation as of June 30, 2024, 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. (2) Includes stock-based compensation expense as follows: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Cost of revenue $ 497 $ 490 $ 963 $ 910 Research and development 8,106 6,903 15,476 14,532 Sales and marketing 3,393 2,998 6,329 6,566 General and administrative 7,242 8,046 13,412 16,329 Total stock-based compensation $ 19,238 $ 18,437 $ 36,180 $ 38,337 25 Comparison of the Three and Six Months Ended June 30, 2024 and 2023 Revenue Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Marketplace (1) $ 166,786 $ 142,308 $ 24,478 17 % $ 331,116 $ 278,984 $ 52,132 19 % Percentage of total revenue 86 % 84 % 86 % 85 % Enterprise (1) 26,343 26,303 40 — % 52,950 50,485 2,465 5 % Percentage of total revenue 14 % 16 % 14 % 15 % Total revenue $ 193,129 $ 168,611 $ 24,518 15 % $ 384,066 $ 329,469 $ 54,597 17 % (1) To conform to the current period presentation as of June 30, 2024, 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. During the three and six months ended June 30, 2024, macroeconomic conditions adversely impacted GSV, which declined 2.7% and 1.1%, as compared to the same periods in 2023, respectively. The number of active clients increased 6% as of June 30, 2024, as compared to June 30, 2023, driven by improvements in both acquisition of new clients and retention of existing clients. As a result of the increase in active clients while GSV declined, our GSV per active client decreased 5% as of June 30, 2024, as compared to June 30, 2023. We expect no material improvement to macroeconomic conditions through the remainder of 2024. For the three and six months ended June 30, 2024, Marketplace revenue increased, as compared to the same periods in 2023, due to a number of initiatives that we implemented over the past several quarters, including modifying existing offerings and other services and features. Specifically, we 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%, increased the number of Connects needed by talent to bid on projects, deployed ads products on our work marketplace, and introduced a contract initiation fee for clients on our Marketplace offering. These factors also drove Marketplace revenue to grow at a faster rate than GSV from our Marketplace offerings, which caused Marketplace take rate to increase to 18.0% and 17.9% during the three and six months ended June 30, 2024, respectively, as compared to 15.0% and 14.9% in the same periods in 2023, respectively. For the three months ended June 30, 2024, Enterprise revenue remained flat, as compared to the same period in 2023. For the six months ended June 30, 2024, Enterprise revenue increased, as compared to the same period in 2023, primarily due to increased revenue from our Managed Services offering, driven by new spend from existing clients. We intend to focus on efforts to attract new clients of both our Enterprise Solutions and Managed Services offerings, as well as talent that meet the criteria sought by such clients. Cost of Revenue and Gross Margin Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Cost of revenue $ 43,852 $ 40,882 $ 2,970 7 % $ 88,045 $ 81,309 $ 6,736 8 % Total gross margin 77 % 76 % 77 % 75 % For the three and six months ended June 30, 2024, cost of revenue increased, as compared to the same periods in 2023, primarily due to increases in the cost of talent services to deliver Managed Services revenue of $2.0 million and $3.8 million, respectively, and amortization expense related to internal- 26 use software and platform development costs of $1.3 million and $2.5 million, respectively. For each of the three and six months ended June 30, 2024, gross margin increased to 77%, as compared to 76% and 75% in the same periods in 2023, respectively, primarily driven by the increase in Marketplace revenue. 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 several quarters will positively impact gross margin in 2024, as compared to 2023. Research and Development Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Research and development $ 52,465 $ 43,246 $ 9,219 21 % $ 105,381 $ 87,727 $ 17,654 20 % Percentage of total revenue 27 % 26 % 27 % 27 % For the three and six months ended June 30, 2024, research and development expense increased, as compared to the same periods in 2023, primarily due to investments we made to increase the size of our research and development workforce that resulted in increases in personnel-related costs of $7.5 million and $14.2 million, respectively. Additionally, for the six months ended June 30, 2024, costs related to software and intangible amortization increased $1.3 million and $0.8 million, respectively, compared to the same period in 2023. We remain committed to ongoing innovation to further enhance our platform, including improving the quality of our offerings and building new features, with a focus on machine learning and generative artificial intelligence. We expect research and development expense to increase in future periods, as compared to the same periods in 2023, but decline as a percentage of revenue throughout the remainder of 2024. Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Sales and marketing $ 47,333 $ 59,069 $ (11,736) (20) % $ 95,184 $ 124,069 $ (28,885) (23) % Percentage of total revenue 25 % 35 % 25 % 38 % For the three and six months ended June 30, 2024, sales and marketing expense decreased, as compared to the same periods in 2023, due to a number of cost-saving measures that we implemented in the second quarter of 2023, including reducing our investments in brand marketing and vendor spend, as well as implementing a reduction of our workforce and slowing our Enterprise sales hiring pace. As a result, during the three and six months ended June 30, 2024, we experienced reductions in marketing and advertising expense of $8.8 million and $23.5 million, respectively, and personnel-related costs of $2.7 million and $4.4 million, respectively, as compared to the same periods in 2023. We implemented cost-saving measures in the second quarter of 2023, which resulted in lower levels of sales and marketing expense beginning in the second half of 2023 and continuing throughout 2024. We expect to incur similar levels of sales and marketing expense as a percentage of revenue for the remainder of the year. 27 General and Administrative Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change General and administrative $ 29,924 $ 28,983 $ 941 3 % $ 61,925 $ 58,270 $ 3,655 6 % Percentage of total revenue 15 % 17 % 16 % 18 % For the three and six months ended June 30, 2024, general and administrative expense increased primarily due to increases in personnel-related costs of $0.6 million and $2.0 million, respectively, as compared to the same periods in 2023. We expect general and administrative expense to increase modestly in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary year over year. Provision for Transaction Losses Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Provision for transaction losses $ 1,774 $ 2,547 $ (773) (30) % $ 2,701 $ 9,248 $ (6,547) (71) % Percentage of total revenue 0.9 % 1.5 % 0.7 % 2.8 % We maintain trust and safety measures designed to mitigate bad debt losses, instances of fraud, and chargeback losses. For the three and six months ended June 30, 2024, provision for transaction losses decreased, as compared to the same periods in 2023. Other Income, Net Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Other income, net $ 5,620 $ 3,982 $ 1,638 41 % $ 12,342 $ 46,982 $ (34,640) (74) % For the three months ended June 30, 2024, other income, net increased, as compared to the same period in 2023, due to increases in interest income earned on marketable securities. For the six months ended June 30, 2024, other income, net decreased, as compared to the same period in 2023, due to a gain of $38.9 million on the early extinguishment of a portion of the Notes that we recognized during the three months ended March 31, 2023, partially offset by increases in interest income earned on marketable securities. Income Tax Provision Three Months Ended June 30, Six Months Ended June 30, (In thousands, except percentages) 2024 2023 Change 2024 2023 Change Income tax provision $ (1,181) $ (1,857) $ 676 (36) % $ (2,510) $ (2,652) $ 142 (5)% For the three and six months ended June 30, 2024, income tax provision decreased, as compared to the same periods in 2023. 28 Liquidity and Capital Resources Our principal sources of liquidity are our cash and cash equivalents and marketable securities. Our cash equivalents and marketable securities primarily consist of money market funds, commercial paper, treasury bills, corporate bonds, U.S. and foreign government securities, asset-backed securities, and other types of fixed income securities. The primary objective of our investment activities from our 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. As of June 30, 2024 and December 31, 2023, we had $182.8 million and $79.6 million in cash and cash equivalents, respectively. As of June 30, 2024 and December 31, 2023, we had $314.9 million and $470.5 million in marketable securities, respectively. 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 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, any repurchases of shares of our outstanding common stock or of our outstanding Notes, and our ability to obtain equity or debt financing. 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. If we raise additional funds by issuing equity or equity-linked securities, the ownership and economic interests of our existing stockholders will be diluted. If we raise additional financing by incurring additional indebtedness, we will be subject to additional debt service requirements and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could also be unfavorable to our equity investors. There can be no assurances that we will be able to raise additional capital on terms we deem acceptable, or at all. The inability to raise additional capital as and when required would have an adverse effect, which could be material, on our results of operations, financial condition, and ability to achieve our business objectives. Commitments and Contingencies Our principal commitments consist of the Notes, future purchase commitments for cloud infrastructure and other services of $20.0 million for each of the twelve months ending June 30, 2025 and 2026, and obligations under our non-cancellable operating leases for office space. There were no material changes to our commitments under our lease agreements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. Assuming the outstanding 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 2025 and $1.8 million in 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.” During the periods presented, we did not have, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial 29 condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. Share Repurchase Program In November 2023, our board of directors authorized a share repurchase program for the repurchase of up to $100.0 million of shares of our outstanding common stock, which we refer to as the Share Repurchase Program. 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 Securities Exchange Act of 1934, as amended, which we refer to as 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. During the three and six months ended June 30, 2024, we repurchased and subsequently retired 2.9 million and 8.1 million shares of common stock for an aggregate amount of $33.1 million and $100.0 million at an average price of $11.60 and $12.38 per share, including fees associated with the repurchases, respectively. As of June 30, 2024, we had no remaining balance available for repurchases under the Share Repurchase Program. Escrow Funding Requirements 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 cover the trust with our operating cash in the event of shortages due to the timing of cash receipts from clients for completed hourly billings. Talent submit their billings for hourly contracts to their clients on a weekly basis every Sunday, and the aggregate amount of such billings is added to escrow funds payable to talent on the same day. As of each Sunday of each week, we have not yet collected funds for hourly billings from clients as these funds are in transit. Therefore, in order to satisfy escrow funding requirements, every Sunday we match the shortage of cash in trust by restricting our own operating cash and typically collect this cash shortage from clients within the next several days. As a result, we expect our total cash and cash flows from operating activities to be impacted when a quarter ends on a Sunday. As of June 30, 2024 and December 31, 2023, funds held in escrow, including funds in transit, were $218.7 million and $212.4 million, respectively. We deposit a portion of funds held in escrow in interest-bearing checking accounts. Convertible Senior Notes Due 2026 and Capped Calls As of June 30, 2024 and December 31, 2023, $361.0 million aggregate principal amount of the Notes remained outstanding. The Notes were issued in August 2021, pursuant to and 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. 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. As market conditions warrant, we may, from time to time, repurchase additional outstanding Notes, as we did in the three months ended March 31, 2023, 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 30 prevailing market conditions, our liquidity, and other factors, and may be commenced or suspended at any time. In connection with the issuance of the Notes, we entered into capped call transactions, which we refer to as Capped Calls. The Capped Calls are expected generally to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The initial cap price of the Capped Calls is $92.74 per share of common stock, subject to certain customary adjustments under the terms of the Capped Calls. See “Note 7—Debt” of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding the Notes and the Capped Calls. Cash Flows The following table summarizes our cash flows for the periods presented: Six Months Ended June 30, (In thousands) 2024 2023 Net cash provided by (used in) operating activities $ 42,946 $ (4,392) Net cash provided by investing activities 156,529 196,943 Net cash used in financing activities (90,044) (151,631) Net change in cash, cash equivalents, and restricted cash (1) $ 109,431 $ 40,920 (1) Includes increases in funds held in escrow, including funds in transit of $6.3 million and $16.2 million during the six months ended June 30, 2024 and 2023, respectively. Operating Activities Our largest source of cash from operating activities is revenue generated from our work marketplace. 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 used in 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.” For the six months ended June 30, 2024, net cash provided by operating activities was $42.9 million, which resulted from net income of $40.7 million and non-cash adjustments of $40.2 million, offset by net cash outflows of $37.9 million from changes in operating assets and liabilities. For the six months ended June 30, 2023, net cash used in operating activities was $4.4 million, which resulted from net income of $13.2 million and adjustments of $5.7 million, driven by the gain of $38.9 million on the early extinguishment of a portion of the Notes, offset by net cash outflows of $23.3 million from changes in operating assets and liabilities. Investing Activities For the six months ended June 30, 2024, net cash provided by investing activities was $156.5 million, which was primarily a result of proceeds from maturities of marketable securities of $321.8 million and proceeds from the sale of marketable securities of $35.4 million, partially offset by investing $194.3 million in various marketable securities, as well as $5.6 million of internal-use software and platform development costs that we paid during the period. For the six months ended June 30, 2023, net cash provided by investing activities was $196.9 million, which was primarily a result of proceeds from maturities of marketable securities of $307.4 million and 31 proceeds from the sale of marketable securities of $149.9 million, including $143.7 million to enable the repurchase of a portion of the Notes, partially offset by investing $254.1 million in various marketable securities, as well as $6.1 million of internal-use software and platform development costs that we paid during the period. Financing Activities For the six months ended June 30, 2024, net cash used in financing activities was $90.0 million, which was driven by $100.0 million cash paid for repurchases under the Share Repurchase Program, partially offset by an increase in escrow funds payable of $6.3 million, proceeds received from our 2018 Employee Stock Purchase Plan, which we refer to as the 2018 ESPP, of $2.9 million, and cash received from stock option exercises of $0.8 million. For the six months ended June 30, 2023, net cash used in financing activities was $151.6 million, which was driven by $171.3 million that we paid to consummate the repurchase of a portion of the Notes, including related fees to effect the repurchase, partially offset by an increase in escrow funds payable of $16.2 million, proceeds received from the 2018 ESPP of $2.6 million, and cash received from stock option exercises of $0.9 million. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from these estimates and assumptions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Except as otherwise disclosed in “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements See “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report for recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report.