UPWORK, INC 10-Q

Item 1. Financial Statements. UPWORK INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share data) March 31, 2025 December 31, 2024 ASSETS Current assets Cash and cash equivalents $ 304,449 $ 305,757 Marketable securities 317,619 316,344 Funds held in escrow, including funds in transit 215,942 195,736 Trade and client receivables – net of allowance of $ 5,326 and $ 4,646 as of March 31, 2025 and December 31, 2024, respectively 77,917 75,490 Prepaid expenses and other current assets 22,086 17,727 Total current assets 938,013 911,054 Property and equipment, net 34,927 30,056 Goodwill 121,064 121,064 Intangible assets, net 11,174 12,989 Operating lease asset 5,550 5,752 Deferred tax asset 127,762 128,779 Other assets, noncurrent 1,576 1,919 Total assets $ 1,240,066 $ 1,211,613 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 4,115 $ 6,128 Escrow funds payable 215,942 195,736 Accrued expenses and other current liabilities 47,143 59,300 Deferred revenue 7,496 7,269 Total current liabilities 274,696 268,433 Debt, noncurrent 358,389 357,928 Operating lease liability, noncurrent 10,385 9,567 Other liabilities, noncurrent 2,254 308 Total liabilities 645,724 636,236 Commitments and contingencies (Note 6) Stockholders’ equity Common stock, $ 0.0001 par value; 490,000,000 shares authorized as of March 31, 2025 and December 31, 2024; 134,048,900 and 135,348,453 shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively 13 14 Additional paid-in capital 634,527 653,575 Accumulated and other comprehensive income 548 264 Accumulated deficit ( 40,746 ) ( 78,476 ) Total stockholders’ equity 594,342 575,377 Total liabilities and stockholders’ equity $ 1,240,066 $ 1,211,613 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, (In thousands, except per share data) 2025 2024 Revenue $ 192,706 $ 190,937 Cost of revenue 41,806 44,193 Gross profit 150,900 146,744 Operating expenses Research and development 46,152 52,916 Sales and marketing 35,751 47,851 General and administrative 28,048 32,001 Provision for transaction losses 2,259 927 Total operating expenses 112,210 133,695 Income from operations 38,690 13,049 Other income, net 6,317 6,722 Income before income taxes 45,007 19,771 Income tax provision ( 7,277 ) ( 1,329 ) Net income $ 37,730 $ 18,442 Net income per share: Basic $ 0.28 $ 0.14 Diluted $ 0.27 $ 0.13 Weighted-average shares used to compute net income per share: Basic 135,208 136,357 Diluted 142,777 143,657 Other comprehensive income, net of tax: Net unrealized holding gain (loss) on marketable securities, net $ 284 $ ( 591 ) Total comprehensive income $ 38,014 $ 17,851 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Three Months Ended March 31, 2025 Shares Amount Balances as of December 31, 2024 135,348,453 $ 14 $ 653,575 $ 264 $ ( 78,476 ) $ 575,377 Issuance of common stock upon exercise of stock options 163,078 — 652 — — 652 Stock-based compensation expense — — 13,337 — — 13,337 Issuance of common stock for settlement of RSUs 869,141 — — — — — Tides Foundation common stock warrant expense — — 188 — — 188 Repurchase of common stock, including excise tax ( 2,331,772 ) ( 1 ) ( 33,225 ) — — ( 33,226 ) Unrealized gain on marketable securities — — — 284 — 284 Net income — — — — 37,730 37,730 Balances as of March 31, 2025 134,048,900 $ 13 $ 634,527 $ 548 $ ( 40,746 ) $ 594,342 (In thousands, except share amounts) Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (loss) Accumulated Deficit Total Stockholders’ Equity Three Months Ended March 31, 2024 Shares Amount Shares Amount Balances as of December 31, 2023 137,272,754 $ 14 — $ — $ 674,918 $ 205 $ ( 294,062 ) $ 381,075 Issuance of common stock upon exercise of stock options and common stock warrants 37,650 — — — 106 — — 106 Stock-based compensation expense — — — — 17,085 — — 17,085 Issuance of common stock for settlement of RSUs 854,221 — — — — — — — Tides Foundation common stock warrant expense — — — — 188 — — 188 Repurchase of common stock, including excise tax ( 5,046,280 ) ( 1 ) ( 175,000 ) ( 2,138 ) ( 65,290 ) — — ( 67,429 ) Unrealized loss on marketable securities — — — — — ( 591 ) — ( 591 ) Net income — — — — — — 18,442 18,442 Balances as of March 31, 2024 133,118,345 $ 13 ( 175,000 ) $ ( 2,138 ) $ 627,007 $ ( 386 ) $ ( 275,620 ) $ 348,876 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 UPWORK INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, (In thousands) 2025 2024 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 37,730 $ 18,442 Adjustments to reconcile net income to net cash provided by operating activities: Provision for transaction losses 2,066 796 Depreciation and amortization 4,861 3,146 Amortization of debt issuance costs 460 460 Accretion of discount on purchases of marketable securities, net ( 1,943 ) ( 4,876 ) Amortization of operating lease asset 202 847 Tides Foundation common stock warrant expense 188 188 Stock-based compensation expense 12,272 16,942 Changes in operating assets and liabilities: Trade and client receivables (1) ( 3,535 ) ( 3,231 ) Prepaid expenses and other assets ( 3,298 ) ( 2,129 ) Operating lease liability 830 ( 1,549 ) Accounts payable ( 1,987 ) 782 Accrued expenses and other liabilities ( 11,108 ) ( 10,897 ) Deferred revenue 227 ( 4,107 ) Net cash provided by operating activities 36,965 14,814 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 50,708 ) ( 149,876 ) Proceeds from maturities of marketable securities 51,380 131,772 Proceeds from sale of marketable securities 280 26,909 Purchases of property and equipment ( 2,472 ) ( 177 ) Internal-use software and platform development costs ( 3,703 ) ( 2,488 ) Net cash (used in) provided by investing activities ( 5,223 ) 6,140 CASH FLOWS FROM FINANCING ACTIVITIES: Change in escrow funds payable, net (1) 19,258 1,392 Proceeds from exercises of stock options and common stock warrants 652 106 Repurchase of common stock ( 33,054 ) ( 66,876 ) Net cash used in financing activities ( 13,144 ) ( 65,378 ) NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 18,598 ( 44,424 ) Cash, cash equivalents, and restricted cash—beginning of period 505,593 296,418 Cash, cash equivalents, and restricted cash—end of period $ 524,191 $ 251,994 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest 451 458 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES: Property and equipment purchased but not yet paid 875 160 Internal-use software and platform development costs incurred but not yet paid 227 30 (1) Refer to “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” for discussion of the change in the current period presentation. The accompanying notes are an integral part of these condensed consolidated financial statement s. 5 UPWORK INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1— Organization and Description of Business Upwork Inc., which is referred to as the Company or Upwork, operates a work marketplace that connects businesses, which are referred to as clients, with independent talent. Independent talent on the Company’s work marketplace, which are referred to as talent, and, together with clients, as customers, include independent professionals and agencies of varying sizes and are an increasingly sought-after, critical, and expanding segment of the global workforce. The Company is incorporated in the state of Delaware and is headquartered in Palo Alto, California. Unless otherwise expressly stated or the context otherwise requires, the terms “Upwork” and the “Company” in these notes to the condensed consolidated financial statements refer to Upwork and its wholly owned subsidiaries. Note 2— Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, which is referred to as U.S. GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, which is referred to as the Annual Report, filed with the SEC on February 13, 2025. The condensed consolidated balance sheet as of December 31, 2024 included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by U.S. GAAP. The condensed consolidated financial statements include the accounts of Upwork and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the financial position, results of operations, changes in stockholders’ equity and cash flows for the interim periods, but do not purport to be indicative of the results of operations or financial condition to be anticipated for the full year ending December 31, 2025. Prior period presentation has been revised to conform to the current period presentation as of March 31, 2025. Changes in Presentation In 2024, the Company elected to change the presentation of certain cash flows on its Consolidated Statement of Cash Flows. The change in Trade and client receivables relating to amounts received on behalf of talent to fund their escrow accounts was reclassified from operating activities to financing activities, reflected within the caption Change in escrow funds payable, net. Prior period comparative amounts have been recast to conform to the current period presentation. This change had the impact of increasing cash flow provided by operating activities by $ 9.2 million for the three months ended March 31, 2024, and a corresponding offset in cash used in financing activities. This reclassification did not affect the previously reported total cash balances on the Consolidated Statement of Cash Flows. Additionally, these reclassifications had no impact on the Consolidated Statements of Operation and Comprehensive Income, Consolidated Balance Sheets, or Consolidated Statements of Shareholders’ Equity. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported 6 amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Such estimates include, but are not limited to: the useful lives of assets; assessment of the recoverability of long-lived assets; goodwill impairment; allowance for expected credit losses; liabilities relating to transaction losses; stock-based compensation; and accounting for income taxes. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The Company evaluates its estimates, assumptions, and judgments on an ongoing basis using historical experience and other factors and revises them when facts and circumstances dictate. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. Summary of Significant Accounting Policies The significant accounting policies applied in the Company’s audited consolidated financial statements, as disclosed in the Annual Report, are applied consistently in these unaudited interim condensed consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted With the exception of those discussed below, the Company has reviewed the accounting pronouncements issued prior to or during the three months ended March 31, 2025 and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is referred to as ASU 2023-09 . ASU 2023-09 requires public entities to provide annual disclosures of specific categories in the rate reconciliation and to disclose income taxes paid, disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that ASU 2023-09 will have on its consolidated financial statements and accompanying footnotes. In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses , which is referred to as ASU 2024-03. ASU 2024-03 requires public entities to disclose detailed information about specific types of expenses included within the expense captions presented on the face of the income statement. While ASU 2024-03 does not alter the presentation of expense captions on the face of the income statement, it introduces requirements for disaggregating certain expense captions into specified categories within the footnotes to the financial statements. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact that ASU 2024-03 will have on its consolidated financial statements and accompanying footnotes. Note 3— Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Chief Operating Decision Maker, which is referred to as the CODM, the nature, amount, timing, and uncertainty of revenue and cash flows and how they are affected by economic factors are most appropriately depicted by the type of service and primary geographical markets. Revenues recorded within these categories are earned from similar products and services for which the nature of associated fees and the related revenue recognition models are substantially similar. The Company disaggregates revenue by two types of services: Marketplace revenue and Enterprise revenue. 7 The following table sets forth total revenue by type of service for the periods presented: Three Months Ended March 31, (In thousands) 2025 2024 Marketplace $ 166,293 $ 164,330 Enterprise 26,413 26,607 Total revenue $ 192,706 $ 190,937 The following table sets forth total revenue by geographic area based on the billing address of talent and clients for the periods presented: Three Months Ended March 31, (In thousands) 2025 2024 Talent United States $ 27,339 $ 27,767 Philippines 14,584 14,556 India 13,501 14,469 Rest of world (1) 52,371 53,391 Total talent 107,795 110,183 Clients United States 59,242 59,760 Rest of world (1) 25,669 20,994 Total clients 84,911 80,754 Total revenue $ 192,706 $ 190,937 (1) During each of the three months ended March 31, 2025 and 2024, no single country included in the Rest of world category had revenue that exceeded 10% of total talent revenue, total clients revenue, or total revenue. Deferred Revenue and Remaining Performance Obligation Deferred revenue represents amounts billed in advance for services not yet rendered. Deferred revenue expected to be recognized within the next twelve months is classified as current deferred revenue. The Company has applied the practical expedients and exemptions and does not disclose the value of remaining performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation under the series guidance. 8 Contract Balances The following table provides information about the balances of the Company’s Trade and client receivables, net of allowance and contract liabilities included in deferred revenue and other liabilities, noncurrent as of the dates presented: (In thousands) March 31, 2025 December 31, 2024 Trade and client receivables, net of allowance $ 77,917 $ 75,490 Contract liabilities Deferred revenue, current 7,496 7,269 During the three months ended March 31, 2025, changes in the contract liabilities balances were primarily the result of normal business activity, including the deferral and subsequent recognition of revenue related to arrangements with talent subject to tiered service fees and related allocation of transaction price to material rights. Revenue recognized during the three months ended March 31, 2025 that was included in deferred revenue as of December 31, 2024 was $ 7.2 million. Revenue recognized during the three months ended March 31, 2024 that was included in deferred revenue as of December 31, 2023 was $ 9.3 million . Note 4— Fair Value Measurements The Company defines fair value as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance describes three levels of inputs that may be used to measure fair value: • Level I—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets; • Level II—Observable inputs other than Level I prices, such as unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation. The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to its fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the assets or liabilities. The Company’s financial instruments that are carried at fair value consist of Level I and Level II assets as of March 31, 2025 and December 31, 2024. The following tables summarize the Company’s available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value 9 by significant investment category reported as cash equivalents or marketable securities as of March 31, 2025 and December 31, 2024: (In thousands) March 31, 2025 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash Equivalents Marketable Securities Level I Money market funds $ 215,450 $ — $ — $ 215,450 $ 215,450 $ — Treasury bills 151,886 2 ( 6 ) 151,882 — 151,882 U.S. government securities 31,654 71 — 31,725 — 31,725 Total Level I 398,990 73 ( 6 ) 399,057 215,450 183,607 Level II Commercial paper 11,167 — — 11,167 — 11,167 Corporate bonds 115,599 533 ( 66 ) 116,066 — 116,066 Commercial deposits 1,743 — — 1,743 — 1,743 Asset-backed securities 317 1 — 318 — 318 Foreign government and agency securities 4,706 19 ( 7 ) 4,718 — 4,718 Total Level II 133,532 553 ( 73 ) 134,012 — 134,012 Total $ 532,522 $ 626 $ ( 79 ) $ 533,069 $ 215,450 $ 317,619 (In thousands) December 31, 2024 Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash Equivalents Marketable Securities Level I Money market funds $ 193,481 $ — $ — $ 193,481 $ 193,481 $ — Treasury bills 131,022 40 — 131,062 — 131,062 U.S. government securities 32,625 22 ( 33 ) 32,614 — 32,614 Total Level I 357,128 62 ( 33 ) 357,157 193,481 163,676 Level II Commercial paper 16,233 — — 16,233 — 16,233 Corporate bonds 126,395 431 ( 144 ) 126,682 — 126,682 Commercial deposits 4,121 — — 4,121 — 4,121 Asset-backed securities 592 2 — 594 — 594 Foreign government and agency securities 5,036 14 ( 12 ) 5,038 — 5,038 Total Level II 152,377 447 ( 156 ) 152,668 — 152,668 Total $ 509,505 $ 509 $ ( 189 ) $ 509,825 $ 193,481 $ 316,344 Additionally, the Company deposits funds held in escrow in interest-bearing and non-interest-bearing cash accounts. The interest earned on the interest-bearing accounts is included in Revenue in the Company’s condensed consolidated statement of operations and comprehensive income. As of March 31, 2025 and December 31, 2024, the fair value of the Company’s funds held on behalf of customers and held in interest-bearing cash accounts was measured using Level I inputs. 10 The following table summarizes the remaining contractual maturities of our cash equivalents and marketable securities as of March 31, 2025: (In thousands) Amortized Cost Fair Value Due within one year $ 385,795 $ 385,792 Due after one year through five years 146,727 147,277 Total $ 532,522 $ 533,069 Unrealized Investment Losses For available-for-sale marketable debt securities with unrealized loss positions, the Company does not intend to sell these securities, nor does it anticipate that it will need to or be required to sell the securities. As of March 31, 2025 and December 31, 2024, the decline in fair value of these securities was attributable to changes in interest rates and not due to credit-related factors. As of March 31, 2025 and December 31, 2024, the Company considered any decreases in market value to be temporary in nature and did not consider any of the Company’s marketable securities to be other-than-temporarily impaired. The Company did not record any impairment charges with respect to its marketable securities during each of the three months ended March 31, 2025 and 2024. During the three months ended March 31, 2025 and 2024, interest income, net was $ 7.1 million and $ 7.7 million, respectively. Interest income, net is included in Other income, net in the Company’s condensed consolidated statement of operations and comprehensive income. Note 5— Balance Sheet Components Cash and Cash Equivalents, Restricted Cash, and Funds Held In Escrow, Including Funds In Transit The following table reconciles cash and cash equivalents, restricted cash, and funds held in escrow that are restricted as reported in the condensed consolidated balance sheets as of March 31, 2025 and December 31, 2024 to the total of the same amounts shown in the condensed consolidated statement of cash flows for the three months ended March 31, 2025: (In thousands) March 31, 2025 December 31, 2024 Cash and cash equivalents $ 304,449 $ 305,757 Restricted cash 3,800 4,100 Funds held in escrow, including funds in transit 215,942 195,736 Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statement of cash flows $ 524,191 $ 505,593 Property and Equipment, Net Property and equipment, net consisted of the following as of the dates presented: (In thousands) March 31, 2025 December 31, 2024 Internal-use software and platform development $ 64,145 $ 59,815 Computer equipment and software 7,066 6,817 Leasehold improvements 8,683 6,025 Office furniture and fixtures 1,940 1,755 Total property and equipment 81,834 74,412 Less: accumulated depreciation ( 46,907 ) ( 44,356 ) Property and equipment, net $ 34,927 $ 30,056 11 For the three months ended March 31, 2025 and 2024, depreciation expense related to property and equipment, excluding internal-use software and platform development, was $ 0.4 million and $ 0.6 million, respectively. For the three months ended March 31, 2025 and 2024, the Company capitalized $ 4.6 million and $ 2.5 million of internal-use software and platform development costs, respectively. For the three months ended March 31, 2025 and 2024, amortization expense related to the capitalized internal-use software and platform development costs was $ 2.6 million and $ 2.1 million, respectively. Net Intangibles Assets The carrying value of intangible assets was as follows as of the dates presented: March 31, 2025 December 31, 2024 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technology $ 11,000 $ 1,222 $ 9,778 $ 11,000 $ 305 $ 10,695 Assembled workforce 3,188 2,125 1,063 3,188 1,727 1,461 Customer relationships 1,000 667 333 1,000 167 833 Total $ 15,188 $ 4,014 $ 11,174 $ 15,188 $ 2,199 $ 12,989 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following as of the dates presented: (In thousands) March 31, 2025 December 31, 2024 Accrued compensation and related benefits $ 14,170 $ 30,666 Accrued indirect taxes 14,624 11,394 Accrued vendor expenses 9,060 9,485 Accrued payment processing fees 4,936 4,478 Operating lease liability, current 1,636 1,624 Accrued talent costs 2,079 801 Other 638 852 Total accrued expenses and other current liabilities $ 47,143 $ 59,300 Stockholders’ Equity 2025 PSU Awards During the three months ended March 31, 2025, the compensation committee of the Company’s board of directors, which is referred to as the compensation committee, approved the grant of performance stock unit awards, which are referred to as PSUs, to certain members of the Company’s leadership team under the Company’s 2018 Equity Incentive Plan, which awards are referred to as the 2025 PSU Awards. These awards were granted on March 18, 2025, which is referred to as the 2025 PSU Grant Date. Up to fifty percent of the maximum number of shares subject to the 2025 PSU Awards are eligible to vest based on the Company’s achievement of certain financial performance targets over the two-year performance period consisting of the Company’s fiscal years ending December 31, 2025 and 2026, and up to the remaining fifty percent of the maximum number of shares subject to the 2025 PSU Awards are eligible to vest based on the Company’s achievement of certain financial performance targets over the 12 three-year performance period consisting of the Company’s fiscal years ending December 31, 2025, 2026, and 2027. For each performance period, the number of PSUs that become earned and eligible to vest is based on the Company’s achievement of pre-established financial and market-based performance targets established by the compensation committee at the time of grant, which is referred to as the PSU Performance Condition. Following the completion of a performance period, the compensation committee will certify the Company’s achievement of the PSU Performance Condition with respect to such performance period. The dates on which such certifications take place are referred to as Certification Dates. In order for any PSUs to be earned and vest, a recipient must be in continuous service with the Company on the applicable Certification Date, which is referred to as the PSU Service Condition. The Company classifies the 2025 PSU Awards as equity awards. Stock-based compensation expense related to the 2025 PSU Awards is a component of operating expenses in the Company’s condensed consolidated statements of operations and comprehensive income and is recognized over the longer of the expected achievement period for the PSU Performance Condition and the PSU Service Condition, which is 23 months and 35 months for the shares eligible to vest under the 2025 PSU Awards based on performance in each of the performance periods ending December 31, 2026 and 2027, respectively. The grant date fair value of the 2025 PSU Awards was determined using valuation models that incorporate the impact of market-based conditions. At each reporting date prior to the Certification Dates, the number of 2025 PSU Awards that are probable of vesting will be reassessed and any changes are reflected in stock-based compensation expense for the period. Share Repurchase Program In October 2024, the Company’s board of directors authorized a share repurchase program for the repurchase of up to $ 100.0 million of shares of the Company’s outstanding common stock, which is referred to as the 2024 Share Repurchase Authorization. Repurchases of the Company’s common stock under the 2024 Share Repurchase Authorization 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 of 1934, as amended), in privately negotiated transactions, or by other methods, at the Company’s discretion, and in accordance with applicable securities laws and other restrictions. The 2024 Share Repurchase Authorization has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason. The 2024 Share Repurchase Authorization does not obligate the Company 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 months ended March 31, 2025, the Company repurchased and subsequently retired 2.3 million shares of its common stock under the 2024 Share Repurchase Authorization for an aggregate amount of $ 33.1 million at an average price of $ 14.18 per share, including fees associated with the repurchases and excluding excise tax. As of March 31, 2025, the Company had $ 66.9 million available for repurchases under the 2024 Share Repurchase Authorization. The Company previously repurchased $ 100.0 million of common stock under the share repurchase program authorized by the Company’s board of directors in November 2023. These repurchases were completed between February 2024 and April 2024, and the program was fully utilized as of December 31, 2024. Note 6— Commitments and Contingencies Letters of Credit In conjunction with the Company’s operating lease agreements, as of March 31, 2025 and December 31, 2024, the Company had irrevocable letters of credit outstanding in the aggregate amount of $ 0.3 million and $ 0.6 million, respectively. The letters of credit are collateralized by restricted cash in the same amount. No amounts had been drawn against these letters of credit as of March 31, 2025 and December 31, 2024. 13 Contingencies The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Potential contingencies may include various claims and litigation or non-income tax matters that arise from time to time in the normal course of business. Due to uncertainties inherent in such contingencies, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability or damages. Any claims, litigation, or other contingencies could have an adverse effect on the Company’s business, financial position, results of operations, or cash flows in or following the period that claims, litigation, or other contingencies are resolved. As of March 31, 2025 and December 31, 2024, the Company was not a party to any material legal proceedings or claims, nor is the Company aware of any pending or threatened litigation or claims, including non-income tax matters, that could reasonably be expected to have a material adverse effect on its business, operating results, cash flows, or financial condition. Accordingly, the amounts accrued for contingencies for which the Company believes a loss is probable were not material as of March 31, 2025 and December 31, 2024. Indemnification The Company has indemnification agreements with its officers, directors, and certain key employees to indemnify them while they are serving in good faith in their respective positions. In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to clients, business partners, vendors, and other parties, including, but not limited to, losses arising out of the Company’s breach of such agreements, claims related to potential data or information security breaches, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from the Company’s products and services or its acts or omissions. In addition, subject to the terms of the applicable agreement, as part of the Company’s Enterprise Solutions and certain other premium offerings, the Company indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the facts and circumstances involved in each particular provision. 14 Note 7— Debt The following table presents the carrying value of the Company’s debt obligations as of March 31, 2025 and December 31, 2024: (In thousands) March 31, 2025 December 31, 2024 Convertible senior notes $ 360,998 $ 360,998 Total debt 360,998 360,998 Less: unamortized debt issuance costs ( 2,609 ) ( 3,070 ) Debt, noncurrent $ 358,389 $ 357,928 Weighted-average interest rate 0.77 % 0.76 % Convertible Senior Notes Due 2026 In August 2021, the Company issued 0.25 % convertible senior notes due 2026, which are referred to as the Notes. The Notes were issued pursuant to and are subject to the terms and conditions of an indenture between the Company 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 were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. As of March 31, 2025 and December 31, 2024, $ 361.0 million aggregate principal amount of the Notes remained outstanding. The Notes are senior, unsecured obligations of the Company and bear interest at a rate of 0.25 % per year. Interest will accrue from August 10, 2021 and is payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2022, and the principal amount of the Notes will not accrete. The Notes will mature on August 15, 2026, unless earlier redeemed, repurchased, or converted in accordance with the terms of the Notes. Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount at the option of the holder (i) on or after May 15, 2026, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, and (ii) prior to the close of business on the business day immediately preceding May 15, 2026, only upon satisfaction of certain conditions and during certain periods specified as follows: • during any calendar quarter commencing after the calendar quarter ending on December 31, 2021, if the last reported sale price of the Company’s common stock is greater than or equal to 130 % of the conversion price for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter of the conversion price on each applicable trading day; • during the five consecutive business day period after any five consecutive trading day period, which is referred to as the Measurement Period, in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; • if the Company calls such Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and • upon the occurrence of specified corporate events described in the Indenture. Upon conversion, the Notes may be settled in shares of the Company’s common stock, cash or a combination of cash and shares of the common stock, at the election of the Company. The Notes have an initial conversion rate of 15.1338 shares of common stock per $1,000 principal amount of Notes, which is subject to adjustment in certain circumstances. This is equivalent to an initial conversion price of approximately $ 66.08 per share of the Company’s common stock. The conversion rate is subject to customary adjustments under certain circumstances in accordance with the terms of the Indenture. In 15 addition, if certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) occur or if the Company issues a notice of redemption with respect to the Notes prior to the maturity date, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The Company may redeem for cash all or any portion of the Notes (subject to a partial redemption limitation), at the Company’s option, on or after August 20, 2024, if the last reported sale price per share of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically. Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders have the right to require the Company to repurchase for cash all or a portion of their Notes at a price equal to 100 % of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon, if any, until, but excluding, the fundamental change repurchase date. The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries. For each of the three months ended March 31, 2025 and 2024, interest expense was $ 0.2 million and amortization of the issuance costs was $ 0.5 million related to the Notes. As of March 31, 2025 and December 31, 2024, the if-converted value of the Notes did not exceed the outstanding principal amount. As of March 31, 2025, the total estimated fair value of the Notes was $ 335.7 million and was determined based on a market approach using actual bids and offers of the Notes in an over-the-counter market on the last trading day of the period. The Company considers these assumptions to be Level II inputs in accordance with the fair value hierarchy described in “Note 4—Fair Value Measurements.” Capped Calls In connection with the issuance of the Notes, the Company entered into privately negotiated capped call transactions, which are referred to as the Capped Calls, with various financial institutions. Subject to customary anti-dilution adjustments substantially similar to those applicable to the Notes, the Capped Calls cover the number of shares of the Company’s common stock initially underlying the Notes. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event a conversion of the Notes is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion of the Notes its common stock price per share exceeds the conversion price of the Notes, with such reduction subject to a cap based on the cap price. If, however, the market price per share of common stock, as measured under the terms of the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of common stock exceeds the cap price of the Capped Calls. The initial cap price of the Capped Calls is $ 92.74 per share of common stock, which represents a premium of 100 % over the last reported sale price of the common stock of $ 46.37 per share on August 5, 2021, the date of issuance of the Notes, and is subject to certain customary adjustments under the terms of the Capped Calls; provided that the cap price will not be reduced to an amount less than the strike price of $ 66.08 per share. 16 The Capped Calls are separate transactions and are not part of the terms of the Notes. The Capped Calls meet the criteria for classification as equity and, as such, are not remeasured each reporting period and are included as a reduction to additional paid-in-capital within stockholders’ equity. Note 8— Net Income per Share The following table sets forth the computation of the Company’s basic and diluted net income per share for the periods presented: Three Months Ended March 31, (In thousands, except share and per share data) 2025 2024 Numerator: Basic: net income $ 37,730 $ 18,442 Interest expense related to convertible senior notes, net of tax 576 640 Diluted $ 38,306 $ 19,082 Denominator: Weighted-average shares used to compute net income per share, basic and diluted Basic 135,208,178 136,356,961 Options to purchase common stock 590,766 1,204,762 Common stock issuable upon vesting of restricted stock units and performance stock units 971,177 — Common stock issuable upon exercise of common stock warrants 232,847 297,781 Common stock issuable in connection with employee stock purchase plan 310,599 334,500 Common stock issuable in connection with convertible senior notes 5,463,045 5,463,045 Diluted 142,776,612 143,657,049 Net income per share: Basic $ 0.28 $ 0.14 Diluted $ 0.27 $ 0.13 The following potentially dilutive shares were excluded from the computation of diluted net income per share because including them would have been anti-dilutive: Three Months Ended March 31, 2025 2024 Options to purchase common stock 1,500,000 2,020,500 Common stock issuable upon vesting of restricted stock units and performance stock units 9,389,674 13,370,738 Common stock issuable in connection with employee stock purchase plan 373,809 980,231 Total 11,263,483 16,371,469 17 Note 9— Income Taxes The Company computes its provision for income taxes by applying the estimated annual effective tax rate to year-to-date income from recurring operations and adjusts the provision for discrete tax items recorded in the period. The Company’s income tax provision was $ 7.3 million and $ 1.3 million for the three months ended March 31, 2025 and 2024, respectively. The income tax provision for the three months ended March 31, 2025 was primarily driven by income in the United States and non-deductible compensation, offset by the generation of research and development tax credits and the benefit from the Foreign-Derived Intangible Income deduction. The lower income tax provision for 2024 was primarily attributable to the valuation allowance recorded during that period. The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. This assessment is based on the weight of all available positive and negative evidence and considers factors such as cumulative pre-tax income or losses, anticipated future earnings, the impact of permanent differences, and items recorded in other comprehensive income. Based on all available positive and negative evidence, having demonstrated sustained profitability, which is objective and verifiable, and taking into account anticipated future earnings, the Company concluded it is more likely than not that its U.S. federal and state deferred tax assets will be realizable. The Company is subject to taxation in the United States and various other state and foreign jurisdictions. As of March 31, 2025, the Company’s tax years 2001 to 2023 remain subject to examination by the major taxing jurisdictions in which the Company is subject to tax. Due to differing interpretations of tax laws and regulations, tax authorities may dispute the Company’s tax filing positions. The Company periodically evaluates its exposures associated with its tax filing positions and believes that adequate amounts have been reserved for adjustments that may result from tax examinations. Note 10— Segment Information Operating segments are defined as components of an entity for which separate financial information is available and that is regularly provided to the CODM in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the Company’s CODM. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. The accounting policies of the Company’s reportable segment, as well as how the Company derives revenue, are consistent with those described in “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. The CODM uses consolidated net income to assess performance, evaluate cost optimization, and allocate resources, including personnel-related and financial or capital resources, in the annual budget and forecasting process, as well as budget-to-actual variances on a monthly basis. As such, the Company has determined that it operates as one operating and reportable segment. The following tables set forth significant expense categories and other specified amounts included in consolidated net income that are otherwise regularly provided to the CODM for the three months ended March 31, 2025 and 2024: 18 Three Months Ended March 31, 2025 2024 Revenue $ 192,706 $ 190,937 Cost of revenue (1) 39,201 41,909 Research and development (1) 38,544 44,658 Sales and marketing (1) 33,750 44,906 General and administrative (1)(2) 22,940 25,212 Provision for transaction losses 2,259 927 Stock-based compensation expense 12,272 16,942 Depreciation and amortization 4,861 3,146 Interest income ( 7,098 ) ( 7,685 ) Interest expense 686 693 Income tax (benefit) provision 7,277 1,329 Other segment items (3) 284 458 Segment net income $ 37,730 $ 18,442 (1) For all periods presented, excludes stock-based compensation and depreciation and amortization included in cost of revenue, research and development, sales and marketing, and general and administrative expenses, as these amounts are regularly provided to the CODM. (2) For all periods presented, excludes expenses related to the warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $ 0.01 per share issued to the Tides Foundation in 2018, which is referred to as the Tides Foundation Warrant. (3) For all periods presented, the Company incurred $ 0.2 million of expenses related to the Tides Foundation Warrant. There are no reconciling items or adjustments between segment net revenues, net income, total assets and consolidated net revenues, net income and total assets. Substantially all of the Company’s long-lived assets were located in the United States as of March 31, 2025 and December 31, 2024. 19