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. We refer to talent and clients together as customers. Financial Highlights Over the past several years, we have implemented a number of strategic initiatives intended to drive long-term growth, enhance monetization, and improve operational efficiency. These initiatives include (i) increasing the number of Connects (which are virtual tokens that are required for talent to bid on projects and purchase ads products on our work marketplace) needed by talent to bid on projects, (ii) expanding our ads and monetization products on the work marketplace, (iii) executing operational efficiency initiatives aimed at improving profitability, (iv) retiring the tiered service fee structure for talent working with clients on our Marketplace offering in favor of a flat fee, (v) implementing a new Enterprise strategy, including expanded offerings to serve broader client segments, and (vi) continuing to invest in generative AI capabilities and premium offerings. While evolving macroeconomic conditions and broader economic headwinds continue to weigh on customer demand and spending behavior, these strategic initiatives contributed to Marketplace take rate expansion and revenue growth in the three months ended March 31, 2025. Marketplace revenue slightly increased by 1% to $166.3 million for the three months ended March 31, 2025, compared to $164.3 million in the same period in 2024. Marketplace take rate increased to 18.3% for the three months ended March 31, 2025, compared to 17.7% in the same period in 2024, reflecting the growing contributions from ads and monetization products. We expect Marketplace take rate to remain relatively constant throughout the remainder of 2025. During the three months ended March 31, 2025, we generated net income of $37.7 million and adjusted EBITDA of $56.0 million, compared to net income of $18.4 million and adjusted EBITDA of $33.3 million during the same period in 2024. These changes are primarily due to the cost-saving measures implemented in recent years, including reduced investments in brand marketing and vendor spend. We expect these cost-saving measures will continue to positively impact net income and adjusted EBITDA throughout the remainder of 2025, as compared to 2024. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with generally accepted accounting principles in the United States, which we refer to as U.S. 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 20 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 decisions. As of and for the three months ended March 31, 2025 and 2024, our key financial and operating metrics were as follows: Three Months Ended March 31, Change (In thousands, except percentages and basis points) 2025 2024 GSV $ 987,712 $ 1,008,797 (2) % Marketplace revenue $ 166,293 $ 164,330 1 % Marketplace take rate 18.3 % 17.7 % 60 bps Net income $ 37,730 $ 18,442 105 % Adjusted EBITDA (1) $ 56,011 $ 33,325 68 % (1) 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, the most directly comparable financial measure prepared under U.S. GAAP. As of March 31, % Change (Active clients are in thousands) 2025 2024 Active clients 812 872 (7) % GSV per active client $ 4,912 $ 4,755 3 % We believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results, and management uses these metrics to track our performance. We expect our key metrics may fluctuate between periods due to a number of factors, including changing macroeconomic conditions; the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period; the lapping of significant launches of new products, pricing changes, and other monetization efforts; and ongoing efforts to improve processes on our work marketplace, including project proposals and purchases of Connects, among others. For a discussion of limitations in the measurement of our key financial and operational metrics, see “Risk Factors—We track certain performance metrics with internal tools and do not independently verify such metrics. 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 21 from our Marketplace offerings, which include all offerings other than our Enterprise offerings—Enterprise Solutions and Managed Services. We generate Marketplace revenue from both talent and clients. Marketplace revenue is primarily generated from talent service fees paid by talent as a percentage of the total amount talent charges clients for services accessed on our Marketplace, and to a lesser extent, client marketplace fees. We also generate Marketplace revenue through ads and monetization products, including 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. Additionally, we earn interest on funds held on behalf of customers, which is included in Marketplace revenue. 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. 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 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. 22 The following table presents a reconciliation of net income, 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 March 31, (In thousands) 2025 2024 Net income $ 37,730 $ 18,442 Add back (deduct): Stock-based compensation expense 12,272 16,942 Depreciation and amortization 4,861 3,146 Other income, net (6,317) (6,722) Income tax provision 7,277 1,329 Other (1) 188 188 Adjusted EBITDA $ 56,011 $ 33,325 (1) During the three months ended March 31, 2025 and 2024, we incurred $0.2 million of expense related to the warrant to purchase 500,000 shares of our common stock at an exercise price of $0.01 per share issued to the Tides Foundation in 2018. 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; • 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; 23 • 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 net income and our other financial performance measures prepared in accordance with U.S. GAAP. Components of Our Results of Operations Revenue Marketplace Revenue. Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees. We maintain a flat talent service fee of 10% for talent working with clients on our Marketplace offerings. Revenue for a majority of our talent service fees is recognized on the Sunday of each week, as this is the day we have the contractual right to bill talent for the service fees. We charge a client marketplace fee of 5% on each transaction—or 3% if paid via ACH for eligible clients. We also generate revenue through ads and monetization products, including 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. Additionally, we earn interest on funds held on behalf of customers. Enterprise Revenue. Enterprise offers two lines of service—Enterprise Solutions and Managed Services. Our Enterprise Solutions offering includes access to additional product features, premium access to top talent, professional services, custom reporting, and flexible payment terms. Revenue from our Enterprise Solutions offering includes all client fees, subscriptions, and talent service fees. For our Enterprise Solutions offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on talent services, in addition to a 10% service fee paid by talent. Additionally, clients of our Enterprise Solutions offering can also subscribe to a compliance service that includes worker classification services for an additional fee and may also choose to use our work marketplace to engage talent that were not originally sourced through our work marketplace for a lower fee percentage. Through our Managed Services offering, we are responsible for providing services and engaging talent directly or as employees of third-party staffing providers to perform services for clients on our behalf. The talent providing services in connection with our Managed Services 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, 24 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. 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; 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 (Expense), Net Other income (expense), net consists primarily of interest income that we earn from our operating investments, namely our deposits in money market funds and investments in marketable securities, interest expense on our outstanding borrowings, as well as gains and losses from foreign currency exchange transactions. Income Tax Provision Income tax provision consists primarily of U.S. federal and state income taxes. We will continue to monitor the need for a valuation allowance against our deferred tax assets on a quarterly basis. 25 Results of Operations The following table sets forth our condensed consolidated results of operations for the periods presented: Three Months Ended March 31, (In thousands) 2025 2024 Revenue Marketplace $ 166,293 $ 164,330 Enterprise 26,413 26,607 Total revenue 192,706 190,937 Cost of revenue (1) 41,806 44,193 Gross profit 150,900 146,744 Operating expenses Research and development (1) 46,152 52,916 Sales and marketing (1) 35,751 47,851 General and administrative (1) 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 (1) Includes stock-based compensation expense as follows: Three Months Ended March 31, (In thousands) 2025 2024 Cost of revenue $ 187 $ 466 Research and development 5,812 7,370 Sales and marketing 1,501 2,936 General and administrative 4,772 6,170 Total stock-based compensation $ 12,272 $ 16,942 26 Comparison of the Three Months Ended March 31, 2025 and 2024 Revenue Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Marketplace $ 166,293 $ 164,330 $ 1,963 1 % Percentage of total revenue 86 % 86 % Enterprise 26,413 26,607 (194) (1) % Percentage of total revenue 14 % 14 % Total revenue $ 192,706 $ 190,937 $ 1,769 1 % During the three months ended March 31, 2025, macroeconomic conditions adversely impacted GSV, which declined 2%, compared to the same period in 2024. The number of active clients decreased 7% as of March 31, 2025, compared to March 31, 2024, driven by slower growth in acquisition of new clients. GSV per active client increased 3% as of March 31, 2025, compared to March 31, 2024. We expect no material improvement to macroeconomic conditions throughout the remainder of 2025. For the three months ended March 31, 2025, total revenue was $192.7 million, representing an increase of $1.8 million, or 1%, compared to the same period in 2024. Marketplace revenue increased by $2.0 million, or 1%, compared to the same period in 2024, primarily driven by higher revenue from ads and monetization products. This increase was partially offset by a decrease in talent service fees, attributable to lower recognition of deferred revenue, resulting from our 2023 transition from a tiered service fee structure to a flat fee model. We expect Marketplace revenue to decline for the remainder of 2025 compared to the same periods in 2024, reflecting the anticipated impact of broader macroeconomic conditions. For the three months ended March 31, 2025, Enterprise revenue decreased by 1% compared to the same period in 2024. During the first quarter of 2025, we focused on supporting existing Enterprise clients, which contributed to stable active account trends despite a challenging macro environment, and improving year-over-year trends in spend per active enterprise client. As we continue refining our Enterprise strategy, we expect Enterprise revenue to decline for the remainder of the year compared to the same periods in 2024. Cost of Revenue and Gross Margin Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Cost of revenue $ 41,806 $ 44,193 $ (2,387) (5) % Total gross margin 78 % 77 % For the three months ended March 31, 2025, cost of revenue decreased by $2.4 million, or 5%, compared to the same period in 2024. This decrease was primarily driven by a $1.9 million reduction in data center and customer support costs and a $1.1 million decrease in costs associated with our Upwork Professional offering, reflecting ongoing hosting optimization efforts and workforce reductions, as well as a $0.4 million reduction in payment processing fees. These decreases were partially offset by a $0.5 million increase in the cost of talent services to deliver Managed Services revenue and $0.6 million in amortization expense related to internal-use software and platform development costs. For the three months ended March 31, 2025, gross margin increased to 78% compared to 77% in the same period in 2024, primarily due to lower cost of revenue driven by cost-optimization efforts implemented in prior year, including workforce reductions and other cost-saving measures. 27 We expect cost of revenue to decrease in absolute dollars in future periods, reflecting both the impact of cost optimization efforts and an expected decrease in revenue 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 gross margin to remain consistent throughout the remainder of 2025, compared to 2024. Research and Development Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Research and development $ 46,152 $ 52,916 $ (6,764) (13) % Percentage of total revenue 24 % 28 % For the three months ended March 31, 2025, research and development expense decreased by $6.8 million, or 13%, compared to the same period in 2024. The decrease was primarily driven by a $4.5 million reduction in personnel-related costs, attributable to workforce reduction and other cost-saving measures implemented in 2024, as well as $2.2 million in incremental internal-use software and platform development costs that we capitalized during the three months ended March 31, 2025. These costs were partially offset by a $0.9 million increase in amortization of intangible assets compared to the same period in 2024. While we remain committed to ongoing innovation to further enhance our platform, building new features, with a focus on generative AI, we expect total research and development expenses to decrease throughout the remainder of 2025, compared to 2024. Sales and Marketing Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Sales and marketing $ 35,751 $ 47,851 $ (12,100) (25) % Percentage of total revenue 19 % 25 % For the three months ended March 31, 2025, sales and marketing expense decreased by $12.1 million, or 25%, compared to the same period in 2024. The decrease was primarily due to cost-optimization efforts implemented in the prior year, including the realignment and streamlining of our sales and marketing workforce. As a result, personnel-related costs decreased by $9.4 million and marketing and advertising expense decreased by $1.9 million compared to the same period in 2024. We expect sales and marketing expense to continue to decrease throughout the remainder of 2025 compared to 2024, primarily due to the ongoing impact of workforce-related changes and other cost-saving initiatives implemented in 2024. General and Administrative Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change General and administrative $ 28,048 $ 32,001 $ (3,953) (12) % Percentage of total revenue 15 % 17 % For the three months ended March 31, 2025, general and administrative expense decreased by $4.0 million, or 12%, compared to the same period in 2024. The decrease was primarily driven by a $2.6 million reduction in personnel-related costs, largely due to lower stock-based compensation expense. 28 While general and administrative expenses are expected to increase modestly in the second and third quarters of 2025, primarily due to the timing of certain operational initiatives, we expect fourth quarter and full-year general and administrative expenses to be lower compared to 2024. Provision for Transaction Losses Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Provision for transaction losses $ 2,259 $ 927 $ 1,332 144 % Percentage of total revenue 1.2 % 0.5 % For the three months ended March 31, 2025, provision for transaction losses increased by $1.3 million, compared to the same period in 2024. The provision for the three months ended March 31, 2024, was lower primarily due to better than expected collections during that period. We expect provisions for transaction losses to return to normalized levels of between 1% to 2% of revenue for the remainder of 2025. Other Income, Net Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Other income, net $ 6,317 $ 6,722 $ (405) (6) % For the three months ended March 31, 2025, other income, net decreased, compared to the same period in 2024, due to decreases in interest income earned on marketable securities. Income Tax Provision Three Months Ended March 31, (In thousands, except percentages) 2025 2024 Change Income tax provision $ (7,277) $ (1,329) $ (5,948) 448 % Effective tax rate 16.2 % 6.7 % For the three months ended March 31, 2025, our income tax provision increased by $5.9 million, compared to the same period in 2024. Our effective tax rate was 16.2% for the three months ended March 31, 2025, compared to 6.7% for the same period in 2024. The increase in our effective tax rate was primarily driven by the absence of a valuation allowance in the current period, whereas the prior-year rate reflected a lower tax expense due to the impact of a valuation allowance on our U.S. deferred tax assets. Our 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. 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 March 31, 2025 and December 31, 2024, we had $304.4 million and $305.8 million in cash and cash equivalents, respectively. As of March 31, 2025 and December 31, 2024, we had $317.6 million and $316.3 million in marketable securities, respectively. 29 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 our 0.25% convertible senior notes due 2026, which we refer to as the 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, and obligations under our non-cancellable operating leases for office space. During the periods presented, we did not have, nor do we 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 condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. Notes Assuming the outstanding Notes are not converted into our common stock, repurchased, or redeemed prior to maturity on August 15, 2026, (i) annual interest expense relating to the Notes will be $2.1 million for the remainder of fiscal year 2025 and $1.8 million in 2026 and (ii) principal in the amount of $361.0 million will be payable upon maturity. For additional information about our Notes, see the section below titled “—Convertible Senior Notes Due 2026 and Capped Calls.” Future Purchase Commitments for Cloud Infrastructure In July 2024, we commenced a non-cancellable agreement for cloud infrastructure and other services that contains future purchase commitments of $40.0 million over two years, with $20.0 million in each year. As of March 31, 2025, we had remaining purchase commitments under this agreement of $23.7 million. 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, 2024. 30 Share Repurchase Program In October 2024, our board of directors authorized a share repurchase purchase program for the repurchase of up to $100.0 million of shares of our outstanding common stock, which is referred to as the 2024 Share Repurchase Authorization. Repurchases of our 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, 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 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 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 months ended March 31, 2025, we repurchased and subsequently retired 2.3 million shares of our 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, we had $66.9 million available for repurchases under the 2024 Share Repurchase Authorization. We previously repurchased $100.0 million of common stock pursuant to the share repurchase program authorized by our board of directors in November 2023, which is referred to as the 2023 Share Repurchase Authorization. The 2023 Share Repurchase Authorization was fully utilized as of December 31, 2024. 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 fluctuate based on marketplace activity 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 of March 31, 2025 and December 31, 2024, funds held in escrow, including funds in transit, were $215.9 million and $195.7 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 March 31, 2025 and December 31, 2024, $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 outstanding Notes, as we did in the three months ended March 31, 2023, in the open market, in privately negotiated transactions, by tender 31 offer, by exchange transaction, or otherwise. Such repurchases of Notes, if any, will depend on prevailing market conditions, our liquidity, and other factors, and may be commenced or suspended at any time. In connection with the issuance of the Notes, we entered into capped call transactions, which we refer to as the 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: Three Months Ended March 31, (In thousands) 2025 2024 Net cash provided by operating activities (1) $ 36,965 $ 14,814 Net cash (used in) provided by investing activities (5,223) 6,140 Net cash used in financing activities (1) (13,144) (65,378) Net change in cash, cash equivalents, and restricted cash (1) $ 18,598 $ (44,424) (1) The Company elected to change the presentation of certain cash flows on its condensed Consolidated Statement of Cash Flow, reclassifying the change in Trade and client receivables, related to amounts received on behalf of talent to fund their escrow account, from operating activities to financing activities. Prior period comparative amounts have been recast to conform to the current period presentation. For additional information, refer to “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statement included elsewhere in this Quarterly Report. (1) Includes increases in funds held in escrow, including funds in transit of $19.3 million and $1.4 million during the three months ended March 31, 2025 and 2024, 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, payment processing fees, amounts paid to talent to deliver services for clients under our Managed Services offering, and third-party hosting costs. For the three months ended March 31, 2025, net cash provided by operating activities was $37.0 million, which resulted from net income of $37.7 million, non-cash adjustments of $18.1 million, and net cash outflows of $18.9 million from changes in operating assets and liabilities. For the three months ended March 31, 2024, net cash provided by operating activities was $14.8 million, which resulted from net income of $18.4 million and non-cash adjustments of $17.5 million, offset by net cash outflows of $21.1 million from changes in operating assets and liabilities. Investing Activities For the three months ended March 31, 2025, net cash used in investing activities was $5.2 million, which was primarily a result of investing $50.7 million in various marketable securities, $3.7 million in internal-use software and platform development costs, and $2.5 million for purchases of property and equipment. These outflows were partially offset by $51.4 million in proceeds from maturities of marketable securities and $0.3 million in proceeds from the sale of marketable securities. 32 For the three months ended March 31, 2024, net cash provided by investing activities was $6.1 million, which was primarily a result of proceeds from maturities of marketable securities of $131.8 million and proceeds from the sale of marketable securities of $26.9 million, partially offset by investing $149.9 million in various marketable securities, as well as $2.5 million of internal-use software and platform development costs that we paid during the period. Financing Activities For the three months ended March 31, 2025, net cash used in financing activities was $13.1 million, which was driven by $33.1 million cash paid for repurchases under the 2024 Share Repurchase Authorization, partially offset by an increase in escrow funds payable of $19.3 million and cash received from stock option exercises of $0.7 million. For the three months ended March 31, 2024, net cash used in financing activities was $65.4 million, which was driven by $66.9 million cash paid for repurchases under the 2023 Share Repurchase Authorization, partially offset by an increase in escrow funds payable of $1.4 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, 2024. 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.