Upwork(UPWK) - 2025 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section warns readers that the report contains forward-looking statements about future operating results, financial position, business strategy, and market trends, subject to risks and uncertainties. - Forward-looking statements cover future operating results, financial position, business strategy, anticipated events, potential growth, competitive position, technological and market trends, and share repurchases[7] - These statements are based on current expectations and projections and are subject to risks, uncertainties, and assumptions detailed in Part II, Item 1A, "Risk Factors"[8] - The company expressly disclaims any duty to update forward-looking statements after the filing date, except as required by law[9] PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Upwork Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with their accompanying notes. Condensed Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 Details Upwork's financial position, showing total assets increased by $28.45 million, driven by current assets, with corresponding increases in liabilities and equity. Condensed Consolidated Balance Sheets (In thousands) | Metric | March 31, 2025 | December 31, 2024 | Change (vs. Dec 31, 2024) | | :-------------------------------- | :------------- | :---------------- | :------------------------ | | Total Assets | $1,240,066 | $1,211,613 | +$28,453 | | Total Liabilities | $645,724 | $636,236 | +$9,488 | | Total Stockholders' Equity | $594,342 | $575,377 | +$18,965 | | Cash and cash equivalents | $304,449 | $305,757 | -$1,308 | | Marketable securities | $317,619 | $316,344 | +$1,275 | | Funds held in escrow | $215,942 | $195,736 | +$20,206 | | Trade and client receivables – net | $77,917 | $75,490 | +$2,427 | | Escrow funds payable | $215,942 | $195,736 | +$20,206 | Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2025 and 2024 Reports a significant increase in net income to $37.73 million for Q1 2025, driven by revenue growth and substantial reductions in operating expenses. Condensed Consolidated Statements of Operations (In thousands, except per share data) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------- | | Revenue | $192,706 | $190,937 | +$1,769 (+1%) | | Cost of revenue | $41,806 | $44,193 | -$2,387 (-5%) | | Gross profit | $150,900 | $146,744 | +$4,156 (+3%) | | Total operating expenses | $112,210 | $133,695 | -$21,485 (-16%) | | Income from operations | $38,690 | $13,049 | +$25,641 (+196%) | | Net income | $37,730 | $18,442 | +$19,288 (+105%) | | Basic EPS | $0.28 | $0.14 | +$0.14 | | Diluted EPS | $0.27 | $0.13 | +$0.14 | Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2025 and 2024 Stockholders' equity increased to $594.34 million, primarily due to net income and stock-based compensation, partially offset by common stock repurchases. Changes in Stockholders' Equity (In thousands) | Metric | Balances as of Dec 31, 2024 | Net Income | Stock-based Compensation Expense | Repurchase of Common Stock | Balances as of Mar 31, 2025 | | :-------------------------------- | :-------------------------- | :--------- | :----------------------------- | :------------------------- | :-------------------------- | | Total Stockholders' Equity | $575,377 | $37,730 | $13,337 | $(33,226) | $594,342 | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2025 and 2024 Net cash from operating activities significantly increased to $37.0 million, while investing activities shifted to an outflow, and financing activities used less cash. Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------- | | Net cash provided by operating activities | $36,965 | $14,814 | +$22,151 (+149%) | | Net cash (used in) provided by investing activities | $(5,223) | $6,140 | -$11,363 | | Net cash used in financing activities | $(13,144) | $(65,378) | +$52,234 | | Net change in cash, cash equivalents, and restricted cash | $18,598 | $(44,424) | +$63,022 | | Cash, cash equivalents, and restricted cash—end of period | $524,191 | $251,994 | +$272,197 | - The company reclassified the change in Trade and client receivables related to escrow funds from operating activities to financing activities, increasing cash flow provided by operating activities by $9.2 million for the three months ended March 31, 2024[26] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and additional information on Upwork's organization, accounting policies, revenue, fair value, balance sheet, commitments, debt, EPS, taxes, and segment information. Note 1—Organization and Description of Business Upwork Inc. operates a global work marketplace connecting businesses with independent talent, incorporated in Delaware and headquartered in Palo Alto, California. - Upwork operates a work marketplace that connects businesses (clients) with independent talent (professionals and agencies)[21] - The company is incorporated in the state of Delaware and is headquartered in Palo Alto, California[21] Note 2—Basis of Presentation and Summary of Significant Accounting Policies Unaudited financial statements are prepared under U.S. GAAP and SEC rules, with a reclassification of escrow-related cash flows impacting prior-period comparisons. - Financial statements are prepared under U.S. GAAP and SEC rules, with certain disclosures condensed or omitted[23] - In 2024, the company reclassified changes in Trade and client receivables related to escrow funds from operating to financing activities, increasing Q1 2024 operating cash flow by $9.2 million[26] - Management's estimates and assumptions, such as useful lives of assets, allowance for credit losses, and stock-based compensation, are subject to change and actual results may differ[28][29] Note 3—Revenue Revenue is disaggregated into Marketplace ($166.3 million) and Enterprise ($26.4 million) services, with the majority from U.S. talent and clients. Revenue by Type of Service (In thousands) | Type of Service | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------- | :-------------------------------- | :-------------------------------- | | Marketplace | $166,293 | $164,330 | | Enterprise | $26,413 | $26,607 | | Total revenue | $192,706 | $190,937 | Revenue by Geographic Area (In thousands) | Geographic Area | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------- | :-------------------------------- | :-------------------------------- | | Talent | | | | United States | $27,339 | $27,767 | | Philippines | $14,584 | $14,556 | | India | $13,501 | $14,469 | | Rest of world | $52,371 | $53,391 | | Total talent | $107,795 | $110,183 | | Clients | | | | United States | $59,242 | $59,760 | | Rest of world | $25,669 | $20,994 | | Total clients | $84,911 | $80,754 | | Total revenue | $192,706 | $190,937 | - 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, compared to $9.3 million for the same period in 2024[40] Note 4—Fair Value Measurements Financial instruments at fair value totaled $533.07 million, primarily in Level I and II assets, with unrealized losses considered temporary due to interest rate changes. Fair Value of Cash Equivalents and Marketable Securities (In thousands) | Category | March 31, 2025 Fair Value | December 31, 2024 Fair Value | | :-------------------------------- | :-------------------------- | :-------------------------- | | Level I | | | | Money market funds | $215,450 | $193,481 | | Treasury bills | $151,882 | $131,062 | | U.S. government securities | $31,725 | $32,614 | | Total Level I | $399,057 | $357,157 | | Level II | | | | Commercial paper | $11,167 | $16,233 | | Corporate bonds | $116,066 | $126,682 | | Commercial deposits | $1,743 | $4,121 | | Asset-backed securities | $318 | $594 | | Foreign government and agency securities | $4,718 | $5,038 | | Total Level II | $134,012 | $152,668 | | Total | $533,069 | $509,825 | - Interest income, net, was $7.1 million for the three months ended March 31, 2025, down from $7.7 million in the same period in 2024[48] - The company did not record any impairment charges on marketable securities for the three months ended March 31, 2025 and 2024, as declines in fair value were considered temporary due to interest rate changes[47] Note 5—Balance Sheet Components Details cash, cash equivalents, restricted cash ($524.19 million), property and equipment, intangible assets, accrued expenses, and common stock repurchases. Cash, Cash Equivalents, and Restricted Cash (In thousands) | Metric | 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 cash flows) | $524,191 | $505,593 | Property and Equipment, Net (In thousands) | Metric | 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 | - The company capitalized $4.6 million in internal-use software and platform development costs in Q1 2025, up from $2.5 million in Q1 2024[51] - Upwork repurchased 2.3 million shares of its common stock for an aggregate amount of $33.1 million in Q1 2025 under the 2024 Share Repurchase Authorization, with $66.9 million remaining available[61] Note 6—Commitments and Contingencies Upwork had $0.3 million in outstanding letters of credit, was not party to material legal proceedings, and provides indemnification for worker misclassification. - As of March 31, 2025, Upwork had $0.3 million in irrevocable letters of credit outstanding, collateralized by restricted cash[63] - The company was not a party to any material legal proceedings or claims as of March 31, 2025, and amounts accrued for contingencies were not material[65] - Upwork indemnifies clients that subscribe to worker classification services for losses arising from worker misclassification as part of its Enterprise Solutions and other premium offerings[66] Note 7—Debt Upwork has $361.0 million in 0.25% convertible senior notes due 2026, with capped call transactions to reduce potential dilution. Debt Obligations (In thousands) | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------- | :------------- | :---------------- | | Convertible senior notes | $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 % | - $361.0 million aggregate principal amount of 0.25% convertible senior notes due 2026 remained outstanding as of March 31, 2025[69] - The company entered into privately negotiated capped call transactions with an initial cap price of $92.74 per share to reduce potential dilution from note conversions[80] Note 8—Net Income per Share Basic EPS was $0.28 and diluted EPS was $0.27 for Q1 2025, a significant increase from the prior year, with 11.3 million anti-dilutive shares excluded. Net Income per Share (In thousands, except share and per share data) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (basic) | $37,730 | $18,442 | | Interest expense related to convertible senior notes, net of tax | $576 | $640 | | Diluted net income | $38,306 | $19,082 | | Weighted-average shares (basic) | 135,208,178 | 136,356,961 | | Weighted-average shares (diluted) | 142,776,612 | 143,657,049 | | Basic EPS | $0.28 | $0.14 | | Diluted EPS | $0.27 | $0.13 | - Potentially dilutive shares totaling 11.3 million (Q1 2025) and 16.4 million (Q1 2024) were excluded from diluted EPS computation because their inclusion would have been anti-dilutive[82] Note 9—Income Taxes Income tax provision increased to $7.3 million with a 16.2% effective tax rate, primarily due to U.S. income and the absence of a valuation allowance. Income Tax Provision (In thousands) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income tax provision | $7,277 | $1,329 | | Effective tax rate | 16.2 % | 6.7 % | - The higher income tax provision in Q1 2025 was primarily due to income in the United States, non-deductible compensation, and the absence of a valuation allowance, compared to a lower provision in Q1 2024 due to the impact of a valuation allowance[84][141] - The company concluded that its U.S. federal and state deferred tax assets are more likely than not realizable, based on sustained profitability and anticipated future earnings[86] Note 10—Segment Information Upwork operates as a single segment, with the CEO as CODM assessing performance using consolidated net income, and most long-lived assets in the U.S. - Upwork operates as one operating and reportable segment[90] - The Chief Operating Decision Maker (CODM) uses consolidated net income to assess performance, evaluate cost optimization, and allocate resources[90] - Substantially all of the company's long-lived assets were located in the United States as of March 31, 2025, and December 31, 2024[93] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides a detailed analysis of Upwork's financial condition and results of operations for Q1 2025, covering business overview, financial highlights, key metrics, and liquidity. Overview Upwork operates the world's largest work marketplace, connecting businesses with independent talent, and defines Gross Services Volume (GSV) as total client spending. - Upwork operates the world's largest work marketplace that connects businesses with independent talent from across the globe[95] - Gross Services Volume (GSV) represents the total amount that clients spend on offerings, as well as additional fees charged to talent and clients for other services[95] Financial Highlights Strategic initiatives led to Marketplace take rate expansion and revenue growth, with net income more than doubling to $37.7 million and Adjusted EBITDA increasing by 68%. - Strategic initiatives include increasing Connects for bids, expanding ads and monetization products, executing operational efficiency, retiring tiered service fees for a flat fee, implementing a new Enterprise strategy, and investing in generative AI capabilities[96] - Marketplace revenue slightly increased by 1% to $166.3 million for the three months ended March 31, 2025, and Marketplace take rate increased to 18.3% (from 17.7% in Q1 2024)[97] Financial Highlights (In thousands) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :------------- | :-------------------------------- | :-------------------------------- | :------------------- | | Net income | $37,730 | $18,442 | +$19,288 (+105%) | | Adjusted EBITDA | $56,011 | $33,325 | +$22,686 (+68%) | Key Financial and Operational Metrics GSV declined by 2% to $987.7 million, and active clients decreased by 7%, while Marketplace revenue grew 1% to $166.3 million, and take rate increased to 18.3%. Key Financial and Operational Metrics (In thousands, except percentages and basis points) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------- | | 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 | $56,011 | $33,325 | 68% | Client Metrics (In thousands, except percentages) | Metric | As of March 31, 2025 | As of March 31, 2024 | Change (YoY) | | :-------------------- | :------------------- | :------------------- | :------------------- | | Active clients | 812 | 872 | (7)% | | GSV per active client | $4,912 | $4,755 | 3% | - Adjusted EBITDA is a non-GAAP measure, reconciled from net income by adding back stock-based compensation expense, depreciation and amortization, other income (expense), net, income tax benefit (provision), and certain other non-cash or significant isolated gains/losses[108][109] Components of Our Results of Operations Details Upwork's revenue streams, cost of revenue, gross profit, gross margin, operating expenses, other income, and income tax provision. Revenue Revenue is driven by Marketplace (talent service fees, client fees, ads) and Enterprise (subscriptions, service fees, Managed Services where Upwork is principal). - Marketplace revenue is primarily generated from a flat 10% talent service fee and client marketplace fees (5% or 3% via ACH), along with ads, monetization products, and interest on customer funds[112][113] - Enterprise Solutions offer additional product features, premium talent access, professional services, custom reporting, and flexible payment terms, with revenue from client fees, subscriptions, and talent service fees[115] - Managed Services revenue recognizes the entire GSV of projects as Upwork is deemed the principal in these arrangements[116] Cost of Revenue, Gross Profit, and Gross Margin Cost of revenue includes payment processing, talent costs for Managed Services, personnel, hosting, and amortization, influencing gross profit and margin fluctuations. - Cost of revenue consists primarily of payment processing fees, amounts paid to talent for Managed Services, personnel-related costs for services and support, third-party hosting fees, and amortization of capitalized internal-use software[117] - Gross profit and gross margin fluctuations are influenced by revenue, payment methods, hosting capacity, investments in services and support teams, Managed Services talent payments, and amortization of internal-use software[118][119] Operating Expenses Operating expenses comprise Research and Development, Sales and Marketing, General and Administrative, and Provision for Transaction Losses. - Research and development expense primarily consists of personnel-related costs, expensed as incurred, except for capitalized internal-use software and platform development[120] - Sales and marketing expense includes advertising, marketing activities, and personnel-related costs, including sales commissions[121] - Provision for transaction losses consists primarily of losses from fraud and bad debt expense associated with receivables and chargebacks, based on historical incurred losses and other factors[122] Other Income (Expense), Net Primarily consists of interest income from investments, interest expense on borrowings, and foreign currency exchange gains/losses. - Other income (expense), net, primarily consists of interest income from operating investments, interest expense on outstanding borrowings, and gains/losses from foreign currency exchange transactions[123] Income Tax Provision Primarily U.S. federal and state income taxes, with the company continuously monitoring the need for a valuation allowance against deferred tax assets. - Income tax provision primarily consists of U.S. federal and state income taxes[124] - The company monitors the need for a valuation allowance against its deferred tax assets on a quarterly basis[124] Results of Operations Analyzes Upwork's consolidated results for Q1 2025 versus Q1 2024, comparing revenue, cost of revenue, gross margin, operating expenses, and net income. Comparison of the Three Months Ended March 31, 2025 and 2024 Total revenue increased 1% to $192.7 million, gross margin improved to 78%, operating expenses decreased significantly due to cost optimization, and net income more than doubled. Consolidated Results of Operations (In thousands) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------- | | Total revenue | $192,706 | $190,937 | +$1,769 (+1%) | | Cost of revenue | $41,806 | $44,193 | -$2,387 (-5%) | | Gross profit | $150,900 | $146,744 | +$4,156 (+3%) | | Operating expenses | $112,210 | $133,695 | -$21,485 (-16%) | | Income from operations | $38,690 | $13,049 | +$25,641 (+196%) | | Net income | $37,730 | $18,442 | +$19,288 (+105%) | - During the three months ended March 31, 2025, macroeconomic conditions adversely impacted GSV, which declined 2%, and the number of active clients decreased 7%[126] - Cost of revenue decreased by $2.4 million (5%) primarily due to a $1.9 million reduction in data center and customer support costs, a $1.1 million decrease in Upwork Professional offering costs, and a $0.4 million reduction in payment processing fees[130] - Research and development expense decreased by $6.8 million (13%) due to a $4.5 million reduction in personnel-related costs and $2.2 million in incremental capitalized internal-use software and platform development costs[133] - Sales and marketing expense decreased by $12.1 million (25%) due to cost-optimization efforts, including a $9.4 million reduction in personnel-related costs and a $1.9 million decrease in marketing and advertising expense[135] - General and administrative expense decreased by $4.0 million (12%) primarily driven by a $2.6 million reduction in personnel-related costs, largely due to lower stock-based compensation expense[137] - Provision for transaction losses increased by $1.3 million (144%) compared to the same period in 2024, which had lower provisions due to better-than-expected collections[139] - Other income, net, decreased due to decreases in interest income earned on marketable securities[140] - Income tax provision increased by $5.9 million (448%) with an effective tax rate of 16.2% (vs. 6.7% in 2024), primarily due to higher income and the absence of a valuation allowance in the current period[141] Liquidity and Capital Resources Upwork's liquidity sources include $304.4 million cash and $317.6 million marketable securities, deemed sufficient for the next 12 months, with $66.9 million remaining for share repurchases. Liquidity Position (In millions) | Metric | March 31, 2025 | December 31, 2024 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $304.4 | $305.8 | | Marketable securities | $317.6 | $316.3 | - The company believes its existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient for at least the next 12 months[144] - As of March 31, 2025, the company had remaining purchase commitments under a cloud infrastructure agreement of $23.7 million[149] - During Q1 2025, the company repurchased $33.1 million of common stock under the 2024 Share Repurchase Authorization, with $66.9 million available for repurchases as of March 31, 2025[152] - Funds held in escrow, including funds in transit, were $215.9 million as of March 31, 2025, and are subject to escrow funding requirements[154] Critical Accounting Policies and Estimates Financial statement preparation involves management estimates and assumptions, with no material changes to critical accounting policies since the 2024 Form 10-K, except as noted in Note 2. - The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures[169] - There have been no material changes to critical accounting policies and estimates compared to those described in the Annual Report on Form 10-K for the year ended December 31, 2024, except as disclosed in Note 2[171] Recent Accounting Pronouncements Refers to Note 2 for information on recently issued accounting pronouncements not yet adopted. - Refer to "Note 2—Basis of Presentation and Summary of Significant Accounting Policies" for recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report[172] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses Upwork's exposure to market risks, primarily interest rate fluctuations and foreign currency exchange rates, in its domestic and international operations. Interest Rate Risk Upwork is exposed to interest rate risk from its $361.0 million fixed-rate convertible senior notes and investment portfolio, with a 100 basis point change not expected to materially impact results. - Upwork had $361.0 million aggregate principal amount of fixed-rate convertible senior notes outstanding as of March 31, 2025 and December 31, 2024[174] - The fair value of the company's investment portfolio and interest earned on funds held in escrow are relatively insensitive to interest rate changes[175][176] - A hypothetical increase or decrease in interest rates of 100 basis points is not expected to have a material impact on operating results or financial condition[176] Foreign Currency Risk Operating results are subject to foreign currency fluctuations due to multi-currency client invoices, mitigated by forward contracts, with immaterial impact to date. - Upwork's operating results and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, as clients can settle invoices in various non-U.S. dollar currencies[177] - The company mitigates foreign currency risk by entering into forward contracts or securing foreign currency exchange rates, and the impact has been immaterial to date[177] Item 4. Controls and Procedures Details the evaluation of Upwork's disclosure controls and procedures and reports on any changes in internal control over financial reporting during Q1 2025. Evaluation of Disclosure Controls and Procedures Management concluded that Upwork's disclosure controls and procedures were effective as of March 31, 2025, ensuring timely and accurate information reporting. - As of March 31, 2025, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[178] - Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports is accumulated and communicated to management for timely decisions and is recorded, processed, summarized, and reported within specified time periods[178] Changes in Internal Control over Financial Reporting No material changes to internal control over financial reporting occurred during Q1 2025. - There were no changes to internal control over financial reporting that occurred during the quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[179] PART II—OTHER INFORMATION Item 1. Legal Proceedings Upwork is not a party to any material pending legal proceedings, with additional information on commitments and contingencies in Note 6. - Upwork is not a party to any material pending legal proceedings[180] - Refer to "Note 6—Commitments and Contingencies" for additional information on commitments and contingencies[180] Item 1A. Risk Factors Outlines significant risks and uncertainties that could materially affect Upwork's business, operations, financial condition, and growth prospects across various domains. Summary of Risk Factors Summarizes material risks including dependence on talent/clients, growth management, evolving strategy, reliance on partners, fraud, international operations, competition, and regulatory compliance. - Key risks include dependence on attracting and retaining talent and clients, challenges in managing growth, evolving business strategy and pricing, reliance on banking and payment partners, payment and fraud risks, customer circumvention, disputes, international operations, and intense competition[182][185] - Other risks cover security breaches, brand reputation, system errors, extensive government regulation (worker classification, privacy, payments, anti-corruption, export controls), a history of net losses, fluctuating operating results, reliance on internal metrics, internal control effectiveness, tax liabilities, and the need for additional capital[185] - Risks related to common stock ownership (volatility, share repurchases, no dividends) and convertible senior notes (indebtedness, capped call effects) are also highlighted[185] Risks Related to our Business Operations, Execution, and Growth Upwork's growth depends on attracting and retaining talent and clients, managing growth, adapting strategy, and mitigating risks from banking partners, fraud, circumvention, disputes, and international operations. - Growth depends on the ability to attract and retain a community of talent and clients, which is challenging due to competition, macroeconomic conditions, and evolving customer expectations[183][184][186] - Changes to business strategy, offerings, and pricing models can have unintended negative effects, including increased customer dissatisfaction, harm to reputation, increased circumvention rates, or reductions in project activity[189][190] - Reliance on banking and payment partners, as well as strategic relationships with third parties (e.g., staffing providers, software vendors, payment processors), poses risks if these relationships are terminated or unfavorable[191][193][194] - The company faces payment and fraud risks, including unauthorized use of data, money laundering, and fraudulent sales, which can harm its reputation, divert management attention, and adversely impact business[195][198] - Customers circumvent the work marketplace to avoid fees, leading to revenue loss, and efforts to reduce circumvention may be costly or disruptive[199] - Disputes between talent and clients, regarding service standards, payment, or intellectual property, can lead to claims against the company and adversely affect its business[200][201] - International operations expose the company to significant challenges, including varying laws, geopolitical instability, currency risks, and difficulties in establishing local brand recognition and support[202][203] - The loss of senior management or other key personnel, including CEO Hayden Brown, could compromise the company's future vision, strategic direction, and technology[204][206] - Acquisitions, investments, and other strategic transactions are inherently risky and may result in operating difficulties, use of cash, dilutive equity issuances, or failure to realize anticipated benefits[207][209][210] Risks Related to Our Industry, Offerings, and Services The evolving independent talent market, intense competition, need for continuous offering development (especially AI), search engine rankings, security breaches, brand reputation, system errors, and customer support quality pose significant risks. - The market for online independent talent is relatively new, rapidly evolving, and unproven, with its growth dependent on competition, technological developments (including AI), and macroeconomic, geopolitical, legal, and regulatory conditions[211] - Failure to develop and release new offerings or successful enhancements to existing services, particularly with generative AI tools, could adversely affect the business due to rapid technological change and evolving customer demands[212] - Upwork faces intense competition from traditional staffing providers, online freelancer platforms, large internet companies (e.g., Google, LinkedIn, Amazon), and companies utilizing emerging technologies like AI and blockchain[214][215][216] - If internet search engines' methodologies or other channels used to direct traffic to the website are modified to the company's disadvantage, or search result page rankings decline, customer growth could decrease[221][222] - Security breaches, hacking, ransomware, or other privacy/security incidents affecting Upwork or its third-party partners could harm its reputation, reduce demand, disrupt operations, and incur significant legal costs, fines, or liabilities[223][224][225] - Failure to maintain and enhance the company's brand and reputation, or negative publicity, could adversely affect its business and financial condition[228] - Business or system errors, defects, or disruptions, including reliance on third-party cloud infrastructure (e.g., Amazon Web Services), could diminish demand, adversely impact business operations, and subject the company to liability[229][231][232] - The ability to attract and retain customers depends on the quality of customer support, and any failure to offer high-quality support, especially with international expansion or AI tool integration, could adversely impact the business[233] - Customer growth and engagement on mobile devices depend on third parties maintaining open application marketplaces (e.g., Apple App Store, Google Play) and effective operation with mobile operating systems, networks, and standards[234][235] Risks Related to Legal and Regulatory Matters Upwork is subject to extensive global regulations, including worker classification, privacy, payments, anti-corruption, and export controls, with non-compliance or changes posing significant business risks. Worker Classification Worker classification regulations are uncertain and evolving, potentially reducing demand for independent contractors, despite Upwork offering indemnification for misclassification in premium services. - Clients are generally responsible for worker classification, but Upwork offers an optional service for premium offerings to help classify talent, indemnifying clients for misclassification risk[241][242] - The worker classification regulatory landscape is highly uncertain and evolving, with laws like California's Assembly Bill 5 and new U.S. Department of Labor rules creating complexity[243] - Changes in worker classification regulations or public perception could reduce the demand for independent contractors and adversely affect the business[244] Privacy and Data Protection Upwork's handling of personal data is subject to complex global privacy laws, with new regulations or AI developments potentially increasing compliance costs or limiting platform functionality. - Upwork receives, collects, stores, processes, transfers, and uses personal information and other customer data, subject to numerous federal, state, local, and international privacy and data protection laws (e.g., GDPR, CCPA)[245][246][247] - New laws, the loss of existing cross-border data transfer frameworks, or future enforcement actions could increase costs, require material service modifications, or limit data processing capabilities[248] - Developments in AI may lead to increased restrictions that could impact the platform's functionality, limiting potential benefits[247] Payments Upwork Escrow Inc. is licensed in California and subject to DFPI regulations, with changes in escrow or money transmission laws potentially requiring additional licensing or increasing compliance costs. - Upwork Escrow Inc. is licensed as an internet escrow agent under California's Escrow Law and is subject to regulations by the DFPI[249] - Changes in laws or interpretations related to escrow, money transmission, or handling of money could require additional licensing, increase compliance costs, or lead to regulatory enforcement[249][250] Anti-Corruption, Anti-Money Laundering, and Sanctions Upwork implements compliance programs for AML, OFAC, and anti-corruption, but these may not prevent misuse or satisfy regulators, leading to reputational harm or adverse effects. - Upwork has implemented anti-money laundering, U.S. economic sanctions (OFAC), and anti-corruption (FCPA, UK Bribery Act) compliance programs[251][252][253] - These programs may not be sufficient to prevent misuse of the platform or satisfy regulators, and inadvertent violations or new sanctions could lead to adverse effects[251][252][253] - Non-compliance by competitors with such laws could decrease customer perception of online freelance marketplaces and adversely affect Upwork's business[254] Export Controls Upwork is subject to export controls restricting services to certain entities and countries, with potential violations harming reputation or changes decreasing international marketplace use. - Upwork may be subject to export controls and similar regulations that prohibit the shipment or provision of certain products and services to certain countries, governments, and persons[255] - Precautions may not prevent violations, and changes in import or export regulations could result in decreased use of the work marketplace by customers with international operations[255][256] We are vulnerable to intellectual property infringement claims and challenges to our intellectual property rights brought against us by third parties. Upwork is vulnerable to IP infringement claims, potentially exacerbated by generative AI use, which could lead to litigation, monetary liability, or business disruption. - Upwork is vulnerable to intellectual property infringement claims from third parties, including competitors, due to considerable activity in its industry[257] - The improper use of generative AI by customers of the work marketplace may lead to additional claims of intellectual property infringement[257] - Litigation or disputes could divert management attention and resources, subject the company to significant legal costs and liability, or require alterations to its work marketplace or business strategy[258] Failure to protect our intellectual property could adversely affect our business. Upwork's success depends on protecting its proprietary technology and data, but IP is vulnerable to unauthorized access, and enforcement may be difficult, harming its competitive position. - Upwork relies on various intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as contractual arrangements, to protect its proprietary technology and data[259] - Intellectual property is vulnerable to unauthorized access, and effective protection may not be available in every country, especially with a remote workforce, making control of confidential materials more difficult[259][261][263] - Failure to protect and enforce intellectual property rights successfully or cost-effectively could adversely impact the company's competitive position, brand, and financial condition[264] The use of open source software could restrict our ability to market or operate our work marketplace and could negatively affect our business. Upwork's use of open source software carries risks of license non-compliance, requiring re-engineering or source code disclosure, and lacks warranties or support, negatively affecting the business. - The work marketplace incorporates open source software, and non-compliance with license terms could lead to copyright infringement, re-engineering, or the requirement to make proprietary source code available[265][266] - Open source software generally does not provide warranties or assurances of title, performance, or non-infringement, and lacks guaranteed support or security updates, posing additional risks[267] Litigation could have a material adverse impact on our operating results and financial condition. Litigation and legal proceedings, with uncertain outcomes, can divert management, incur expenses, harm reputation, and require costly business changes or damages. - Upwork is involved in litigation and other legal proceedings, and the outcome of any such proceeding is inherently uncertain[268] - Legal proceedings can divert management's attention and resources, harm reputation, and cause significant expenses and liabilities, potentially requiring costly changes to business practices or payment of damages[268] If we are deemed to be an investment company under the Investment Company Act of 1940, our results of operations could be harmed. If deemed an "investment company" under the 1940 Act, Upwork would face stringent compliance, increased costs, and operational limitations, materially harming its business. - Upwork believes it is not an "investment company" under the Investment Company Act of 1940, as it is primarily engaged in operating an online work marketplace and complies with applicable exemptions and safe harbors[269] - If obligated to register as an "investment company," Upwork would face stringent compliance requirements, increased operating and compliance costs, and operational limitations, which could materially harm its business[269] Risks Related to Finance, Accounting, and Tax Matters Upwork faces risks from its history of net losses, fluctuating operating results, reliance on internal metrics, internal control effectiveness, complex tax laws, and limitations on NOL carryforwards. We have a history of net losses, may increase our operating expenses in the future, and may not be able to sustain profitability. Upwork has an accumulated deficit of $40.7 million and may not sustain profitability due to significant expenditures and potential revenue growth challenges amid macroeconomic uncertainty. - Upwork has incurred net losses in the past and had an accumulated deficit of $40.7 million as of March 31, 2025[270] - The company expects to make significant expenditures for business development and expansion, which may be more expensive than anticipated, and may not succeed in increasing revenue sufficiently to offset higher expenses[270] - Sustaining profitability is uncertain, particularly if revenue declines or fails to grow faster than operating expenses, or if macroeconomic conditions continue to adversely impact GSV (which declined 2% in Q1 2025)[270] Our operating results and performance metrics may fluctuate from period to period, which makes our future results difficult to predict. Upwork's operating results and performance metrics are subject to unpredictable fluctuations from macroeconomic conditions, competition, and seasonality, making future results difficult to predict. - Operating results and performance metrics have fluctuated in the past and may fluctuate in the future, particularly in periods of macroeconomic uncertainty and elevated interest rates and inflation[271] - Fluctuations are influenced by numerous unpredictable factors, including macroeconomic conditions, customer growth, competition, pricing model changes, spending patterns, seasonality, and transaction losses[272] - Period-to-period comparisons of operating results and performance metrics may not be meaningful, and past performance should not be relied upon as an indicator of future performance[272] 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. Upwork tracks performance metrics with unverified internal tools, which may contain inaccuracies or be impacted by fraud, potentially harming reputation and affecting strategies. - Upwork tracks performance metrics (e.g., active clients, GSV, Marketplace take rate) with internal tools that are not independently verified and have limitations, potentially leading to inaccurate data[274] - Performance metrics are impacted by illegal or improper activity, including fraud, spam, and fake accounts, which cannot be entirely prevented from being reflected in reported metrics[274] - Inaccurate or perceived inaccuracies in metrics could harm the company's reputation, lead to legal or regulatory actions, and adversely affect operating and financial results[274] If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired. Failure to maintain effective disclosure controls and internal control over financial reporting could impair financial reporting accuracy, lead to investor confidence loss, or delisting. - Effective internal controls are necessary for Upwork to provide reliable and accurate financial statements and to effectively prevent fraud[275] - Failure to maintain effective internal control over financial reporting could lead to loss of investor confidence, a decline in stock price, SEC investigation, or inability to remain listed on The Nasdaq Global Select Market[275] - Increased regulatory focus on environmental, social, and governance (ESG) matters and related disclosures adds to compliance risks, and incomplete or inaccurate reporting could adversely impact the business[276] The applicability of sales, use, and other tax laws or regulations on our business could subject us or our customers to additional tax liability and related interest and penalties, and adversely impact our business. Complex and uncertain tax laws in various jurisdictions could lead to additional tax liabilities, interest, and penalties, especially with international expansions or changes in tax laws. - Upwork is subject to numerous sales, use, and other tax laws in the U.S. and foreign jurisdictions, with significant judgment required to evaluate obligations and inherent uncertainty in ultimate tax determinations[277] - Changes in tax laws, administrative interpretations, audit results, or business operations (e.g., international expansions, transfer pricing) could lead to additional tax liabilities, interest, and penalties[277][279] - An adverse result from tax audits or investigations could have a significant adverse impact on financial results, and future effective tax rates could be affected by changes in tax rates or deferred tax asset valuations[280] Our ability to use our net operating loss carryforwards and certain other tax attributes is limited. Upwork's ability to use federal and state NOL carryforwards is limited by past and potential future ownership changes, which could increase future tax obligations. - As of December 31, 2024, Upwork had federal NOL carryforwards of $18.9 million and California state NOL carryforwards of $91.0 million[281] - The ability to utilize these NOL carryforwards is limited by past ownership changes under Section 382 of the Internal Revenue Code and could be further restricted by future changes in stock ownership or regulatory changes[282] - Any material limitation or expiration of NOLs may harm future operating results by effectively increasing future tax obligations[282] We may require additional capital to fund our business and support our growth, and any inability to generate or obtain such capital may adversely affect our business, operating results, and financial condition. Additional capital may be needed for growth, features, acquisitions, or repurchases, with equity potentially diluting stockholders and debt imposing restrictive covenants. - Upwork may require additional capital to fund business growth, develop new features, acquire technologies, improve infrastructure, or repurchase shares[283] - Raising funds through equity or convertible debt could result in significant dilution for existing stockholders, while debt financing may impose additional restrictive covenants[284] - Inability to obtain adequate financing on satisfactory terms could significantly impair business growth and strategy, adversely affecting operating results and financial condition[284] Risks Related to Ownership of Our Common Stock Risks include stock price volatility, uncertainty of share repurchase benefits, potential dilution from future sales, no foreseeable dividends, and charter provisions that could hinder acquisitions. The stock price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment. Upwork's common stock price has been volatile due to various unpredictable factors, potentially leading to investor losses and securities litigation. - The market price of common stock has been and may continue to be volatile due to numerous unpredictable factors, including actual or anticipated fluctuations in operating results, macroeconomic conditions, and negative publicity[285] - Volatility could lead to investor losses, and involvement in securities litigation could result in substantial costs and diversion of management resources[286] We cannot guarantee that the 2024 Share Repurchase Authorization will be fully consummated or that repurchases made under our share repurchase authorizations will enhance long-term stockholder value. Share repurchases could also increase the volatility of the trading price of our common stock and diminish our cash reserves. The $100.0 million share repurchase authorization is not guaranteed to be fully consummated or enhance long-term value, potentially increasing stock volatility and diminishing cash reserves. - The 2024 Share Repurchase Authorization for $100.0 million (with $66.9 million available as of March 31, 2025) is not guaranteed to be fully consummated or to enhance long-term stockholder value[288] - Share repurchases could affect the trading price, increase volatility, and diminish cash and cash equivalents available for working capital, debt repayment, capital expenditures, and strategic opportunities[288] Sales of substantial amounts of our common stock in the public markets, particularly sales by our directors, executive officers, and significant stockholders, or the perception that these sales could occur, could cause the market price of our common stock to decline and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Large sales of common stock by insiders or the perception of such sales could cause the market price to decline and make it difficult for investors to sell shares. - Sales of a large number of common stock in the market, particularly by directors, executive officers, and significant stockholders, or the perception of such sales, could cause the market price to decline[289] - Future issuances of common stock, convertible securities, or preferred stock in connection with financing, acquisitions, or investments could result in substantial dilution to existing stockholders[289] [We do not intend to pay dividends for the foreseeable future.](index=61&type=section&id=We%20do%20not%20intend%20to%20p