Upwork(UPWK) - 2023 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements The report contains forward-looking statements about future operating results, financial position, business strategy, growth, expenses, and share repurchase plans, subject to risks detailed in the 'Risk Factors' section - The report contains forward-looking statements about future operating results, financial position, business strategy, growth, expenses, and share repurchase plans. These statements are based on current expectations and projections and are subject to risks, uncertainties, and assumptions, including those detailed in the 'Risk Factors' section[12][13][14] PART I Item 1. Business Upwork Inc. operates the world's largest work marketplace, connecting businesses with independent talent globally, facilitating $4.1 billion in Gross Services Volume (GSV) in 2023 - Upwork operates the world's largest work marketplace, connecting businesses with independent talent globally[16] Gross Services Volume (GSV) | Year | GSV (Billions) | | :--- | :--- | | 2023 | $4.1 | | 2022 | $4.1 | | 2021 | $3.5 | - Revenue is primarily generated from talent service fees (percentage of billings) and client marketplace fees (per-transaction basis), with additional revenue from premium offerings like Upwork Payroll, Connects, and talent memberships[21][241] Overview Upwork operates the world's largest work marketplace, connecting businesses with independent talent and facilitating billions in Gross Services Volume annually - Upwork operates the world's largest work marketplace, connecting businesses with independent talent, facilitating $4.1 billion in Gross Services Volume (GSV) in 2023[16] - The platform serves as a discovery engine for talent, offering flexible work, secure payments, and market visibility, while providing clients with fast, secure access to high-quality talent across over 10,000 skills, including generative AI[17][18][19] - Revenue is primarily generated from talent service fees (percentage of billings) and client marketplace fees (per-transaction basis), along with premium offerings and foreign currency exchange fees[21] Our Work Marketplace The Upwork marketplace leverages technology, data science, and AI to build trust, ensure security, and efficiently match clients with talent - Upwork's work marketplace is built on fostering trust and credibility through technology, data science, machine learning, and AI for security, identity verification, fraud detection, and dispute resolution[22] - Proprietary data on talent skills, feedback, and success indicators, combined with machine learning models, drives efficient matching of clients to talent and projects to skills, leveraging closed-loop transaction data[23][24] - The platform offers robust functionality including proposal tracking, search, collaboration tools, time tracking, invoicing, and payment services, creating powerful global network effects that drive efficient customer growth and predictable recurring revenue[24][25][26][27] Our Offerings Upwork provides diverse offerings, including a marketplace for independent talent, Upwork Payroll, and enterprise solutions for large clients - Marketplace offerings provide clients with access to independent talent, verified work history, instant matching, collaboration features, and premium perks like verified client badges and highlighted job posts[28] - Upwork Payroll is available for clients engaging talent as employees through third-party staffing providers[29][31] - Enterprise offerings (Enterprise Solutions and Managed Services) cater to large clients, providing advanced features, account management, detailed reporting, and compliance services, including direct engagement of talent by Upwork for Managed Services[30] Our Team and Culture Upwork fosters a remote-first, diverse, and inclusive culture, investing in employee development and well-being to support its mission - Upwork's mission to create economic opportunities drives its remote-first work model, fostering a diverse, inclusive, and belonging-oriented culture for its approximately 800 employees and 2,500 independent team members[32][33][34][35] - The company invests in employee development through training, competitive compensation (including equity), and comprehensive benefits (medical, dental, mental health, 401(k) match, unlimited PTO) to attract and retain talent[37][38][41] - People analytics and board oversight ensure continuous improvement in workforce experience, productivity, and a values-based culture, with emphasis on CEO and management contributions to culture[39][40][42] Sales and Marketing Sales and marketing strategies focus on increasing brand awareness, generating demand, and expanding enterprise client relationships through targeted campaigns - Upwork's sales and marketing strategy aims to increase brand awareness, generate customer demand, and grow account relationships across all client sizes, from independent professionals to Fortune 100 companies[43] - The Enterprise sales team focuses on 'Land and Expand' strategies to acquire new enterprise-scale clients and scale usage within existing organizations through strategic relationship development and persona-based campaigns[44][46][47] - Marketing efforts include digital, direct mail, event marketing, email, and advertising campaigns, leveraging insights from the Upwork Research Institute to highlight benefits like talent quality, speed, flexibility, and cost-effectiveness[45] Our Technology Upwork heavily invests in R&D to enhance its AWS-hosted platform, focusing on security, scalability, and AI-driven matching capabilities - Upwork invests heavily in R&D to enhance its platform, develop new features, and improve infrastructure, hosted on Amazon Web Services (AWS) with a flexible, services-oriented architecture for scalability and reliability[48][52] - Security is a core focus, with ISO 27001/27018, SOC 2 Type II, SOC 3, PCI-DSS, and Privacy Shield certifications, multi-level controls, fraud detection algorithms, third-party user verification, and encryption for sensitive data[49][50][51][52] - The platform leverages machine learning and AI, trained on proprietary closed-loop transaction data, to provide adaptive customer experiences, optimize talent-project matching, balance supply and demand, and assess talent potential[54][55][56] Our Impact Upwork aims to create economic opportunities globally, promoting flexible work, inclusive hiring, and sustainable operations through remote engagements - Upwork's mission is to create economic opportunities, enabling millions globally to access flexible work, set their own rates, and market skills beyond local labor markets, promoting inclusive hiring through accessibility improvements and diversity-certified talent badges[58][59] - The company supports a more efficient and sustainable way to work by facilitating remote engagements, committing to carbon-neutral operations, purchasing 100% carbon-free electricity, and reducing Scope 3 emissions[60] - Upwork continuously assesses its social and environmental impact, focusing on economic opportunity, business integrity, diversity, inclusion, belonging, workforce innovation, well-being, environmental sustainability, and supplier engagement[61] Competition The independent talent market is highly competitive and fragmented, with Upwork competing on platform features, customer base, and innovation - The market for independent talent is highly competitive, rapidly evolving, and fragmented, with numerous online and offline platforms, traditional staffing firms, and new entrants driven by remote work trends[62] - Key competitive factors include platform features, verified work history, customer base size, skill breadth, project quality, data assets, ease of use, brand reputation, trust and safety, customer satisfaction, and innovation[63] - Upwork competes favorably on these factors and continues to invest in its business for long-term success[63] Intellectual Property Upwork protects its technology and brand through a portfolio of patents, trademarks, trade secrets, and contractual agreements - Upwork protects its technology and intellectual property through patents, trademarks, trade secrets, copyrights, confidentiality agreements, and contractual commitments[64] - As of December 31, 2023, the company held 20 issued U.S. patents and 6 registered U.S. trademarks (including Upwork, Elance, oDesk, and Talent Cloud), plus 139 foreign registered trademarks[65] Government Regulation Upwork maintains a robust regulatory compliance program for evolving U.S. and international laws, covering worker classification, data protection, and payments - Upwork maintains a robust regulatory compliance program for U.S. federal, state, and foreign laws applicable to internet companies and online marketplaces, covering areas like worker classification, data protection, payments, and anti-money laundering[66] - The company is licensed as an internet escrow agent by the California Department of Financial Protection and Innovation (DFPI)[66] - The regulatory landscape is evolving and uncertain, with potential for new interpretations or laws that could adversely impact the business, though compliance is not currently expected to have a material adverse effect[66] Corporate Information Upwork Inc., incorporated in Delaware in 2013, operates its single work marketplace from its San Francisco headquarters - Upwork Inc. was incorporated in Delaware in December 2013, formed from the combination of Elance, Inc. and oDesk Corporation, and operates under a single work marketplace since 2016[67] - The principal executive office is in San Francisco, California, and the company's website is www.upwork.com[68](index=68&type=chunk) Available Information Upwork provides public filings with the SEC and disseminates company news and financial information via its investor relations website and social media - Upwork files annual, quarterly, and current reports with the SEC (www.sec.gov) and makes them available free of charge on its investor relations website (investors.upwork.com)[70] - The company uses its investor relations website, X (Twitter) handles, and LinkedIn profiles as channels for disseminating news, financial performance, investor events, and material non-public information[71] Item 1A. Risk Factors Upwork faces diverse material risks across business operations, industry competition, legal and regulatory compliance, financial performance, and common stock ownership, impacting its growth and profitability - Upwork's growth is highly dependent on its ability to attract and retain both talent and clients, and failure to do so cost-effectively could adversely impact the business[74] - The company faces significant payment and fraud risks, including unauthorized use of payment information and fraudulent conduct, which could harm its reputation and financial condition[85][87] - Upwork is subject to extensive and evolving government regulations globally, particularly concerning worker classification, data protection, and payment services, with non-compliance potentially leading to significant liabilities and operational changes[136][137][139] Summary of Risk Factors This section summarizes Upwork's key risks, encompassing customer dependence, growth management, payment fraud, and regulatory compliance challenges - Key risks include dependence on customer attraction/retention, challenges in sustaining growth, evolving business strategies, payment/fraud risks, and maintaining banking relationships[73] - Other material risks involve sales force productivity, strategic third-party relationships, customer circumvention, client payment failures, customer disputes, international operations, and the market for independent talent[73] - Further risks cover security breaches, brand reputation, search engine dependency, system errors, government regulation, net losses, fluctuating operating results, and stock price volatility[73] Risks Related to our Business Operations, Execution, and Growth Upwork's business operations face risks from customer acquisition, growth management, strategy changes, payment fraud, and international complexities - Upwork's growth relies on attracting and retaining clients and talent; failure to do so, or if generative AI replaces traditional tasks, could adversely impact the business[74][76] - The company's historical growth rates may not be sustainable, especially with macroeconomic uncertainty, and effective management of growth requires continuous improvement in systems and workforce[80][81] - Changes to business strategy, offerings, or pricing models can lead to customer dissatisfaction, increased circumvention, or reduced project activity, making future prospects difficult to evaluate[82][83] - Payment and fraud risks, including sophisticated illegal activities and increased transaction losses (e.g., $89.9 million net loss in 2022), could harm reputation and business[85][87] - Dependence on banking and payment partners means unfavorable terms or termination of relationships could disrupt payment collection and disbursement[89][90] - Revenue growth and profitability depend on increasing sales force productivity, particularly for large enterprise clients with longer sales cycles and higher service demands[91][92] - Reliance on third-party strategic relationships (staffing, software, payment processors) means their failure to perform or offer services on favorable terms could adversely impact the business[94] - Customer circumvention of the platform to avoid fees, especially during economic downturns, negatively impacts revenue and is difficult to measure[95] - Clients sometimes fail to pay invoices, particularly for Enterprise Solutions, increasing financial exposure and collection costs, a risk exacerbated during macroeconomic downturns[96] - Disputes between talent and clients, or claims against Upwork, can divert management attention, harm reputation, and incur liabilities, especially if contract terms are deemed unenforceable[97][98] - International operations in over 180 countries expose Upwork to varying laws, geopolitical instability (e.g., suspension in Russia/Belarus), currency risks, and difficulties in localization and compliance[99][100][101] - Loss of key personnel, including CEO Hayden Brown, or inability to attract and retain skilled employees, particularly software engineers, could compromise business strategy and operations[102][103][104] - Acquisitions or investments in other companies may divert management attention, dilute stockholders, incur expenses, or lead to integration difficulties and unforeseen risks[106] Risks Related to Our Industry, Offerings, and Services Industry-specific risks include market evolution, intense competition, technological changes, security breaches, and brand reputation challenges - Upwork's substantial reliance on Marketplace offerings means failure to meet customer demands, expand services, or maintain trust could adversely affect business and financial condition[107] - The market for online independent talent is new and evolving; slower-than-expected growth, declining demand for IT services, or increased preference for traditional employment could impact Upwork's growth[109] - Failure to develop and release new offerings, enhancements, or features, especially with rapid technological change (e.g., generative AI), could make existing services obsolete and negatively affect the business[111][112] - Upwork faces intense competition from traditional staffing firms, other online freelancer platforms, large internet companies (Google, LinkedIn), and emerging technology companies (blockchain, AI), many of whom have greater resources and brand recognition[113][114][115][116][118] - Security breaches, hacking, phishing, or other privacy incidents affecting Upwork or its third-party partners could harm reputation, reduce demand, disrupt operations, and incur significant legal costs and liabilities[120][121][122][123] - Failure to cost-effectively develop, maintain, and enhance its brand and reputation, or negative publicity, could adversely affect customer acquisition and retention[124][126][127] - Changes in internet search engine algorithms or other traffic channels could reduce website visitors and customer growth, potentially requiring increased marketing expenditures[128][129] - Business or system errors, defects, or disruptions (e.g., hardware/software errors, natural disasters, cybersecurity attacks) could diminish demand, harm reputation, and subject Upwork to liability[130][131][132][133] - Inability to offer high-quality customer support, especially for large enterprise clients or international customers, could harm reputation and adversely impact business[134] - Dependence on third-party mobile operating systems and application marketplaces means changes in their policies or functionality could adversely impact customer growth and engagement on mobile devices[135] Risks Related to Legal and Regulatory Matters Legal and regulatory risks involve evolving worker classification laws, data privacy, payment regulations, intellectual property, and potential litigation - Upwork is subject to extensive and complex U.S. and international laws and regulations (worker classification, data protection, payments, IP, consumer protection), with evolving interpretations that could adversely impact the business[136][137][138] - Regulatory scrutiny is increasing, and non-compliance or alleged failures could result in enforcement actions, fines, lawsuits, operational limitations, and reputational harm[138][139] - Uncertainty in worker classification laws (e.g., California's AB 5, U.S. Department of Labor's new rule) poses a risk of misclassification for independent contractors, potentially reducing demand for such services and increasing Upwork's employment-related risks[140][141][142][143] - The complex and evolving global regulatory framework for privacy and data protection (e.g., GDPR, CCPA, AI restrictions) could increase compliance costs, limit service development, and lead to significant liabilities[144][145][146][147][148] - As a licensed internet escrow agent, Upwork is subject to escrow and money transmission regulations; changes in these laws or their interpretation could require new licenses or lead to enforcement actions[149][150] - Compliance with anti-money laundering, sanctions (e.g., OFAC, Ukraine war sanctions), and anti-corruption laws (FCPA, UK Bribery Act) is critical; failures or inadvertent violations could lead to regulatory action, reputational damage, and business disruption[151][152][153][154][155] - Export controls and encryption regulations could limit Upwork's ability to distribute its platform or customers' access in certain countries, impacting international operations[156][157] - Upwork is vulnerable to intellectual property infringement claims and challenges to its own IP rights, which could result in monetary liability, business disruption, or costly litigation[158] - Failure to protect its proprietary technology, data, and brand through patents, trademarks, and trade secrets could adversely affect its competitive position and operating results, especially with remote employees increasing risk of confidential material exposure[160][161][162][163] - The use of open-source software carries risks, including potential license non-compliance that could require re-engineering, monetary damages, or disclosure of proprietary source code[164][165][166] - Litigation, including class actions, can divert management attention, incur significant expenses, harm reputation, and force costly changes to business practices[167] - If deemed an 'investment company' under the Investment Company Act of 1940, Upwork would face stringent regulatory requirements, increasing costs and potentially making its current business model impractical[168][169] Risks Related to Finance, Accounting, and Tax Matters Financial risks include a history of net losses, fluctuating operating results, reliance on internal metrics, and complex tax laws impacting profitability - Upwork has a history of net losses (e.g., $89.9 million in 2022) and may increase operating expenses, making sustained profitability uncertain, especially if revenue growth does not offset higher costs[170] - Operating results and performance metrics are subject to significant period-to-period fluctuations due to macroeconomic conditions, product launches, pricing changes, and other factors, making future results difficult to predict[171][172][173][174] - Reliance on internal tools for performance metrics (e.g., active clients, GSV per active client) means potential inaccuracies due to limitations, errors, or fraudulent activity could harm reputation and business[175] - Failure to maintain effective disclosure controls and internal control over financial reporting could impair timely and accurate financial statements, leading to loss of investor confidence and potential SEC sanctions[176][177][178] - Fluctuations in foreign currency exchange rates, particularly a strengthening U.S. dollar, could adversely affect operating results and make transactions more costly for international clients[179][180] - The complex and evolving nature of sales, use, and other tax laws (e.g., marketplace facilitator taxes, Form 1099-K reporting) could subject Upwork or its customers to additional tax liabilities, interest, and penalties[181][182][183][184][185][186] - Upwork's ability to use its net operating loss (NOL) carryforwards ($181.2 million federal, $81.3 million California as of Dec 31, 2023) is limited by ownership changes (Section 382) and tax law changes (Tax Cuts and Jobs Act), potentially increasing future tax obligations[187][188][189] - The company may require additional capital for growth, acquisitions, or share repurchases; inability to obtain such capital on favorable terms could dilute existing stockholders or impose restrictive debt covenants[190] Risks Related to Ownership of Our Common Stock Risks related to common stock ownership include market price volatility, the share repurchase program's impact, potential stock sales, and lack of future cash dividends - The market price of Upwork's common stock has been and may continue to be volatile due to broader market fluctuations, macroeconomic uncertainty, company performance, and other factors, potentially leading to investor losses[191][192] - The Share Repurchase Program, authorized for up to $100.0 million, does not guarantee repurchases or long-term stockholder value enhancement and could affect stock price volatility or cash reserves[193][194] - Sales of substantial amounts of common stock by directors, executive officers, or significant stockholders, or the perception of such sales, could cause the market price to decline and dilute existing stockholders[195] - Upwork does not intend to pay cash dividends in the foreseeable future, meaning investors must rely on stock price appreciation for gains[196] - Provisions in charter documents and Delaware law (e.g., classified board, super-majority voting, 'blank check' preferred stock) could make an acquisition more difficult and limit stockholders' ability to influence management or obtain a favorable judicial forum[197][198][199][200] Risks Related to Our Convertible Senior Notes Risks associated with convertible senior notes include cash flow limitations, increased vulnerability to adverse conditions, and potential stock dilution upon conversion - Upwork's outstanding convertible senior notes ($361.0 million principal amount as of Dec 31, 2023) could limit cash flow for operations, increase vulnerability to adverse conditions, and dilute existing stockholders upon conversion[201][202] - Capped call transactions, intended to reduce dilution upon conversion of notes, may still affect the value of common stock due to hedging activities by option counterparties[203][204][205] General Risks General risks include adverse macroeconomic conditions, such as inflation or reduced business spending, which can negatively impact demand and financial results - Adverse or changing economic conditions, such as rising inflation, hiring freezes, or reduced business spending, could negatively impact demand for labor and Upwork's business and operating results[206] - Economic downturns can lead to reductions in revenue, increased operating expenses, longer sales cycles, and heightened competition[206] Item 1B. Unresolved Staff Comments Upwork Inc. has no unresolved staff comments to report - Not applicable[207] Item 1C. Cybersecurity Upwork has a comprehensive cybersecurity risk management program integrated into its overall risk management, with physical, technological, and administrative controls, regular testing, and prompt incident escalation - Upwork integrates cybersecurity and data privacy risk management into its overall program, with processes for assessing, identifying, and managing material threats[208] - The company holds multiple security and privacy certifications (ISO 27001/27018, SOC 2 Type 2, SOC 3, PCI-DSS Level 1, Privacy Shield, TrustArc) and leverages the NIST security framework[209] - Technical safeguards include firewalls, intrusion prevention, endpoint detection, logging, monitoring, anti-malware, advanced email security, network security monitoring, access controls, and encryption (TLS, SSL, HSTS)[214] Cybersecurity Risk Management and Strategy Upwork's cybersecurity strategy employs multi-layered controls, incident response, and third-party support to secure data and systems, maintaining various industry certifications - Upwork's cybersecurity strategy includes physical, technological, and administrative controls, incident detection/response procedures, and regular test exercises to ensure preparedness[208] - The platform is designed to secure data and systems, protect customer personal information, and meet enterprise client requirements, holding certifications like ISO 27001, SOC 2 Type 2, and PCI-DSS Level 1[209] - Information security controls operate at multiple levels, utilizing automated risk mitigation, comprehensive trust and safety processes, pattern-matching algorithms for suspicious behavior, and regular mandatory employee training[210] - Third-party vendors and external service providers support cybersecurity processes, including risk assessments, program enhancements, user verification, security reviews, and bug bounty services[211][212] - Technical safeguards include firewalls, intrusion prevention, endpoint detection, logging, monitoring, anti-malware, advanced email security, network security monitoring, access controls, and industry-standard encryption (TLS, SSL, HSTS)[214] - To date, cybersecurity threats have not materially affected Upwork's business strategy, operating results, or financial condition[215] Cybersecurity Governance Cybersecurity and data privacy risk oversight is provided by the board of directors and audit committee, with the CISO leading management's program implementation - Cybersecurity and data privacy risk oversight is shared by Upwork's board of directors, audit committee, and management[216] - The audit committee reviews cybersecurity and data privacy matters quarterly, reporting to the full board, with one member holding a NACD CERT Certificate in Cybersecurity Oversight[217] - The Chief Information Security Officer (CISO), with over 25 years of experience, leads the cybersecurity risk management program, partners with the legal team on data privacy, and provides regular updates to management and the board[217][218][219] Item 2. Properties Upwork's corporate headquarters are in San Francisco, California, occupying approximately 18,500 square feet under a lease expiring in August 2024 - Upwork's corporate headquarters are in San Francisco, California, with a lease for approximately 18,500 square feet expiring in August 2024[220] - Additional office spaces are leased in Chicago, Illinois, and working spaces are rented in Luxembourg and Norway[220] - The company may close, sublease, relocate, or procure additional office space in the future[221] Item 3. Legal Proceedings Upwork is not currently a party to any material pending legal proceedings and is unaware of any pending or threatened litigation that could have a material adverse effect on its business, operating results, cash flows, or financial condition - Upwork is not a party to any material pending legal proceedings[222] - The company may be subject to legal proceedings and claims in the ordinary course of business from time to time[222] Item 4. Mine Safety Disclosures Upwork Inc. has no disclosures related to mine safety - Not applicable[223] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Upwork's common stock (UPWK) has traded on The Nasdaq Global Select Market since October 3, 2018, with approximately 1,280 holders of record as of January 31, 2024, and a $100.0 million share repurchase program authorized in November 2023 - Upwork's common stock (UPWK) has been traded on The Nasdaq Global Select Market since October 3, 2018[225] - As of January 31, 2024, there were approximately 1,280 holders of record for common stock[226] - Upwork has never declared or paid cash dividends and does not intend to in the foreseeable future, retaining earnings for business development and share repurchases[227][196] - In November 2023, the board authorized a $100.0 million share repurchase program, with no activity during Q4 2023[234] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[235] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Upwork's financial performance in 2023 was positively impacted by strategic initiatives and cost-saving measures, leading to net income of $46.9 million (vs. $89.9 million net loss in 2022) and adjusted EBITDA of $73.1 million (vs. $4.0 million loss in 2022), with total revenue increasing 11% to $689.1 million - Upwork's 2023 financial results were positively impacted by initiatives like increasing Connects needed for bids, deploying ads, introducing a contract initiation fee, and changing to a flat 10% talent service fee[242] - Cost-saving measures, including reduced brand marketing and a 15% workforce reduction in May 2023, contributed to improved profitability[243] Key Financial Highlights (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--------------------- | :------------------ | :------------------ | :------- | | Net income (loss) | $46,887 | $(89,885) | * | | Adjusted EBITDA | $73,134 | $(4,029) | * | | Total revenue | $689,136 | $618,318 | 11% | | Marketplace revenue | $586,099 | $518,282 | 13% | | Enterprise revenue | $103,037 | $100,036 | 3% | | GSV | $4,142,252 | $4,104,891 | 1% | | Active clients | 851 | 814 | 5% | | GSV per active client | $4,867 | $5,045 | (4)% | | Marketplace take rate | 15.4% | 13.8% | 1.6% | Overview Upwork's 2023 financial overview highlights strategic initiatives and cost savings that improved profitability, despite flat Gross Services Volume - Upwork operates the world's largest work marketplace, connecting businesses with independent talent across 180+ countries, enabling $4.1 billion in GSV in 2023[237] - In 2023, 26% of GSV was generated from U.S. talent, with India and the Philippines as the next largest talent geographies. Approximately 69% of GSV came from U.S. clients[238][239] - Upwork changed its 'Upwork Enterprise' offering name to 'Enterprise Solutions' and combined it with 'Managed Services' into a suite of 'Enterprise offerings' for current period presentation[240] - Key initiatives in 2023, including changes to Connects, ads products, a contract initiation fee, and a flat 10% talent service fee (replacing tiered 5-20%), positively impacted Marketplace revenue and take rate[242] - Cost-saving measures, such as reduced brand marketing and a 15% workforce reduction, led to a net income of $46.9 million in 2023, a significant improvement from a $89.9 million net loss in 2022[243][244] Key Financial and Operational Metrics | Metric | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :--------------------- | :--------- | :--------- | :--------- | | GSV | $4,142,252 | $4,104,891 | $3,546,774 | | Marketplace revenue | $586,099 | $518,282 | $427,476 | | Marketplace take rate | 15.4% | 13.8% | 13.2% | | Net income (loss) | $46,887 | $(89,885) | $(56,240) | | Adjusted EBITDA | $73,134 | $(4,029) | $19,127 | | Active clients | 851 | 814 | 771 | | GSV per active client | $4,867 | $5,045 | $4,599 | - GSV remained relatively flat at $4.1 billion in 2023 compared to 2022, while active clients increased by 5% to 851 thousand, leading to a 4% decrease in GSV per active client[246][254][278] - Marketplace revenue, the primary driver of the business, is correlated to GSV and is expected to grow as GSV grows, with Marketplace take rate measuring monetization efficiency[251][252][253] - Client spend from existing clients is a significant growth driver, with historical cohorts continuing to spend meaningfully on the platform[256] Components of Our Results of Operations This section details Upwork's revenue streams from Marketplace and Enterprise offerings, along with the composition of its cost of revenue and operating expenses - Revenue is generated from Marketplace and Enterprise offerings. Marketplace revenue primarily comes from talent service fees (flat 10% since May 2023, replacing tiered 5-20%) and client marketplace fees (5% or 3% via ACH), plus contract initiation fees and other services[258][259][260] - Enterprise revenue includes Enterprise Solutions (subscriptions, client service fees, talent service fees, compliance services) and Managed Services (where Upwork acts as principal, recognizing entire GSV as revenue)[261][262][263][264] - Cost of revenue includes payment processing fees, talent costs for Managed Services, personnel-related costs for support, third-party hosting fees (AWS), and amortization of capitalized software[265] - Operating expenses consist of Research and Development (personnel, software, capitalized internal-use software), Sales and Marketing (advertising, personnel, commissions), General and Administrative (executive, finance, legal, impairment), and Provision for Transaction Losses (fraud, bad debt, chargebacks)[267][268][269] - Other income (expense), net primarily includes interest income from investments, interest expense on borrowings, and foreign currency exchange gains/losses[270] - Income tax provision is accounted for using the asset and liability method, recognizing deferred assets/liabilities and establishing a valuation allowance when deferred tax assets are unlikely to be realized[271][272][273][274] Results of Operations Upwork's 2023 results show an 11% revenue increase, improved gross margin, and reduced operating expenses, leading to a significant shift from net loss to net income Consolidated Results of Operations (2023 vs. 2022 vs. 2021) | (In thousands) | 2023 | 2022 | 2021 | | :------------- | :---------- | :---------- | :---------- | | Revenue | $689,136 | $618,318 | $502,797 | | Cost of revenue| $170,450 | $160,402 | $135,508 | | Gross profit | $518,686 | $457,916 | $367,289 | | Operating expenses: | | R&D | $177,363 | $154,553 | $119,083 | | S&M | $220,681 | $246,882 | $183,294 | | G&A | $118,925 | $123,952 | $113,081 | | Prov. for trans. losses | $12,977 | $25,153 | $6,048 | | Total operating expenses | $529,946 | $550,540 | $421,506 | | Loss from operations | $(11,260) | $(92,624) | $(54,217) | | Other income (expense), net | $60,137 | $3,275 | $(1,901) | | Income (loss) before taxes | $48,877 | $(89,349) | $(56,118) | | Income tax provision | $(1,990) | $(536) | $(122) | | Net income (loss) | $46,887 | $(89,885) | $(56,240) | Revenue Comparison (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change ($) | Change (%) | | :------------- | :---------- | :---------- | :--------- | :--------- | | Marketplace | $586,099 | $518,282 | $67,817 | 13% | | Enterprise | $103,037 | $100,036 | $3,001 | 3% | | Total revenue | $689,136 | $618,318 | $70,818 | 11% | - Total revenue increased by 11% to $689.1 million in 2023, primarily driven by a 13% increase in Marketplace revenue due to changes in client marketplace fees, Connects, and talent service fees, leading to a Marketplace take rate increase to 15.4% (from 13.8% in 2022)[279] - Cost of revenue increased by 6% to $170.5 million in 2023, mainly due to higher payment processing fees, talent services for Managed Services, amortization of capitalized software, and hosting fees. Gross margin improved to 75% (from 74% in 2022)[281] - Research and development expense increased by 15% to $177.4 million in 2023, driven by higher personnel-related costs and software costs, partially offset by increased capitalization of internal-use software[283] - Sales and marketing expense decreased by 11% to $220.7 million in 2023, primarily due to a $39.1 million reduction in marketing and advertising, and a workforce reduction, partially offset by increased personnel costs[285] - General and administrative expense decreased by 4% to $118.9 million in 2023, mainly due to lower indirect taxes and reduced humanitarian response efforts, partially offset by increased software costs[287] - Provision for transaction losses decreased by 48% to $13.0 million in 2023, representing 2% of revenue (down from 4% in 2022), due to enhanced trust and safety measures[289] - Other income, net significantly increased by $56.9 million in 2023, primarily due to a $38.9 million gain on early extinguishment of debt (Note Repurchases) and $16.5 million higher interest income from marketable securities[291] - Income tax provision increased by $1.5 million in 2023, primarily due to a year-over-year increase in U.S. federal taxable income[293] Non-GAAP Financial Measures Adjusted EBITDA, a non-GAAP measure, is used to assess Upwork's operational efficiency by excluding non-cash and non-recurring items from net income - Adjusted EBITDA is a non-GAAP measure used to evaluate operational efficiency, defined as net income (loss) adjusted for stock-based compensation, depreciation/amortization, interest, other income/expense, income tax, and certain non-cash or non-recurring items (e.g., Ukraine humanitarian response costs)[294][295] Adjusted EBITDA Reconciliation | (In thousands) | 2023 | 2022 | 2021 | | :------------- | :---------- | :---------- | :---------- | | Net income (loss) | $46,887 | $(89,885) | $(56,240) | | Stock-based comp. expense | $74,195 | $75,501 | $53,592 | | Depreciation & amortization | $9,449 | $8,057 | $10,261 | | Other (income) expense, net | $(60,137) | $(3,275) | $1,901 | | Income tax provision | $1,990 | $536 | $122 | | Other (Tides Foundation, Ukraine, Impairment) | $750 | $5,037 | $9,491 | | Adjusted EBITDA | $73,134 | $(4,029) | $19,127 | - Adjusted EBITDA increased significantly to $73.1 million in 2023 from a $4.0 million loss in 2022, reflecting improved operational performance[296] Liquidity and Capital Resources Upwork maintains strong liquidity through cash and marketable securities, expecting sufficient funds for short-term needs, while managing debt and a share repurchase program - Upwork's primary liquidity sources are cash and cash equivalents ($79.6 million in 2023) and marketable securities ($470.5 million in 2023), primarily fixed income securities, with the objective of preserving principal[299] - Existing liquidity and cash flow from operations are expected to be sufficient for at least the next 12 months, but long-term needs depend on revenue growth, capital expenditures, acquisitions, and market conditions[300] - Principal commitments include $361.0 million in convertible senior notes due August 2026 and $13.1 million in future operating lease commitments[301] - A $100.0 million share repurchase program was authorized in November 2023, with no activity in Q4 2023, and future repurchases may be subject to a 1% excise tax under the Inflation Reduction Act of 2022[302] - The company may seek additional capital through equity or debt financing, which could dilute stockholders or impose restrictive covenants[303] Escrow Funding Requirements As a licensed internet escrow agent, Upwork holds customer funds in trust, which are recorded as assets and liabilities, subject to regulatory funding requirements - As a licensed internet escrow agent, Upwork holds customer funds in trust, recording them as assets and corresponding liabilities for escrow funds payable[305] - Escrow funds held, including funds in transit, were $212.4 million as of December 31, 2023 (vs. $161.5 million in 2022)[305] - Escrow regulations require Upwork to fund trust shortages with operating cash to cover hourly billings in transit, impacting total cash and cash flows when a quarter ends on a Sunday[305] Convertible Senior Notes Due 2026 Upwork's convertible senior notes, initially $575.0 million, were partially repurchased in 2023, with $361.0 million remaining outstanding and maturing in August 2026 - Upwork issued $575.0 million aggregate principal amount of 0.25% convertible senior notes due August 15, 2026, in August 2021[306] - In March 2023, the company repurchased $214.0 million principal amount of these notes for $170.8 million cash, resulting in a $38.9 million gain on early extinguishment of debt[291][307] - As of December 31, 2023, $361.0 million aggregate principal amount of the notes remain outstanding, bearing 0.25% annual interest[307] Capped Calls Capped call transactions were implemented to mitigate potential stock dilution from convertible notes, with an initial cap price of $92.74 per share - In connection with the notes issuance, Upwork entered into privately negotiated capped call transactions to reduce potential dilution to common stock upon conversion or offset cash payments, subject to a cap price[308] - The initial cap price is $92.74 per share, a 100% premium over the common stock price on August 5, 2021, and these remain in effect despite the note repurchases[309] Cash Flows Upwork's 2023 cash flows show increased operating cash, positive investing cash from marketable securities, and significant financing cash usage due to note repurchases Cash Flow Summary (2023 vs. 2022 vs. 2021) | (In thousands) | 2023 | 2022 | 2021 | | :------------- | :---------- | :---------- | :---------- | | Operating activities | $27,221 | $6,559 | $10,836 | | Investing activities | $88,270 | $(69,468) | $(428,980) | | Financing activities | $(114,304) | $6,082 | $537,739 | | Net change in cash, cash equivalents, and restricted cash | $1,187 | $(56,827) | $119,595 | - Net cash provided by operating activities increased to $27.2 million in 2023 (from $6.6 million in 2022), driven by net income and non-cash charges, partially offset by increased trade and client receivables[311] - Net cash provided by investing activities was $88.3 million in 2023 (vs. $69.5 million used in 2022), primarily from proceeds from marketable securities maturities and sales, partially offset by new marketable securities purchases and capitalized software costs[314] - Net cash used in financing activities was $114.3 million in 2023 (vs. $6.1 million provided in 2022), mainly due to $171.3 million paid for note repurchases, partially offset by increased escrow funds payable and employee stock plan proceeds[317] Critical Accounting Policies and Estimates Upwork's financial statements rely on significant management estimates for revenue recognition, stock-based compensation, and income taxes under U.S. GAAP - Upwork's consolidated financial statements are prepared under U.S. GAAP, requiring significant management estimates and assumptions for revenue recognition, stock-based compensation, and income taxes[320] - Revenue recognition involves judgments on principal vs. agent presentation and estimating standalone selling prices for material rights (e.g., tiered service fees for talent, which were retired in May 2023)[321][322][323][324] - Stock-based compensation expense for options, RSUs, PSUs, and ESPP purchase rights is measured at fair value on the grant date, using models like Black-Scholes and Monte Carlo, with assumptions for dividend yield, expected term, risk-free rate, and volatility[325] - Income taxes are accounted for using the asset and liability method, with deferred tax assets/liabilities and a valuation allowance established based on the likelihood of future realization, and uncertain tax positions recognized if more likely than not to be sustained[326] Recent Accounting Pronouncements Upwork is currently evaluating the potential impact of new accounting standards related to segment reporting and income tax disclosures - Upwork is evaluating the impact of ASU No. 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[327][328] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Upwork is exposed to market risks primarily from interest rate fluctuations on its investment portfolio and foreign currency exchange rates due to international operations - Upwork is exposed to market risks from interest rate and foreign currency exchange rate fluctuations due to its U.S. and international operations[328] - The company's investment portfolio, primarily fixed-income securities, is relatively insensitive to interest rate changes, and a 100 basis point change is not expected to materially impact operating results[330][331] - Foreign currency risk arises from clients settling U.S. dollar invoices in local currencies; derivative instruments (forward contracts) are used to hedge this exposure, which has been immaterial[332] Item 8. Financial Statements and Supplementary Data This section presents Upwork's audited consolidated financial statements for the years ended December 31, 2023, 2022, and 2021, including the balance sheets, statements of operations and comprehensive income (loss), stockholders' equity, and cash flows - The consolidated financial statements for 2023, 2022, and 2021 are presented, including balance sheets, statements of operations, stockholders' equity, and cash flows[333] - PricewaterhouseCoopers LLP issued an unqualified opinion on Upwork's consolidated financial statements and the effectiveness of its internal control over financial reporting as of December 31, 2023[336][337] - A critical audit matter identified was the significant management judgment involved in estimating the standalone selling price of talent material rights and the period for revenue deferral and recognition[344][345] Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on Upwork's 2023 consolidated financial statements and internal control over financial reporting - PricewaterhouseCoopers LLP audited Upwork's consolidated financial statements and internal control over financial reporting as of December 31, 2023[336] - An unqualified opinion was issued, stating the financial statements present fairly in all material respects, and internal control over financial reporting was effective[337] - A critical audit matter involved the significant judgment in estimating the standalone selling price of talent material rights and the period for deferring/recognizing related consideration in revenue recognition[344][345] Consolidated Balance Sheets Upwork's balance sheets show a decrease in total assets and liabilities from 2022 to 2023, with a notable increase in stockholders' equity Consolidated Balance Sheets (as of December 31) | (In thousands) | 2023 | 2022 | | :------------- | :---------- | :---------- | | ASSETS | | | | Cash and cash equivalents | $79,641 | $129,384 | | Marketable securities | $470,457 | $557,230 | | Funds held in escrow, including funds in transit | $212,387 | $161,457 | | Trade and client receivables – net | $103,061 | $64,888 | | Total current assets | $883,371 | $930,906 | | Property and equipment, net | $27,140 | $22,063 | | Goodwill | $118,219 | $118,219 | | Intangible assets, net | $3,048 | — | | Operating lease asset | $4,333 | $7,603 | | Total assets | $1,037,541 | $1,080,245 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $5,063 | $7,549 | | Escrow funds payable | $212,387 | $161,457 | | Accrued expenses and other current liabilities | $58,192 | $53,611 | | Deferred revenue | $17,361 | $25,075 | | Total current liabilities | $293,003 | $247,692 | | Debt, noncurrent | $356,087 | $564,261 | | Operating lease liability, noncurrent | $6,088 | $11,177 | | Total liabilities | $656,466 | $831,366 | | Total stockholders' equity | $381,075 | $248,879 | | Total liabilities and stockholders' equity | $1,037,541 | $1,080,245 | - Total assets decreased from $1,080.2 million in 2022 to $1,037.5 million in 2023, while total liabilities decreased from $831.4 million to $656.5 million, primarily due to a reduction in noncurrent debt[349] - Stockholders' equity increased from $248.9 million in 2022 to $381.1 million in 2023, reflecting net income and changes in accumulated other comprehensive income[349] Consolidated Statements of Operations and Comprehensive Income (Loss) Upwork achieved a net income of $46.9 million in 2023, a significant turnaround from prior years' losses, driven by increased revenue and reduced operating expenses Consolidated Statements of Operations and Comprehensive Income (Loss) | (In thousands, except per share data) | 2023 | 2022 | 2021 | | :------------------------------------ | :---------- | :---------- | :---------- | | Revenue | $689,136 | $618,318 | $502,797 | | Cost of revenue | $170,450 | $160,402 | $135,508 | | Gross profit | $518,686 | $457,916 | $367,289 | | Operating expenses: | | | | | Research and development | $177,363 | $154,553 | $119,083 | | Sales and marketing | $220,681 | $246,882 | $183,294 | | General and administrative | $118,925 | $123,952 | $113,081 | | Provision for transaction losses | $12,977 | $25,153 | $6,048 | | Total operating expenses | $529,946 | $550,540 | $421,506 | | Loss from operations | $(11,260) | $(92,624) | $(54,217) | | Other income (expense), net | $60,137 | $3,275 | $(1,901) | | Income (loss) before income taxes | $48,877 | $(89,349) | $(56,118) | | Income tax provision | $(1,990) | $(536) | $(122) | | Net income (loss) | $46,887 | $(89,885) | $(56,240) | | Net income (loss) per share: | | | | | Basic | $0.35 | $(0.69) | $(0.44) | | Diluted | $0.06 | $(0.69) | $(0.44) | | Total comprehensive income (loss) | $50,177 | $(92,442) | $(56,787) | - Upwork reported a net income of $46.9 million in 2023, a significant improvement from net losses of $89.9 million in 2022 and $56.2 million in 2021[350] - Total revenue increased to $689.1 million in 2023 from $618.3 million in 2022, while total operating expenses decreased from $550.5 million to $529.9 million[350] - Diluted EPS was $0.06 in 2023, compared to $(0.69) in 2022 and $(0.44) in 2021[350] Consolidated Statements of Stockholders' Equity Total stockholders' equity significantly increased in 2023, reflecting net income and changes in comprehensive income, while the accumulated deficit decreased Consolidated Statements of Stockholders' Equity (as of December 31) | (In thousands, except share amounts) | 2023 | 2022 | 2021 | | :----------------------------------- | :---------- | :---------- | :---------- | | Total Stockholders' Equity | $381,075 | $248,879 | $259,517 | | Common Stock (shares) | 137,272,754 | 132,368,265 | 129,130,478 | | Additional Paid-in Capital | $674,918 | $592,900 | $511,096 | | Accumulated Other Comprehensive Income (Loss) | $205 | $(3,085) | $(528) | | Accumulated Deficit | $(294,062) | $(340,949) | $(251,064) | - Total stockholders' equity increased significantly to $381.1 million in 2023 from $248.9 million in 2022, primarily driven by net income and stock-based compensation expense[352] - Accumulated deficit decreased to $(294.1) million in 2023 from $(340.9) million in 2022, reflecting the return to profitability[352] Consolidated Statements of Cash Flows Upwork's 2023 cash flows show increased operating cash, positive inve