# UPWORK, INC (UPWK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UPWORK, INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1627475/000162747524000012/upwk-20231231.htm
Accession: 0001627475-24-000012
Filing date: 2024-02-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/UPWK/
All MD&A years: /company/UPWK/mda/
Previous year: /company/UPWK/mda/fy2022/ (FY 2022)
Next year: /company/UPWK/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the sections titled “Business” and “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that may never materialize or that may be proven incorrect. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” and in other parts of this Annual Report.

Overview

Business

Independent talent is an increasingly sought-after, critical, and expanding segment of the global workforce. We operate the world’s largest work marketplace that connects businesses with independent talent from across the globe, as measured by GSV. GSV represents the total amount that clients spend on our offerings as well as additional fees we charge to talent and clients for other services. Talent includes independent professionals and agencies of varying sizes. Clients on our work marketplace range in size, from independent professionals and small businesses to Fortune 100 companies. With customers in over 180 countries, our work marketplace enabled $4.1 billion of GSV for the year ended December 31, 2023. For purposes of determining countries where we enable GSV, we include both the countries in which the clients that paid for the applicable services are located, as well as the countries in which talent that provided those services are located.

As a global work marketplace that connects talent and clients regardless of their location, our GSV originates from around the world. Of the $4.1 billion of GSV enabled on our work marketplace in 2023, approximately 26% was generated from U.S. talent, which was our largest talent geography in each of 2023, 2022, and 2021, as measured by GSV, while talent in India and the Philippines remained our next largest talent geographies in all three years. Of the $4.1 billion and $3.5 billion of GSV enabled on our work marketplace in 2022 and 2021, respectively, approximately 26% and 25% was generated from talent in the United States in each year, respectively.

Approximately 69% of our GSV in 2023 was generated from U.S. clients, compared to approximately 68% and 66% of GSV in 2022 and 2021, respectively, with clients in no other country representing more than 10% of our GSV in any such year.

In 2023, we changed the name of our Upwork Enterprise offering to Enterprise Solutions. Concurrently, to align with customer needs and internal decision-making, we combined Enterprise Solutions and Managed Services into a suite of Enterprise offerings. In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate.

We generate revenue from both talent and clients of our Marketplace and Enterprise offerings. Revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees. We also generate revenue from fees for premium offerings, including our Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S. dollar.

Financial Highlights for 2023

In 2023, we implemented a number of initiatives that positively impacted our financial results, including increasing the number of Connects needed by talent to bid on projects, deploying ads products on our work marketplace, introducing a contract initiation fee in April 2023 for clients on our Marketplace offering, and retiring the tiered service fee structure in May 2023 for talent working with clients on our Marketplace offering in favor of a flat fee. These initiatives, along with others, resulted in an increase to Marketplace revenue of $67.8 million, or 13%, for the year ended December 31, 2023, compared to 2022.

In 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs. Additionally, in light of the challenging macroeconomic conditions as well as our efforts to reduce spend and streamline operations, we implemented a reduction of our workforce in May 2023 representing approximately 15% of full-time employees, largely in our sales team, and we also reduced a smaller percentage of independent team members. As a result, we generated net income of $46.9

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million in 2023 compared to a net loss of $89.9 million in 2022. Our adjusted EBITDA was $73.1 million in 2023, as compared to adjusted EBITDA loss of $4.0 million in 2022. We expect these measures will continue to positively impact net income and adjusted EBITDA in 2024. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with generally accepted accounting principles in the United States, which we refer to as U.S. GAAP. See “Key Financial and Operational Metrics—Non-GAAP Financial Measures” below for a definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared under U.S. GAAP.

Key Financial and Operational Metrics

We monitor the following key financial and operational metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

Our key metrics were as follows as of or for the periods presented:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

*Not meaningful

(1)In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue and Marketplace take rate.

(2)Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP. See “—Non-GAAP Financial Measures” below for the definition of adjusted EBITDA and for information regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared under U.S. GAAP.

As discussed below with respect to each key metric, we believe these key financial and operational metrics are useful to evaluate period-over-period comparisons of our business and in understanding our operating results, and management uses these metrics to track our performance. We expect our key metrics may fluctuate between periods due to a number of factors, including changing macroeconomic conditions; the number of Sundays (i.e., the day we have the contractual right to bill and recognize revenue for the majority of our talent service fees each week) in any given period; the lapping of significant launches of new products, pricing changes, and other monetization efforts; and ongoing efforts to improve processes on our work marketplace, including project proposals and purchases of Connects, among others. For a discussion of limitations in the measurement of our key financial and operational metrics, see “Risk Factors—We track certain performance metrics with internal tools and do not independently verify such metrics. Certain of our performance metrics may not accurately reflect certain details of our business, are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.”

Gross Services Volume (GSV)

GSV is an important metric because it represents the amount of business transacted through our work marketplace. The primary component of GSV is client spend, which we define as the total amount that clients spend on our offerings. GSV also includes fees charged to talent and clients, such as for transacting payments through our work marketplace, purchases of Connects, talent memberships, and foreign currency exchange.

Growth in the number of active clients and GSV per active client are the primary drivers of GSV. We derive a substantial portion of our GSV and revenue from small- and medium-sized businesses.

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Marketplace Revenue

Marketplace revenue is the primary driver of our business, and we believe it provides comparability to other online marketplaces. Marketplace revenue represents the majority of our revenue and is derived from our Marketplace offerings, which include all offerings other than our Enterprise offerings—Enterprise Solutions, previously referred to as Upwork Enterprise, and Managed Services. We generate Marketplace revenue from both talent and clients. Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees. We also generate Marketplace revenue from fees for premium offerings, such as our Upwork Payroll offering, as well as purchases of Connects, talent memberships, and other services, such as foreign currency exchange when clients choose to pay in currencies other than the U.S. dollar. In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue.

Our Marketplace revenue is primarily generated from the service fees paid by talent as a percentage of the total amount talent charges clients for services accessed on our Marketplace offering. Therefore, Marketplace revenue is correlated to GSV, and we believe that our Marketplace revenue will grow as GSV grows, although they could grow at different rates. For a discussion of how we measure and evaluate the correlation between Marketplace revenue and Marketplace GSV, see “—Marketplace Take Rate” below.

Marketplace Take Rate

Marketplace take rate measures the correlation between Marketplace revenue and Marketplace GSV and is calculated by dividing Marketplace revenue by Marketplace GSV. Marketplace take rate is an important metric because it is the key indicator of how well we monetize spend on our work marketplace from our Marketplace offerings. In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue and GSV from our Enterprise Solutions offering in Marketplace take rate.

Active Clients and GSV per Active Client

We define an active client as a client that has had spend activity on our work marketplace during the 12 months preceding the date of measurement. GSV per active client is calculated by dividing total GSV during the four quarters ended on the date of measurement by the number of active clients on the date of measurement. We believe that the number of active clients and GSV per active client are indicators of the growth and overall health of our business. The number of active clients is a primary driver of GSV and, in turn, Marketplace revenue.

While continued use of our work marketplace by talent is a factor that impacts our ability to attract and retain clients, we currently have a significant surplus of talent in relation to the number of clients actively engaging talent for most categories of services on our work marketplace. As a result of this surplus, we primarily focus our efforts on retaining client spend and acquiring new clients, as opposed to acquiring new talent and retaining existing talent. Moreover, we generate revenue when clients engage and pay talent, and therefore, our key metrics and operating results are directly impacted by client spend. Additionally, the number of talent retained between periods is merely one of many factors that may impact client spend in a particular period and is not a primary driver of our key metrics and operating results.

Cohort Analysis

Client Spend by Annual Client Cohort

Our growth has been driven, in significant part, by retaining client spend from existing clients as we grow our client base. As illustrated in the chart below, we have been able to retain client spend over long periods of time with clients in historical cohorts continuing to spend meaningfully on our work marketplace. A client belongs to an annual cohort based on the date of first spend activity with talent. For example, the 2023 cohort includes all clients that had their first spend activity with talent between January 1, 2023 and December 31, 2023. For the years ended December 31,

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2023, 2022, and 2021, client spend from new client cohorts was $556.3 million, $507.6 million, and $537.9 million, respectively.

Components of Our Results of Operations

Revenue

Marketplace Revenue. Marketplace revenue is primarily generated from talent service fees, and to a lesser extent, client marketplace fees.

We generate Marketplace revenue from talent of our Marketplace offerings. Prior to May 2023, we had a tiered talent service fee schedule based on cumulative lifetime billings by talent to each client. In May 2023, we retired the tiered service fee structure for talent working with clients on our Marketplace offerings—ranging from 5% to 20%—in favor of a simplified flat fee of 10%. This change took effect for new contracts and existing contracts that would have otherwise been subject to a 20% fee under the former tiered service fee model. Contracts under the former tiered service fee model that had a 5% fee retained that rate for those contracts through the end of 2023. We recognize revenue on Sunday of each week for the majority of our talent service fees as that is the day we have the contractual right to bill talent for the service fees. To a lesser extent, we also generate revenue from talent through purchases of Connects, membership fees, and withdrawal and other fees.

In addition, we generate Marketplace revenue from clients of our Marketplace offerings, whereby we charge a client marketplace fee of 5% on each transaction—or 3% if paid via ACH for eligible clients. In April 2023, we introduced a contract initiation fee for clients on our Marketplace offerings. To a lesser extent, we also generate revenue from clients through foreign currency exchange fees when clients choose to pay in currencies other than the U.S. dollar and from interest earned on funds held on behalf of customers.

One of our premium offerings, Upwork Payroll, is available to clients when talent are classified as employees for engagements on our work marketplace. We work with unrelated third-party staffing providers that provide employment services to such clients.

Enterprise Revenue. Enterprise offers two lines of service—Enterprise Solutions and Managed Services.

Our Enterprise Solutions offering includes access to additional product features, premium access to top talent, professional services, custom reporting, and flexible payment terms. Revenue from our Enterprise Solutions offering includes all client fees, subscriptions, and talent service fees. For our Enterprise Solutions offering, we charge clients a monthly or annual subscription fee and a service fee calculated as a percentage of the client’s spend on talent services, in addition to a 10% service fee paid by talent. Additionally, clients of our Enterprise Solutions offering can also subscribe to a compliance service that includes worker classification services for an additional fee

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and may also choose to use our work marketplace to engage talent that were not originally sourced through our work marketplace for a lower fee percentage.

Through our Managed Services offering, we are responsible for providing services and engaging talent directly or as employees of third-party staffing providers to perform services for clients on our behalf. The talent providing services in connection with our Managed Services offering include independent talent and agencies of varying sizes. Under U.S. GAAP, we are deemed to be the principal in these Managed Services arrangements and therefore recognize the entire GSV of Managed Services projects as Managed Services revenue, as compared to recognizing only the percentage of the client spend that we receive, as we do with our Marketplace and Enterprise Solutions offerings.

Cost of Revenue and Gross Profit

Cost of Revenue. Cost of revenue consists primarily of the cost of payment processing fees, amounts paid to talent to deliver services for clients under our Managed Services offering, personnel-related costs for our services and support personnel, third-party hosting fees for our use of AWS, and the amortization expense associated with capitalized internal-use software and platform development costs. We define personnel-related costs as salaries, bonuses, benefits, travel and entertainment, and stock-based compensation costs for employees and the costs related to other service providers we engage.

Gross Profit and Gross Margin. Our gross profit and gross margin may fluctuate from period to period. Such fluctuations may be influenced by our revenue, the mix of payment methods that our clients choose, the timing and amount of investments to expand hosting capacity, our continued investments in our services and support teams, the timing and amounts paid to talent in connection with our Managed Services offering, and the amortization expense associated with capitalized internal-use software and platform development costs. In addition, gross margin will be impacted by fluctuations in our revenue mix between Marketplace revenue and Enterprise revenue. We expect gross profit to increase in absolute dollars in future periods, although gross margin, expressed as a percentage of total revenue, may vary from period to period.

Operating Expenses

Research and Development. Research and development expense primarily consists of personnel-related costs. Research and development costs are expensed as incurred, except to the extent that such costs are associated with internal-use software and platform development that qualifies for capitalization.

Sales and Marketing. Sales and marketing expense consists primarily of expenses related to advertising and marketing activities, as well as personnel-related costs, including sales commissions, which we expense as they are incurred.

General and Administrative. General and administrative expense consists primarily of personnel-related costs for our executive, finance, legal, human resources, and operations functions; outside consulting, legal, and accounting services; impairment expense; and insurance.

Provision for Transaction Losses. Provision for transaction losses consists primarily of losses resulting from fraud and bad debt expense associated with our trade and client receivables balance and transaction losses associated with chargebacks. Provisions for these items represent estimates of losses based on our actual historical incurred losses and other factors.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income that we earn from our operating investments, namely our deposits in money market funds and investments in marketable securities, interest expense on our outstanding borrowings, as well as gains and losses from foreign currency exchange transactions.

Income Tax Provision

We account for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.

Deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the

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realization criteria set forth in the relevant authoritative guidance. To the extent that we believe any amounts are less likely than not to be realized, we record a valuation allowance to reduce our deferred tax assets. The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize potential liabilities based on an estimate of whether, and the extent to which, additional taxes will be due. We account for uncertain tax positions in accordance with the relevant guidance, which prescribes a recognition threshold and measurement approach for uncertain tax positions taken or expected to be taken in our income tax return, and also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance utilizes a two-step approach for evaluation of uncertain tax positions. The first step is to determine if the weight of available evidence indicates a tax position is more likely than not to be sustained upon audit. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized on ultimate settlement. A liability is reported for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any interest and penalties related to unrecognized tax benefits are recorded as income tax expense.

Results of Operations

The following table sets forth our consolidated results of operations for the years ended December 31, 2023, 2022, and 2021:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operation” included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 16, 2023.

Comparison of the Years Ended December 31, 2023 and 2022

Revenue

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

(1) In order to conform to the current period presentation as of December 31, 2023, we present revenue from Enterprise Solutions and Managed Services together as Enterprise revenue in prior periods and no longer report revenue from our Enterprise Solutions offering in Marketplace revenue.

For the year ended December 31, 2023, GSV remained relatively flat at $4.1 billion, as compared to 2022. The number of active clients increased 5% as of December 31, 2023 compared to December 31, 2022, driven by growth in acquisition of new clients. As a result, our GSV per active client decreased 4% as of December 31, 2023 compared to December 31, 2022.

For the year ended December 31, 2023, total revenue was $689.1 million, representing an increase of $70.8 million, or 11%, as compared to 2022. In 2023, we implemented a number of initiatives that positively impacted Marketplace revenue and Marketplace take rate, including modifying existing offerings and other services and features. Specifically, we increased the number of Connects needed by talent to bid on projects, deployed ads products on our work marketplace, introduced a contract initiation fee in April 2023 for clients on our Marketplace offering, and in May 2023, retired the tiered service fee structure for talent working with clients on our Marketplace offering—ranging from 5% to 20%—in favor of a flat fee of 10%. As a result, for the year ended December 31, 2023, Marketplace revenue represented 85% of total revenue and increased by $67.8 million, or 13%, as compared to 2022. Marketplace revenue growth was primarily driven by increases in revenue from client marketplace fees, Connects, and talent service fees. Overall, these factors caused Marketplace revenue to grow at a faster rate than GSV from our Marketplace offerings, which caused Marketplace take rate to increase to 15.4%, as compared to 13.8% in 2022. We expect these factors will cause Marketplace revenue and Marketplace take rate to continue to increase in 2024.

Enterprise revenue represented 15% of total revenue for the year ended December 31, 2023 and increased by $3.0 million, or 3%, as compared to 2022, due to increased revenue from our Enterprise Solutions and Managed Services offerings. We intend to focus on efforts to attract new clients, as well as talent that meet the criteria sought by such clients. As a result of these efforts, we expect Enterprise revenue to increase in 2024.

Cost of Revenue and Gross Margin

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

For the year ended December 31, 2023, cost of revenue increased by $10.0 million, or 6%, as compared to 2022, primarily as a result of increases in payment processing fees of $3.2 million, cost of talent services to deliver Managed Services of $2.6 million primarily driven by new spend from existing clients of our Managed Services offering, amortization expense associated with capitalized internal-use software and platform development costs of $1.9 million, and hosting fees and other software costs of $1.8 million.

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We expect cost of revenue to increase in future periods as we continue to support growth on our work marketplace. Amounts paid to talent in connection with our Managed Services offering are tied to the volume of managed services used by our clients. The level and timing of these items could fluctuate and affect our cost of revenue in the future. We expect the pricing changes that we have made over the past twelve months will continue to positively impact gross margin in 2024.

Research and Development

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","$","","%"],["Research and development","$","177,363","","","$","154,553","","","$","22,810","","","15","%"],["Percentage of total revenue","26","%","","25","%"]]
[[/GREPCENT_TABLE]]

In 2023, we focused our investment in research and development on the quality and adoption of our current offerings and products. Specifically, we increased the size of our research and development workforce, enhanced platform functionality, and built new product features. As a result, for the year ended December 31, 2023, research and development expense increased by $22.8 million, or 15%, as compared to 2022, driven by increases in personnel-related costs of $28.4 million and software costs of $3.5 million, as compared to 2022. These increases were partially offset by $7.2 million of incremental internal-use software and platform development costs that we capitalized during the year ended December 31, 2023, as compared to 2022. Additionally, during the year ended December 31, 2022, we incurred approximately $2.7 million of research and development expense related to our humanitarian response efforts in response to the war in Ukraine.

We intend to increase our investment in research and development to further enhance our platform, including the quality of our offerings, and to build new features, in particular, with a focus on machine learning and generative artificial intelligence. As a result, we expect research and development expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Sales and Marketing

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

In 2023, we implemented a number of cost-saving measures, including reducing our investments in brand marketing, vendor spend, and other non-personnel costs. We also reduced our investments in sales, including slowing our Enterprise sales hiring pace, as compared to 2022. As a result, for the year ended December 31, 2023, sales and marketing expense decreased by $26.2 million, or 11%, as compared to 2022, driven primarily by reductions in marketing and advertising expense of $39.1 million. This decrease was partially offset by increases in personnel-related costs of $10.4 million, as we continue to invest in opportunities for growth. We also implemented a reduction of our workforce in May 2023, resulting in employee severance and benefit costs of $2.5 million, largely in our sales team, during the year ended December 31, 2023.

As a result of our reduced investment in brand marketing, the reduction of our workforce, and other cost-saving measures implemented in 2023, we expect sales and marketing expense to decrease in 2024.

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General and Administrative

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","$","","%"],["General and administrative","$","118,925","","","$","123,952","","","$","(5,027)","","","(4)","%"],["Percentage of total revenue","17","%","","20","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2023, general and administrative expense decreased by $5.0 million, or 4%, as compared to 2022. This decrease was primarily due to lower expense related to indirect taxes of $5.8 million, as compared to 2022. Additionally, in 2022, we incurred approximately $1.3 million of general and administrative expense related to our humanitarian response efforts and charitable donations related to the war in Ukraine. These reductions in expense were partially offset by an increase in software costs of $1.4 million during the year ended December 31, 2023, as compared to 2022.

We expect to continue to incur additional general and administrative expenses, including increased stock-based compensation expense related to executive compensation arrangements, legal and accounting costs, insurance premiums, and compliance costs. As a result, we expect general and administrative expense to increase in absolute dollars in future periods, although this expense, expressed as a percentage of total revenue, may vary from period to period.

Provision for Transaction Losses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","$","","","%"],["Provision for transaction losses","$","12,977","","","$","25,153","","","$","(12,176)","","","","(48)","%"],["Percentage of total revenue","2","%","","4","%"]]
[[/GREPCENT_TABLE]]

In 2023, we continued to enhance our trust and safety measures. As a result, for the year ended December 31, 2023, provision for transaction losses decreased by $12.2 million, or 48%, as compared to 2022, and represented approximately 2% of revenue, as compared to 4% in 2022. We continue to closely monitor this activity and maintain a number of measures designed to mitigate transaction losses going forward.

Other Income, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","$","","","%"],["Other income, net","$","60,137","","","$","3,275","","","$","56,862","","","","*"]]
[[/GREPCENT_TABLE]]

*Not meaningful

For the year ended December 31, 2023, other income, net increased by $56.9 million, as compared to 2022, primarily driven by a gain on early extinguishment of debt of $38.9 million related to the Note Repurchases, increases in interest income of $16.5 million primarily due to higher interest rates from our marketable securities, and lower interest expense as a result of the Note Repurchases, which lowered our outstanding debt balance in March 2023. See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information.

Income Tax Provision

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","$","","","%"],["Income tax provision","$","(1,990)","","","$","(536)","","","$","1,454","","","","*"]]
[[/GREPCENT_TABLE]]

*Not meaningful

For the year ended December 31, 2023, income tax provision increased by $1.5 million, as compared to the same period in 2022, primarily due to a year-over-year increase in our U.S. federal taxable income.

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Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, adjusted EBITDA is a non-GAAP measure that we believe is useful in evaluating our operating performance.

We define adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense; depreciation and amortization; interest expense; other income (expense), net; income tax benefit (provision); and, if applicable, other non-cash transactions. Additionally, in response to the war in Ukraine, during the year ended December 31, 2022, we incurred certain incremental expenses associated with our humanitarian response efforts. These expenses are not representative of our ongoing operations, and, as a result, we excluded these costs from adjusted EBITDA for the year ended December 31, 2022. Adjusted EBITDA is not prepared in accordance with, and is not an alternative to, financial measures prepared in accordance with U.S. GAAP.

The following table presents a reconciliation of net income (loss), the most directly comparable financial measure prepared in accordance with U.S. GAAP, to adjusted EBITDA for each of the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(In thousands)","2023","","2022","","2021"],["Net income (loss)","$","46,887","","","$","(89,885)","","","$","(56,240)"],["Add back (deduct):"],["Stock-based compensation expense","74,195","","","75,501","","","53,592"],["Depreciation and amortization","9,449","","","8,057","","","10,261"],["Other (income) expense, net (1)","(60,137)","","","(3,275)","","","1,901"],["Income tax provision","1,990","","","536","","","122"],["Other (2)(3)(4)","750","","","5,037","","","9,491"],["Adjusted EBITDA","$","73,134","","","$","(4,029)","","","$","19,127"]]
[[/GREPCENT_TABLE]]

(1)During the year ended December 31, 2023, we recognized a gain on early extinguishment of debt of $38.9 million, which is included in other income (expense), net in the consolidated statement of operations and comprehensive income (loss). See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes.

(2)During each of the years ended December 31, 2023, 2022, and 2021, we incurred $0.8 million of expense related to our Tides Foundation warrant.

(3)During the year ended December 31, 2022, in response to Russia’s invasion of Ukraine, we incurred certain incremental expenses associated with our humanitarian response efforts. These expenses are not representative of our ongoing operations, and, as a result, we excluded these costs from adjusted EBITDA for the year ended December 31, 2022. These expenses consisted of (i) $1.4 million of special one-time bonuses to our team members in the region impacted by Russia’s invasion of Ukraine, (ii) $1.5 million of expenses incurred in connection with the relocation of our team members in the impacted region, (iii) $1.1 million of donations made to humanitarian aid organizations to support initiatives related to humanitarian response efforts in the impacted region, primarily to Direct Relief International, a humanitarian aid organization, and (iv) $0.4 million of payments of one-time service award bonuses (and associated taxes) to certain of our team members paid in recognition of contributions made by such team members to our humanitarian response efforts in the impacted region.

(4)During the year ended December 31, 2021, we incurred impairment charges of $8.7 million as a result of the execution of sublease agreements related to two of our operating leases. See “Note 5—Balance Sheet Components” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes.

We use adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

•adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense; depreciation and amortization; interest expense; other income (expense), net; income tax benefit (provision); and, if

52

applicable, other non-cash transactions that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;

•our management uses adjusted EBITDA in conjunction with financial measures prepared in accordance with U.S. GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and

•adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of our core operating results, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are as follows:

•adjusted EBITDA excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;

•although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (c) tax payments that may represent a reduction in cash available to us; and

•other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of this measure for comparative purposes.

Because of these and other limitations, you should consider adjusted EBITDA along with other financial performance measures, including net income (loss) and our other financial results prepared in accordance with U.S. GAAP.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and marketable securities, including the net proceeds from the sale of the Notes. Our cash equivalents and marketable securities primarily consist of money market funds, commercial paper, treasury bills, corporate bonds, U.S. and foreign government securities, asset-backed securities, and other types of fixed income securities. The primary objective of our investment activities from operating investments is to preserve principal while maximizing income without significantly increasing risk. Since our inception, our business has consisted of the operation of an online work marketplace that connects businesses with independent talent from across the globe, and we do not make investments for trading or speculative purposes. As of December 31, 2023 and 2022, we had $79.6 million and $129.4 million in cash and cash equivalents, respectively. As of December 31, 2023 and 2022, we had $470.5 million and $557.2 million in marketable securities, respectively.

We believe our existing cash and cash equivalents, marketable securities, and cash flow from operations (in periods in which we generate cash flow from operations) will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements. In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the cost to host our work marketplace, the introduction of new offerings and services, the continuing market adoption of our work marketplace, any acquisitions or investments that we make in complementary businesses, products, and technologies, macroeconomic conditions, the number of shares of our common stock that we repurchase under our Share Repurchase Program, or the aggregate principal amount of our outstanding Notes that we repurchase, and our ability to obtain equity or debt financing. Our principal commitments consist of the Notes and obligations under our non-cancellable operating leases for office space. In March 2023, we sold $138.2 million of available-for-sale marketable securities to enable the Note Repurchases. Assuming the remaining Notes are not converted into our common stock, repurchased or redeemed prior to maturity, (i) annual interest expense relating to the Notes will be $2.7 million in each fiscal year through 2026 and (ii) principal in the

53

amount of $361.0 million will be payable upon the maturity of the Notes on August 15, 2026. For additional information about our Notes, see the section below titled “—Convertible Senior Notes Due 2026.” As of December 31, 2023, our future lease commitments were $13.1 million (excluding adjustments for discount to present value), including $5.8 million for 2024.

In November 2023, our board of directors authorized the Share Repurchase Program, under which we may repurchase up to $100.0 million of shares of our outstanding common stock. Repurchases of our common stock under the Share Repurchase Program may be made from time to time on the open market (including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act), in privately negotiated transactions, or by other methods, at our discretion, and in accordance with applicable securities laws and other restrictions. The Share Repurchase Program has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason. The Share Repurchase Program does not obligate us to repurchase any dollar amount or number of shares, and the timing and amount of any repurchases will depend on market and business conditions. We had no share repurchase activity during the quarter ended December 31, 2023. On August 16, 2022, the Inflation Reduction Act of 2022, which we refer to as the Act, was signed into law. Under the Act, share repurchases after December 31, 2022 will be subject to a 1% excise tax. In addition, as market conditions warrant, we may, from time to time, repurchase additional outstanding Notes in the open market, in privately negotiated transactions, by tender offer, by exchange transaction, or otherwise. Such repurchases of Notes, if any, will depend on prevailing market conditions, our liquidity, and other factors, and may be commenced or suspended at any time. The amounts involved and total consideration paid may be material.

To the extent existing cash and cash equivalents, cash from marketable securities, and cash from operations (in periods in which we generate cash flow from operations) are insufficient to fund our working capital and capital expenditure requirements, or should we require additional cash for other purposes, we will need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements, as we did with the offering of the Notes in 2021. If we raise additional funds by issuing equity or equity-linked securities, the ownership and economic interests of our existing stockholders will be diluted. If we raise additional financing by incurring additional indebtedness, we will be subject to additional debt service requirements and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could also be unfavorable to our equity investors. There can be no assurances that we will be able to raise additional capital on terms we deem acceptable, or at all. The inability to raise additional capital as and when required would have an adverse effect, which could be material, on our results of operations, financial condition, and ability to achieve our business objectives.

During the periods presented, we did not have, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Escrow Funding Requirements

As a licensed internet escrow agent, we offer escrow services to customers of our work marketplace and, as such, we are required to hold our customers’ escrowed cash and in-transit cash in trust as an asset and record a corresponding liability for escrow funds held on behalf of talent and clients on our balance sheet. We expect the balances of our funds held in escrow, including funds held in transit, and the related liability to grow as GSV grows and may vary from period to period. Escrow regulations require us to fund the trust with our operating cash to cover shortages due to the timing of cash receipts from clients for completed hourly billings. Talent submit their billings for hourly contracts to their clients on a weekly basis every Sunday, and the aggregate amount of such billings is added to escrow funds payable to talent on the same day. As of each Sunday of each week, we have not yet collected funds for hourly billings from clients as these funds are in transit. Therefore, in order to satisfy escrow funding requirements, every Sunday we fund the shortage of cash in trust with our own operating cash and typically collect this cash shortage from clients within the next several days. As a result, we expect our total cash and cash flows from operating activities to be impacted when a quarter ends on a Sunday. As of December 31, 2023 and 2022, funds held in escrow, including funds in transit, were $212.4 million and $161.5 million, respectively. Funds held in escrow are deposited in interest-bearing checking accounts.

54

Convertible Senior Notes Due 2026

The Notes were issued in August 2021, pursuant to and are subject to the terms and conditions of an indenture between us and Computershare Trust Company, National Association (as successor in interest to Wells Fargo Bank, National Association), as trustee, which is referred to as the Indenture. The Notes are senior, unsecured obligations and bear interest at a rate of 0.25% per year, payable semiannually in arrears, and are due August 15, 2026. Upon conversion, we have an option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock.

To consummate the Note Repurchases, in March 2023 we entered into separate, privately negotiated repurchase agreements with a limited number of institutional holders of the Notes to repurchase an aggregate of $214.0 million principal amount of the Notes for an aggregate cash payment of $170.8 million. As of December 31, 2023, $361.0 million aggregate principal amount of the Notes remain outstanding. We intend to use the remainder of the net proceeds from the offering for general corporate purposes, including marketing, brand awareness and sales, and which may include working capital, capital expenditures, and investments in and acquisitions of other companies, products or technologies that we may identify in the future. See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes.

Capped Calls

In connection with the issuance of the Notes, we entered into the Capped Calls. The Capped Calls are expected generally to reduce the potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

The initial cap price of the Capped Calls is $92.74 per share of common stock, subject to certain customary adjustments under the terms of the Capped Calls. See “Note 7—Debt” of the notes to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding the Notes and the Capped Calls.

The Capped Calls remain in effect notwithstanding the Note Repurchases.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2023, 2022, and 2021:

[[GREPCENT_TABLE]]
[["(In thousands)","2023","","2022","","2021"],["Net cash provided by operating activities","$","27,221","","","$","6,559","","","$","10,836"],["Net cash provided by (used in) investing activities","88,270","","","(69,468)","","","(428,980)"],["Net cash provided by (used in) financing activities","(114,304)","","","6,082","","","537,739"],["Net change in cash, cash equivalents, and restricted cash (1)","$","1,187","","","$","(56,827)","","","$","119,595"],["(1) Includes increases in funds held in escrow, including funds in transit of $50.9 million, $0.6 million, and $25.8 million during the years ended December 31, 2023, 2022, and 2021, respectively."]]
[[/GREPCENT_TABLE]]

Operating Activities

Our largest source of cash from operating activities is revenue generated from our work marketplace. Our primary uses of cash from operating activities are for personnel-related expenditures, marketing activities, including advertising, payment processing fees, amounts paid to talent to deliver services for clients under our Managed Services offering, and third-party hosting costs. In addition, because we are licensed as an internet escrow agent, our total cash and cash provided by operating activities may be impacted by the timing of the end of our fiscal quarter as discussed in the section titled “—Liquidity and Capital Resources—Escrow Funding Requirements.”

Net cash provided by operating activities during 2023 was $27.2 million, which resulted from net income of $46.9 million and non-cash charges of $45.1 million, offset by net cash outflows of $64.7 million from changes in operating assets and liabilities. The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables due to December 31, 2023 falling on a Sunday. Due to fluctuations in revenue and the number of transactions on our work marketplace, coupled with fluctuations in the timing of cash receipts from clients, our trade and client receivables will likely continue to fluctuate in the future.

Net cash provided by operating activities during 2022 was $6.6 million, which resulted from non-cash charges of $112.2 million, offset by a net loss of $89.9 million and net cash outflows of $15.7 million from changes in operating

55

assets and liabilities. The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables.

Net cash provided by operating activities during 2021 was $10.8 million, which resulted from non-cash charges of $83.5 million, offset by a net loss of $56.2 million and net cash outflows of $16.5 million from changes in operating assets and liabilities. The change in operating assets and liabilities primarily resulted from the increase in trade and client receivables.

Investing Activities

Net cash provided by investing activities during 2023 was $88.3 million, which was primarily a result of proceeds from maturities of marketable securities of $648.8 million and proceeds from the sale of marketable securities of $165.0 million, including $143.7 million to enable the repurchase of a portion of the Notes, partially offset by investing $709.2 million in various marketable securities, as well as $12.7 million of internal-use software and platform development costs that we paid during the period, and $3.0 million purchase of an intangible asset.

Net cash used in investing activities during 2022 was $69.5 million, which was primarily a result of investing $581.9 million in various marketable securities, as well as $7.5 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $1.2 million, partially offset by proceeds from maturities of marketable securities of $521.2 million.

Net cash used in investing activities during 2021 was $429.0 million, which was primarily a result of investing $525.3 million in various marketable securities, as well as $5.1 million of internal-use software and platform development costs that we paid during the period and purchases of property and equipment of $1.0 million, partially offset by proceeds from maturities of marketable securities of $102.5 million.

Financing Activities

Net cash used in financing activities during 2023 was $114.3 million, which was driven by $171.3 million paid to consummate the Note Repurchases, including related fees to effect the Note Repurchases, partially offset by an increase in escrow funds payable of $50.9 million, proceeds received from our employee stock purchase plan of $4.1 million, and cash received from stock option exercises of $2.0 million.

Net cash provided by financing activities during 2022 was $6.1 million, which was primarily a result of proceeds received from our employee stock purchase plan of $3.8 million, cash received from stock option exercises of $1.6 million, and an increase in escrow funds payable of $0.6 million.

Net cash provided by financing activities during 2021 was $537.7 million, which resulted primarily from proceeds from the Notes, net of debt issuance costs of $560.1 million, an increase in escrow funds payable of $25.8 million, cash received from stock option exercises of $7.2 million, and proceeds received from our employee stock purchase plan of $4.8 million, partially offset by purchases of the Capped Calls of $49.4 million and repayments of borrowings on debt of $10.8 million.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from these estimates and assumptions. Certain of our accounting policies require higher degrees of judgment than others in their application. These include certain aspects of accounting for revenue recognition, stock-based compensation, and income taxes.

Revenue Recognition

We generate revenue from talent and clients from our Marketplace and Enterprise offerings. We account for revenue in accordance with Topic 606. Revenue is recognized upon transfer of control of promised services to customers in an amount that reflects the consideration we expect to receive in exchange for those services.

Determining the method and amount of revenue to recognize requires management to make judgments and estimates. Judgments include determining whether to present revenue gross, as a principal, or net, as an agent, which is based on an evaluation of whether we control the service prior to it being transferred to the client, and certain aspects of applying Topic 606 to our arrangements with talent subject to tiered service fees.

We apply judgement in the application of the portfolio approach practical expedient to our arrangements with talent subject to tiered service fees, which includes estimating the standalone selling price of the material rights and the

56

period of time over which to defer and recognize the consideration allocated to the material rights. Specifically, management applies judgement in assessing the continued appropriateness for the estimates, which include assessing the continued appropriateness of the methodology and relevant data inputs to estimate the likelihood and the period of time over which to defer and recognize the consideration allocated to the material rights. We utilize historical customer transaction data in developing these estimates. We recognize revenue related to the material rights based on our estimate of when the material rights are exercised, and adjust revenue for changes in estimates in the period of change on a cumulative catch-up basis.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards granted to service providers, including stock options, restricted stock units, which we refer to as RSUs, performance stock units, which we refer to as PSUs, and purchase rights granted under our 2018 Employee Stock Purchase Plan, which we refer to as the 2018 ESPP, based on the estimated fair value of the award on the grant date. We calculate the estimated fair value of stock options and purchase rights granted under the 2018 ESPP on the date of grant using the Black-Scholes option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected dividend yield, the expected term of the awards, the risk-free interest rates, and the expected common stock price volatility over the term of the option awards. The fair value and derived service period of stock options with market-based conditions is estimated using the Monte Carlo valuation model. We evaluate the assumptions used to value option awards upon each grant of stock options. The grant date fair value of PSUs is determined using the closing common stock price of our common stock on the grant date multiplied by the number of PSUs that are probable of being earned as of the grant date. We use the quoted market price of our common stock as reported on The Nasdaq Global Select Market for the fair value of RSUs, PSUs, stock options, and purchase rights under our 2018 ESPP. We generally recognize the fair value of stock options and RSUs on a straight-line basis over the period during which a service provider is required to provide services in exchange for the award (generally the vesting period). We recognize the fair value of purchase rights granted under the 2018 ESPP as an expense on a straight-line basis over the offering period and account for forfeitures as they occur. Stock-based compensation expense associated with service- and market-based stock options is recognized over the longer of the expected achievement period for the service condition and market condition. Stock-based compensation expense associated with PSUs is recognized over the longer of the expected achievement period for the performance condition and the service condition.

Income Taxes

We utilize the asset and liability method under which deferred tax assets and liabilities arise from the temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements, as well as from net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided for under current tax law. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, we assess, among other things, the historical levels of income and various sources of taxable income. We regularly review our tax positions and benefits to be realized. We recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more likely than not to be sustained. An uncertain income tax position will be recognized only if it is more likely than not to be sustained. We recognize interest and penalties related to income tax matters as income tax expense.

Recent Accounting Pronouncements

See “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of the notes to our consolidated financial statements included elsewhere in this Annual Report for recently issued accounting pronouncements not yet adopted as of the date of this Annual Report.