Upwork, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Upwork operates an online marketplace connecting businesses with independent talent. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $175.7 million | $158.6 million | $505.2 million | $456.9 million |
| Gross profit / margin | $132.5 million / 75% | $118.2 million / 74% | $380.6 million / 75% | $337.6 million / 74% |
| Operating income (loss) | $11.5 million | ($25.4 million) | ($19.7 million) | ($72.1 million) |
| Net income (loss) | $16.3 million | ($24.8 million) | $29.5 million | ($73.4 million) |
| Adjusted EBITDA | $31.2 million | ($2.9 million) | $42.7 million | ($5.2 million) |
Q3 basic and diluted EPS were both $0.12, versus a loss of $0.19 per share a year earlier. Nine-month basic EPS was $0.22, while diluted EPS was a loss of $0.06 because the diluted calculation reflected the debt-extinguishment gain and related convertible-note adjustments. Adjusted EBITDA is a non-GAAP measure; it excludes, among other items, stock-based compensation, which was $17.8 million in Q3 and $56.1 million for the nine-month period.
- Revenue mix and marketplace activity: Marketplace revenue was $161.7 million in Q3, up 11%, and $466.5 million for nine months, up 11%. Managed Services revenue was $14.0 million in Q3, up 4%, and $38.7 million for nine months, up 2%. GSV was approximately $1.03 billion in Q3 and $3.07 billion for nine months, essentially flat year over year. Active clients increased 2% to 836,000; GSV per active client fell 1% to $4,906.
- Monetization and expenses: Marketplace take rate rose to 15.9% in Q3 from 14.3%, and to 15.4% for nine months from 13.8%. Q3 sales and marketing expense fell 25% to $47.3 million, while research and development rose 12% to $43.4 million. Transaction-loss provision declined 84% to $1.6 million in Q3 and 43% to $10.9 million for nine months.
- Cash flow: Nine-month operating cash flow was $32.6 million, compared with cash use of $1.9 million in 2022. Investing activities provided $151.7 million, largely reflecting marketable-security maturities and sales; financing activities used $150.3 million, principally for debt repurchases. Cash, cash equivalents and restricted cash totaled $329.2 million at September 30, 2023. This includes restricted cash and escrow funds; escrow balances are matched by escrow-funds-payable liabilities.
- Liquidity and debt: Cash and cash equivalents were $146.8 million and marketable securities were $408.4 million. Current assets were $810.0 million versus current liabilities of $253.1 million. Upwork repurchased $214 million principal amount of its 0.25% convertible notes in March for $170.8 million cash, leaving $361.0 million principal outstanding, due August 2026. Carrying value of noncurrent debt was $355.6 million.
Material changes and unusual items
- Revenue grew 11% even as GSV remained flat, primarily reflecting pricing and fee changes. In April 2023, Upwork introduced a client contract-initiation fee of up to $4.95. In May, it replaced the talent fee tiers with a flat 10% fee for applicable new and existing contracts; existing 5% contracts retain that rate through 2023.
- Q3 operating results improved as lower sales and marketing costs and lower transaction losses more than offset higher research and development costs. Management attributed savings to reduced brand marketing, vendor and other non-personnel spending, and a May workforce reduction.
- Nine-month other income included a $38.9 million gain on early extinguishment of debt. Higher interest income on cash and securities also contributed to other income. The debt gain materially affects the comparison of net income with operating results.
- Shares outstanding increased to 136.1 million from 132.4 million at December 31, 2022. Stock-based compensation was a significant recurring expense.
Outlook, risks and contingencies
- No specific numerical full-year revenue or earnings guidance is provided in this filing. Management expected pricing changes to continue supporting Marketplace revenue, take rate and gross margin through the remainder of 2023. It expected sales and marketing expense to decrease, research and development expense to increase, and cost of revenue to rise as the marketplace is supported.
- Management said existing cash, marketable securities and operating cash flow, when generated, should cover requirements for at least the next 12 months. The company reported a history of annual net losses and an accumulated deficit of $311.4 million, and noted that profitability may not be sustained.
- Key risks include flat marketplace activity and sensitivity to macroeconomic conditions; attracting and retaining clients and talent; effects of changing fees; fraud, chargebacks and client nonpayment; competition and circumvention; cybersecurity and platform availability; contractor-classification and other regulatory changes; and international, foreign-exchange and partner risks. The company also identifies generative AI as both a product opportunity and a potential substitute for some talent services.
- Upwork reported no material pending legal proceedings and no material accrued contingency liabilities at quarter-end. It disclosed ordinary-course indemnification commitments whose maximum potential loss cannot be determined.
- In November 2023, after quarter-end, the board authorized a discretionary share repurchase program of up to $100 million, with no expiration date and no obligation to repurchase shares. The company stated that available liquidity was sufficient for at least 12 months; the buyback and any future debt repurchases could affect liquidity.
Important facts for investors to verify
- Whether flat GSV and only modest active-client growth translate into sustained revenue growth, and whether fee changes affect retention, spend or marketplace activity.
- How much reported profitability depends on cost reductions, improved transaction-loss estimates and interest income, versus recurring operating performance; review GAAP results alongside adjusted EBITDA.
- Cash and marketable securities available after accounting for escrow restrictions, the $361.0 million note principal due in 2026, and any share or debt repurchases.
- Whether management’s stated 2023 cost and margin expectations were achieved, and the subsequent pace of research and development and sales and marketing spending.
- Potential dilution from equity awards and convertible notes, and the actual timing and amount of repurchases under the $100 million authorization.