Upwork, Inc. — Q3 2022 Form 10-Q
Business context and period. Upwork operates an online marketplace connecting businesses with independent talent, alongside enterprise and managed-services offerings. This unaudited report covers the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Financial amounts below are in U.S. dollars.
Key financial and operating metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $158.6 million | $128.1 million | $456.9 million | $365.9 million |
| Gross profit / gross margin | $118.2 million / 74% | $93.2 million / 73% | $337.6 million / 74% | $267.5 million / 73% |
| Operating loss | $(25.4) million | $(8.3) million | $(72.1) million | $(32.4) million |
| Net loss | $(24.8) million | $(9.3) million | $(73.4) million | $(33.7) million |
| Net loss per share, diluted | $(0.19) | $(0.07) | $(0.56) | $(0.27) |
| Adjusted EBITDA, non-GAAP | $(2.9) million | $8.2 million | $(5.2) million | $22.4 million |
- Revenue and marketplace activity: Q3 revenue increased 24% year over year. Marketplace revenue rose 23% to $145.1 million; managed-services revenue rose 30% to $13.5 million. GSV was $1.027 billion, up 14% year over year, while marketplace take rate was 14.3%, versus 13.2%. Active clients reached 818,000, up 9%; GSV per active client was $4,958, up 13%.
- Expenses and profitability: Q3 operating expenses rose to $143.6 million from $101.5 million. Sales and marketing increased 46%, research and development 26%, and general and administrative 20%. The provision for transaction losses increased to $10.1 million from $1.4 million. Gross margin improved one percentage point, but the company’s losses widened.
- Cash flow and liquidity: Operating cash flow was negative $1.9 million for the first nine months of 2022, compared with positive $23.3 million in 2021. Investing cash outflow was $32.4 million; financing cash inflow was $13.0 million. At September 30, cash and cash equivalents were $156.4 million and marketable securities were $519.4 million. The company said these resources, together with operating cash flow when generated, should meet requirements for at least 12 months.
- Debt: Convertible senior notes had $575.0 million principal outstanding, due August 2026, bearing 0.25% annual interest. Their balance-sheet carrying value was $563.5 million, net of issuance costs. The notes are senior unsecured obligations and may be settled in cash, shares, or a combination upon conversion.
- Balance sheet: Total assets were $1.079 billion and stockholders’ equity was $242.6 million. Escrow funds of $170.0 million were matched by an equivalent payable and are held for marketplace users, not freely available operating liquidity.
Material changes versus the prior comparable period
- Revenue growth did not translate into improved bottom-line results: Q3 net loss grew to $24.8 million from $9.3 million, and nine-month net loss more than doubled to $73.4 million.
- Transaction-loss provision increased sharply, primarily reflecting higher fraud and chargebacks. The company also reserved $2.7 million for one Upwork Enterprise client’s failure to pay; its receivables allowance rose to $16.1 million from $3.4 million at year-end 2021.
- Stock-based compensation was $20.4 million in Q3 and $56.1 million for the nine-month period, versus $13.9 million and $38.7 million, respectively, in 2021.
- Operating cash flow shifted from positive to negative for the nine-month period. Cash and cash equivalents declined from $187.2 million at December 31, 2021, while marketable securities increased from $497.6 million.
- The new Client Marketplace pricing, introduced in April 2022, eliminated monthly subscription fees for legacy Basic and Plus clients and introduced a 5% transaction fee, or 3% for eligible ACH payments. Upwork said this raised revenue and take rate but also reduced some client spend. GSV declined sequentially in Q3 versus Q2, which management attributed to the pricing change, seasonality, and difficult macroeconomic conditions.
Outlook, management commentary, and risks
- Outlook: Management expected year-over-year active-client growth to decline in Q4 versus Q3, while marketplace revenue and take rate were expected to increase year over year, reflecting the new pricing model. It expected continued investment in research and development, sales, marketing, and general and administrative costs. The filing provides no numerical earnings or revenue guidance.
- Business trends: Management cited increased spend from existing clients and growth in enterprise and managed services. It also noted longer enterprise sales cycles and fewer Enterprise client acquisitions in Q3 compared with the prior period in 2021 and Q2 2022.
- Transaction losses: Upwork said it was strengthening fraud detection and integrating a third-party fraud detection vendor, but cautioned that these steps may not be effective or cost-efficient.
- Geopolitical and macroeconomic exposure: The company suspended operations in Russia and Belarus, with affected contracts required to wind down by May 1, 2022. It reported no material adverse impact on revenue or other financial results for the quarter or nine-month period, but said the future impact of the war, sanctions, and disruption remains uncertain. It cited seasonal and challenging macroeconomic conditions as contributors to the sequential GSV decline.
- Other notable items: The company excluded $4.3 million of humanitarian-response costs from nine-month adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, recurring stock-based compensation. In September, Upwork announced a search for a new CFO and the impending separation of CFO Jeff McCombs.
- Contingencies and other risks: Upwork reported no material pending legal proceedings and no material accrued contingency liabilities. Its principal risks include fraud and payment losses, client nonpayment, pricing-related user attrition or circumvention, competition, macroeconomic and geopolitical uncertainty, worker-classification and regulatory exposure, and the possibility of continued losses.
Important facts for investors to verify
- Whether the Q3 sequential GSV decline persists, and whether revenue and take-rate gains from the Client Marketplace pricing change offset lower client spend or increased circumvention.
- Whether fraud, chargebacks, and Enterprise client credit losses subside; monitor the transaction-loss provision and receivables allowance.
- Whether expense growth, especially sales and marketing, research and development, and stock-based compensation, supports sustainable growth and improves profitability.
- Whether operating cash flow recovers and the company’s stated liquidity outlook remains adequate, considering escrow funding needs and the $575.0 million notes due in 2026.
- Whether management’s qualitative Q4 expectations are met, including the expected slower active-client growth and higher year-over-year marketplace revenue and take rate.